Regional Investment Bankers Association Works With NASD To Establish Agenda for OTC Bulletin Board Roundtable Session.

CHARLESTON, S.C.--(BUSINESS WIRE)--Feb. 9, 1999--Regional Investment Bankers Association has worked closely with the National Association of Securities Dealers (NASD) to establish an agenda for the NASD's upcoming roundtable session, which will address the challenges facing the OTC BB.

"The financial and regulatory community has struggled with the potential and the challenge of the OTC Bulletin Board," said Regional Investment Bankers Association president Jeffery Adduci. "We welcome the leadership of Frank Zarb, chairman and chief executive officer of the National Association of Securities Dealers, who convened this roundtable discussion. Hopefully, this roundtable session will be the first step in charting a strategic course for the Bulletin Board which will allow issuers and securities professionals to take advantage of its potential."

Adduci added that the role the OTC Bulletin Board can play has taken on renewed importance given the tightening and elevating of standards on The Nasdaq SmallCap and National Market System tiers and the consequent number of companies which are being delisted. "We believe there are several specific ways that the OTC Bulletin Board can be molded to help ensure that it is not the last stop for companies on their way down, but the first stop on their way up."

Adduci said that three RIBA-developed strategies will be discussed at the NASD's roundtable session, which will be attended by market regulators, securities professionals and entrepreneurs. These strategies include the directing of Bulletin Board orders to the market maker with the best bid or offer, the possible use of independent ratings for Bulletin Board companies, and the application of short sale rules to Bulletin Board issues.

The First Best Market

Adduci said that "Rather than imposing additional reporting requirements and trading restrictions on the less liquid, lower tier markets, we believe the NASD should consider initiatives that level the playing field, stimulate competition and maintain liquidity." Specifically, he said that RIBA has proposed, and the OTCBB roundtable session will discuss, creating a single standard for the direction of order flow in the thinly traded companies on the OTCBB.

"The proposal would require order givers to send their orders to OTCBB market makers that post the best bid or offer. Where two or more market makers display identical best markets, the priority rule would apply giving the order to the market maker which first posted its bid/offer; thus creating what we would call a First Best Market system."

The FBM approach, said Adduci, could deliver the following benefits: better prices for retail customers; spreads set more by market forces; mitigation of manipulation problem between dealers; enhanced Limit Order protection over current OTCBB rules; and greater liquidity.

Short Sale Rule

The issue of the Short Sale Rule, its impact and practicability, has been a hot topic in the late 1980s and into the 1990s. Adduci said that the time has come to consider its application in the lower tiers of the OTC market, and that the OTCBB roundtable will discuss how its application on the Bulletin Board may improve liquidity.

The first Short Sale Rule, Rule 10a-1 of the 1934 Exchange Act was approved by the SEC in 1938 in response to a sharp market decline in the fall of 1937. The Rule prohibited any person from selling an exchange-traded security "short" into a declining market. The Rule was amended in 1939 allowing the "tick test" to permit sales at the same price as the last transaction as long as the last price change was positive. Therefore, the Short Sale Rule has been in place for approximately 60 years. "If nothing else," said Adduci, "the Rule has been time tested in all market conditions."

The issue going forward, he said, is whether a rule intended to stop abusive and manipulative practices in the NMS market should also be applied to not only the SmallCap Market but the Bulletin Board as well. "Arguably," he said, "the issuers in these markets are more vulnerable to a Bear Raid, the retail shareholders do not receive the same market analysis reports available to NMS shareholders, and investment banker/broker dealers in the market tier are far more vulnerable as well." The negative impact on long-term liquidity where an issuer has been targeted by the "shorts" cannot be overstated. "The extension of the Rule to the OTCBB could be very helpful in certain cases and should be considered a long term strategy for the health of this marketplace."

Rating Agencies

Adduci said that listing standards maintained by the various exchanges and trading markets have served as a de facto rating service for equities by ensuring that issuers meet specific, numeric, and qualitative standards. However, he said that meeting these standards have become prohibitively expensive for many small issuers, even though many of them offer speculative opportunity for long term capital gains. "Unfortunately, the opportunity these equities may offer is overshadowed by their relative invisibility on the Bulletin Board."

Adduci said that the OTCBB roundtable session will consider the adoption of a rating agency approach that could mitigate some of the inefficiencies of exchange listing procedures and provide valuable information for retail investors. "Services such as Moody's and Standard & Poors have proven to be very well received in the fixed income market," he said. "We feel a similar approach could be established for SmallCap and OTCBB equities." He said that independent rating agencies could establish four or five categories including (i) Risk, (ii) Assets, (iii) Disclosure and (iv) Corporate Governance and that ratings would be independently conducted with regular financial reporting required to maintain the rating. Further, he said that exchanges and marketplaces may themselves wish to compete as rating agencies, and the agencies, whatever their final form, could apply for Blue-Sky qualification which would have a shelf life beyond the first day of trading.

"The changes in the ways that individual investors are participating in the market means that the Bulletin Board, as an established electronic marketplace, can with the right stewardship, become a viable and important market tier benefiting issuers as well as investors." Accordingly, he said that Regional Investment Bankers Association enthusiastically embraces the opportunity to work with the NASD to improve the conditions in this marketplace.

Regional Investment Bankers Association is a national association of regional and independent broker-dealer and investment banking firms that seek to improve conditions in their industry, to strengthen the free enterprise system, and to provide a vital source of information and education to their member practitioners, regulatory and legislative agencies, and the investing public.

These firms employ in excess of 13,700 registered representatives in over 1,850 offices throughout the United States that serve a number of client/investors estimated to exceed two million. During the past 5 years, RIBA member firms managed or co-managed over 660 underwritings that raised some $6.3 billion in new capital.

The association provides its member firms with regularly scheduled forums where they are able to exchange ideas and information, evaluate presentations made by companies being underwritten or sponsored by member firms, collectively voice their positions on industry issues, and enhance their knowledge and expertise through ongoing educational programs designed to enable them to remain competitive.

For more information about RIBA activities and membership benefits, please contact Jeffery Adduci, President, or Dawn Carpenter, Director of Member Development, Regional Investment Bankers Association, 171 Church Street, Suite 260, Charleston, SC 29401 or call [phone].