On February 15, 2011, below the radar of the financial community and with no publicity, they started dropping. First it was 48, then 4 on the following two days. Then on February 22, the floodgates opened and 569 companies were delisted from the OTC Bulletin Board and moved to the relatively new OTCQB, officially part of the OTC Market Group’s OTC Link quotation system. The reason given in each case? “Failure to comply with Rule 15c2-11.” What has changed so drastically in the past week, and why has it resulted in the sudden delisting of 622 OTCBB companies?

The reason isn’t that these companies have failed to meet certain quality standards or are delinquent in their reporting to the SEC. Quite the opposite – the OTCQB is a new market (launched in April 2010) for OTC-traded companies that are registered and current in their reporting obligations to the SEC, so a move from the BB to the QB by no means signals delinquency or lower reporting quality.

The root cause, as with almost any aspect of the financial world, comes down to money. All companies quoted on the OTCBB must maintain at least one registered market maker (see FAQ #14) to remain on the OTCBB. The issuer can’t voluntarily withdraw from the OTCBB, but when the last market maker withdraws from the stock, it is removed from the OTCBB after 4 days pursuant to Rule 15c2-11.

When this happens, the stock is usually quoted solely on the OTC Link system, rather than the typical dual BB/OTC Link quotation. The stock will trade on the OTCQB, the middle tier of the OTC marketplace reserved for fully reporting issuers that are quoted on one or both quotation platforms (Bulletin Board and OTC Link). The new OTC tier system classifies all OTC companies, whether quoted on the BB, OTC Link or both, into one of three tiers (OTCQX, OTCQB, or OTC Pink) based on the amount and quality of information they provide to investors. This tier system separates SEC-compliant issuers in the OTCQB tier from the speculative marketplace known as the “Pink Sheets” (nowcalled “OTC Pink”), which is the bottom of the three tiers.

FINRA’s fee for OTCBB market makers is $6.00 per security traded during a given month. For market makers quoting hundreds of securities per month, these costs can quickly become prohibitive. According to the CCH Washington Service Bureau:

http://seekingalpha.com/instablog/478544-redchip/142980-otcbb-delistings-and-rule-15c2-11-what-happened

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Be well