The Pink Sheets Tries to Change Its Colors

As Stock Marketplace Seeks to Broaden Its Mandate, Its Regulator, Finra, Pursues Grab in Its Data Business

 

NEW YORK—The Pink Sheets operator won't be pink much longer.
The nation's biggest marketplace in shares of companies that don't list on exchanges is expected to drop "Pink" from its name, going from Pink OTC Markets Inc. to OTC Markets Group Inc. by early next year. The change, subject to shareholder vote, comes as the company strives to show it has evolved from its reputation of a stomping ground for murky enterprises to a broader firm where respectable companies want their shares to trade.
The firm now quotes nearly 10,000 stocks, including roughly 3,000 that also are quoted on its main competitor, OTC Bulletin Board. It has broken its listings into tiers, ranking companies by how forthright they are in divulging information and affixing graphics, such as a skull-and-crossbones, for issuers it maintains merit more caution. Unlike the Bulletin Board, a quote-listing service, Pink for several years has allowed electronic trading, after investing in technology upgrades.
Still, a major player isn't ready to cede Pink all the OTC territory, and that player is the Financial Industry Regulatory Authority, or Finra, the Wall Street regulator that is sole overseer of the over-the-counter market.
Finra owned Pink competitor OTC Bulletin Board before agreeing in September to sell the Bulletin Board's website and trademark to Rodman & Renshaw Capital Group. The firm, which has an investment bank, said it plans to use the Bulletin Board to diversify its product base.
Finra isn't bowing out of the space altogether. Instead, it is gunning for a lucrative corner of the market where Pink competes—supplying OTC data.

Finra last year proposed to the Securities and Exchange Commission a plan that would require Finra members, such as brokerages, to supply Finra in real time with their best quotes on over-the-counter stocks. Those quotes would become part of a Nasdaq OMX data feed that Finra supplies with Bulletin Board quotes; Finra currently reaps about $8 million a year for that service, it says.
Finra said its statutory obligations as a regulator mean it should be corralling the best prices for all unlisted stocks to provide investors information.
It also noted the expanded feed would help it oversee the market, though Pink already submits all its quotes to the regulator daily for surveillance purposes.
But adding a fuller range of OTC quotes to data nearly everyone already purchases would threaten about half of Pink's market-data business, a business that represents an estimated 40% of Pink's revenue, said R. Cromwell Coulson, chief executive of Pink OTC Markets.
"It is very hard for a bakery to make money selling bread if there is a policeman forcing every patron who walks in to buy a loaf of bread that the policeman has confiscated from the bakery," Mr. Coulson said.
The regulator says it has no plans to compete with Pink. The nonprofit's revenues go to cover the cost of regulation, said Steven Joachim, executive vice president of transparency services at Finra. While currently Pink is the only other OTC marketplace besides the Bulletin Board, that could change, making a comprehensive data feed more important, he said. And, he notes, Finra's data feed won't include prices far from the best bid and offer, which Pink supplies.
The industry has widely come out on Pink's side, in numerous comment letters to the SEC. "The vast majority of the volume takes place on the Pink Sheets right now," said Leonard Amoruso, general counsel at Knight Capital Group, one of the most active OTC market makers, in an interview. Finra's proposal would generate information "already being provided by the Pink Sheets."
SEC staff is considering comments and preparing a recommendation for the commission, an agency spokesman said.
As for stringency of oversight, Mr. Coulson acknowledged that investors should be wary of some OTC issuers. Pink allows some listings to trade without SEC registration, though it alerts investors of that status; the Bulletin Board requires issuers it lists to be registered with the SEC.

Earlier this month, the SEC filed a lawsuit against Larry Wilcox, who played Officer Jonathan "Jon" Baker on the 1970s-1980s television show "CHiPs," alleging a kickback scheme involving a company traded on the Pink Sheets. A lawyer for Mr. Wilcox didn't respond to a request for comment.
Mr. Coulson said most companies that Pink quotes don't deserve a shaky reputation. That is the main reason, Mr. Coulson said, that in early 2011 the business will be rechristened OTC Markets Group.
No longer will the company's downtown Manhattan office look like "Barbie's playhouse," he said. The pink M&Ms in the reception area will be joined by orange and green ones.
As for his office, he said, it will have "a pink photo my wife gave me for Christmas, an orange rug and a green painting."




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