CLEARING

WHAT IS "CLEARING"?

"Clearing" is a process of recording the purchase or sale of shares of stock through the four parties involved in a stock purchase by adding a FIFTH party. In other words, clearing is an unnecessary step.

The four parties involved in a stock transaction are: the company, because the company needs to know when its shares have been transferred in order to send the new owners annual reports, stock dividends, voting ballots, etc.; the purchaser; the seller; and the middle man in the arrangement, who will be the NASD broker-dealer, who has a staff of administrative workers responsible for going through a checklist of duties for every sale of stock.

Although the stock clearing company can take on additional duties like mailing prospectuses or annual reports, replacing lost stock certificates and mailing dividend checks; its primary purpose is to tally and maintain shareholder records. The majority of stock purchases at this time are "book-entry only," and no certificates are held by any purchasers, with the exception of one sample share kept by the clearing company. This also makes possible "day-trading." One private corporation which has a relationship with the Federal Reserve, called the Depository Trust Corporation, handles something like 99% of all stock transactions. In the same way that Federal Reserve computers cancel the various home loans and mortgage payments and checking accounts and checks, the Depository Trust Corporation keeps track of the buyers and sellers of stocks. It is partnered with the National Stock Clearing Corporation, which recently merged with it, and handles the majority of clearing business. Although there are other stock clearing companies, like U.S. Stock Clearing, it is my limited understanding that NSCC is tied into the NASDAQ system and handles most of the business.

Historically, small companies have chosen not to add the fifth party to this arrangement, and have been "self-clearing." These companies are also well-suited to provide direct sales of stock through their "Dividend Re-Investment Plan" direct sales programs. DRIP's usually do not purchase stock from existing shareholders, but only sell stock.

"Self-clearing" is apparently a manageable task for the Company.

A Broker-dealer selling a small company's stock must make a record of the sale, and keep these books for a set number of years in an accessible place. The majority of stock sales it "middle-man's" will be between the Company itself, and investors. The Broker-dealer may also have an inventory of stock available that it may sell. OTCBB stocks are discouraged from being "listed" over the NASDAQ system with "firm quotes" by the extremely large minimum orders required for entering quotes over the NASDAQ equipment. When an investor calls a broker-dealer to buy an OTC stock, the broker-dealer will look for the company symbol, and -- if no firm orders are listed -- then find the identifying info for the broker-dealers who "make a market" in that stock.

According to a 1998 document, sales of securities, whether by phone for a tiny OTC stock listed on the Electronic Quotation System or a large NASDAQ stock are required to be reported by the "market maker" in the majority of cases, using whatever computer system it maintains, which is usually NASDAQ. This may have changed, but hopefully OTC trades are still required to be reported over NASDAQ equipment. (Why or how they fail to be publicly disclosed when there is a conflict of interes?. This is another one of the NASD/NASDAQ gray areas that can cause my head to spin,...since all broker-dealers are NASD members, though, it's also splitting hairs).

There should then be a public record of the sale of the stock at whatever price which other investors can peruse. The only instance I know of of a "requirement" for fifth-party clearing was in the case of a retirement plan, which wanted the assurance that the investment was legitimate. Although "clearing" approved of the investment, it is generally unsuitable for this.