On January 5, 1999 the SEC amended NASD rules to require that all companies whose shares are listed on the OTC Bulletin Board report their current financial information to the SEC (or, where appropriate, another regulatory agency). Prior to that amendment, a company’s shares could be traded on the OTC Bulletin Board even if the company was "non-reporting" – that is, it did not file regular reports with the SEC and thereby make information available to stockholders and potential investors. Companies that fail to comply on schedule will be delisted
The SEC acted in response to concerns over the potential for abuse and manipulation in the existing system. Much of the public perceives the OTC Bulletin Board as a highly regulated market similar to the New York Stock Exchange or NASDAQ, in part because OTC Bulletin Board prices and executions, like those at NASDAQ, are available electronically on a real-time basis. Indeed, many investors have assumed that the Bulletin Board is part of NASDAQ (it is not).
This potential for confusion has allowed unscrupulous brokers to blur the line between the highly regulated NASDAQ, where issuers must first meet stringent listing requirements and then make timely public disclosures on an ongoing basis, and the OTC Bulletin Board, where listing is not subject to such standards and no such routine disclosures have been necessary. On occasion brokers have fostered this misconception by incorrectly referring to the OTC Bulletin Board as the NASDAQ Bulletin Board.
The process of delisting companies from the OTC Bulletin Board if they don’t report their financial information began in July 1999 and will conclude in June 2000. It is anticipated that as many as 2,000 to 3,000 companies will be delisted during that time period. In most cases companies who lose their Bulletin Board listings will immediately become eligible for quotation in something called "the Pink Sheets." The "Pink Sheets" (which earned that name because they are printed on pink paper) are published by the National Quotation Bureau on a weekly basis and list prices for approximately 3,600 stocks, most of which are not traded on any of the national stock exchanges, NASDAQ or the OTC Bulletin Board.
Historically, brokers who want to buy or sell a "Pink Sheet" stock must first review the printed sheets to determine who the market makers are and what prices they have quoted for the stock (although "Pink Sheet" quotations are not binding). They are then required to obtain price quotations from at least three of the market makers before concluding a transaction. In the electronic age this process would be considered archaic. In the computer age it is absolutely Byzantine.
The National Quotation Bureau acknowledges that this process has long been outdated and says that it is putting "Pink Sheet" information online (www.otcquote.com). For the first time "Pink Sheet" quotations, as well as telephone numbers for market makers and information about "Pink Sheet" companies, will be available electronically to brokers and market makers who subscribe to the National Quotation Bureau’s new service. Since trading will not occur online, telephone calls to market makers will still be required. But the availability of current prices on a computer screen may help to elevate the "Pink Sheets" from a netherworld where prices have sometimes been nebulous and hard to find.
The "Pink Sheets" will continue to expand as they become a haven for refugees from the OTC Bulletin Board and new public companies that cannot comply with the requirements of the OTC Bulletin Board or the listing criteria of the exchanges. And therein lies the rub. The National Quotation Bureau is a privately owned company. It is neither a regulatory body nor a regulated entity. And while the SEC may continue to promulgate rules that require market makers to review certain information about a company before it can be listed in the "Pink Sheets" the fact remains that little, if any, of that information will be readily available to investors.
So what, if anything, has been accomplished by removing the most thinly traded and undercapitalized stocks from the NASD OTC Bulletin Board? Now, instead of being quoted and traded under the umbrella of a regulated entity, the NASD, quotations will be available only through a mechanism provided by an unregulated company.
Approximately three years ago NASDAQ tightened its listing requirements, thereby forcing companies that previously would have qualified for the NASDAQ Small Cap Market to list instead on the OTC Bulletin Board. In this manner NASDAQ rid itself of the pesky burden of monitoring and regulating the most easily and frequently abused sector of its market. Now the NASD has followed the same course. Step by step these stocks have been moved down, and virtually off, the regulatory ladder. The result: the NASD is relieved of a regulatory burden while investors may now be even less protected against the very abuses that caused the SEC to act in the first place. Now, more than ever, it is time for Buyers to be Wary.
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