Marketplace Rules
The Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC) regulate trading in the OTC market. FINRA's responsibilities include establishing rules governing the business conduct of its broker-dealer members; setting qualification standards for securities industry professionals; examining members for their financial and operational condition, as well as their compliance with appropriate rules and regulations; investigating alleged violations of securities laws; disciplining violators of applicable rules and regulations; and responding to inquiries and complaints from investors and members. A selection of some of the most important FINRA and SEC rules governing the OTC marketplace are below.
Firm Quotes
To ensure the integrity of quotations, FINRA requires every member to trade at its publicly quoted prices. Integrity of quotes is essential to the normal operation of the OTC market as the failure to honor quotations, also known as “backing away,” can be disruptive to a fair and orderly market. FINRA Rule 5220: Offers at Stated Prices and IM-5220 Firmness of Quotations
Minimum Quote Sizes
Priced quotations in the OTC Link or the OTCBB inter-dealer quotation systems are firm for certain minimum sizes. Minimum quote sizes are based upon quote price. As the price of a quote decreases, the size associated with a price increases. Mandatory sizes assure a minimum amount of liquidity in the market and add weight to a member’s firm quote obligation. FINRA Rule 6433
Best Execution of Customer Orders
FINRA requires member firms to ascertain the best market to execute their customer orders. OTC Link and the OTCBB are the two recognized inter-dealer quotation systems in the OTC market that can be relied upon for electronic best execution if there are two priced quotes. If fewer than two quotations are displayed on an inter-dealer quotation system that permits quotation updates on a real-time basis, FINRA members must contact at least three dealers by phone to obtain other quotations. FINRA Rule 2320
Protection of Customer Limit Orders
FINRA members may not trade for their own account at prices that are equal to or better than the prices of limit orders that they have received from their customers or from another FINRA member firm on behalf of its customers. Protecting customer limit orders encourages the use of such orders by the investing public and results in more capital committed to securities trading in the secondary markets by a source other than securities dealers. The protection of customer limit orders for all OTC securities was implemented in the 4th quarter of 2008. FINRA Rule 5320
Real-Time Trade Reporting
Within 30 seconds, members must report their transactions to FINRA’s OTC Reporting Facility, its service to accommodate reporting and dissemination of last sale reports in all OTC Equity Securities. The rule creates a uniform method of reporting obligations of member firms, including who must report, when those reports are due, what must be reported, and how to cancel trades already reported. Subsequent dissemination of transaction information by NASDAQ, on behalf of FINRA, increases the transparency of the market for all OTC Equity Securities, including OTCQX, OTCQB and Pink Sheets securities, which improves pricing for investors and results in greater volumes and better overall liquidity. In 2008 FINRA expanded the rule to cover real-time trade reporting and dissemination of trade reports to include OTC ADRs and Foreign Ordinary shares. FINRA Rule 6622
Order Audit Trail SystemSM
FINRA has established OATSSM as an integrated audit trail of order, quote, and trade information for NASDAQ and OTC equity securities. FINRA uses this audit trail system to recreate events in the life cycle of orders and monitor more completely the trading practices of its members. FINRA Rule 7400
Short Position Disclosure
FINRA members must report their short interest positions in all OTC Equity Securities mid-month and end-of-month. Short interest reporting brings more transparency to the short selling activities by member firms, and reduces the possibility of manipulative behavior associated with naked short selling. FINRA Rule 4560
Naked Short Selling Prohibitions
FINRA applies short sale delivery requirements to those equity securities not otherwise covered by the delivery requirements of SEC Regulation SHO. Reg. SHO applies to all securities of all reporting issuers whether listed for trading on an exchange or quoted in the OTC market. New Rule 4320 expanded Reg. SHO requirements for FINRA member firms to include non-reporting OTC Equity Securities. Together Reg. SHO and Rule 4320 are designed to limit the possibility of abusive naked short selling in all OTC Equity securities. FINRA Rule 4320
Initial Quote Disclosure Requirements
To initiate quotations in any OTC Equity security or resume quotations after a four day absence or SEC suspension on either the OTC Link or OTCBB inter-dealer quotation system, a market maker must first obtain and review certain specified information regarding the issuer. The information requirements are specified in the SEC's Rule 15c2-11. The information is supplied to FINRA on Form 211. When approved by FINRA, the member may submit its quotation to OTC Link or the OTCBB, as sufficient reliable current information is available in the marketplace to support the member’s quotation. FINRA Rule 6432
Trading and Quotation Halts
FINRA may halt trading and quotations in OTC Equity Securities in very limited circumstances where FINRA determines it is necessary to protect investors and the public interest. FINRA will exercise this authority only when 1) the OTC Equity Security or the security underlying an OTC ADR is halted on either a U.S. exchange or a foreign securities exchange or when FINRA determines that an extraordinary event has occurred that has a material effect on the market or may cause major disruption to the marketplace and/or significant uncertainty in the settlement and clearance process. FINRA Rule 6440
View a more complete list of FINRA and SEC rules for the OTC marketplace.
