August 27, 2014
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OTC Rule Proposals Submitted to SEC

On July 17, 1998, the National Association of Securities Dealers, Inc. (NASD®) submitted to the Securities and Exchange Commission (SEC) a series of proposed rule changes for the OTC Bulletin Board (OTCBB) and the OTC market. (OTC securities are those not listed on Nasdaq or any registered national securities exchange.) These OTC securities are quoted in media where there are no listing requirements and oftentimes, no public information available. The proposals are intended to: 1) balance the benefits that the transparency of the OTCBB provides with the public need for information about the issuers being quoted; 2) ensure that Market Makers are fully informed about the securities they are recommending to customers; and 3) ensure that investors understand the differences between OTC and highly regulated markets, such as Nasdaq or the registered exchanges.

OTC Bulletin Board Eligibility Rule
This proposed rule change will ensure that current financial information about domestic companies that are quoted on the OTCBB is publicly available. Presently, NASD rules require issuers of foreign and American Depositary Receipts (ADRs) to file periodic reports with the SEC in order to be quoted on the OTCBB. The NASD is proposing to extend that requirement to domestic securities. If approved, the rule will permit only those domestic companies that report their current financial information to the SEC, banking, or insurance regulators to be quoted on the OTCBB.

  • This requirement will be immediately effective upon approval by the SEC for securities not previously quoted on the OTCBB.
  • Non-reporting companies whose securities are already quoted on the OTCBB will have between 6 and 18 months (depending on where they fall in a phase-in period) to comply with the new requirements once the rule becomes effective.
  • If an issuer becomes delinquent in its reports, there will be a grace period of 30 - 60 days (depending on the type of issuer) during which Market Makers may continue to quote the security.

Recommendation and Disclosure Rules
These rules will require brokers to take additional steps before they recommend a transaction in any OTC security, and provide investors in all OTC transactions with increased disclosure.

  • The Recommendation Rule will require brokerage firms to review current financial information about the issuer before they recommend a transaction in any OTC security to a customer. Additionally, firms must designate a qualified registered individual to review the information required by the rule.
  • The Disclosure Rule will require brokerage firms to provide investors with written disclosure of the differences between OTC securities and those that trade on a highly regulated market such as Nasdaq or a registered national securities exchange. This disclosure will be made on each customer’s confirmation following any trade in an OTC security.
  • The proposed Recommendation and Disclosure rules would not apply to transactions in securities of banks and insurance companies, or companies with more than $100 million in assets and $10 million in shareholder’s equity. Transactions with institutional investors will also be exempt.

In December 1997, the NASD Board agreed on the importance of the reform proposals and sought public comment on them. During more than two months of public comment, the NASD received numerous comment letters, all of which were reviewed prior to developing these final revised proposals. You can view and print the entire proposal, as well as submit your comments to the SEC, once it is published in the Federal Register.


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