SEC Alert
Eliminating the OTCBB
By: Steve Kronengold and David C. Zuckerbrot
© December 2014
All rights reserved
Introduction
On October 7, 2014, the SEC published a release instituting proceedings to determine whether to adopt FINRA’s proposal to implement comprehensive rule changes for the operation and governance of the over-the-counter (OTC) market and to phase-out the OTC Bulletin Board (OTCBB). FINRA’s proposed rule change was originally published for comment in the Federal Register on July 15, 2014, but the SEC had received only one comment letter relating to the proposed rule change. The comment letter was from OTC Markets Group, Inc. (“OTC Markets”), a competitor of the OTCBB and the owner of the inter-dealer quotation systems known as OTC Pink, OTCQB, and OTCQX. At this time, the SEC is seeking additional input from interested parties on the proposed rule change.
Background
The OTC market is comprised of publicly traded securities that are not listed on a national securities exchange. The trading platforms for OTC securities are referred to as “inter-dealer quotation systems.” Today there are two main inter-dealer quotation systems: (i) the FINRA-owned OTCBB (www.otcbb.com), and (ii) the OTC Markets-owned OTC Pink, OTCQB, and OTCQX (www.otcmarkets.com). Many small cap start-ups and investors mistakenly believe that the OTC marketplace is comprised of a single marketplace, and are unaware of the existence of two competing OTC quotation systems.
FINRA, under the statutory mandate of Section 15A of the Securities Exchange Act of 1934, had previously adopted rules governing the form and content of quotations relating to securities sold OTC, including rules designed to: (1) produce fair and informative quotations; (2) prevent fictitious or misleading quotations; and (3) promote orderly procedures for collecting, distributing, and publishing quotations. For example, FINRA’s Rule 6400 Series (Quoting and Trading in OTC Equity Securities), among other things, provides a regulatory framework governing the form and content of quotations in OTC equity securities. In addition, FINRA also operates the OTCBB and has established the Rule 6500 Series, which governs the operation and use of the OTCBB.
While FINRA’s quotation governance rules govern the conduct of members that publish quotations in OTC equity securities and are designed to ensure informative content and an orderly process for the quotation of securities sold over-the-counter, they do not address the structure and operation of the inter-dealer quotation systems on or through which such quotation activity may take place. To be fair, FINRA has adopted such rules for the OTCBB, its own inter-dealer quotation system, but these rules do not apply to other inter-dealer quotation systems.
In light of the absence of a comprehensive set of rules and procedures governing the activities of inter-dealer quotation systems themselves, FINRA, consistent with its goal of facilitating the widespread dissemination of reliable and accurate quotation information in penny stocks, is proposing to enact regulations and governance standards for inter-dealer quotation systems generally, as well as to cease operations of the OTCBB.
Proposed Rules
FINRA is proposing to complement the existing framework governing the form and content of quotations by amending FINRA Rule 6431 to require that a member inter-dealer quotation system (which includes the OTC Markets-owned quotation systems): (1) adopt and provide to FINRA written policies and procedures relating to the collection and dissemination of quotation information in OTC equity securities, (2) establish and provide to FINRA fair and non-discriminatory written standards for granting access to quoting and trading on its system, and (3) provide to FINRA for regulatory purposes a written description of each quotation-related data product offered by such member inter-dealer quotation system and related pricing information, including fees, rebates, discounts and cross-product pricing incentives.
Moreover, FINRA is proposing to delete the FINRA Rule 6500 Series, which governs the operation of the OTC Bulletin Board service, and thus cease operation of the OTCBB. FINRA believes that the discontinuance of the OTCBB as an inter-dealer quotation system will not have an appreciable impact on issuers, investors, or member firms. FINRA has stated that the level of transparency in OTC equity securities facilitated by the operation of the OTCBB has been declining significantly for years as other quotation venues have emerged. FINRA believes that the amount of quotation information widely available to investors relying on OTCBB data has declined and has become negligible. Furthermore, FINRA believes that the OTCBB information being disseminated to investors is so incomplete as to be potentially misleading with respect to the current pricing in these securities. For example, FINRA states that of the approximately 10,000 OTC equity securities quoted over the counter on the largest inter-dealer quotation system, less than 10% of those issues also are eligible to be quoted on the OTCBB. In addition, less than twelve securities out of the 10,000 OTC equity securities are quoted solely on the OTCBB.
The proposed rule change will primarily affect OTC Markets, and in its comment letter to the SEC, OTC Markets stated that it strongly supports the proposal since the proposal would enable the efficient operation of inter-dealer quotation systems for OTC equity securities while ensuring fair and non-discriminatory access to those systems and would thereby strengthen the trading market for OTC equity securities. OTC Markets added that FINRA’s discontinuing operation of the OTCBB, in conjunction with FINRA’s expanded oversight of qualifying inter-dealer quotation systems, would help eliminate investor and issuer confusion, while promoting the goals underlying Section 17B of the Securities Exchange Act of 1934, which include ensuring the widespread availability of reliable and accurate quotation information.
As noted above, the SEC is waiting to receive comments and arguments from additional parties regarding these proposed rule changes.
This article is provided for educational, informational and non-commercial purposes only. The content of this article is not intended to provide legal advice on any subject matter and should not be relied on as such.