OTC Markets Group Submitted a Comment Letter to FINRA Related to FINRA Rule 6432




Posted by on June 18, 2018

OTC Markets Group Submitted a Comment Letter to FINRA Related to FINRA Rule 6432- On January 8, 2018, OTC Markets Group submitted a comment letter to FINRA related to FINRA Rule 6432.  Rule 6432 requires that a market maker or broker-dealer have the information specified in Securities Exchange Act Rule 15c2-11 before making a quotation in a security on the over-the-counter market.

Subject to certain exceptions, Rule 6432 requires that all broker-dealers have and maintain certain information on a non-exchange traded company security prior to resuming or initiating a quotation of that security.  Compliance with the rule is demonstrated by filing a Form 211 with FINRA.

The most widely relied upon exception is known as the “piggyback exception.”  The 15c2-11 piggyback exception provides that if an OTC Markets security has been quoted during the past 30 calendar days, and during those 30 days the security was quoted on at least 12 days without more than a four-consecutive-day break in quotation, then a broker-dealer may “piggyback” off of prior broker-dealer information.  In other words, once an initial Form 211 has been filed by a market maker and approved by FINRA and the stock quoted for 30 days by that market maker, subsequent broker dealers can quote the stock and make markets without resubmitting information to FINRA.  The piggyback exception lasts in perpetuity as long as a stock continues to be quoted.

As a result of the piggyback exception, the current information required by Rule 15c2-11 may only actually be available in the marketplace at the time of the Form 211 application and not years later while the security continues to trade.

The opening paragraph of OTC Markets’ comment letter related to Rule 6432 sets the tone for the entire letter, stating, “[W]e continue to believe that the cumbersome operational processes around Rule 6432, and the related Rule 15c2-11… under the… Exchange Act, unnecessarily impede capital formation by small issuers.”  I agree that the process creates an unnecessary difficulty on smaller companies seeking to access public markets in the U.S.

OTC Markets suggests that the recent boom in ICO’s is a natural response to the difficulties with navigating the capital and secondary markets for smaller companies, including the Form 211 process, DTC eligibility,  depositing non-exchange traded securities and market liquidity.   A re-working of Rule 6432 and the interaction with the 45-year-old Rule 15c2-11 would help improve the marketplace dramatically.

Rule 15c2-11 was enacted in 1970 to ensure that proper information was available prior to quoting a security in an effort to prevent microcap fraud.  At the time of enactment of the rule, the Internet was not available for access to information.  The premise of the rule was to require broker-dealers, who would be quoting the securities, to maintain information and provide that information to investors upon request.  Rule 6432 requires FINRA member firms to comply with Rule 15c2-11 by filing a Form 211 with FINRA.  In reality, a broker-dealer never provides the information to investors, FINRA does not make or require the information to be made public, and the broker-dealer never updates information, even after years and years.  Moreover, since enactment of the rules, the Internet has created a whole new disclosure possibility and OTC Markets itself has enacted disclosure requirements, processes and procedures.

The current system does not satisfy the intended goals or legislative intent and is unnecessarily cumbersome at the beginning of a company’s quotation life with no follow-through.   In the next LawCast in this series, I will go through OTC Markets specific recommended changes to the rule.