SEC Updates Regulations for OTC Market Issues

Brokers now have to do issuers' due diligence before accepting any quotes.

The United States Securities and Exchange Commission (SEC) has amended its rules to add some important component of the over-the-counter (OTC) market regulatory structure, the agency announced on Wednesday.

The updated rules enhanced market disclosure and also investor protection in the OTC market. 

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The regulator pointed out that the securities traded on the OTC market are primarily owned by retail investors, and broker-dealers provide access to these OTC securities, mostly playing the role of a gatekeeper.

The new laws will ensure that none of the broker-dealers publish quotations for an issuer’s security when current issuer information is not publicly available. However, there can be certain exceptions.

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Additionally, they need to review the basic issuer information before taking any quotations for the OTC instruments.

“These retail investor-focused improvements to Rule 15c2-11 are long overdue,” Jay Clayton, chairman at the SEC, said in a statement. “The technological advancements that have taken place since the rule was last amended enable us to require that information in the OTC market be more timely, enabling investors to make better-informed investment decisions, and reducing fraud in these markets where retail presence is significant and, unfortunately, pump-and-dump and other frauds are too common.”

Tightening the Loopholes

The SEC detailed that before the amendments, broker-dealers were allowed to maintain a quoted market in perpetuity when no information about the issuer is available or even in the case of non-existent issuers.

The regulator highlighted that the amendments will enhance the efficiency of the OTC market and will also minimize fraud or manipulation.

“The amendments strike the right balance between promoting critically important investor protections while at the same time providing new exceptions that should make it easier for certain securities to develop a quoted market,” Brett Redfearn, director of the division of trading and markets, added.

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