The case for change in the Pink Sheets and Bulletin Board is clear. In this era of more transparency, it is difficult to find a reason to keep the lights dimmed for one crucial component of trading. That's the total short positions in all customer and proprietary accounts. Now there is a campaign to have this information published. It would be accomplished if the NASD expands 3360 of the Rules of Fair Practice so that all publicly traded equity securities are covered. This is not the first attempt at reform. But there is a more compelling reason for reform than ever before. The markets are still recovering from a period of shocks and scandals, a difficult period that can be traced in part to a lack of proper public disclosure of material information. This included real and projected stock prices, earnings and phantom earnings as well as executive compensation. The non-Nasdaq OTC market is no different from the other markets in how it responds to information. If certain information is properly and fully disclosed, then investors are well served. A recent decision by NASD Regulation illustrates how a lack of transparency in short selling can lead to widespread investor fraud. The NASD found that, in 1995, John Fiero and a group of traders orchestrated a bear raid using massive naked short selling. The goal was to drive down the price of securities underwritten by Hanover Sterling and Company. The activities of Fiero and others were ultimately blamed for the shocking collapse of Hanover Sterling's clearing firm, Adler Coleman.
Now the Pink Sheets LLC, which sells pricing and financial data in OTC securities, has petitioned the Securities and Exchange Commission to amend Rule 3360 [see Washington Watch]. Pink Sheets wants these total short positions reported in all publicly traded equities. The NASD would collect and gather the data. "The Commission's action is urgently needed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, and protect investors and the public interest," according to Pink Sheets. The last serious attempt to persuade the SEC to amend the rule was in 1991. The SEC published for comment a rulemaking request submitted by the Association of Publicly Traded Companies. Since then, the proposal has gathered dust. To be sure, the non-Nasdaq OTC market is not heavily capitalized in contrast to the New York Stock Exchange and Nasdaq. However, trading activity has been swelling with dealers attracted by the opportunity to make a spread. The regulators, who are undoubtedly busy, should pay attention. As the Cover Story on algorithms demonstrates, there are always new areas for attention. Where does all this rulemaking begin and end? In the case of the OTC markets, an established body of evidence suggests that regulatory attention is required. Waiting any longer might end in more investor fraud.
John A. Byrne
Editor
E-mail: john.byrne@thomsonmedia.com
