An SEC Rule Was Meant to Protect Individual Investors. Chaos Ensued.

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Thousands of stocks and bonds are now out of reach for small investors in the over-the-counter market. Professionals are still doing business.

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Just like water, market liquidity can evaporate in an instant. Many traders learned that in January when Robinhood and other brokerages restricted trading in hot stocks like Gamestop. Corporation

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and AMC Entertainment Holdings Inc.

During the “Flash Crash” of May 6, 2010, liquidity also ran out immediately. In the 2008–09 financial crisis, even the UltraSafe money-market fund temporarily suspended giving shareholders their money back on demand.

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Small investors learned that old lesson anew when a regulation went into effect late last month, disrupting trading in thousands of stocks and bonds.

Scott Wetzel, 64, is a retired business-information executive in the Seattle area whose portfolio consists partly of bonds and income-producing stocks. Multiple trades in the OTC Markets group,

Main over-the-counter markets.

The OTC market is the main center of stock trading in the US and is primarily a province of individual investors. About 12,000 stocks are not listed on a national exchange such as the Nasdaq or the New York Stock Exchange. You can buy shares in adidas AG

, Air Canada or Grayscale Bitcoin Trust.

You can be cheated by them too fly-by-night plans Dishonest stocks are run by promoters.

Historically, on the OTC, legitimate and illegitimate companies often opted not to make their financial statements public.

Over the years, Mr. Wetzel has enjoyed huge dividends and interest, with some solid OTC companies paying him. Then, on October 1, the market value of his preferred stock issued by Ladenburg Thalmann Financial Services Inc., an investment bank and brokerage, fell 23%.

This week, the favorite fell so far that its $2 dividend would fetch 18% annually, which it could buy at a price of about $11 per share.

Believing it was still a good investment, Mr. Wetzel tried to buy more at a much lower price. His broker said that he could only sell, not buy.

that’s because A rule from the Securities and Exchange Commission Take effect at the end of September, generally prohibits brokers from providing public price quotes on securities issued by companies that do not issue current financial information. Ladenburg, which was acquired by privately held Advisor Group Inc in early 2020, no longer provides financial statements to the general public.

Under SEC rule, many brokers stop offering price quotes on Ladenburg and thousands of other companies that do not provide public information. And OTC Markets has classified Ladenburg’s securities as ineligible for public quotation.

Just like that, Mr. Wetzel’s holding was flash-frozen. He would love to buy more than what he believes in, but can’t. Last week of September, prefer online forums silicon investor And Complaints and praise erupted from individual holders of OTC securities, which were rendered unusable in the blink of an eye.

“We find ourselves in a situation where there are real opportunities sitting before us,” says Mr. Wetzel, “but we cannot take advantage of them!”

The SEC intended the rule to protect individual investors “in these markets where retail presence is important and, unfortunately, pump-and-dump and other frauds are very common,” said then-SEC Chairman Jay Clayton.

said last year.

There is a chance that regulation could protect small investors from fraud, but this was half-hearted. The result is a stampede. Small investors are furious and professionals are trading what those individuals can no longer do.

David Waters, who runs Alluvial Capital Management LLC, an investment firm in Siwickley, Pa., is buying—because his broker will still allow him, as a professional investor, to buy any OTC securities under SEC rule. “This creates an opportunity for professionals at the expense of retail investors,” he says. “It’s an unfair transfer of value.”

The SEC declined to comment.

For a closer look at the chaos, look to the preferred shares of Golar LNG Partners LP, an energy company. At their par value of $25 per share, they pay an 8.75% annual dividend.

On September 27, Golar closed at $22.60, classified as a “Pink Current” stock, eligible for public quotation on OTC Markets. The next morning, OTC Markets designated it as a specialist market security, effectively unavailable to individual buyers. Shares fell 11.5 per cent in intraday trading.

On September 29, OTC markets reclassified Golar as “Pink Current” and the stock shot a four-day high of $25.75.

However, on October 5, OTC Markets reverted the stock back to expert status. It fell 11% in two days.

“We just didn’t do it,” says Jason Paltrowitz, executive vice president of OTC Markets. Refusing to comment specifically on Golar, he says that under SEC rule on trading volume and financial tests, securities can move back and forth between the Pink and Expert market tiers. He says less than 1% of the OTC market shares have done so.

Roughly 2,700 securities became eligible for public price quotations on OTC markets after trading platforms determined they met the requirements of the new rule. At the same time, OTC markets stopped offering public prices for about 2,200 shares.

“if [small investors] Were not paying attention to that rule change, it would be better to be happy with what they have, because they could be stuck with it for too long,” says Robert Forster, a former hedge-fund portfolio manager who once -ever trades. counter. “You have a publicly traded security; You are now a private-equity holder. Congratulations! You own it forever. “

Warren Buffett often advises investors to buy stocks they would be happy with if they couldn’t sell for years. The market turns that adage into reality from time to time.

[email protected] . on Jason Zweig


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