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JANE BRYANT QUINN
The National Association of Securities Dealers, known as NASD, is cleaning out its garbage pit, otherwise known as the OTC Bulletin Board.
That’s where prices are quoted for stocks that aren’t listed on the various stock exchanges. For the first time, Bulletin Board stocks will have to live up to respectable financial-reporting standards. If they don’t, they’ll be thrown off.
Around 6,700 companies trade on the board, which the NASD started in 1990. Many of them are legitimate. But the Board is also a playground for stock manipulators and crooks.
Until recently, the NASD didn’t pay much attention. The Bulletin Board quoted the price of any stock, of any quality, that a broker wanted to sell. The company didn’t have to file regular financial reports. No one checked to see if it was a real business or an empty shell.
As a result, phony stock promotions flourished, with some Bulletin Board stocks becoming the favorites of cheating Internet rumor sites and high-pressure telephone crooks.
The NASD found itself under fire for tolerating such a mess, especially since so many new investors are influenced by the Web. Board volume more than tripled in the past year, says Adena Friedman, director of trading and market services. This year, the board is averaging 350 million shares a day.
So finally, some minimum standards are coming into view, which should clear out the worst of the companies. If you’ve been picking up tips from the Web, you may be holding some of the cats and dogs the board is about to dump.
Since January, all stocks that come to the Bulletin Board for the first time have been required to file audited financial reports with the Securities and Exchange Commission, a banking regulator or an insurance regulator. Last month, this reporting rule was extended to all the stocks that are traded there.
The NASD is checking these older stocks in alphabetical order. In the first group of 93 stocks, only 29 were filing the proper reports. Another 13 hurried to do so. The remaining 51 don’t report, so their prices no longer show on the board.
In the second group of 177 stocks, 121 were thrown off.
Think about it: That’s 172 so-called public companies that won’t disclose to their investors their actual financial status and business prospects. They may send you short, self-serving statements. But they recoil from the level of truth required in filings to regulators.
The NASD cleanup squad is still working through stocks with trading symbols that start with A. By next June, it expects to finish with the Zs. All told, around 3,000 stocks may get the boot.
Anyone holding a stock that’s quoted on the board should ask the company whether it’s complying (or will comply) with the new NASD rules. If the answer is no, ask yourself why you’re investing in people like that.
You also might check on the companies that have been kicked off the board so far (you’ll find their names and ticker symbols at www.otcbb.com). Ask a stockbroker to tell you what happened to their price. In general, it can’t have been good.
Still, all is not lost for speculators dedicated to mystery stocks. Starting this month, a new electronic garbage pit opened for business: the Pink Sheets Electronic Quotation Service.
In print form, the Pink Sheets have been published since 1913 by the National Quotation Bureau, or NQB. They’re a daily listing of some 6,000 stocks not traded on any exchange.
Any company can be quoted on the Pink Sheets, with no continuing financial disclosures required. “We’re the flea market of securities,” NQB Chairman Cromwell Coulson told my associate, Dori Perrucci. Coulson expects to pick up 2,000 to 3,000 stocks that the Bulletin Board boots off.
Initially, electronic quotes are available only to brokers. But eventually, they’ll be on the Internet for everyone to see. Innocents will move seamlessly from the Bulletin Board to the Pink Sheets, led by some of the same stock manipulators as before.
To Coulson, that’s your lookout. “It’s like buying a used car at auction,” he says. “If you don’t bring in anybody to look under the hood, you’re an idiot.”
That’s a pretty fair warning, for idio-, er, investors whose “research” consists of following chat boards on the Net. Buyer beware.
Welcoming Y2K
For the most part, American companies are ready for Y2K. So says the brokerage firm Merrill Lynch in a sweeping report on worldwide preparation for the millennium’s end.
Millions of computer programs and chips have been replaced or updated since companies first began to learn about the millennium bug.
The bug would have stopped computers from accepting the new century’s starting date Jan. 1, 2000. That could have caused havoc, by shutting systems down. Instead, New Year’s Day should be just another Saturday for corporate America, including banks, brokerage firms, mutual funds, nuclear power plants, other utilities and airlines.
A June test of 34 of the world’s largest payment systems, which handle trillions of dollars daily, went off with no errors at all. Glitches will doubtlessly occur on Jan. 1. But when problems turned up in testing, they generally have been corrected fast.
So Y2K worries are fastening on two other targets. First, foreign countries how well are they prepared? And second, the American public will they panic at year-end, perhaps fed by scare stories in the press?
Merrill analysts are sanguine about Canada, Australia and industrial Europe. In Japan, the sectors the government oversees appear well prepared. This includes finance, utilities and air transport.
Poor disclosure makes readiness harder to assess in the developing world. Still, Merrill expects most of Latin America to escape economic dislocation.
Asia’s key companies also appear to be Y2K-compliant. But they might be undermined by outages at state-run power plants, which haven’t had the money to check all the chips in their older plants.
For countries at relatively high risk, Merrill fingers China, India, Thailand, the Philippines and Indonesia.
In the United States, by contrast, the major risk is fear itself. Based on no evidence at all, large numbers of people expect ATMs to freeze, checks to bounce and banks to fail. That ain’t gonna happen.
Y2K could actually offer a lot of investment pluses, according to Merrill analysts:
? In the next few months, economic growth will get an extra push worldwide, as companies stockpile components and supplies. They don’t want their own sales interrupted if a power grid fails somewhere in Thailand or India.
In early 2000, new orders for goods will probably slow, as inventories get worked off. But the slowdown will probably be modest.
? U.S. stocks and bonds might attract money fleeing potential turmoil in the developing world. This could cap the rise in interest rates and help push stock prices up.
If the opposite happens, and frightened U.S. investors bail out of stocks (especially stocks with connections abroad), the brave will be able to buy some good companies, cheap.
? Many companies did more than fix their millennium bugs. They also rethought their entire information systems. So they’re emerging from Y2K with a more productive infrastructure. What’s more, they’ll have more money to invest in their businesses, now that they’re over the expense of Y2K.
Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.
