NASD Rule Aims to Counter Stock Fraud

The National Assn. of Securities Dealers on Thursday approved a rule that will force as many as 3,400 small companies off the Nasdaq Stock Market’s over-the-counter listing service that has been plagued by a rash of stock-manipulation fraud in recent years.

Most of these thinly traded stocks will have to move from Nasdaq’s OTC-Bulletin Board, a loosely regulated electronic-quote service, to the Pink Sheets, which post less timely quotes than those on the bulletin board.

NASD executives said they want to improve OTC-Bulletin Board standards to help protect the reputation of Nasdaq, the nation’s second-largest stock market, and rid the bulletin board of fraud.

But some Securities and Exchange Commission officials question whether the NASD rule might simply shift the venue for scam artists to the Pink Sheets, which are owned by the private National Quotation Bureau in New York.

The NASD rule would require all 6,800 companies on the OTC-Bulletin Board to register with federal regulators and submit to the SEC’s disclosure and accounting requirements. Only about half of these companies now do so. The proposal will be submitted for public comment and then forwarded to the SEC for final approval.

“These measures are designed to ensure that the level of integrity that exists in other parts of the market is achieved in the smaller capitalized section as well,” said NASD Chairman Frank Zarb.

Zarb estimated that more than half the 3,400 unregistered companies would elect to register with the SEC--and pay tens of thousands of dollars in legal and accounting fees--to avoid switching to the less reputable Pink Sheets.

A trade group of public companies agreed that hundreds of unregistered companies would choose to register with the SEC.

The NASD on Thursday also approved a rule to require broker-dealers to review an OTC company’s financial statements before recommending the stock.