OTC Markets Group Inc.
, Stock Forum
) President and CEO Cromwell Coulson wants to make it more difficult for shady characters to operate on his U.S. over the count market, by adopting new measures designed to increase transparency.
“Sunlight is the best disinfectant,’’ said Coulson, during a recent interview with Stockhouse in Vancouver. “If we can bring greater transparency to our market like we have done in the trading process, we are going to reduce the level of fraud.”
The move comes after OTC recently rolled out new eligibility rules that permit non-SEC reporting companies that trade on international markets, including the TSX, TSX Venture and Canadian Securities Exchange to list their shares on the second tier of the over-the-counter market.
Based in New York, OTC Markets Group Inc.
is a stock exchange-listed quotation system which operates a 3-tiered over the counter market for 10,000 U.S. and global securities. Of that amount, roughly 1,500 are Canadian.
The three tiers include OTCQX at the top level, the venture-oriented OTCQB in the middle (3,000 securities), and OTC Pink at the bottom.
Coulson was in Vancouver last week to explain the new rules to legal advisors and the media. He said he is well aware that the OTC market has a reputation for being a haven for miscreants engaged in manufacturing shells which are used for pump and dump schemes.
“There are some companies that treat their SEC reporting like a dating website profile. They are not completely truthful. They pretend to be someone that they are not,’’ he said.
“That hurts all investors.’’
Under the new transparency rules, OTC is requiring companies that are quoted on the OTCQB to verify that their information is up to date in a certification document signed by the company’s CEO or CFO.
OTCQB companies are also required to provide information about their reporting status, management and boards, major shareholders, law firms, transfer agents and investor relations and public relations firms. These rules became effective on May 1, 2014.
Rather than rely on the SEC, Coulson said OTC staff will also approach the transfer agent of listed companies to confirm the number of shares that each company has outstanding.
The biggest shareholder of OTC Markets with a 30% stake, Coulson said he cannot hope to clean up all of OTC’s problems overnight.
“You don’t snap your fingers and make the bad guys go away.’’
However, he said OTC Markets has taken a step along the way by “initially defaulting to transparency.” It has also implemented a ($0.01) bid price requirement which is intended to remove companies that are most likely to be the subject of dilutive stock fraud schemes and promotions.
As a result, any company that trades below a penny for any length of time will be downgraded to OTC Pink.
Meanwhile, OTC is reaching out to internationally traded companies who are seeking greater exposure to investors in the United States.
On May 1, 2014, venture-stage companies that traded on the TSX Venture, the London Stock Exchange’s AIM market and other qualified international exchanges (including the Canadian Securities Exchange CSE) became eligible for trading on the OTCQB.
“You don’t need to be SEC reporting any more. If you are on the TSX Venture or CSE, you can use your SEDAR disclosure,’’ Coulson said.
One of the key goals is to make OTCQB, a real venture stage marketplace in the U.S. similar to entry level markets like the TSX Venture Exchange in Canada and the AIM market in London.
The idea is to serve early and developing companies that don’t qualify for top tier markets, yet can still benefit from a well regulated market with information and verification standards, Coulson said.
There will be an annual fee for the OTCQB marketplace of $10,000 per year, and a one-time $2,500 application fee. These fees are discounted for current OTCQB companies that apply in 2014 to $7,500 per year for the first two years, and the application fee will be waived.
Separately, Stockhouse asked Coulson for comment on a Financial Advisor Magazine report which said the brokerage industry is hoping to head off a Financial Regulatory Authority (FINRA) proposal floated late last year that would have the regulator capture and retain a huge amount of client account data for compliance purposes.
According to Financial Advisor, brokerage industry sources say FINRA’s Comprehensive Automated Risk Data System, or “CARDS” has become one of their top regulatory concerns.
They worry about how Finra would use such a massive amount of client account data, how it would be secured, the costs of implementing the system, and why it is even needed.
Coulson said he can see why brokers are concerned. “I think the [CARDS system] could be hugely beneficial. But it also has huge risks because people are nervous about sharing information.’’
As outlined by Finra late last year, the CARDS system would download customer trade data from clearing firms and analyze it to identify churning, pump-and-dump schemes, excessive markups and mutual fund switching.
The data would also be used for exams of broker dealers