FR 2020-29215

The document published in the Federal Register presents a notice from the Securities and Exchange Commission (SEC) regarding a proposed rule change by the Financial Industry Regulatory Authority, Inc. (FINRA). FINRA aims to rescind the existing rules governing the OTC Bulletin Board Service, which has fallen out of use, and establish new standards for member-operated systems that provide real-time updates for over-the-counter (OTC) equity securities. The SEC is conducting proceedings to determine whether to approve or disapprove this proposal and is seeking public comments on its merits.

General Summary

In essence, FINRA is looking to overhaul its approach to overseeing how member firms provide quotations in OTC equity securities, focusing on enhancing the accuracy and reliability of these quotations. The proposal suggests eliminating the outdated OTC Bulletin Board Service in favor of new rules that ensure member inter-dealer quotation systems operate under stricter standards. The new rules aim to make the quotation process more transparent and equitable, addressing issues of investor confusion and outdated technology.

Significant Issues or Concerns

The document is filled with legal terminology that could be challenging for individuals outside the legal or financial sectors to understand. It lacks clear examples or case studies that would help readers grasp the implications of the proposed changes. Moreover, there is no discussion regarding the economic impact or potential costs associated with implementing the new rule, potentially leaving stakeholders unsure about how the changes could affect them financially.

Additionally, the decision to phase in certain reporting requirements over a year is mentioned, but the document does not provide a clear rationale for this timeline, nor does it discuss any associated risks or benefits. The absence of a discussion on possible alternative approaches also suggests that FINRA may not have fully examined all available options before deciding to terminate the OTC Bulletin Board's operation.

Impact on the Public

From a public perspective, these changes could simplify the process of obtaining accurate and reliable quotations for OTC equity securities, potentially reducing confusion. By modernizing quotation systems, FINRA aims to protect investors and ensure fairer trading practices. However, it's important for the public to be aware of the transition period and what changes to expect, especially regarding access to information.

Impact on Specific Stakeholders

For broker-dealers and those currently involved in operating the OTC Bulletin Board Service, these changes would necessitate adapting to new regulatory standards and possibly incurring additional compliance costs. FINRA’s proposal seeks to standardize practices across member systems, which could operationally challenge some firms, particularly smaller ones with fewer resources.

On the positive side, the financial markets could benefit from improved reliability and transparency, potentially attracting more investors to OTC markets. Enhanced real-time systems could provide a more competitive trading environment, benefiting both brokers and investors through improved liquidity and price discovery.

In conclusion, while the proposal aims to modernize and enhance transparency in OTC securities trading, it presents challenges and uncertainties regarding implementation, costs, and market adaptation. Stakeholders are encouraged to engage with the SEC's solicitation for comments to provide input and seek clarifications on these matters.

In the document, the concept of financial reference is encountered in the context of how certain stocks are categorized, particularly with the term "penny stock." According to Exchange Act Rule 3a51-1, a "penny stock" is defined as a non-NMS stock, which should be understood as stocks outside of the main national market systems. Importantly, the document describes that these stocks do not include securities priced at five dollars or more. This specific price threshold sets a clear financial boundary for what is considered a "penny stock" under this regulatory framework.

Lack of Financial Implications Discussion

One of the notable omissions in the document is the absence of a detailed discussion regarding the economic impact or cost implications associated with implementing the new Rule 6439 for member Inter-Dealer Quotation Systems (IDQSs). There is no discussion on whether adhering to these new requirements would necessitate financial investments or adjustments by the IDQSs, such as technology upgrades or increased staffing to meet compliance standards. This is a significant oversight, as understanding the financial burden of compliance is crucial for affected organizations.

Phased Reporting Requirements

The document briefly mentions the decision to phase in certain reporting requirements related to the new rule over a 365-day timeframe. However, it does not explore the financial reasoning behind adopting this particular timeline. For instance, spreading an implementation across a year could imply considerations about reducing upfront financial strain on organizations or ensuring that costs can be distributed more evenly over time. Yet, without explicit mention or analysis, the potential financial risks or benefits of this phased approach remain unexplored.

Absence of Financial Alternatives Analysis

Additionally, the document does not contemplate alternative solutions to phasing out the OTC Bulletin Board (OTCBB), nor does it discuss other possibilities that might be evaluated from an economic perspective. For example, maintaining certain aspects of the OTCBB might hold financial advantages or reduce costs compared to entirely new systems, but such considerations are not addressed. The void of an economic evaluation of alternative approaches makes the financial implications of the considered regulatory changes less transparent.

Overall, while the document touches on the definition and categorization of financial elements like "penny stocks," it falls short of exploring the broader financial picture associated with the proposed regulatory changes. This lack of analysis makes it difficult for stakeholders to fully understand the potential financial impacts or strategic decisions involved in implementing these new rules.