WASHINGTON -- The group that runs the Nasdaq Stock Market is considering whether to remove some 3,400 small-company stocks from special over-the-counter listings as the nation's second-largest stock market tries to distance itself from tiny speculative stocks.
Stock fraud frequently involves low-priced shares of such high-risk stocks, sometimes called "penny stocks," that are thinly traded and loosely regulated. Two Nasdaq sources confirmed Tuesday that the board of the National Association of Securities Dealers -- Nasdaq's parent organization -- will vote on the proposal to boot out the 3,400 or so stocks from the OTC Bulletin Board, an electronic market of about 6,800 securities.
The sources, speaking on condition of anonymity, said the board will vote on the proposal on Thursday.
The stocks that would be dropped also include many special shares of foreign companies. Market analysts said such stocks could still be listed on the so-called Pink Sheets, a less automated system not affiliated with Nasdaq -- but would be more difficult to trade.
Neal Sullivan, executive director of the North American Securities Administrators Association, called the proposal "a very positive step." The proposal, which Mr. Sullivan said is expected to be approved by the NASD board, takes into account the "systemic nature of these problems," he said.
Nasdaq runs the Bulletin Board, but its stocks are not actually listed on the Nasdaq market. The small companies don't meet Nasdaq listing standards or don't file financial disclosure statements with the Securities and Exchange Commission. The Bulletin Board stocks often are linked with Nasdaq's name, however.
Under the proposal being considered, companies would have their stocks removed unless they agreed to file statements with the SEC or other financial regulators, according to Tuesday's Wall Street Journal. In addition, brokerage firms could be barred from quoting prices for the stocks unless the brokers had current reliable financial information about the companies.
Spokesmen for Nasdaq and NASD Regulation, the self-policing arm of the securities dealers' group, declined comment on the matter.
Barry Goldsmith, executive vice president of NASD Regulation, recently testified at a Senate subcommittee hearing that "contrary to a popular misconception, often perpetuated by unscrupulous operators, the over-the-counter market is not Nasdaq. The two are separate and distinct."
"It is in the thinly traded (small-company stocks) that characterize the over-the-counter market where we find great potential for fraudulent activity," Mr. Goldsmith said. Such stocks are more easily subject to manipulation by unscrupulous brokers and promoters, he said.
Regulators estimate that American investors are being defrauded of some $6 billion annually -- three times the peak amount during the 1980s before enactment of the Penny Stock Reform Act of 1990.
The SEC has been helping the Justice Department and local authorities in prosecuting more stock fraud cases, and has been looking to close loopholes in the rules governing the penny-stock market.
SEC spokesman Chris Ullman said Tuesday the agency would have to review the new proposal before commenting on it.
Spokesmen for Nasdaq's major competitors, the New York Stock Exchange and the American Stock Exchange, didn't immediately return telephone calls seeking comment.