#$siegy

Even Wall Street has standards.

I know that might sound hard to believe, but to benefit from the liquidity, capital-raising power and prestige that come with a listing on the New York Stock Exchange or Nasdaq, a company has to follow a few rules. 

Among other requirements, to maintain a listing on the NYSE, a company has to have an average market cap and stockholders’ equity of at least $50 million and must have an average share price of $1 or more over a 30-day period. Nasdaq continued listing requirements are slightly different, but the same concepts regarding assets, market cap and share price apply. 

For both NYSE and Nasdaq listing, companies are also required make timely financial disclosures. 

Enter Ocwen Financial Corporation (OCN), which recently made the news for failing file its annual report in a timely manner. Ocwen Financial received a deficiency letter from the NYSE. In plain English, this essentially means that Ocwen is on the naughty mat until it learns how to obey the rules. 

I should be clear that Ocwen is not at immediate risk of being delisted. The company has six months to get its house in order before the NYSE takes any further action. And if after that six-month period Ocwen still has yet to publish its annual filings, the NYSE has the option to allow another six months to pass before initiating delisting. Of course, the NYSE could also opt to delist the company now if it felt that something dodgy was going on. 

I expect Ocwen Financial to get its books in order well before a delisting happens. But this brings up a good question — one that all investors should learn the answer to:

What happens when the shares of a company you own get delisted?

A delisting is scary. And frankly, you generally have no business owning a stock facing delisting because, with few exceptions, a company that fails the continued listing requirements is on the express train to bankruptcy. 

Take RadioShack Corporation (RSHCQ) and its newly minted ticker, for example. Back in February, RadioShack’s plunge reached a low point when, after receiving two delisting warnings, the company was delisted by the New York Stock Exchange after failing to submit a business plan. RadioShack then filed for Chapter 11 bankruptcy protection days later. 

Here are some general rules you should follow with respect to companies at risk of delisting or already trading over the counter:

If the delisting is due to financial distress, stay away. Yes, the company might pull a rabbit out of a hat and recover, but chances are better that delisting is merely a stop on the road to bankruptcy.

The over-the-counter market is a playground for manipulators and fraudsters. This is Jordan Belfort “Wolf of Wall Street” territory. Take any information you get on a non-listed stock with a major grain of salt.

If the stock also trades on a well-regulated market overseas, it is fair game so long as its over-the-counter ADRs trade with sufficient trading volume. (A couple hundred thousand shares per day in volume is adequate liquidity for most investors.)

A recent high-profile example of this last point would be German industrial giant Siemens (SIEGY), which opted to be delisted from the NYSE last year due to the reporting headache of being registered in both Germany and the U.S. 

However, Siemens actually provides a few examples of what to expect during a delisting. Holders of Siemens’ NYSE-traded ADRs woke up one morning to find that the ticker symbols on their shares had been changed from “SI” to “SIEGY.” The five-letter ticker symbol is typical of stocks that trade on the Pink Sheets or Over-the-Counter Bulletin Board (“OTCBB”), which is where most delisted stocks end up. The Pink Sheets and OTCBB are essentially the Wild West of investing, as there is very little in the way of regulation or oversight here. 

Several quality stocks that I have owned over the year trade over the counter, such as Siemens, Nestle (NSRGY) and Daimler (DDAIF). But all of these stocks have one thing in common: They are blue-chip companies subject to a high standard of financial regulation in their home markets (Germany, Switzerland and Germany, respectively). For these companies, the U.S. over-the-counter listing is merely a way to allow Americans to buy the stocks at home, in dollars.

Bottom Line

As a general rule, stay away from companies at risk of delisting. Most already have a host of potholes to deal with. 

Plus, while in theory, nothing will change with respect to your equity in the company, in practice you might find your shares a lot harder to sell. Over-the-counter stocks tend to have low volume and low liquidity because they are shunned by institutional investors. And because of the lax reporting requirements, they are a lot harder to research.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.