Tuesday, October 4, 2016

Brokerage Firms, OTC Markets, and Dark Companies

Followers of this blog know I've had issues with brokerage companies due to the types of companies I own. I have contacted 40 brokerage companies in the past 6 months in an attempt to find one who'll give me the freedom I want. In this post I discuss findings.
If you're interested in this subject I'd suggest you read a few of my older posts:
My Brokerage Firms
Fidelity stopped allowing purchases of dark companies in March 2016. It was very surprising because I had made dark company purchases only a couple weeks prior. Fidelity continues to let me hold dark companies and will let me sell but not buy. I wasn't able to get a straight answer but in the end someone in Fidelity decided these stocks were too risky. Nothing would change their mind.  Specifically Fidelity will not let you buy any company with a stop designation from otcmarkets.com. What does that mean you ask?  Any company with a stop sign, skull and cross bones, or grey market symbol at otcmarkets is 'too risky'. We'll get into that more later. 

On Sept 1, 2016 OptionsHouse placed my account, and my wife's, into liquidation only status and gave me 30 days to get out or they would sell all my stocks for me. The infuriating part is they won't tell me why. I've been on the phone many times and sent too many emails. It was exhausting and in the end I still don't know.  I think it has to do with dark companies.  They told me it does not have to do with Etrade buying OptionsHouse. Again this took me by surprise because not long before getting kicked out I was buying dark company stocks. 

After a lot of looking around and talking with brokerages I have transferred my OptionsHouse account to T Rowe Price (TRP).  More about this below. I will be moving my non-401k Fidelity accounts over as well.  I chose TRP for a few reasons. Number 1 they are one of the few who would take my transfer at all.  Two they will allow me to trade dark companies, OTC stocks, and grey market. The fees are higher than a discount broker like Fidelity but not that bad. It costs $19.95 per trade and that drops to $9.95 if I execute 30 trades in a year (not sure if I'll hit that).  There is an annual account fee of $30 which will be waived if I hit 5 trades in a year.  They have pretty low minimum size requirements of $1k to open an IRA account and $2.5k for personal.

update May 18, 2017: 
I moved my accounts out of TRP and into PennTrade.  See here.  

update June 22, 2019
I moved my accounts out of PennTrade and into Schwab.  See here. 

Clearing Firm
The process of buying or selling a stock involves a number of steps and companies. I don't know a lot about it and don't want to. One important middleman is the clearing firm. When you buy or sell a stock online all you see is the brokerage firm's website. You type in the order and it goes through, what could be simpler. Well behind the scenes your brokerage is somehow passing that order through a clearing firm. Fidelity has their own clearing firm National Financial Services.  OptionsHouse clears through Apex Clearing. TRP clears through Pershing. Incidentally the TRP guy told me he thought Pershing was the largest clearing firm in the country. 

I mention this because in some cases it is the clearing firm who has refused to allow trading of 'risky' stocks like dark companies, grey market, whatever. Fidelity never told me it was their clearing firm but I know a broker whose firm clears through Fidelity and can no longer trade dark companies because Fidelity National Services has blocked them.  OptionsHouse never told me it was their clearing firm but another online brokerage  who clears through Apex explained they could not trade dark companies because their clearing firm does not allow it.

OTC Markets
For Fidelity and some other brokerages this comes back to OTC Markets. OTCM operates 3 levels of stock exchange: OTCQX Best Market, OTCQB Venture Market, and Pink. You can find the reporting requirements here, with special requirements for pink hereThe top two tiers seem to require SEC reporting standards: must file quarterlies plus an annual, 8Ks, form 4s, etc. At the bottom is Pink and within that there is Pink Current Information and Pink Limited Information.  Pink Current Info requires an annual plus quarterlies.  Pink Limited info requires only an annual.  Pink does not require an audit. 

OTC Markets generates revenue by charging the companies in its exchanges.  Requirement number one for each Pink tier is "Subscribe to the OTC Disclosure & News Service on www.otciq.com to publish your financial reports and material news."  See the requirements here.  Subscribing costs $1k to apply then $5k annually for Pink.  A company must pay to upload their filings through the official OTCM channel. 

Below all of these tiers are the OTC markets stop designation lists.  Companies on this list will show a big red stop sign, exclamation point, or skull and crossbones along with a warning such as this:

OTCM will tell you they maintain the stop designation list to protect investors from fraudulent companies. I'll tell you it's that plus profit and laziness. Fidelity told me point blank they will not allow purchases of stocks on the OTCM stop designation list because those stocks are too risky.  The whole reason Fidelity stopped allowing purchases of my stocks is someone decided the OTCM stop designation list was scripture for weeding out risky stocks.  Fidelity is not checking in on each company, they are blindly following the list and that's a problem because OTCM is also not checking in on each company.  OTCM does not view it as their job to seek out company filings.  The only way OTCM will acknowledge financial reports is if the reports are submitted in the proper way to OTCM directly.  Posting reports on a company website, sending reports to shareholders, or including financials in press releases does not count.  

OTCM is holding companies hostage for a fee.  I own a number of companies (MRCR, HEMA, SIMA) that produce annual reports yet OTCM gives them a stop designation as if they're a fraud avoiding the public.  If the companies pay up they would magically be deemed safe as their disclosure already qualifies for OTC Limited Information. Let's go through a couple of examples.

HEMA posts annual and bi-annual audited financial statements on their website.  They send an audited annual report to shareholders and anyone else who asks for it.  Even the HEMA news page on otcmarkets shows their press releases and financial statements.  Yet OTCM maintains HEMA on the stop designation list for witholding information and as a result some brokerages will not allow the stock to be purchased:

IOMT posts unaudited annual reports on their website for the world to see.  They hold an annual meeting.  When I emailed in a couple questions the company promptly responded and talked with me over the phone for almost an hour that same day.  Yet OTCM has the gall to claim the company may not exist.  What a bunch of BS.  OTCM thinks this company is so bad they won't show a quote even though they could gather all the information they want if they'd just get off their rear and visit the company website.  I guess that's too much to ask.

I have contacted otcmarkets about this, as have others.  All we are told is the companies on the stop designation list can get back into good standing by following the process (pay the cash money) to get listed on Pink.  All OTCM cares about is their money, not maintaining a list that accurately reflects non-reporting companies.

Brokerage Firm Info
Now onto the brokerage firm research information.  If you are interested in the type of companies I write about then perhaps you too are in need of a new brokerage firm.  Unfortunately it seems the industry is shifting away from OTC stocks and dark companies in general.  This year I've contacted 40 brokerage firms and got responses from 36.  There are 7 more I didn't contact either because they had merged into something else or I was ineligible.  Below is a table with the results.  I wish I had a more organized grouping but some brokerages gave more info than others and it wasn't exactly a scientific study.

I approached these companies with a few questions.  First would they let me transfer over an account in kind containing OTC stocks.  Second would they let me trade dark companies with a stop designation from OTCM (I used examples COMX, HEMA).  And then again same questions with grey market securities (example SIMA).

Of all the companies I contacted, a grand total of 2 told me for sure they'll take my accounts in transfer and let me trade what I want: T Rowe Price, Union Bank.  The problem with Union Bank is high fees for penny stocks.  Penntrade told me they thought I could transfer and trade what I want but could not give me a guarantee, they said we have to try to find out.  Interactive Brokers and Placetrade were close but would not let me trade grey market stocks.  Motif said they'd let me transfer but not trade.  I didn't get into the questions with some brokerages because they had other restrictions like too high of a min account value.

The answers I got are not written in stone so I suggest if you're looking for a brokerage you investigate yourself.  I'd be glad to answer any specific questions.  These companies have changing policies and a few times I was given one answer only to be told later something different.  ETrade told me no transfer but I know they took the transfer of one blog reader who had a larger account size.  Going back to the clearing firms, more than one brokerage firm told me National Financial Services would not let them trade dark companies while one brokerage told me it was fine even after double checking. 

The main issue I found was in transfer.  Finding a brokerage house that will take any OTC stock transfer in kind is difficult.  A number of brokerages will let you trade stop designation OTC stocks and grey market but almost none will take an OTC stock account transfer in kind, even a fully reporting stock on OTCM's highest tiered exchange.  The transfer issue has nothing to do with being dark.  I asked many brokerages why but they never have answers.  The best I got was one who told me OTC stocks are risky because their price can swing widely while the transfer is occurring, as if OTC stocks are the only ones whose price can change.  

What Have I Learned
The industry is moving away from us and I'm sure it all comes down to money.  Transacting penny stocks, dark companies, grey market must not be profitable for them.  If it has been this difficult for me then it is difficult for others and I must be fishing in the right pond.  More trouble = less competition

disclosure: long all stocks mentioned

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  1. Hmm. "Activist" opportunity here?

    1) A company satisfies all of OTCM's requirements except paying the extortion fee.

    2) Individual investor builds a position using one of the few brokerages that allows him or her to trade that company.

    3) Then, said investor pays the companies fees to OTCM to get the "stop" designation removed, opening up that company to a much larger set of brokerages.

    Optional 4) pump stock on twitter. :)

    I'm guessing OTCM would not let a 3rd party pay the filing fees.

    1. I don't think pumping a stock on twitter should be classified as activism.

      If anything, it is unethical and will hurt a number of people.

      To the author, I concur, Interactive Brokers aren't letting me purchase anything grey market. Which sucks, because I see value/opportunities that you post but can't ever partake!

  2. Thank you for sharing all your legwork

  3. What is the approximate account size you need to transfer otc into Etrade?

  4. I just tried transferring a position from Interactive Brokers to Etrade and it was rejected because they will not accept Pink Sheet securities on transfer. No problem to buy and sell but will not accept transfers.

    1. Hello,
      Did you find a Broker who can transfer your stocks?? I have the same problem. etrade do not allow transfers from pink sheet. Please if you found any let me know. Thanks

    2. This blog post lists a handful of brokers who told me they would allow transfers and two brokers specifically that I have transferred info.

    3. Which two Brokers you to transfer? I previously tried Charles Schwab which they only allow OTC which are $5 and above

  5. A reader has informed me that Scottrade will not trade grey market. He says they are merging with TDAmeritrade. I am surprised at this since TDAmeritrade and Scottrade both told me they will allow grey market but what can you do.

  6. I have Accounts with Interactive Brokers, Wells Fargo Investments and Fidelity and only IB let's me trade OTC stocks. I really like Fidelity but found their recent change to no allow buying OTC stocks any more offputting and I have made that clear in several communications with representatives, so far to no avail. I guess this is just too much on the fringe to matter much to them.

    1. I feel your pain. I love the Fidelity site and interface. It's all so nice other than their fear of these companies.

      It really shouldn't be so difficult

  7. added an update to the post that I've moved out of TRP and into PennTrade. See my other blog post: http://www.nonamestocks.com/2017/05/ive-moved-to-penntrade.html

  8. Just had a chat with Schwab.

    I confirmed they will allow to buy and sell OTC stocks, penny stocks, and grey market. That is good

    I also asked about transfer and they elaborated more on what I was told before. OTC stocks are allowed for transfer but penny stocks are not. Boooo! Any OTC over $5 is OK and any OTC under $5 is not allowed for transfer in kind.

  9. The reason they are not allowing the transfer is they cannot confirm the source of the shares. The problem with OTC is the liquidity will never allow them to cover shares that have been "ghosted". If you want to read something scary look up naked shorting and ghost shares. Larger companies have the same issue but they can work through the phantom shares. Small OTC it is virtually impossible.

    1. Please explain further.

      I don't see how it can be "virtually impossible" because I have successfully transferred many OTC stocks inside 5 different accounts from Fidelity and Optionshouse into T Rowe Price then from T Rowe Price into Penntrade. Most of my stocks are OTC and there were zero problems with any of these transfers.

    2. Might want to update Merrill Edge, they changed their policy. You cannot buy OTC stocks under $5 and/or under $300 million market cap as of 7/31/18. You have to be sold out of those positions by 9/30/18.

  10. This post is SO HELPFUL!! I've been doing research on this and have yet to find my answer until running across your blog. I was beginning to just think there was no hope for our
    OTC shares being transferred in, but this gives me a little hope! Hopefully some of the companies that you mentioned do take transfers in, still do. I am contacting them now.

    Thanks so much for this post!

    1. Good luck. I hope you find a place

    2. A friend of mine just told me a few days ago that he successfully transferred over a Roth IRA account in kind into Schwab with OTC stocks under $5. You could try them

  11. Update: I have transferred my PennTrade accounts to Schwab and they all went through.


  12. This post is extremely helpful. Thank you so much for taking the time to record and share your findings. However, I have called most of the brokerage firms on the list and have still not had any luck. Nobody is willing to accept an OTCQB stock certificate or an electronic transfer of the shares. I am still waiting to hear back from PlaceTrade so fingers crossed. If you have any new information or advice I'd greatly appreciate it. Not exactly sure what to do at this point.

    1. I have been able to transfer OTCQB from the transfer agent to Charles Schwab the only issue is the stock has to be at $5.00 or more. The stocks have to be free of trade with no restrictions and they can accept it. I know that Fidelity will also accept them but they are tricky they accept them first but then they blocked my shares so I ended up transferring to Schwab. A more small broker is Wilson and Davis they are the ones who act as a brokerage firm for Glendale securities more expensive but they can do it. I hope this helps.

  13. From what I have read and now understand is the reason these brokers allow share purchase and sales after you have an account but not allow shares to be transferred in is because of "ghost shares". I'll let you read up on that, The general idea is they would be responsible for the shares transferred into an account and the shares may not legitimately exist. If they are the ones that executed the trade they can control whether or not the shares are actually there to be held. I used Scottrade that got sold into TDAmeritrade. I have no issues whatsoever with any stocks included shares of PRED which were basically taken off quote completely. I did have to call in to sell them manually. They handled it with standard charges.