Thursday, October 27, 2016

A Conversation With OTC Markets

Recently I mailed a letter and copy of my blog post Brokerage Firms, OTC Markets, and Dark Companies to the CEO of OTC Markets (OTCM).  I explained the issues I have with OTCM's stop designation list and told him I'd like to talk about how we can come to a resolution.  Thankfully he took me up on the request and we had a phone call the other day. It was great to hear another point of view and I just wanted to do a follow up post to get out their side of the story.

I have written about the stop designation list in several blog posts: 
My problem is some brokerage firms (ex Fidelity) use the OTCM stop designation list as a risk filter, blindly blocking all of its stocks.  Also when an investor looks at the OTCM site to research a company they are greeted with stop signs and scary warnings about risk and withheld information.  I would rather OTCM kept their opinions of risk to themselves and Fidelity ignore the list.  Some companies on the list (ex HEMA, COMX, MRCR) do produce annual reports which are perfectly satisfactory to me.  OTCM is not researching each company it puts on the list.

I had a call with OTCM's CEO R. Cromwell Coulson, General Counsel Dan Zinn, and Director of Issuer and Information Services Liz Heese.  Overall it was great to hear another point of view and I'm thankful they took time to speak with me.  I try to consider all angles.

The main takeaway is OTCM editorializes on companies.  They are not a simple information source. They place a risk label on companies not filing reports through the official OTCM channel.  Whether you want to see the risk label or not, their brokerage company customers have asked for it and OTCM is delivering.  This is where it becomes clear how far I am in the minority with my investment style.  They mentioned 99% of the OTC dollar volume is through their exchange tiers with official filing companies.  So even those brave enough to venture into the 'risky' OTC space will not stoop this low!  I'm in the right place.

Why does OTCM put companies not paying their fee onto the stop designation list:
One thing Coulson drove home when speaking about this is I should direct my energy towards the companies and I agree.  Believe me I have tried.  I've sat in annual meetings and discussed the stop designation list face to face with CEOs.  I've talked to them about it on the phone and by email.  I told them the stock price is hurt by this and they should pay the fee to file through OTCM.  They have a fiduciary duty to act in shareholders' interests. Some care and some don't and that's just the nature of investing in dark companies.

Coulson and Zinn explained the dark company reports not filed through OTCM are not up to par.  OTCM has lower requirements than the SEC but there are still requirements and it's a gate which must be passed through.  One thing is if a company posts a report on their website they can take it down for any reason.  Maybe they find an error or just don't want the public to know the info.  I saw it happen with a HEMA report last year and the CEO told me they took it down because they thought that info clouded the picture of where their company was headed.  When a report is filed through OTCM is it online permanently for the world to see. Zinn took a look at the HEMA reports posted on their website and said they are not up to the disclosure standards of OTCM.  I did not go into details on exactly what the issue is.  And if a broker is getting fined or sued they would rather report to authorities that the financial reports came from OTCM than a company website.

Another thing here is we have to put energy into changing the SEC regulation on de-registering.  I have tried this as well and encourage you all to do the same.  The SEC allows these companies to go dark and screw over the shareholders.  It's criminal. 

Overall OTCM is not going to change the way they do business or take any companies off the stop designation list.  OTCM says they have various tiers to support the different companies out there and really the fees are not that high.  OTCM is a public company and has to make their money somehow.  Back when it was just the Pink Sheets all of OTC was considered a dark alley of questionable companies.  Now with their tiers 99% of the dollar volume through OTCM has come out of that dark alley.  The stop designation list companies represent a very low percentage of their volume. 
So OTCM has been moving in the right direction.  They offer different tiers and even outside of those tiers they offer an exchange for the stop designation companies.  

Why is Fidelity using the stop designation list as a risk filter:
This is my main question and it applies to other brokerages as well.  What do they care what I buy since it's my risk and I'm not paying them for advice?  Coulson told me he was aware this happens.  He said brokers and brokerages have been getting heavy fines and lawsuits as regulations have mounted over the years and it's getting worse.  I am not totally clear on the reason behind it all but somehow brokerages are liable in certain cases for securities they offer.  I wonder if these fines and lawsuits ever come from a self directed brokerage customer such as myself or if that's only in other products.  Either way this explains Fidelity's actions: they are protecting themselves.  Coulson explained the brokerages have been wanting a way to weed out the trash and they love the stop designation list.  OTCM's customers have been asking for something like the stop designation list and are glad to have it.

What's next:
I was very encouraged to hear the CEO say there are two things he will take into consideration from my blog and our conversation.  One is some way to allow grey market companies to disclose information through OTCM.  Two is work with brokerages to come up with a waiver that could be offered to investors: investors sign the waiver then the brokerage allows investors to trade stocks on the OTCM stop designation list. I would love the waiver as that's exactly what I asked Fidelity for at the beginning of all this.  I don't know if anything will come of this.  Hopefully we are getting somewhere

I still don't agree with the stop designation list but I understand why OTCM populates it the way they do. 



  1. Thanks for the legwork and info

  2. Dan,
    Thanks for the follow-up.

    The 99% dollar amount that OTCM reports is a bit misleading in my opinion in that several large multi-national companies do not have US listings or ADS shares and thus trade as 5 letter symbols. That was the case for Nestle, at least when I last looked at Nestle. Trading of Nestle will easily overwhelm the trading of 100's of companies like COMX, even though there may be a large number of COMX companies out there for every one Nestle.
    Also, as a profit-seeker, OTCM wants to encourage companies to file with them and pay their fees. If they don't, then they don't mind "hurting" the companies with warnings and risk alerts. Perhaps OTCM thinks that such actions will prompt the companies to pay the OTCM fees. IF not, then what does OTCM care. When the companies don't care enough to sign up with OTCM or don't want to be bothered with OTCM rules/fees, then it is the shareholder who suffers. Ultimately, it is the brokerage firms that are "at fault" since they choose to follow OTCM designations or not. Brokerage firms want income without problems, so they make strict rules to avoid problems that don't bring in much income. It seems like a catch 22. Ultimately, it seems like things fall back on the individual companies to play the game by the OTCM rules or not, since OTCM and Brokerage firms are not likely to change based on what you have learned thus far.

    1. Agreed on all that.

      I'll have to look through to try to figure out how many companies are on their different tiers. OTC Markets has 9627 total securities. The top exchange OTCQX only has 450 stocks. Next is OTCQB at 960. So between Pink Current Info, Pink Limited Info, Pink No Info, and Other OTC (Grey, FINRA BB) we have 8217 stocks...

      What I got out of the call with OTCM is they created the stop designation list for the brokerage firms and the firms like it. It did not sound like there was much room to get rid of it or remove the companies who post reports outside the OTCM official channel. The CEO said he liked my blog post because it showed me finding brokerages who would offer the stocks I want so I think in his mind there will be some brokerages who serve investors such as myself and others who don't.

      We have SEC negligence allowing companies to go dark, brokerage firms blocking their own customers, exchanges labeling solid companies as risky, and dark companies not caring about their shareholders. What a pain

      The most promising thing I have is OTCM's CEO telling me he would consider working with brokerage firms on a waiver.

  3. most brokerages make you sign a waiver to trade options right now due to the risky nature of options trading, seems like they could easily do the same for dark companies

    1. You'd think... I've asked Fidelity and OptionsHouse for such a waiver and told it doesn't exist.

      Fidelity has a waiver for "penny stock trading" that increases the max allowed number of shares per trade but they have nothing for the stop designation list.

  4. Although his name sounds like a 17th century lord, I like Cromwell. I've long been a holder of OTCM and he and his team are quite good at making shareholders and small-fries feel listened to and understood. Thanks for the series here. I've also had many conversations with brokerages along the same lines and figured out really quickly it was lawyers who mucked it up (on both sides).

    1. One thing I can say for Cromwell is he certainly listened. I'm just a random individual investor and was able to get a call with the CEO, counsel, and a director. He could have just ignored me