SEC Targets Bulletin Board Fraud
In a move to combat fraud in thinly traded small stocks, the Securities and Exchange Commission approved a rule Wednesday that could force as many as 3,250 stocks--including hundreds in California--to be thrown off the electronic Bulletin Board market.
The SEC ruled that the roughly 6,500 companies whose stocks trade on the Bulletin Board--a computer-based trading venue run by the National Assn. of Securities Dealers--must file regular financial statements with regulators to maintain their stock quotes.
Only half of the companies currently submit such reports. Delisted stocks would be pushed to the so-called Pink Sheets, a paper-based quotation system that has long been the domain of the most illiquid and speculative stocks.
The rule, which was proposed by NASD, is intended to battle fraud in which unscrupulous promoters tout worthless stocks to unsuspecting investors. Many of those promoters’ targets have been Bulletin Board stocks, which are there only because they don’t meet the electronic Nasdaq Stock Market’s more rigorous listing standards for size and financial health.
The NASD wants companies “to give as much information as possible to the investing public,” spokesman Mike Shokouhi said.
However, some experts said the plan might actually hurt investors in so-called micro-cap companies.
Though they’re technically publicly owned, many credible small firms prefer to give investors as little information as possible. The businesses are often family-controlled and, unlike most other companies, intentionally blunt access to their financial records.
Those companies are unlikely to file reports and may actually want to be delisted, said James Mitchell, general partner of Mitchell Partners, a Costa Mesa investment firm specializing in small stocks.
“They’re legitimate companies, but they don’t necessarily care about their shareholders,” Mitchell said.
Conversely, “a company run by a promoter-type will take whatever steps necessary to keep its stock in front of the public” by filing statements and maintaining an electronic listing, Mitchell said.
Under the new rule, companies must file regular financial reports either with the SEC or with banking or insurance regulators. Companies have until at least July to begin submitting records.
Companies that don’t comply will be delisted alphabetically from July through June 2000.
The SEC is still reviewing two companion NASD proposals. They would require brokerages to analyze a company’s financial statements before recommending its stock, and to disclose to customers the difference between stocks trading on Nasdaq or an exchange and those that don’t qualify.
