NASD's
New Bulletin Board Rule:
More Useful Information for Investors
By Timothy Major and John Worrell
Pennaluna & Company
A
wave of change is sweeping across the Over The Counter Bulletin
Board.
You may have seen signs.
Maybe you wanted a quote, but the stock had vanished from the
system. Or a trading symbol suddenly sprouted an extra letter
"E", hanging off it like a new tail.
Such oddities are sparked
by an important new amendment to the Rules of the National Association
of Securities Dealers (NASD), the body that operates the Bulletin
Board through its Nasdaq Stock Market subsidiary.
It's called the OTC
Bulletin Board Eligibility Rule. Approved in January 1999 by
the Securities and Exchange Commission (SEC), it was phased in
over a period of a year and a half and became fully effective
in late June.
Big Change
The
new Eligibility Rule marks a fundamental shift in Nasdaq policy.
Basically, it mandates
that a stock may no longer be quoted on the Bulletin Board unless
the company is "fully reporting". In other words, the
firm must provide audited financial statements and report current
financial information periodically to the SEC, or to industry
regulators in the case of banks and insurance companies and these
reports must be filed on time.
If reports aren't filed
when due, a short grace period is allowed. (At this point, the
trading symbol gets that extra "E" to red flag the
situation.)
If the problem isn't
corrected, then the stock is cut from the Bulletin Board which
means it loses significant market exposure, and often value.
Then the disqualified
stock may drift into a "work out" market devoid of
firm dealer quotes. Or it may move via special exemption onto
the Pink Sheets, a smaller quotation medium that's been published
for market makers for nearly a century. (The Pink Sheets, taking
a cue from the Bulletin Board, are also undergoing major changes
and moving online at www.pinksheets.com. In August, this new
website began publishing free 15 minute delayed quotes on Pink
Sheet stocks, and also some basic company data.)
The Aim: More Information
The
goal of the new Eligibility Rule is to give investors better
and more timely information about companies whose stocks are
quoted on the Bulletin Board often small, thinly capitalized
firms whose uncertain futures offer speculative investors the
possibility of either great reward or great disappointment.
These stocks are generally
low priced. Many are under $5 a share, some only pennies. Still,
more than 900 Bulletin Board stocks are quoted above $5 a share
as we write, and nearly 20 are over $200.
Adena
Friedman has served as Director of the OTCBB for the past three
years. She manages a staff of about a dozen people at NASD headquarters
in Washington D.C. An articulate woman with a MBA from Vanderbilt
University, she recently met in her office with our associate
Tom Wobker.
Friedman told him she
believes the Eligibility Rule aids investors by providing added
information about companies.
"One of the goals
we have for the Bulletin Board is to make more useful information
available to investors, and I think the new rule is serving that
purpose," she said. "The change gives them access to
more information and more objective information than they had
before. I think it gives them some degree of extra protection."
Growing Popularity
The
timing of this important change coincides with an upsurge in
popularity of the Bulletin Board, which accounts for more than
90% of all U.S. over the counter trades. (An over the counter
stock is one that's not listed or traded on Nasdaq or a national
securities exchange.)
As the great bull market
of the last decade took off, so did trading on the OTCBB. In
1995, daily volume averaged about 41 million shares on fewer
than 7,000 trades a day. For the first quarter of 2000, that
average skyrocketed to over one billion shares on 200,000 trades
a day.
Director Friedman attributes
much of the Bulletin Board's recent popularity to three factors
that all converged at once.
"We now have a
great deal of media focus on the stock market, both on TV and
in the press, so the public has been made more aware of the financial
markets. Also there are free delayed quotes available in many
places on the Internet, and there are Internet financial chat
rooms that didn't exist before, and all these things probably
lead to more investor interest," she says.
Fewer Stocks
One
notable effect of the new rule is a sharp decline in the number
of stocks quoted on the Bulletin Board.
SEC reporting can be
a relatively complex, slow and expensive process. It involves
certified public accountants and often securities lawyers. Many
stocks were dropped when firms either decided not to spend the
time and money needed to report, or missed their phase-in deadline.
Bulletin Board stocks
declined from nearly 6,700 in June 1999 to around 3,700 in June
2000, as roughly 3,000 non-reporting companies fell away. (It's
likely some are now working on filing paperwork or answering
SEC comments and will eventually be quoted again.)
Despite this reduction,
investors seem hungry for the fully reporting stocks that remain.
Total OTCBB trading volume for February 2000 rose to 24.2 billion
shares over four times the February 1999 total. Volume crested
at over 25 billion shares last March, before falling abruptly
in April's sharp market correction to levels not seen since 1999,
and then drifting lower during the summer trading doldrums.
Future Growth
Corrections
and pullbacks are to be expected, of course. But it seems likely
that unless a strong bear market hits, the Bulletin Board will
continue to attract growing numbers of aggressive investors well
into the future. There are several reasons.
Continued economic
expansion, demographics that favor saving and investing, the
popularity of financial news media, and greater interest in mini-and
micro-cap stocks, all fuel the trend. Wider delivery of market
data also plays a key role.
The number of professional
market data terminals that access OTCBB real-time quotes has
now climbed to roughly 500,000 worldwide. In addition, the Internet
today carries these quotes in delayed form to millions of individual
home and office computers. Such exposure dramatically increases
the potential size, breadth and liquidity of this marketplace.
More Changes?
We
can probably expect more changes down the road, since the Bulletin
Board is relatively young and still evolving. Developed in 1990
as a pilot program for a computerized real time quotation medium,
its goal was to improve market transparency and regulatory oversight
by quickly disseminating quotations and sales information on
over the counter stock trades.
Before the Bulletin
Board, such information was limited. Quotes were published only
once a day on the old Pink Sheets and other market data was very
hard to come by. So the OTCBB was a big step forward.
Upgraded periodically
from the outset, today it gives not only real time quotes but
also last sale price and real time volume data made possible
because every Bulletin Board trade is now reported within 90
seconds through an automated confirmation system. This gives
investors, brokers, dealers and companies a much clearer picture
of the current market. It also helps NASD Regulation the independent
NASD subsidiary that regulates OTCBB market makers to keep a
closer eye on trading activity.
www.otcbb.com
One
of the Bulletin Board's more useful innovations for investors
is the website at www.otcbb.com.
The site publishes
market statistics in a number of different categories, OTCBB
news, investor information, FAQ's, and other data. Various trading
activity reports are also available there for a nominal fee.
Latest additions to
the site: free 15 minute delayed quotes on Bulletin Board stocks,
including inside bid and ask prices, cumulative share volume
for the current trading day, and other data.
Director Friedman is
upbeat about the website's growing usefulness. Relying on her
"right hand" product manager Liz Heese and skilled
information technology support people, her aim is to keep improving
the information investors find there.
"We want to provide
plenty of information for investors", says Friedman. "But
we want to keep the site simple to use and not too cluttered."
A Hit Or A Miss?
Other
OTCBB changes are also underway. They include Nasdaq's new trade
and quote halt authority, a proposed pilot program for limit
order protection, a new minimum quotation size rule for high
price stocks, and possible amendment to the Three Quote Rule
to speed up trade executions.
But the Eligibility
Rule promises more dramatic and immediate impact on investors
and the marketplace than these other modifications do.
While it's too soon
to fully assess the results of the new change at this point,
we believe the Eligibility Rule is already exerting a strong
positive effect on the Bulletin Board.
Along with its positive
potential, though, our experience suggests the new rule also
brought some investor confusion along with it.
Many of our customers
trade Bulletin Board stocks. They've expressed a wide range of
reaction to the change over the past months. Some folks called
us puzzled about the symbol mutation when the extra "E"
showed up. Others were concerned because their stock was cut
from the OTCBB and moved unannounced over to the Pink Sheets.
Some felt the change would lead to less "game playing"
on the Bulletin Board. Others thought the process was overly
complicated.
But this initial confusion
seems to be fading away and should gradually disappear.
We think the bottom
line is this. Despite the turmoil of implementation and the usual
discomfort of change, we expect that over time the Eligibility
Rule will enhance investor safety and confidence. We believe
it will lead to a more transparent, respected and important market
for small company stocks.
Editor's Note: Timothy
Major (BCom) and John Worrell (BS, MBA) are stockbrokers with
Pennaluna & Company in Coeur d'Alene, Idaho. Their phone
is 800-535-5329. The firm trades stocks on all U.S. and Canadian
exchanges, Nasdaq, OTCBB and Pink Sheets and has specialized
in low cap stocks since 1926. Visit the Web site at www.pennaluna.com
and e-mail is pennaluna@pennaluna.com. Tom Wobker of the firm
provided research and other assistance.
