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 <--

PennTrade has shut down.  All accounts were being moved to a full service, no online trading, brokerage so I had to move.  I'm happy to report Schwab took all my account transfers in kind with tiny dark OTC stocks inside.  I'm no longer at T Rowe Price or PennTrade or Optionshouse.
--> My Brokerages: Fidelity, Schwab, Etrade <--

10 comments:

  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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  2. these companies are market maker money laundering stocks, they want you to sell them worthless stock to your broker since they are short and your position is in the red,...the broker pays you nothing and you get it off your brokerage account. they keep it trading so all your retail loser can sell and close your losing positions. or leave the stock.

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  3. Hello, I know that even with the SEC allowing companies to go dark, if the company is publicly traded, without a listed market (so OTC mostly), they still should be filing with FINRA for actions (such as dividends, splits, etc) under Rule 6490. I've heard that there are penalties if they don't do so (though it looks like they top out at $5k per violation). However, I don't know how much teeth it has, nor how often it is enforced. Do you have any experiences with this? As I'm in one OTC stock that had a split (per the financial statements), but it still hasn't been reported to FINRA or the DTC, as it is still being listed at the OTC markets as pre-split.

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    1. Sorry I don't have any experience with that. My experience with these companies is they file or don't file as they please and it's up to you to take them to court. Some will be nice and respond if you just ask them. Some will ignore you.

      I suggest contacting the company

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  4. Looks like Penntrade is going belly-up, this notice is on their site now:

    ---
    Dear valued client,

    As of June 3, 2019 Paulson Investment Company, LLC’s clearing relationship with RBC Correspondent Services will be terminated. After the termination date, all accounts remaining at RBC will be entered into liquidation only mode meaning no new purchasing transactions can be conducted into and any actions needed for your accounts remaining at RBC would need to be directed by you directly to RBC rather than through Paulson. You will still be able to view positions from the Penntrade site, but no account transactions will be able to be conducted. RBC’s Client Service team can be reached at 612-371-7830 to facilitate any requests.

    Account Transfer, Cash Distribution, and Securities Sales:

    Cash Distributions: Please call the Client Service Team at 612-371-7830 and RBC CS would work directly with the you to disburse the funds to you via, check, ACH, or wire.
    Cash & Securities (including limited partnerships or other physical securities):
    For transfers of accounts you would need to establish an account elsewhere and submit ACAT forms to their new firm to submit via the Account Transfer system.
    Please call 612-371-7830 to request a liquidation of a position if you seeking to sell any existing positions in your account.
    If a position is worthless, you can sign a dollar write off letter and submit to RBC CS or call 612-371-7830 to obtain the form.
    If a security is in physical form, please call 612-371-7830 to have it sent to your address of record provided it’s not a retirement account.
    Paulson’s Idaho office and brokers including the Penntrade platform will be moving to another broker dealer Glendale Securities where it is intended all Penntrade accounts will be transferred to. We will be reaching out to you with further information on the transfer process and timing in the near future. You can get into contact with Glendale directly by calling John Worrell at 208-415-1932.
    ---

    So I guess our accounts are "intended to be moved" to Glendale. Whether that's good or bad, no idea, but I would certainly have appreciated an earlier heads-up, and a clear plan instead of an intention. June 3 is a week from now; no way I can liquidate before then, so I'll just have to hope my account is transfered to Glendale, that Glendale is a good broker, and that they accept foreign (Dutch) accounts. If not, I guess T Rowe Price is the least worst option remaining?

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    1. Dang that stinks. Guess our accounts will be moving to Glendale. I wonder if they'll have online trading.

      I'd like to move my accounts to Schwab. Maybe I should just try and see what happens

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    2. Yeah we'll see.

      From http://www.nonamestocks.com/2016/10/brokerage-firms-otc-markets-and-dark.html I got the impression Schwab was less OTC/dark/penny friendly than T Rowe Price, may I ask why you're thinking of moving to Schwab?

      Thanks for sharing all the research on brokers btw, that helps a LOT!

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    3. My issues with T Rowe Price were they have a restriction with how many shares can be traded online and they won't let me trade my wife's account online.

      With Schwab there are zero issues once you have your account set up. They let me trade anything I want and can do it all online.

      Issue with Schwab from last I asked was they would not allow OTC stocks to transfer in kind when moving your account over. I will ask them about this again or else I might just try to move one.

      I talked to PennTrade this morning. Not an ideal situation. End of this week they will no longer have access to our accounts. We will be able to sell by calling RBC but cannot execute any more buy orders. The accounts will be transferred to Glendale but that won't occur until July some time which is horrible. And then at Glendale there are no online trades.

      So I'm going to move my accounts once again. I have accounts at EE TRade and Schwab which both allow me to buy and sell anything I want. I'd like to transfer into one of those. If not then I'll do T Rowe Price. But it's been long enough that I need to call them again to ask latest status on their rules.

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    4. Ah yes, I forgot that you mentioned those restrictions @ TRP.
      Good to know that it'll take so long for the accounts to be transferred to Glendale! I don't want to wait that long, think I'll move my Penntrade account to TRP. I don't really mind having to call them for big orders, and from your research I get the impression they're the most grey/dark-company-friendly of the bunch, and have the biggest chance of actually transferring grey/dark stocks in.
      Thanks again!

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    5. Right, I called T Rowe Price (in the US) and they say they don't accept clients from the Netherlands. They directed me to their UK branch but I'm not sure I want to go there (might have different rules for OTC stocks, etc).

      But I just realized that according to your list, Interactive Brokers *does* allow transferring grey stocks in, and I have an IB account. So then all I need is a Schwab account for new grey stock buys (which IB indeed doesn't allow) and I should be set :-)
      Now let's find out if Schwab actually wants to open an account for a strange foreigner like me...

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