Saturday, July 31, 2021

Brokerages, the new SEC Rule, and a Podcast

Now that the SEC followed through with their rule 15c2-11 change blocking quotes from non-reporting companies, the brokerages are all backing away.  I don't know if the SEC realized this would happen but it seems like every online brokerage company's response is to just take their ball and go home.  

In recent weeks we've seen announcements from Schwab, TDAmeritrade, and others saying they will not allow clients to purchase non-reporting stocks after August 2021.  Unfortunately I don't know of a single online brokerage that will let you buy dark stocks after the rule change goes into effect in Sept 2021.  

I was a guest on The Investor's Roundtable the other day to discuss this topic.  You can hear the audio here and watch video here.  Give it a listen to hear my own opinion as well as some others I really respect.  I have to say it was a real trip to be on a panel with my hero Dave Waters of OTC Adventures / Alluvial Capital.  

You can see the full Schwab statement here and I've attached screenshots to the end of this post.  TDAmeritrade says the same thing which makes sense given their merger.  They will not allow any more buys of anything not listed as current on OTCMarkets.  No stop signs, no grey market, no caveat emptor.  At least we can still buy the yield sign Pink Limited Information tier stocks so there's that.  In all, Schwab is turning off the lights on ~6-7k stocks when you combine this with the Caveat Emptor announcement from earlier this year.  It's so sad.  

I've run into similar issues with brokerages before and 5 years ago I contacted every brokerage I could find to see who would let me buy these types of stocks and who would allow an account transfer containing these stocks.  You can see the results here and there were only a handful even at that time.  My plan now is to ask around again, starting with those brokerages who did not give me an explicit no last time.  But with all the uncertainty right now I'd bet I have to wait until Oct to get a real answer.  

As of right now I know T Rowe Price will still allow purchases of dark and caveat emptor stocks but I've heard they will not after Sept.  I have been told Canadian brokerages will allow purchases right now but I haven't confirmed myself.  I know at least some full service brokers operating through Pershing, like Odean, will allow customers to buy anything still, but I don't know what they'll do come Sept.  

The basic change coming from this SEC rule change is no brokerage is allowed to provide bid/ask quotes for any non-reporting stocks.  In response, OTCmarkets has put in an SEC proposal to move all these dark stocks onto their Expert Market where they would provide quotes and qualified investors could trade.  So far the SEC has not responded to the OTCmarkets proposal which is messed up since the rule goes into effect in a matter of weeks.  When I've asked brokerages about this they can't even respond because it's not a real thing yet.  

I think we will have a way to trade these stocks at some point, '"m just not clear on what that will entail.  It may require higher commission payments.  I may have to *gasp* pick up the phone to call in trades.  It may not be available for some time after Schwab blocks me from buying dark stocks.  I really don't know but I think capitalism will find a way.  

So the question is what can you do about it.  Bitching and moaning is fun but gets us no where so what I suggest is two fold:

  • If you want to trade these stocks let your brokerage know.  They will only change if they know what their customers want.  I have told Schwab over chat, email, and twitter.  I haven't started in on Etrade yet but I will.  And I'll be contacting other brokerages.  
  • Push the SEC to adopt the OTCmarkets Expert Market.  I know it's not ideal, and you'd have to be qualified to access, but the Expert Market is better than nothing.  There are a lot of "what-ifs" but I have to try: if they do get the exemption, and brokerages do allow people to trade on this market, and if I can qualify.  
So pasted below is my comment letter to the SEC.  You can see them all here.  If you want to comment then you just have to send an email to with the file number S7-23-20 in the subject. My past attempts to influence the SEC have borne no fruit but I have to try again. If you want something you must fight for it.

disclosure: drained, sad, and shaking my head

Dan Schum Sat, Jul 31, 2021 at 9:29 PM
To whom it may concern,

I am a private investor focusing on the small and dark stock space.  I own many stocks affected by the recent change to SEC rule 15c2-11.  Recently a number of brokerages have communicated their actions as a result of this rule and unfortunately all of them are backing away from trading.  See Schwab's announcement here for example:  This is the important line from Schwab's announcement, "Ahead of the regulatory enforcement date, Schwab will o
nly accept orders to liquidate positions (i.e. no new buy orders) starting in late August 2021."  I am sad to say I can't find a single online brokerage that will allow me to buy non-reporting stocks after your rule enforcement date of Sept 2021.  

Whatever the SEC was hoping to accomplish with this rule change I can tell you many real companies are not going to change their ways.  Combine the SEC rule change with the brokerages' reaction of blocking buys and this means many stocks I own can no longer be bought.  TCOR for example posts financial results on their website and is currently selling for about 0.2x revenue, 0.4x book value, and 6x earnings yet no one will be able to buy it anymore.  DYSL sends a full annual report to all sharesholders, is profitable and selling below book yet no one will be able to buy it anymore.  I could go on.  There are real quality companies in this space and this corner of the market is one place where an individual investor can have a real edge over the big hedge funds of the world.  Please do not cut me off from my alpha.

I urge you to do two things:
  • approve the otcmarkets' Expert Market exemption without a sunset provision as soon as possible so brokerages and the market can react.  Without this approval brokerages cannot plan and carry out their business for clients like myself that would like to transact in this corner of the market.  
  • extend the adoption date of this new rule to give the market and brokerages time to adjust and approve necessary individuals

Thank you,
Dan Schum


  1. What I do not understand is why no one has proposed the obvious step of suing the SEC. Rule 15c2-11 is obviously unconstitutional as it prohibits dealers from advertising a lawful product. The Supreme Court invalidated similar laws in Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council and 44 Liquormart, Inc. v. Rhode Island. In the former case the purported law prohibited pharmacists from advertising the prices of drugs, analogous to 15c2-11's prohibition on dealers advertising the prices of stocks. The law violated not only the right of pharmacists to give information but the right of customers to receive information. The SEC's repeated statements in the responses to comments that it wanted to prohibit dealers from "publish[ing]" quotes, and that any expert market must not let retail investors "see" quotes, sets up the agency perfectly for a permanent restraining order.

    1. That is very interesting. Have to say I had not thought of that. I'd be down

    2. I have absoutely no experience with this kind of thing, but I'm also down to help anywhere I can. Maybe if some signatures need to be signed?

  2. With all these new investors coming in and not giving a damn about value and only thinking of brands and price, it seems like the SEC is kowtowing to help keep things safer for the most inexperienced to the detriment of the folks like us that want to dig and uncover hidden value. Stinks that regulators don't think of people in the middle that might not be at the level of an accredited investor yet and are actually delaying getting to that level. We're a minority, if we were a mob and could make a bigger, more noticeable stink out of it we'd be more likely to get results. I'll submit an SEC letter, thanks for the details on how to do that.

    1. A better and more fair solution that would limit speculation would be to tax the hell out of capital gains on positions held less than 6 months and have progressively lower rates for each year an investment is held. And for trades within tax deferred accounts that are held for short amounts of time charge a fee or surcharge. Reward plus punishment. I'm so tired of all these silly imposed limitations because of a mob of speculators and trying to "protect the little guy"...

  3. Well nevermind on those SEC comments I guess. They put out a press release today saying they don't care, "This proposed order is not on the Chair’s agenda in the short term"

  4. Will cos providing SEC statements only on their website stay listed? Or are all companies with a stop sign on OTC website going to be delisted?

    1. Neither the SEC or OTCmarkets recognize any company filings on their own company website, or mailed to shareholders. The SEC and OTCmarkets only recognize filings submitted in the official way through them. I think the OTC markets tiers and symbols like stop sign will be the official gatekeepers

    2. Ok thanks. I think some shareholders are going to be caught off guard by this.

  5. Dan, you have put in great effort toward this cause and it's a shame that the SEC's intended reason for this change, to provide transparency, will actually impair and further hurt the small investor. But let's not bitch and lets "what-if" this for a minute. What if we do not liquidate these positions, AND, the company never formally reports?

    The SEC rule requires no advertised "bid/ask"; the major brokerages likely find this portion of the business, under the new conditions, to be cost-prohibitive and have responded by completely eliminating trading.

    At the worst: the shares of the company will still be owned by you, but in a very similar manner to shares in a private corporation. It will likely be very difficult but not impossible to sale these shares, but you'll have to find a buyer the old school way.

    Likely scenario: Capitalism will solve this. A brokerage will realize the opportunity and begin catering to "dark" stocks, allowing trading but complying with the SEC rule. Eventually with time showing the negative impact of this rule and enough grass-roots complaining, the rule will be reversed.

    Just my two cents on the matter.

  6. Will Interactive Brokers permit trading in such stocks?

    1. I don't think so but I have not asked them myself. I think I've heard others say IB will not

    2. here is the response from Interactive Brokers:

  7. here's a very in depth article about the new SEC rule:

  8. I wonder if we should now assume that these stocks will go down. Basically, you can only sell them e.g. with IB. I wonder to whom, though. The (stock) supply is greater than the demand, which should have a negative impact on the price. At least in theory.

  9. alternative to dark stock could also be very tiny global stocks. according to this article, returns (55% p.a.) look similar to U.S. stocks. "But there are far more good-looking foreign nanocaps than US-traded nanocaps and their returns are also much more consistent".