finra

FINRA

For Release: 
Contact: 
Thursday, May 7, 1998
Nancy A. Condon - (202) 728-8379
  Other Contact: 

Barry R. Goldsmith - (202) 974-2850


NASD Board Approves Microcap Rule Proposals

Washington, D.C.—The National Association of Securities Dealers, Inc. (NASD®) today announced that its Board of Governors has approved a series of proposed rule changes for the OTC Bulletin Board® and the OTC market.

 

These rules, which will now be sent to the Securities and Exchange Commission (SEC) for approval, will enhance investor protection by ensuring that current financial information about the companies that are quoted on the OTC Bulletin Board is publicly available. The rules also include sales practice initiatives that will require brokers to take additional steps before they recommend a transaction in any OTC security, and provide investors in all OTC transactions with increased disclosure. The rules approved today will:

  • OTC Bulletin Board Eligibility Rule – Permit only those companies that report their current financial information to the SEC, banking, or insurance regulators to be quoted on the OTC Bulletin Board. Companies whose securities are quoted on the OTC Bulletin Board, when the rule becomes effective, will have 6-12 months to comply with the new requirements.
  • Recommendation Rule – Require brokerage firms to review current financial statements before they recommend a transaction in any OTC security (a security that is not listed on Nasdaq® or any registered national securities exchange).
  • Disclosure Rule – Require brokerage firms to provide investors with written disclosure of the differences between OTC securities and those that trade on a listed market. The disclosure statement will be provided on each customer’s confirmation following any trade in an OTC security.

Under the new OTC Bulletin Board Eligibility Rule, any company that does not make current filings with the SEC, bank, or insurance regulators will be eliminated from the OTC Bulletin Board after the phase-in period. By encouraging companies to provide information to regulators, this rule significantly increases the amount of current public information available to investors. Companies that are not eligible to be quoted on the OTC Bulletin Board would be eligible to be quoted in other quotation mediums, such as the Pink Sheets. Beginning in April 1998, the SEC required foreign securities to be fully registered with the SEC to remain quoted on the OTC Bulletin Board.

 

The proposed Recommendation and Disclosure rules would not apply to transactions in securities of banks and insurance companies, and to companies with more than $100 million in assets and $10 million in shareholder equity. Transactions with institutional investors will also be exempt.

 

"Effectively eliminating non-reporting companies from the OTC Bulletin Board, coupled with the required pre-recommendation review of current financial information and the additional investor disclosure, will help address microcap market abuses," said Frank G. Zarb, NASD Chairman and Chief Executive Officer.

 

In December 1997, the NASD Board agreed on the importance of the reform proposals and sought public comment on them. During more than two months of public comment, the NASD received a total of more than 60 comment letters, all of which were reviewed prior to developing these final rules.

 

The OTC Bulletin Board is a quotation service that displays real-time quotes, last sale prices, and volume information in domestic and certain foreign securities. Eligible securities include national, regional, and foreign equity issues; and warrants, units, and American Depositary Receipts (ADRs) not listed on any other U.S. national securities market or exchange. Unlike The Nasdaq Stock MarketSM or other listed markets—where individual companies apply for listing and must meet and maintain strict listing standards—individual brokerage firms, or market makers initiate quotations for specific securities on the OTC Bulletin Board. Currently, approximately 6,400 securities are quoted on the OTC Bulletin Board.

 

The National Association of Securities Dealers is the largest securities-industry self-regulatory organization in the United States. Through its subsidiaries, NASD Regulation, Inc., and The Nasdaq Stock Market, Inc., the NASD develops rules and regulations; provides a dispute resolution forum; conducts regulatory reviews of members’ activities; and designs, operates, and regulates securities markets all for the benefit and protection of investors.