SEC Tightens Rule on OTC Issuer Information Disclosure

All it takes is a dollar (stock) and a dream. 

That’s the mindset of many — possibly too many — retail investors who trade stocks over the counter. The OTC market is lightly regulated compared with NYSE and Nasdaq, and the securities are speculative. But there’s always the chance that dicey biotech, oil-exploration or cannabis firm that trades at $1 now will be $20 in a year.

The U.S. Securities and Exchange Commission on Wednesday took a step to make the wild west of the OTC market a little less wild by adopting an amended rule that bars  broker-dealers from providing public price quotations on companies that have not provided current information about their business or their financials. 

In a Wednesday afternoon telephone interview with Traders Magazine, Brett Redfearn, Director of the SEC’s Division of Trading and Markets, said that currently, about 3,000 of the 10,000 companies that trade OTC are in arrears on filing disclosure reports, to the extent that it would preclude broker-dealers from making public markets in their stocks.   

Brett Redfearn, SEC

“The bottom line is we’re trying to reduce the risk of fraud and manipulation and protect mainstream investors,” Redfearn said. “The idea is to say, “Get that financial information out there if you want to continue to be quoted in the same way.” 

“We think this will allow retail investors to make better informed investment decisions, which will aid in reducing fraud in the over-the-counter market,” Redfearn said, citing ‘pump and dump’ schemes and other sketchy activity that tends to happen in OTC.

Redfearn noted that SEC already requires broker-dealers to review basic financial information of a company before initiating OTC price quotations, but there are loopholes such as the “piggyback rule,” which allows broker-dealers to sign off on information received from another broker, rather than directly from the issuer. The rule amendment disallows this by requiring that information come directly from the issuer, and be no more than one year old.  

With the amended rule, the SEC has relaxed requirements for certain OTC securities issuers with actively traded securities whose information is more readily available, where there’s less concern about fraud. Also, “we recognize that not all issuers of quoted OTC securities do provide current publicly available financial information, so the commission going forward will consider requests for exemptive relief in certain circumstances,” Redfearn said. “Some of those circumstances could include limiting quoting to a market specifically for sophisticated or professional investors.”

In a release, the SEC said it “adopted amendments to Exchange Act Rule 15c2-11, an important component of the over-the-counter (“OTC”) market regulatory structure. The amendments are designed to modernize the rule, which was last substantively amended nearly thirty years ago, including to recognize advances in communications technologies.  The amended rule enhances disclosure and investor protection in the OTC market by ensuring that broker-dealers, in their role as professional gatekeepers to this market, do not publish quotations for an issuer’s security when current issuer information is not publicly available, subject to certain exceptions.”