SEC Says Nasdaq Venture Market May Attract Stock Manipulators

By Nina Mehta

Dec. 8 (Bloomberg) -- Nasdaq OMX Group Inc.’s proposed equity market for companies that fail to meet listing standards of other exchanges may lure stock manipulators, the Securities and Exchange Commission said.

The SEC gave the public 45 days to comment on BX Venture Market, which Nasdaq OMX BX applied for in August. The exchange operated by Nasdaq OMX Group is seeking permission for the venue as an alternative for smaller companies and those delisted from exchanges because they fell below minimum share or market value.

The listings forum would be an over-the-counter venue to compete with the OTC Bulletin Board, operated by the Financial Industry Regulatory Authority, and Pink OTC Markets Inc., which will change its name to OTC Markets Group Inc. in January. Finra has said the OTC Bulletin Board website and content is for sale.

“The exchange is proposing initial and continued listing standards that are significantly lower than those of other exchanges with active listing markets,” the SEC said. “This raises issues as to whether BX-listed securities could be more prone to manipulation.”

Nasdaq submitted a 145-page proposal on Dec. 6 that addressed concerns raised in comment letters responding to its original proposal in August. While the SEC said it hasn’t formed any conclusions about the new market, it decided to take a procedural step to limit the review period because of “legal and policy issues raised by the proposal.”

‘Not Comfortable’

“From a process standpoint, they must approve the rule, deny it or move toward disapproval,” said Robert McCooey, senior vice president of the new listings and capital markets group at Nasdaq. “That doesn’t mean they won’t approve it. It means that at this point in time they’re not comfortable approving it.”

BX securities wouldn’t be deemed National Market System stocks, exempting them from rules that guide trading on exchanges. Venues executing NMS stocks must obey policies designed to promote fair and orderly markets and coordinated trading.

“The goal has been to work with the SEC toward making them comfortable with what we’re proposing,” McCooey said. “There’s nothing between a full Nasdaq listing and the OTC medium and Pink Sheets. This would bring small and emerging growth companies onto a more highly regulated market.”

McCooey added that he’s hopeful the SEC will approve the new listings market.

Nasdaq Brand

“It’s good Nasdaq is experimenting, but it’s hard when it’s a world-class brand like Nasdaq because smaller companies have a different risk profile than those listed on a national stock exchange,” said R. Cromwell Coulson, president and chief executive officer of Pink OTC Markets Inc. “Bx Venture will be great if it drives SEC-reporting companies to adopt higher corporate governance standards, but only if those standards are significantly higher,” he said.

Of the 9,920 quoted OTC securities, more than 9,900 have bids and offers published on Pink OTC by broker-dealers trading the securities, according to Coulson. About 30 percent of trades between brokers take place on the company’s Pink Link messaging network, with the rest negotiated by the firms themselves.

The SEC said investors may be confused about differences between BX shares and those listed on Nasdaq Stock Market. The Massachusetts Securities Division told the regulator in a Sept. 28 letter it was concerned BX could “inappropriately borrow some of the prestige” of the Nasdaq market. It suggested Nasdaq create a separate market instead of using BX.

Market Safeguards

“The Securities Division is concerned that the safeguards that the BX Market plans to put into place will not prevent unscrupulous penny stock promoters or boiler room brokerages from asserting that securities they are offering and selling are exempt from state registration,” the Massachusetts group told the SEC. Companies on the Boston Stock Exchange, which Nasdaq bought in 2008 for $61 million and reintroduced as Nasdaq OMX BX, were exempt from state registration in Massachusetts and 11 other states, the letter said.

Companies seeking BX Venture listings would be required to have a market value of $2 million, according to Nasdaq. They would also need a year of operating history, a minimum bid price of $1 and 200,000 shares held by investors, among other requirements. Firms that had already traded on exchanges would have similar requirements although they could have bid prices less than $1.

The average price of stocks in the Russell 2000 dropped 13 percent to $21.11 a share in 2010, from $24.27 five years ago, according to Bloomberg data.

Nasdaq’s amended proposal said BX would publish quote and trade information about BX-listed securities and would “clearly differentiate” the securities from those listed on Nasdaq or traded elsewhere. Nasdaq also said it would strengthen the process for deciding whether to approve companies seeking a listing on BX.

“We’re very encouraged by the discussions we’ve been having about the benefits of this market and how we can structure it in terms of the regulatory framework and listing standards to meet any concerns the SEC may have,” McCooey said.

--With assistance from Whitney Kisling in New York. Editor: Chris Nagi
To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net.
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.