ON THE LEVEL — Warding off `penny dreadfuls’

Seldom do I feel any urge to applaud those ever broadening regulations imposed by burgeoning provincial bureaucracies that frequently seem hell-bent on strangling our mining industry.

But surely few tears will be shed over the proposed new draft policy of the Ontario Securities Commission (OSC) that will clamp down on broker-dealers and their high-pressure telephone salesmen who extol what are popularly known as the “penny dreadfuls.”

These are brokerage houses that don’t belong to any of our stock exchanges or the Investment Dealers Association. While fewer than a dozen remain, this is still believed to be a $100-million-a-year business — but one that is giving mining a bad name both at home and abroad.

The largest brokerage houses too, not all of which are lily white, may also soon be feeling the OSC’s strong investigative arm. This would not pertain to penny stocks, but to what is commonly known as the “bought deal” — a highly lucrative business for the big wheeler-dealers enabling senior companies to quickly raise billions of dollars annually through their friendly brokers. The regulatory authorities, it seems, are concerned that smaller investors are being squeezed out of this lucrative market. And perhaps these almighty institutional investors just might be getting some inside information on new securities issues that they are able to buy at a discount to the prevailing market price?

But let’s get back to the penny stocks. Unquestionably the broker-dealers of yesteryear did play a historic role in raising risk capital for the Canadian mining industry. But those days are gone, for both the mining and investment businesses have changed dramatically. And it has been a long, long time since the broker-dealer arm of the business has found any profitable mines. The OSC is rightly concerned about the continued use of high pressure and other unfair sales practices employed to market these highly speculative issues from which only a tiny portion of the money milked out gets into the ground. Hence the tough new regulations which, if enforced, could put these telephone penny stock pushers right out of the mining business. The OSC defines a penny stock as the equity security of an issuer that is not listed on either the Toronto or Montreal exchange and selling under $5 a share. Furthermore, the issuer itself must have more than $5 million in net tangible assets.

Under these proposed new regulations a first-time buyer of one of these penny stocks must fill out a 3-page form signed by both the would-be purchaser and the salesman, and return it to the dealer before any stock changes hands. This would outline the buyer’s financial position in some detail, the dealer’s average cost per share and his markup, as well as the salesman’s total compensation.

These much tougher regulations are aimed primarily at broker-dealer issues. There are, of course, hundreds of listed penny mining stocks that are exempt, providing they are traded in accordance with the rules of the applicable exchange.

Presumably, those traded on the Canadian Dealing Network (CDN) are also exempt. This is the former over-the-counter mining market which is presently being upgraded to junior exchange status.

Any firms or individuals breaching these regulations can be suspended, fined or restricted from making repeated phone calls to Ontario residents in their homes.

That used to be a common practice in the heydays of the roaring postwar mining markets, I well recall. That was when I was working at Little Long Lac Gold Mines at Geraldton, Ont., where I was repeatedly badgered both by mail and phone to “get in on the ground floor” on new fly-by-night junior mining issues, all of which bore assurances of an early fortune.

As no brokerage house was in town at that time, our local friendly banker, Royal Bank, would supply twice-daily quotes on all district mining issues, and gladly look after any buy or sell orders.

When I told him how I was being pestered and pressured to buy certain of those broker-dealer issues, he offered a simple and quick solution: “The next time he calls, tell him you want to buy 10,000 shares to be sent draft-attached to our bank here — which we just won’t accept.” It worked, for I never heard from that house again.