(Reuters) -As many as 2,000 companies could disappear from the "pink sheets" off the stock market, long a favorite among retail investors, when a new rule aimed at eradicating fraud in this notoriously risky enclave in US stock markets comes enters into force next week.
The Securities and Exchange Commission rule increases investors' information by requiring issuers, often penny corporations that do not meet the listing standards of the main exchange, to make accurate and up-to-date financial information publicly available.
Due to a loophole in the current rules, about 2,000 of the approximately 11,000 companies listed on the Pink Market operated by the New York-based OTC Markets Group do not provide such information publicly.
OTC Markets has tried to spread the word and encourage companies to get their paperwork in order, but it was still unclear how many would do so by the September 28 deadline, if at all, says Daniel Zinn, the company's general counsel.
The market operator may need to remove, if only temporarily, between 1
The shakeup, which comes in the midst of a retail boom, has led some brokers, including Charles Schwab / TD Ameritrade and Fidelity, to block new purchases of affected stocks, causing concern among retail investors who are unsure whether they should save or keep the course in the hope that companies follow.
Although clients will still be able to sell their shares after September 28, brokers have warned of severely limited liquidity, which usually means that investors get a bad deal. Investors who are still anxious to fight in companies that have not followed them may need to call their broker for a quote.
The rule will also apply to certain government and corporate bonds, leading industry lobby groups to warn this week of potential disruptions to the critical finance market.
Overall, the new rule is likely to increase the cost of trading these companies, Zinn said.
"We agree with the SEC's goal of providing as much information as possible," Mr Zinn said. However, some companies prefer not to provide public financial information for a number of legitimate reasons, or may not be able to, he continued.
For example, some companies may not want legal costs to provide compatible paperwork, while others may not want to promote trading in their shares.
"Under these circumstances, no listing at all can lead to more harm than good to existing investors," Zinn said.
The SEC did not respond to a request for comment.
The Pink Market is home to a number of publishers, including reputable foreign companies seeking a gateway to the United States. But some are very risky and volatile penny corporations in distress, crime or simply snails.
The SEC has warned that the stock market, more generally, is full of fraud and manipulation.
Under the SEC's previous rules, broker-dealers were required to review a company's finances before making quotations on their shares on the pink market, unless another broker-dealer had already checked them. This was the case even though the first review took place several years ago and the company had since stopped publishing financial information. The new SEC rule ends with that exception.
“Companies have a message that they must provide a certain degree of transparency to their investors or they can not be easily noted. That's good, says Professor Jim Angel at Georgetown University. “The problem is what about the companies that choose not to disclose? Their shareholders are punished for the companies' actions.