OTC Markets Suggested Changes to FINRA Rule 6432




Posted by on June 19, 2018

OTC Markets Suggested Changes 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.

OTC Markets proposes the following changes to Rule 6432 and its administration:

(i) Make the Form 211 review process more objective and efficient.  FINRA’s role should be changed from a subjective gatekeeper to an objective administrator, only ensuring that the market maker has the required information.  FINRA should not review the merits of the information itself.  Furthermore, FINRA should be bound by the three-day requirement set forth in Rule 15c2-11 such that a market maker can proceed with a quote (and receive a ticker symbol where necessary) within the mandated three days.  The goal should be to ensure a market maker has the information mandated by Rule 15c2-11, that such information is publicly available for the investing community, and that an issuer has the responsibility for the accuracy of the information.

I agree with this suggestion.  FINRA can adequately address its gatekeeper role in its annual or biannual audit and review of member firms.  Moreover, if FINRA believes that a member firm has violated its requirements under Rule 6432, as a self-regulatory organization, it has the authority and ability to institute an investigation into such member firm.  By performing subjective reviews of the information itself and merits of such information, FINRA is asserting substantive control over issuers for which it lacks jurisdiction and for which such issuer has no due process rights or recourse.

The SEC itself, who has direct jurisdiction over a company, does not review the merits of a company’s operations, business model or capital structure, but rather only the proper disclosure of same such that an investor can make an informed decision.  FINRA, who does not have direct jurisdiction or governing authority over a company, has found a way to exert subjective influence, without due process, or published rules or information as to the criteria used in their subjective analysis.

(ii) Form 211 materials should be made public and issuers should be liable for any misrepresentations.  Currently, Form 211 materials are not publicly available.  Making the information publicly available would further the clear objective of SEC Rule 15c2-11.

In practice, as part of its review process, FINRA not only requests additional information, but often material non-public information, which is not only beyond the scope of Rule 15c2-11, but which information has no reasonable expectation of being made public.  Clearly, if information is important for the marketplace and investors to make informed investment decisions, it should be required by the rules and should be publicly available.

(iii) Outsource Form 211 processes to IDQS’s.  A broker-dealer should be able to file a Form 211 directly with the interdealer quotation system (IDQS) on which it plans to quote the security.  The IDQS should review such information for completeness and submit the package to FINRA within the three-day rule time frame.  Also, FINRA member IDQS’s should be allowed to submit their own Form 211 application for issuers that meet certain lower risk criteria, such as those already trading on a Qualified Foreign Exchange.

(iv) Allow IDQS’s to monitor ongoing disclosure and institute trading halts.  FINRA member IDQS’s should be responsible for developing a system that ensures ongoing disclosure of Rule 15c2-11 information for quoted securities, including the power to respond to indications of fraud and institute trading halts.

This seems so obvious to me.  Where FINRA exercises subjective merit reviews of initial Form 211 applications, it then takes no action whatsoever to ensure ongoing current information.  I have seen stocks trade large volumes that have been completely dark or devoid of current information for years.  By allowing an IDQS to require ongoing public information by an issuer for the privilege of having market makers make markets, the SEC and FINRA would add a layer of gatekeeping responsibility that does not exist today.  Separately, I note that OTC Markets does have a system and regime that responds to certain issues, such as improper stock promotion, but has no power to institute a trading halt.

(v) Allow broker-dealer compensation for Form 211 filing.  See more discussion on this topic below. I agree that allowing compensation for a Form 211 filing is not only advisable but if structured properly, has no downside.  The compensation can be capped and subject to specific disclosure and reasonableness rules, including compliance with Section 17(b) of the Securities Act.

(vi) Allow multiple market makers to quote a security after a Form 211 is cleared.  This would replace the current rules of only allowing one market maker to quote a security for the first 30 days.

Moreover, I would go further and suggest that the piggyback exception only be allowed if there is publicly available current information.