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FLASHBACK FRIDAY: The SEC Approves Overhaul for the OTC Marketplace

Flashback Friday sponsored by Instinet

Traders Magazine Online News, January 12, 2018

John D'Antona Jr.

Stock fraud. Stock manipulation.

It’s always on the minds of regulators – especially the Securities and Exchange Commission – whether it occurs or can occur today, last year or tomorrow. While regulators like the SEC  have stepped up their surveillance of the markets and investor education efforts to prevent fraud, it can still happen. But with the help of the exchanges or in this case OTC Markets, who has continued to beef up its standards to keep stocks that trade on its three marketplaces safe for investors and minimize fraud.

In this Flashback Friday story, Cromwell Coulson, chairman of the National Quotation Bureau, owner and operator of the manually-traded pink sheets, which has now morphed into OTC Markets, looks back to 1998 and what he has done to make trading in small cap OTC Markets’ stocks safe.

Coulson, in a recent conversation with Traders Magazine, said that the 1998 and 1999 Rule 15c2-11 proposal should acknowledge the SEC’s road back then was paved by good intentions, while also taking note of the overwhelming public backlash against the proposals. In 1991, and subsequently in 1998 and 1999, the SEC proposed comprehensive amendments to Rule 15c2-11 – including eliminating the piggyback exemption – to address concerns about fraud and manipulation in the OTC market. The 1991 proposals to do away with the piggyback exemption, and the 1998 proposed amendments and 1999 re-proposal, relied on microcap fraud prevention as a justification for eliminating the piggyback exemption.

“It is a well-known principle of market structure that increasing the number of market makers is a positive force,” said Coulson. “The piggyback exemption makes it easier for regulated brokers to quote and make a market in a publicly tradable security. An efficient public trading market provides the best estimate of a security’s value based upon publicly available information. Removing the piggyback exemption would diminish price competition and severely harm capital formation by increasing the costs and risks of market making. This would reduce the number of market makers and lower the quality of firms providing market making services.” 

The SEC stated in the original proposal 30 years ago, “Without information, it is difficult for investors, securities professionals, and others to evaluate the risks presented by microcap securities.” OTC Markets Group agrees with that view and has successfully harnessed market forces to encourage issuers to provide current disclosure. 

“We recognize the damage created by fraud and manipulative promotion and have used transparency to improve investor information and mitigate promotion risk to create better informed and more efficient markets,” Coulson said.  “Our efforts have been highly successful in solving the problem of actively traded issuers for which public information is limited.  Today, almost all trading volume takes place in securities with current information publicly available, and most of that dollar volume is in companies that are fully SEC reporting or listed on a qualified foreign exchange.”

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