OTC Market (Microcap Stock) – Impending Rule Changes

INTRODUCTION

In September 2020, the SEC updated Exchange Act Rule 15c2-11 which become effective on September 28, 2021. These regulatory changes prohibit broker-dealers such as IBKR from displaying quotes for securities whose issuer has not met public reporting requirements. This prohibition may significantly restrict your ability to open or close positions in the OTC stock market. Additional information is provided in the Background and FAQs sections below.

 

BACKGROUND

The amendments to the Rule effectively eliminate publicly displayed quotes in particular OTC securities of issuers that fail to provide regulatory required information. Under the Amended Rule, broker-dealers will not be allowed to provide electronic quotations in the securities of issuers that do not make certain information “current” and “publicly available.”. This is likely to reduce the number of market makers quoting in these products, which could result in a significant reduction in the liquidity of these products and these securities moving to the OTC Grey Market. The Grey Market is an opaque marketplace where broker-dealers are unable to publicly quote OTC securities given the absence of investor interest, incomplete company information or lack of regulatory compliance.

In response to these changes, the OTC Markets Group submitted a proposal to the SEC to operate an enhanced Expert Market alternative trading system (ATS) for the trading of shares affected by this rule. If approved, the proposed Expert Market will begin to include the broader group of companies that will no longer be eligible for public quoting under the new rule changes and will serve as a pricing and best execution facility. Broker-dealers will be able to quote and trade Expert Market securities, but this will only be made available to certain sophisticated investors, known as “Qualified Experts.” Qualified Experts include broker-dealers, institutions and accredited investors.

In summary, the amendments to Rule 15c2-11 could have far reaching consequences to your OTC trading activities. Please be advised that you could be negatively impacted by acquiring or maintaining existing shares of non-reporting issuers. These changes may significantly restrict or in certain scenarios prohibit your ability to initiate transactions in the OTC market or to exit your pre-existing position. If an issuer that is delinquent in its regulatory filings is transitioned to the Expert Market, a substantial decline in liquidity and pricing transparency could result.

 

FAQ’s

Q: Why is the SEC mandating these changes?

A: The SEC has indicated that securities traded in the OTC market are primarily retail investors. While many issuers of quoted OTC securities publicly disclose information, other issuers display limited and, in some cases, no publicly available information. The SEC has indicated that a lack of current and public information about these issuers may disadvantage retail investors and the SEC is addressing the issue by eliminating displayed quotes on the affected issuers.

 

Q: Do I need to take any preemptive action before the amendments to the rule are implemented?

A: IBKR strongly advises that you consider the long-term impacts of holding securities that have the potential of being classified and transitioned to the Grey Market or Expert Market. By taking no action, you are accepting the future possibility that you could encounter a significant lack of market data information and liquidity and potentially not be able to close your position quickly or at a price that you believe reflects the current value. IBKR recommends that you review your related holdings and determine the potential risk level you may be accepting should any of your stock positions be impacted.

 

Q: What if I am currently holding a security that eventually becomes classified to the Grey Market?

A: IBKR imposes certain restrictions on U.S. Microcap Stocks. Current information on IBKR stock restrictions are provided at the bottom of this memo detailed in the “IBKR U.S. Microcap Stock Restrictions” link. If you purchased a stock in your IBKR account that becomes “Grey Market” classified, you will be allowed to maintain, close or transfer the position but will not be able to increase your position.

 

Q: How do I sell positions listed on the Grey Market or transitioned in the future to the Expert Market?

A: Currently, IBKR customers are required to call the Trade Desk to execute a trade request.

 

Q: Will I be able to access or view market data on the Expert Market?

A: No. The Expert market is operated by OTC Link LLC and is a private market serving the broker-dealer community. The platform facilitates pricing and best execution needs in securities that are restricted for public quoting or trading.

 

Q: What are the key dates?

A: Key dates relating to this change are as follows:

  • June 30, 2021 – Deadline for issuers to provide required disclosures.
  • September 28, 2021 – Rules compliance date. Disclosure failure will result in removal from Pink Market.

 

Q: Where can I find relevant information?

A: Please refer to the following links for additional information: