The Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission (“SEC”) regulate going public transactions and trading of stocks quoted by the OTC Markets Group.
OTC Markets is not affiliated with FINRA or the SEC and it is not a stock exchange. The OTC Markets also has no listing requirements. It categorizes issuers by the level of disclosure provided to the public.
FINRA and OTC Markets
FINRA establishes rules that impact the OTC Markets including those that regulate its broker-dealer members. FINRA establishes qualification standards for securities industry professionals as well as rules governing compliance. These standards govern the conduct of market makers in going public transaction.
Firm Quotes of OTC Market Securities
To ensure the integrity of quotations, FINRA requires every member to trade at its publicly quoted prices. Integrity of quotes is essential to the normal operation of the OTC Markets as the failure to honor quotations, also known as “backing away,” can be disruptive to a fair and orderly market. See FINRA Rule 5220: Offers at Stated Prices and IM-5220 Firmness of Quotations.
Minimum Quote Sizes of OTC Markets Securities
Priced quotations in the OTC Markets are firm for certain minimum sizes. Minimum quote sizes are based upon quote price. As the price of a quote decreases, the size associated with a price increases. Mandatory sizes assure a minimum amount of liquidity in the market and add weight to a member’s firm quote obligation. See FINRA Rule 6433.
Real-Time Trade Reporting of OTC Markets Securities
Within 30 seconds, FINRA members must report their transactions in OTCMarkets securities to FINRA’s OTC Reporting Facility, the service that accommodates reporting and dissemination of last sale reports in all OTC Equity Securities. This rule creates a uniform method of reporting obligations for member firms: who must report, when those reports are due, what must be reported, and how trades already reported may be cancelled. Subsequent dissemination of transaction information by NASDAQ, on behalf of FINRA, increases the transparency of the market for all OTC Equity Securities, including OTCQX, OTCQB and Pink Sheets securities. That in turn improves pricing for investors and results in greater volumes and better overall liquidity. See FINRA Rule 6622.
The OTC Markets Order Audit Trail SystemSM
FINRA has established the Order Audit Trail System (“OATSSM“) as an integrated audit trail of order, quote, and trade information for NASDAQ and OTCMarkets quoted securities. FINRA uses the OATSSM audit trail system to recreate events in the life cycle of orders and monitor more completely the trading practices of its members. See FINRA Rule 7400.
Short Position Disclosure of OTC Markets Securities
FINRA members are required to report their short interest positions in all OTC Equity Securities mid-month and end-of-month. Reporting of short interest positions provides transparency to the short selling activities by FINRA member firms, and reduces the risk of manipulative behavior associated with naked short selling. See FINRA Rule 4560.
Naked Short Selling & OTC Markets Securities
FINRA applies short sale delivery requirements to those equity securities not otherwise covered by the delivery requirements of SEC Regulation SHO. Reg. SHO applies to all securities of all reporting issuers, whether listed for trading on an exchange or quoted by OTC Markets. New Rule 4320 expanded Reg. SHO requirements for FINRA member firms to include non-reporting OTC Equity Securities quoted on OTCMarkets. Together Reg. SHO and Rule 4320 limit the possibility of abusive naked short selling in securities quoted by the OTCMarkets. See FINRA Rule 4320.
15c2-11 Initial Quotes & the OTC Markets
To initiate quotations in any OTC Equity security or resume quotations after a four day cessation or SEC suspension on the OTCMarkets inter-dealer quotation system, a market maker must first obtain and review certain specified information regarding the issuer. The information requirements are set forth in the SEC’s Rule 15c2-11. The information is supplied to FINRA by a sponsoring market maker on SEC Form 211. When approved by FINRA, the member may submit its quotation because sufficient reliable current information is available to the public to support the member’s quotation. See FINRA Rule 6432.
FINRA Trading and Quotation Halts & the OTCMarkets
FINRA may halt trading and quotations in securities when FINRA determines that doing so is necessary to protect investors and the public interest. FINRA will act only when 1) the security is halted on either a U.S. exchange or a foreign securities exchange or 2) FINRA determines that an extraordinary event has occurred that has a material effect on the market or may cause major disruption to the marketplace and/or significant uncertainty in the settlement and clearance process. See FINRA Rule 6440.
Best Execution of Customer Orders & OTCMarkets Securities
FINRA requires member firms to ascertain the best market to execute their customer orders. OTCMarkets and the OTCBB are recognized inter-dealer quotation systems that can be relied upon for electronic best execution if there are two priced quotes. If fewer than two quotations are displayed on an inter-dealer quotation system that permits quotation updates on a real-time basis, FINRA members must contact at least three dealers by phone to obtain other quotations. See FINRA Rule 2320.
Protection of Customer Limit Orders of the OTCMarkets
FINRA members may not trade for their own account at prices that are equal to or better than the prices of limit orders that are from their customers or from another FINRA member firm on behalf of its customers. See FINRA Rule 5320.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton Florida, (561) 416-8956, by email at info@securitieslawyer101.com or visit www.gopublic101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information about going public and the rules and regulations affecting the use of Rule 144, Form 8K, crowdfunding, FINRA Rule 6490, Rule 506 private placement offerings and memorandums, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration statements on Form S-1 , IPO’s, OTC Pink Sheet listings, Form 10 OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, direct public offerings and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or info@securitieslawyer101.com. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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