There is a crisis facing the OTC market today because of inadequate short-sale position reporting and disclosure standards. That's according to Cromwell Coulson, chief executive and chairman of the Pink Sheets.
His petition for new short-sale rulemaking was recently posted at the Securities and Exchange Commission website in the regulatory actions section.
"I want people to focus on this. I don't think anyone can disagree that we desperately need more transparency in the business," Coulson told Traders Magazine. Under the current short sale reporting rule, Rule 3360 of the NASD's Rules of Fair Practice, OTC equity securities are excluded.
But Coulson wants all NASD members to be required to maintain a record of total short positions in all customer and proprietary firm accounts. The rule extension would cover "all publicly traded equity securities," according to the petition. This information would be reported to the NASD for public disclosure. Without this tougher standard, he notes, those trading these smaller issues are "blind" to short selling in a stock.
Coulson has sent a letter to hundreds of firms that trade or buy Bulletin Board or Pink Sheets issues, asking that they contact the SEC and support his petition.
"I believe regulators should fix the problem," according to the letter. "Small issuers traded on the Pink Sheets and the OTCBB deserve the same transparency and regulatory oversight of short selling as those listed on exchanges or Nasdaq."
Coulson said that he expects there will be little debate over expanding short-sale reporting standards.
"The debate would be over something like naked short selling, but I believe this should not be controversial," according to Coulson.
As Traders Magazine was going to press, Coulson's prediction had proven correct so far. The SEC had received dozens of letters from Pink Sheets dealers and investors-all of them urging passage of Coulson's petition.
"All NASD broker dealers," wrote Edward Machulak, president of Commerce Group Corp., "should be required to maintain a record of the total short positions in all customer accounts in all publicly traded equity securities and to have all this information reported to the NASD for public dissemination as fraudulent acts substantially affect the investors' net worth."
Several officials active in this market said that the lack of transparency is now inhibiting the growth potential of small companies.
"As a result," wrote Chester Billingsley, president of Main Street AC, "smaller companies and their investors, hoping to get some public financing or liquidity, are no longer able to because the market liquidity has been directed into the pockets of shorting brokers."
Nasdaq officials, who have been mulling over what to do with their over-the-counter bulletin board, declined comment. A spokesman for the NASD also wouldn't comment on the Coulson proposal.
