Dark Companies, The SEC, OTC Markets, Brokerages

Every company must file reports with the Securities and Exchange Commission (SEC) when first selling shares to the public.  Dark companies are those that have retreated, often times leaving shareholders with heavy losses and a stock they know nothing about.  They have deregistered from the SEC and forgotten about the very shareholders they once asked for money.  Dark companies have shirked their fiduciary responsibility while the SEC, who is supposed to protect us, allows this to happen.

There are several levels of dark.  When companies deregister from the SEC they move onto the OTC Markets group of exchanges.  Some continue to file all the normal SEC reports.  Some file only annuals.  Some file through the official OTC Markets channel while some post reports on their own website or just mail a paper copy to shareholders.  Some make all the reports and just give them out when asked.  Some require proof of stock ownership and signing of a non-disclosure agreement.  Some go completely dark and share absolutely no information.  Some still pay for an audit while others don't.

Most companies are required by state law to provide annual financial statements to any shareholder who asks as well as hold an annual meeting.  NY and DE for example have these state laws in place.  Not all companies care about this law.

Unfortunately the industry makes it difficult to deal with dark company stocks.  Brokerages don't want to support trading while the companies don't want to give out information.  But behind the difficulty lies opportunity as not many people fish in this pond.

I wrote this page to organize the series of blog posts I have written to do with dark companies, the SEC, OTC Markets, and brokerages.  This is a very important group of information.

First Fidelity blocked me from buying any more dark stocks.  Actually they block purchases of any stock on the OTC Market stop designation list (more on that throughout these posts).  This after I already held these stocks in my Fidelity account.  I had been a customer for many years and managed a few retirement accounts through them.  I called, emailed, and online chatted with way too many support people but in the end they somehow feel it's 'too risky.'
--> Fidelity blocks dark companies <--

One big problem with these dark companies is the SEC allows it all to happen.  Many companies deregister when they should not be allowed to.  Shareholders are left with a dropping stock and no information with which to make an informed decision.  The SEC's ridiculous definition of shareholder "of record" aids these companies.  I wrote a letter to the SEC then a blog post encouraging others to do the same (I still encourage you to write to the SEC as noted in the post).  Somehow Jason Zweig found my blog post and quoted me in a WSJ article (free version here).  Jason focused on how misrepresentative this SEC definition of shareholder of record really is.
--> The SEC allows companies to go dark <--

The most surprising thing was when OptionsHouse abruptly gave me 30 days to close my account.  My wife got the same message on the same day for her account.  Again I was on the phone with customer service so much they must have hated me.  I got passed up to a manager but could not get any higher.  They never would tell me why they chose to close my account but I think it has to do with my owning of dark companies on the OTC Markets stop designation list.  They let me buy the stocks then told me to leave.
--> OptionsHouse kicked me out <--

When Fidelity blocked dark companies I started looking into other brokerages to move my accounts then OptionsHouse really pushed up the priority.  In the end I contacted every online broker I could find.  I talked with 40 brokerages and only 2 said they would take my accounts in transfer.  A number of brokerages would let me trade the stocks I want but almost none would take my stocks in an account transfer.  Still I gathered information from each broker on how they treat dark stocks.  This post gets into the details of the OTC Markets stop designation list that influences brokerages.  A table is provided to summarize all the info I gathered from the brokerages.
--> Brokerage Firms, OTC Markets, and Dark Companies <--

I sent my blog post Brokerage Firms, OTC Markets, and Dark Companies to the CEO of OTC Markets and pretty quickly got a call back from him.  We talked on the phone along with some of his colleagues and they explained their side of the story.  The problem is they are assigning some level of risk to these dark companies without really analyzing the company.  If a dark company does not file through the official OTC Markets channel, and pay the associated fee, they end up on the stop designation list.  Unfortunately brokerages seem to want this stop designation list and use it as a filter.  I wish OTC Markets would keep the commentary to themselves.
--> A Conversation With OTC Markets <--

After a few months with T Rowe Price I moved over to PennTrade.  I now have all accounts with PennTrade that I am allowed to move.  I still have a 401k with Fidelity.
--> I've Moved to PennTrade <--

1 comment:

  1. I have accounts with Scottrade and Fidelity. Scottrade seems to have most OTC stocks available that I have tried to purchase. The trades on OTC cost more, are as much as $12 per trade. My problem is access to international markets, I have been doing research on Interactive Brokers and I think that they may have even better access to the international markets.

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