FINRA Proposes Expansion of the OTCBB

In August 2016, FINRA silently asked for talk about a proposal to broaden the now mostly inactive OTC Bulletin Board quote service (OTCBB) as a backup inter-dealer quote system for OTC Equity securities. As part of the proposal, the OTCBB would be relabeled and branded as the Over-the-counter Display Facility or “ODF.” Formerly, on October 7, 2014, the SEC released a release setting up procedures to figure out whether to authorize FINRA’s demand to erase the guidelines associated with and the operations of, the OTCBB.

On March 12, 2015, FINRA withdrew the proposed guideline change and demand to erase the OTCBB. March 12, 2015, withdrawal did not point out factors, in its brand-new demand for the remark, FINRA shows it withdrew the proposal in reaction to SEC staff demands that FINRA continue to run an alternative quote center.

Since that time the OTCBB has stayed mainly reasonably inactive. According to FINRA’s OTCBB website, there was an overall of 4,842 trades for 61 business on the OTCBB in June. There is no easily available quote platform for individual financiers. By contrast, in June there were 2,889,702 trades including 10,861 business on the OTC Markets platform.

FINRA’s Request for Comment Background and Discussion

FINRA starts its conversation by keeping in mind that for many years, there have been circumstances of market-wide trading stops for all OTC Equity securities “from the issue for a significant absence of openness due to the restricted quote details for these securities.” FINRA continues that these trading stops followed system failures on an inter-dealer quote system (i.e., OTC Markets, as it is the only operating inter-dealer quote system). FINRA recommends that if it ran a center efficient in acting as an alternative inter-dealer quote system for OTC Equity securities, the need for market-wide trading stops would be prevented other than for the most remarkable situations. FINRA mentions that the SEC has prompted FINRA to run a 2nd OTC Equity inter-dealer quote service.

As an aside, when very first reading this intro by FINRA, you might have a memory of such an issue when, and not just recently. A fast Google search revealed that on November 7, 2013, and once again on October 17, 2014, FINRA enforced a market-wide trading stop on OTC Equity securities. No other market-wide trading stops have been enforced, and since 2014, OTC Markets has continued to broaden upon and enhance its systems, consisting of by becoming a SCI Entity under Regulation SCI.

FINRA is proposing to broaden its OTCBB quote system to consist of extra qualified securities and to run as an alternative quote system for all OTC Equity Securities. The ask for remark focuses on placing the OTCBB as a backup to the OTC Markets (or any future inter-dealer quote system) in case of system failures. It is uncertain if FINRA planned to broaden the system to try to become a practical rival to the OTC Markets.

The preliminary remark duration for FINRA’s proposal ended on November 29, 2016. FINRA got 3 actions to its ask for remark: one from OTC Markets Group opposing the proposal; one from the Security Traders Association of New York, similarly opposing the proposal; and one from the Delaware Board of Trade Holdings (DBOTS), which supports the idea but recommends it needs to be the alternative market and not the FINRA-run OTCBB

Since today, no more action has been handled the ask for the remark and no proposed guideline modifications have been sent to the SEC for the application.

Existing OTCBB

Pursuant to Section 15A of the Exchange Act, FINRA is charged with embracing and executing guidelines created “to produce reasonable and helpful quotes, to avoid fictitious or deceptive quotes, and to promote organized treatments for gathering, dispersing, and publishing quotes.” Because regard, FINRA has established a regulative structure, consisting of FINRA’s Rule 6400 series (Quoting and Trading in OTC Equity Securities) and Rule 5200 Series (Quotation and Trading Obligations and Practices) and the Rule 6500 series, governing the OTCBB. FINRA also owns and runs the OTCBB.

The present regulative structure governs the FINRA member companies’ quote activity and not the inter-dealer quote service itself. That is, the existing regulative structure governs the broker-dealers/FINRA member companies’ activities in going into quotes on the inter-dealer quote system, but does not enforce guidelines or guidelines on the inter-dealer quote system itself.

There are guidelines that need FINRA members to either submit a Form 211 with FINRA, consisting of due diligence and disclosure meeting the requirements of SEA Rule 15c2-11, on the company whose securities are being estimated, or be able to rely on another company’s 211 filing (piggyback-qualified) prior to starting a quote; guidelines related to minimum quote cost increments ($ 0.0001 for OTC equity securities priced less than $1 and $.01 for those priced over $1); guidelines restricting cross-quotation; guidelines needing the display screen of customer limitation orders; and a requirement that any priced estimate quote or ask rate represents a bona fide quote for or deal of such security (i.e., the “fictitious quote” restriction).

The FINRA regulative notification recommends that the OTCBB runs today in much the very same kind as it did when produced in 1990, it is not a quote system offered to retail financiers. The previous quote platform at www.otcbb.com now routes to FINRA’s website and its details page on the OTCBB. No real quotes can be seen. As FINRA kept in mind in its 2014 demand to erase the OTCBB completely, it is scantily used and its use has continued to decrease since that time.

FINRA does, nevertheless, issue trading signs to market makers that submit a 15c2-11 application looking for a quote on the OTCBB. To get approved for such signs, the company should go through the reporting requirements of the Securities Exchange Act of 1934, as modified (” Exchange Act”) and present in such requirements. FINRA’s most recent ask for remark proposes removing the requirements that business be Exchange Act-reporting to get approved for the OTCBB.

Proposed Revisions to Current OTCBB

FINRA is proposing to change Rule 6530 (OTCBB Eligible Securities) to permit non-Exchange Act-reporting business to receive a quote. Business would rather be recognized as either reporting and existing, overdue reporting or non-reporting. FINRA would not provide an alternative reporting basic much like the OTC Markets, but rather would count on public info for its classification of a company.

As part of the proposal, the OTCBB would be relabelled and branded as the Over-the-Counter Display Facility or “ODF.” The brand-new system would stay a display-only system and not offer communication links or execution performance in between market makers or member companies. To motivate us, the present $6/security/month position charge relevant to broker-dealers that show quotes on the OTCBB would be gotten rid of.

The brand-new ODF would still need the filing of a 15c2-11 application, or piggyback eligibility, for a quote. FINRA is proposing including exemptions from the 211 requirements to enable member companies to show quotes in any security that is piggyback-eligible on any inter-dealer quote system run by a FINRA member. Most likely, securities that are piggyback-eligible on the OTC Markets would get approved for a quote on the brand-new ODF without an extra 211 applications.

FINRA is also proposing to need member companies or market makers that meet defined quote activity limits in OTC equity securities over the previous 6 months to develop a connection to the FINRA center and test that connection and minimal performance on at least a semiannual basis. FINRA thinks that obligatory screening supports the practicality of the system as an alternative location for the screen of quotes in OTC equity securities must another inter-dealer quote system experience system disruption.

OTC Market’s Response

OTC Markets sent among the 3 remark letters in reaction to the FINRA ask for a remark. In addition, OTC Markets consisted of a conversation of FINRA’s ODF proposal in its quarterly report for the duration ending March 31 (OTC Markets is itself an OTCQX-traded entity). OTC Markets thinks that the FINRA ODF proposal would not achieve its mentioned objectives, is anti-competitive and otherwise need to stagnate forward.

OTC Markets revealed numerous issues over FINRA’s proposal, consisting of that: (i) the ODF would not be a feasible trading system; (ii) the ODF’s obligatory screening requirements represent regulative overreach and a dispute of interest; (iii) the ODF would use unneeded time, resources and financial expenses on FINRA members; (iv) the ODF market structure would puzzle financiers and assist in scams and other market abuses; and (v) the ODF is a “service looking for an issue that does not exist” as the OTC Markets’ inter-dealer quote system is a SCI-compliant entity.

FINRA’s ask for remark shows that the technical performance of the ODF would stay mainly the same from the present OTCBB. The existing OTCBB is a display-only system that does not permit communication and trade execution amongst pricing quote market makers or member companies. It is this absence of performance, to name a few problems, that has led to the irrelevance of the OTCBB in the very first place.

Since the system would not be functionally practical, OTC Markets recommend that members just link because they would be required to by FINRA, which represents a regulative overreach. FINRA is a self-regulatory company with enforcement powers and, as such, must not also be a market operator. Compliance with the brand-new system would also enforce expenses on member companies, needlessly.

OTC Markets also recommends that the brand-new ODF structure would promote scams. In specific, FINRA recommends removing the requirement that business goes through the Exchange Act reporting requirements. OTC Markets recommends that some business, that otherwise cannot offer any existing market details which might have a stop indication on OTC Markets, might declare certification for the ODF and promote “compliance and regulative status” to financiers. The ODF might also puzzle financiers who might think that the FINRA ODF classification shows a certified company that has been accepted by the regulator.

The OTC market consists of openly traded securities that are not noted on a national securities exchange. The trading platforms for OTC securities are described as “inter-dealer quote systems.” Today there are 2 inter-dealer quote systems: (i) the OTC Markets, consisted of OTCQX, OTCQB, and pink sheets (www.otcmarkets.com); and (ii) the FINRA-owed OTCBB (www.otcbb.com). Many small-cap individuals think that the OTC market is consisted of a single market, and are puzzled by the real presence of 2 such markets. Throughout the years this confusion has dissipated as the OTCBB has become a growing number of unimportant; nevertheless, a revamping and renaming of the market will most definitely bring an entire brand-new level of confusion to the system.