The End Of The OTC Bulletin Board ?

Editors Note:

Enron, Another One, WorldCom, where will it end? Just when the few optimists left in the market were saying, “I think we’ve reached the bottom,” all of a sudden corporate malfeasance shows up to kick the corpse.

What’s next and how do we escape this market of despair and disinterest?

Solutions are on the way.

Does this mean tomorrow that the market goes back up for good? Of course not. 

However, the NASD (The National Association of Securities Dealers) has put in motion a bold initiative to help protect the average investor. We applaud them. Better yet, this new plan has been in motion long before Enron et al came to light and corporate responsibility became a political battle cry. We only wish that such vision were prevailing instead of intermittent.

So, what’s on the table is a dissolution of the present OTC Bulletin Board exchange, a venue for some of the greatest stock stories of all time, but undoubtedly an often dubious haven for stock scams and haphazard corporate reporting.

This new “BBX” could have an enormous impact on stock trading, as you know it. Some companies you own or follow will not make the cut. Others will and may revel and prosper in their newly refined status.

So, as usual, we asked Analyst Doug Rogers for his take on these sweeping changes. Will they really matter? Will this help stock prices now? 

Take a look at what our favorite analyst had to say:
 
 

The BBX: An Introduction

During the beginning of 2003, the NASD will introduce a new market platform called the BBX, or Bulletin Board Exchange.  The BBX will ultimately supplant the current OTC Bulletin Board after a reasonable transition period and presents a host of changes aimed at increasing corporate accountability, investor access and stock liquidity.  The primary changes to the current system focus on corporate governance and accountability, and establishing an electronic trading platform to enable real-time quotes, trade data, visibility and overall access by professionals and individuals alike.  These changes, although conceived some time ago, are nonetheless timely when considered in light of the current crises of corporate governance, ethics and accountability.  The proposed changes that we have seen should produce a more robust and virile market for listed small and micro-cap companies and give them even greater potential for growth and success. 

The first, and most influential changes, for corporations that ultimately list on the BBX are the listing standards.  Specifically, changes to public float and shareholder requirements, public interest standards like those on the NASDAQ National Market (NNM), corporate governance standards, as well as listing fees will help to assure investors of the present and future viability of a certain issue.  Currently, the Bulletin Board is at best, an inconsistent marketplace and at worst, an unruly amalgam of the “rest” of the market.  The BBX should go a long way toward changing all of that.  Public Interest standards will be applied in the same manner that they are on the NNM.  This means that NASDAQ will maintain regulatory authority to deny listing or de-list an issuer if it feels, in its infinite wisdom, that taking such action protects investors.  Further listing standards, aimed at ensuring a minimum level of liquidity, require listed companies to demonstrate that there are at least 100 round lot (multiples of 100 shares) share holders and at least 200,000 shares in the public float.  Listing fees will also be charged for various classifications of stock issues that will help weed-out the companies that operate as “going concerns” and are financially viable, from shells and other static, bankrupt or otherwise defunct company issues.

The most dramatic change to corporate issuers as they migrate from the OTC Bulletin Board to the BBX is the imposition of new Corporate Governance Standards that will increase the integrity of the listed issues and provide a more highly developed system of oversight and executive compliance.  The following is an outline and short summary of the likely requirements for Corporate Governance Standards:

Ø Shareholders’ meeting and proxy solicitations.  BBX listed companies will be required to hold, and solicit proxies for, annual shareholders’ meetings.  Most federal and state corporation laws require annual meetings, however, the annual shareholders’ meeting and proxy solicitations are often overlooked or not held with quorum at the OTC level.  The more formal nature will increase costs for BBX listed companies, but it’s an expense they should already be booking to ensure total compliance with local and federal authorities.  We certainly welcome this and hope that investors view it as an opportunity to become actively involved in the operations of the companies that they maintain equity positions in.  Further, the generally more modest investor base of BBX companies should give many relatively “average” investors a substantial amount of voting power, if they choose to exercise that power.  I hope you all take full advantage of this.

Ø Independent Directors.  BBX companies will be required to appoint at least one independent director to the board.  NNM companies are required to appoint three independent directors (a majority), but NASDAQ is claiming to be sympathetic to the task of finding, insuring and possibly compensating that many independent directors for what could be well over 3,000 companies. 
Ø Audit Committee.  Hallelujah!  I’m happy to report that BBX listed companies will be required to appoint an audit committee that must be majority represented by independent directors.  Although watered down from the NNM requirement that the entire audit committee be independent, it is nonetheless, a stride forward.  However, like NNM and SmallCap issues, the audit committee will oversee related transactions and all companies will be required to adopt an Audit Committee charter.

Ø Voting Rights.  NASDAQ will prohibit the disenfranchisement of existing shareholders.

Ø Auditor Peer Review.  All BBX auditors must be subject to the same peer review standards as NNM auditors and abide by the American Institute of Public Accountants procedures.

Ø Shareholder Approval.  BBX companies will be required to seek shareholder approval for transactions that involve the following: stock option grants to executives and directors, below-market issuances (used for raising capital) and any M&A transactions.   This should provide investors with a greater control over their proverbial stock destiny.  Again, we encourage investors to take full advantage of this opportunity to help determine the operations of the companies they’re involved with.

Ø Annual and Quarterly Reports.  NASDAQ will require that BBX companies be pro-active with their annual and current filings by distributing annual reports to existing shareholders and making the current (quarterly) filings available upon request.  BBX companies can use the existing Form 10K filing as their annual report.  This should make current and annual operations and financial data more readily available to shareholders at the expense of some extremely tired IR professionals.

NASDAQ will extend a twelve-month grace period for many of the fundamental changes, but will require that compliance with any shareholder-related issues, such as enfranchisement and proxy solicitations take place immediately upon listing.

Corporate America has demonstrated that more corporate governance is certainly welcome.  However, I feel that the biggest impact that the BBX will have in relation to investors is that it will be a listed exchange.  What does this mean?  Currently, all OTC transactions are still handled via telephone, making it rather difficult for investors to access liquidity for shares they either own, or would like to own.  The ramifications for this are many.  First the speed of the transaction can create liability for investors because by the time that their broker finds some liquidity, the market may have changed drastically.  Further, it is hard to get an accurate quote because updating can be sporadic.  Thus the OTC system can create a lot of trepidation for investors interested in a BB stock that might push them elsewhere.  The BBX will, in my opinion, have an astounding impact on the virility of the small and micro-cap markets.  The BBX, by becoming a listed exchange, will enable electronic direct trading and access that, in my mind, means that the market will be available to institutions and individuals via the NASDAQ Level II and III screens, thus creating significantly more transparency, liquidity and confidence in BBX stocks.  This should drive substantial numbers of new investors to BBX companies, as well. 

I, for one, am extremely excited about the proposed changes and think that where the current system maintains walls, the proposed BBX will offer transparency, confidence and untold opportunity to investors, while holding company executives to similar operational and financial standards as their more mature cousins.  One note of caution:  The BBX is currently under review by the SEC.  This means that the information presented here is likely to change before the BBX goes live.  But, the initial information provided by the NASD indicates an exciting step forward for all of us; one that is probably 20 years late, but welcome indeed.

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