5 Get Smart Tips on OTC Markets Compliance

The OTC equity market can seem overwhelming – with so many securities and data points to track, many compliance professionals are at loss for where to start.  The good news is you are not alone.

Here are 5 tips to understanding the OTC Market

1. Know the Markets

For almost 10 years, OTC Markets Group has been organizing OTC equity securities into tiers based on financial qualifications and the quality and timeliness of disclosure.

These market designations are the cornerstone of OTC Markets’ mission to bring transparency and efficiency to the OTC Market.  Understanding the market structure is the key to creating a robust OTC Compliance process.

We recently enhanced the requirements for the top market, OTCQX, which bars penny stocks (according to SEC definition), requires an audit committee and a board of directors with at least 2 independent directors.  For details on the markets and respective qualifications, see: http://www.otcmarkets.com/learn/otc-market-tiers

2. Know the Numbers

The tiered market structure has resulted in the majority of trading activity and liquidity (in dollar terms) occurring in the top markets. During July 2016, 98.66% of dollar volume was in securities within OTCQX, OTCQB and Pink Current – with only a fraction of dollar volume registered by securities in Pink – No Information.  It is also important to understand the key security types found within the OTC Market.

3. Learn a Little Latin (Caveat Emptor)

Caveat Emptor or Buyer Beware is OTC Markets’ indicator to investors and financial professionals that there may be reason to exercise additional care and perform thorough due diligence in making an investment decision for the noted security.

There are a number of reasons why a security will be put into Caveat Emptor, including: Promotion/Spam without adequate current information, fraud concerns, Suspension/Halt and Undisclosed Corporation Actions.  Regardless of the reason, the Caveat Emptor designation flags higher risk transactions that warrant further investigation.

4. Limited and No Information

Limited Information is a designation for companies with financial reporting problems, economic distress, or in bankruptcy that make limited information publicly available. No Information is used to categorize companies that are not able or willing to provide disclosure to the public markets – either to a regulator, an exchange or OTC Markets Group. These are important attributes to include on AML and compliance exceptions reports.

5. The OTC Bulletin Board is Dead

There are only 102 securities out of the 9,705 quoted OTC securities, quoted on the OTC Bulletin Board. More importantly, 99.99% of priced quotes are on OTC Markets’ OTC Link ATS.  Relying only on reports or data that references the OTC Bulletin Board could provide misleading information.  Compliance professionals should review legacy reports with this in mind.

At the end of the day, follow the data. The amount of data available on OTC securities and issuers has increased exponentially in the past 5 years.

OTC Markets real-time data is available via the major Market Data distributors. Reference, compliance and financial data is available via file/api products and OTCMarkets.com is an invaluable online resource.

There is, of course, so much more to learn about the OTC Market, but understanding these key concepts will help improve your compliance and risk processes.

Matthew Fuchs, EVP of Market Data, leads the product development, distribution and sales of market data at OTC Markets Group. Prior to joining OTC Markets Group, he served in a number of financial technology roles at the National Research Exchange, Bearing Point and Arthur Andersen. Matt received a BA from Columbia University

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