At first look, FINRA Rule 2114, Recommendations to Customers in OTC Equity Securities (The OTC Rec Rule), seems onerous and vague – two of a Compliance Officer’s least favorite adjectives. The initial requirement reads as follows:
“No member or person associated with a member shall recommend that a customer purchase or sell short any OTC Equity Security, unless the member has reviewed the current financial statements of the issuer, current material business information about the issuer, and made a determination that such information, and any other information available, provides a reasonable basis under the circumstances for making the recommendation.”
The requirement is daunting, but diligent Compliance Officers and policy makers who read on are rewarded for their efforts. The OTC Rec Rule offers several key exemptions that allow firms to recommend ~1800 securities, including the ADRs of world-class companies such as Roche and Danone, without engaging in company specific due diligence.
Let’s investigate a few of these exemptions and the securities they cover:
Price Exemption: 603 Securities | The Price Exemption sets a $50 bid price threshold, which is significantly more stringent than the SEC Penny Stock Rule of $5. This 10x multiplier effectively creates an elite group of companies that should be a part of any advisor’s toolkit. Companies currently qualifying for this exemption include:
Asset & Shareholder Equity Exemption: 631 Securities | The Asset & Shareholder Equity Exemption also creates a high bar to clear. Companies must have ‘at least $50 million in total assets and $10 million in shareholder’s equity as stated in the issuer’s most recent audited current financial statements.’ Companies qualifying for this exemption include large financial institutions and many companies operating within the utility sector, such as:
Bank/Insurance Company Exemption: 711 Securities | The Bank & Insurance Company Exemption provides relief for transactions in the securities of these heavily regulated industries. This exemption has become more meaningful with the influx of banks to the OTC market following the JOBS Act. 19 banks have deregistered and moved to the OTC market from an exchange since 2012, including:
These three exemptions, which are noted along with supporting data in our Compliance Data File, cover more than 1,800 OTC equity securities. This list includes securities of some of the largest, most successful companies in the world. View the full list
Compliance departments that take advantage of these data driven exemptions can provide more options for their brokers and advisors while having auditable, quantifiable processes that keep costs down via automation….so everyone is happy…for now.
*Data is as of 10/31/16.