For years cost basis has been used, mostly by mutual funds and brokerages, to voluntarily report cost basis to their shareholders. In the past they were required only to report the gross proceeds in the event of a sale. But the cost basis? That was voluntary. So, what’s the big deal?

During the course of the financial meltdown in 2008, the Internal Revenue Service let its realization be known that investors in securities markets have, for many years, “mis-reported” their cost basis to effect the amount of profit or loss they were willing to report to the IRS. This meltdown timeframe was an appropriate time in which to fix the problem. Therefore, The Emergency Economic Stabilization Act of 2008, also called the Bail-out Bill or the Financial Rescue Law, was signed into law by President George W. Bush. The Cost Basis Reporting provision within the bill is estimated to increase tax revenue from capital gains taxes by approximately $7 billion through 2018.

This law requires all “applicable persons” to report the cost basis to the IRS when securities are sold for all securities acquired after January 1, 2011. That is now only six months away.

We Won’t Go! We Are Survivors!

The United States of America has been built on the backs of our entrepreneurs. That is our basic tenet. If you try hard enough, you can achieve anything. It doesn’t matter what social level you come from, the color of your skin, the religion you practice, your age or your gender. You let nothing stop you. And, you think outside of the box.

When the stock market concept got started here in the 1700’s, it originally consisted of those investments that would help the war movement against the British. Government debt was traded at the corner of Wall and Broad Streets. After the war, both equity and the government bonds were trading in the same location and it began to get a bit crowded along that path in front of Trinity cathedral. In 1790, Alexander Hamilton, as the first Secretary of the Treasury, began promoting actual stock exchanges to strengthen our economy and continue to rebuild from the war effort. In 1817, the New York Stock Exchange Board was then created and they moved into their current location at 40 Wall Street where they are today. However, some stocks were not considered quite worthy enough and were not allowed to trade within the New York Stock Exchange so they traded outside on the curb. The curb traders were our early entrepreneurs and this type of business grew until the New York Curb Exchange became an official exchange and later changed its name to the American Exchange.

Later, as the country grew, a new wave of trading began, created by more entrepreneurs. This trading did not take place on any actual exchange where there were strict rules regarding trading and company governance. This trading did not have to be in one location at all but was able to be done, initially, over the counter at the cage window at different brokerage firms. Later, with the advent of the telephone (and later the computer), this type of trading just exploded. This trading was called over-the-counter, or OTC. OTC trading occurred in the trading departments within brokerage firms that had been involved with initial public offerings of new securities and held a certain amount of inventory of shares within the firm after the issue was made effective and actually trading. These departments’ employees were the market makers of the brokerage firms. They sold their shares to their own investors who had accounts at the brokerage but they also sold their shares to other brokerage firms, whoever they could reach on the phone. The terminology for other brokerages was “other houses on the street”. These market makers made and lost money on the spread and the volume.

The shares traded in this manner, were still offered via a prospectus and either a certain amount of registration or under an exemption from registration. They followed legal guidelines – not as strict as the NYSE or AMEX, but still within boundaries. They carried more risk than the blue chip stocks on the exchanges but there was a limit to the risk. Eventually these OTC stocks fell under the authority of the National Association of Security Dealers and their quotation service, NASDAQ. NASDAQ is now a listed exchange.

Entrepreneurs love to think of new ideas. So, how about selling stocks that were both very risky AND, because of the risk, could also bring a higher rate of return on an investor’s money? What about the smallest companies? They usually had the most creative business ideas but always needed capital. Could they publicly trade to raise that capital? Why not? Therefore, the PinkSheet stocks were created. They were first only listed on printed packets of skinny 14” long paper that were pink in color, hence the name, PinkSheets. The name of the company was listed, the brokerage firms that were offering a market were listed, along with the different bid and ask prices and volumes traded on any particular day. Additional price and corporate action history was listed in a Standard & Poor’s book of stocks. (The Bulletin Board was another quotation service similar to the PinkSheets but there was usually a higher requirement for posting current information to this service than the PinkSheets.) But, unless you contacted the company directly, it was not easy to acquire much additional information for either of these trading venues. Yet these stocks flourished.

Unfortunately, these stocks, being the most risky for investors were also the bane of the authorities. In the past several years, while this level of securities investment offered the most in financial returns they also offered the most opportunity for fraud, money laundering and financing questionable or shell ventures while offering the least in investor protections. The most egregious opportunists within the PinkSheet community cost brokerage firms and their investors millions in losses that lined the pockets of the opportunists only. But the losses incurred here, due to the extremely low prices of the stocks trading here, are no comparison to the losses that can and have occurred on the exchanges where the stock prices are generally much higher.

Now we have the current economy of 2010. It’s an unstable market, in general, reflecting a lack of confidence in the authorities and their ability to protect investors. The majority of losses in this market, however, have occurred due to gaps in oversight on the exchange level securities, not the PinkSheets or Bulletin Board stocks.

As the authorities attempt to curtail the fraudulent activities they have focused on the weakest side of the market, the small cap companies who trade on PinkSheets and Bulletin Board. The small cap companies cannot fight back as successfully as the largest firms on the listed exchanges who have caused the most losses overall.

Currently the U.S. Securities & Exchange Commission has allowed the Financial Industry Regulatory Authority (FINRA, previously NASD) to support their brokerages in not accepting certificate deposits or trading in low-volume, low-priced non-listed stocks (PinkSheets and Bulletin Board). At the same time, the SEC has allowed the Depository Trust & Clearing Corporation, (the ONLY depository in the U.S.) to deny these same small cap companies the ability to trade their shares electronically.

If a small cap company cannot deposit certificates or trade by using stock certificates because they are denied by one authority and they also cannot trade their shares electronically because they have been denied by the other authority, and the one ultimate authority, tasked by Congress to maintain markets and protect investors, the SEC, is not doing their job what will happen to these little entrepreneurs, most of which still have the most creative business ideas, cumulatively hire the most employees nationwide, and, as small businesses, provide the most stable portion of the national economy? Just like the Curb traders of the 1700s and 1800s and the Over-the-Counter traders of the 1900s, the PinkSheet and Bulletin Board Traders will adapt and survive. It is our nature.

We Are American!

Written by Salli A. Marinov

SEC Adopts New Measures to Facilitate Director Nominations by Shareholders

FOR IMMEDIATE RELEASE
2010-155
FACT SHEET: FACILITATING RIGHTS OF SHAREHOLDERS
TO NOMINATE DIRECTORS
SEC Open Meeting
August 25, 2010

The Proxy Voting Process
Public companies across the country hold elections to select members of their boards of directors, which oversee the management of the company. In most cases, the existing directors nominate the slate of candidates and the company sends information to the shareholders through so-called proxy materials, so those shareholders have information to vote their shares.

But, because the shareholders rarely have any input into the slate of candidates, they are not always able to vote for the person they believe may be best suited to fill the post.

In many situations, companies permit shareholders to show up to the annual shareholder meeting where the election occurs and nominate different candidates than the ones on the ballot. But, by then it is too late to be meaningful because the proxy votes will have already been cast.

As a result, shareholders who wish to nominate their own candidates today must launch a proxy fight in which they mail out their own ballots.

Recent Developments Regarding Proxy Access
Last year, the Commission proposed amendments to its rules that would provide shareholders with a meaningful ability to exercise their state law rights to nominate and elect directors.

Since then, the SEC has received and reviewed more than 600 public comments about its proposal.

And, more recently, Congress passed a new financial reform law that specifically states the SEC has authority to adopt rules that require companies to include shareholder board nominees in company proxy materials.

The Rules
The rules approved today are the result of careful consideration of the comments received during the public comment process. Under the final rules, shareholders who otherwise are provided the opportunity to nominate directors at a shareholder meeting under applicable state or foreign law will be able to have their nominees included in the company proxy materials sent to all shareholders.

Shareholders also have the ability to use the shareholder proposal process to establish procedures for the inclusion of shareholder director nominations in company proxy materials.

INCLUDING NOMINEES IN THE COMPANY’S PROXY MATERIALS
New Exchange Act Rule 14a-11 — companies are required, under certain circumstances, to include a shareholder nominee or nominees for director in company proxy materials.

Under the rule, companies will be required to include shareholder nominees for director in the company’s proxy materials, if the shareholder meets certain conditions, and if the shareholders are not otherwise prohibited — either by applicable state or foreign law or a company’s governing documents — from nominating a candidate for election as a director.

Which companies are subject to the rule?
The rule applies to all Exchange Act reporting companies, including investment companies, other than companies whose only public securities are debt securities.

“Smaller reporting companies” are subject to the rule, but it does not apply to them until after a three-year phase-in period.

Foreign companies that come within the definition of “foreign private issuer” are not currently subject to the SEC’s proxy rules and would not be subject to these new rules. Foreign companies that do not qualify as foreign private issuers would be subject to the rules.

Which shareholders will be able to have their nominees included in the proxy materials?
Shareholders will be eligible to have their nominee included in the proxy materials if:

• They own at least 3 percent of the total voting power of the company’s securities that are entitled to be voted on the election of directors at the annual meeting. Shareholders will be able to aggregate holdings to meet this threshold.
• Shareholders will be required to have held their shares for at least three years and will be required to continue to own at least the required amount of securities through the date of the meeting at which directors are elected.
• Shareholders will not be eligible to use the rule if they are holding the securities for the purpose of changing control of the company, or to gain a number of seats on the board of directors that exceeds the number of nominees a company is required to include under new Rule 14a-11.

What requirements will a shareholder’s nominee be required to meet to be nominated?
The nominee’s candidacy or, if elected, board membership must not violate applicable laws and regulations.
The nominee must satisfy objective independence standards of the applicable national securities exchange or national securities association.

Neither the nominating shareholder nor the nominee may have a direct or indirect agreement with the company regarding the nomination of the nominee.

There will be no restrictions on the relationship between the nominating shareholder and the nominee.

How many nominees for director will a shareholder be able to include in company proxy materials?
A shareholder will be able to include no more than one nominee, or a number of nominees that represents up to 25 percent of the company’s board of directors, whichever is greater.

For example, if the board is comprised of three members, one shareholder nominee could be included in the proxy materials. If the board is comprised of eight members, up to two shareholder nominees could be included in the proxy materials.

What has to be disclosed about nominating shareholders and their nominees?
The nominating shareholder will be required to file with the Commission and submit to the company a new Schedule 14N, which would be publicly available on EDGAR, the SEC’s electronic filing system. The Schedule 14N will require, among other things, disclosure of the amount and percentage of the voting power of the securities owned by the nominating shareholder, the length of ownership, and a statement that the nominating shareholder intends to continue to hold the securities through the date of the meeting.

The disclosure provided in the Schedule 14N will identify the nominee or nominees, include biographical information about the nominee(s), and include a description of the nature and extent of the relationships between the nominating shareholder and nominee(s) and the company. In addition, the Schedule 14N will require several certifications relating to eligibility and the accuracy of the information provided. A nominating shareholder can also include a statement of support for its nominee in the Schedule 14N.

The company will include in its proxy materials disclosure concerning the nominating shareholder, as well as the shareholder nominee or nominees, that is similar to the disclosure currently required in a contested election.

Will the nominating shareholder be liable for information provided to the company?
As is the case when directors nominate candidates, the nominating shareholder or group will be liable for any false or misleading statements it makes about the nomination, regardless of whether the statements are included in the company’s proxy materials.

A company will not be responsible for information provided by the shareholder and then reproduced in the company’s proxy materials.

ALLOWING SHAREHOLDERS PROPOSALS
Amended Exchange Act Rule 14a-8(i)(8) — companies must include in their proxy materials, under certain circumstances, proposals that seek to establish a procedure in the company’s governing documents for the inclusion of shareholder director nominees in company proxy materials.

Currently, Exchange Act Rule 14a-8(i)(8) permits companies to exclude shareholder proposals that relate to elections. Under the amendment, if adopted, this so-called “election exclusion” would be narrowed, thereby allowing in the proxy materials more shareholder proposals regarding elections.

Specifically, shareholder proposals by qualifying shareholders that seek to establish a procedure in the company’s governing documents for the inclusion of shareholder director nominees in company proxy materials would not be excludable under amended Rule 14a-8(i)(8). A company would not be required to include in its proxy materials a shareholder proposal that seeks to limit the availability of Rule 14a-11.

Which shareholders will be able to submit a shareholder proposal?
The current eligibility provisions of Rule 14a-8 would continue to apply. Those provisions require that a shareholder proponent have continuously held at least $2,000 in market value (or 1 percent, whichever is less) of the company’s securities entitled to be voted on the proposal at the meeting, for a period of one year prior to submitting the proposal.
* * *
When will the new rules and amendments start to apply?
There are several variables that will impact this question in the first year. Generally, the new rules will be effective 60 days after publication in the Federal Register.

Proxy Access: For Rule 14a-11, shareholders must submit nominees no later than 120 days before the anniversary date of the mailing of the company’s proxy statement in the prior year. Shareholders will be able to submit nominees for inclusion in the next year’s proxy statement if the 120 day deadline falls on or after the effective date of the rules. For example, if the rules become effective on Nov. 1, 2010, Rule 14a-11 generally would be available at companies that mailed their proxy statement for their last annual meeting no earlier than March 1, 2010.

Shareholder Proposals: For Rule 14a-8, to have a proposal included in a company’s proxy materials, a shareholder must submit the proposal no later than 120 days before the anniversary date of the mailing of the company’s proxy statement in the prior year. Shareholders will be able to submit proposals for inclusion in the next year’s proxy statement if the 120 day deadline falls on or after the effective date of the rules.
http://www.sec.gov/news/press/2010/2010-155.htm