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May 31, 1998

The NASD Approves Proposal Increasing Desk Responsibility: Dealers Are Worried About New Reportin

By Michael L. O'Reilly

The National Association of Securities Dealers has approved a new set of proposals that would increase the responsibilities of brokerage firms that quote small, thinly-traded stocks.

On May 7, the NASD board of governors voted to require broker dealers to review and disclose financial information before recommending a non-Nasdaq, over-the-counter security.

The new rules are subject to approval by the Securities and Exchange Commission.

Broker dealers, meanwhile, worry that the new rules would unfairly place responsibility for company information on trading desks, instead of on issuers, who are the primary source of information.

Currently, only the broker dealer initially quoting an OTC stock is required to review an issuer's financial data. Updates are not required.

"Market makers should not be held responsible for a company's information because they trade that stock," said Nicholas Ponzio, managing director at Hill, Thompson, Magid & Co. in Jersey City. The firm is a leading OTC market maker, covering more than 4,500 issues.

"If firms are held liable, it would be too cumbersome to make markets in small-cap stocks," Ponzio added.

The rules would not apply to stock transactions in banking and insurance companies, and to companies with more than $100 million in assets and $10 million in shareholder equity. Transactions with institutional customers would also be exempt from the new rules.

At the same time, the NASD approved a rule permitting only those companies reporting current financial information to the SEC and insurance and banking regulators to be quoted on the OTC Bulletin Board. Companies would be allowed up to 12 months to comply with the new requirements.

The NASD proposals coincide with a separate SEC initiative to reduce OTC stock fraud.

The OTC market, including the OTC Bulletin Board and the pink sheets, is generally perceived to harbor some questionably-listed companies.

The OTC Bulletin Board, although owned by the NASD, is not held to the regulatory agency's listing standards. The pink sheets are owned and operated by the New York-based National Quotation Bureau.

Through the end of May, the NASD had received more than 60 comment letters on the proposal, according to an NASD spokesman.