An analysis of data produced by our new Blue Sky Compliance data product has yielded some compelling insight into the OTC equities market. This latest blog highlights some of the more current trends and identifies additional areas for automation and process improvement.
As a quick reminder, Blue Sky laws are state specific rule sets which govern primary and secondary markets for non-Exchange listed securities. From a broker-dealer perspective, Blue Sky laws place restrictions around solicitation and recommendation. Consequently, broker-dealers may not solicit or offer any type of recommendation to residents of a state where the respective OTC equity or fixed income security does not qualify for an exemption.
OTC Markets Blue Sky data product plays a critical role in helping broker-dealers ensure they are in compliance with state security laws for secondary trading—effectively providing key information to create new, more efficient policies and processes. To better understand its practical application, we took a deep dive into the data, and more specifically, the exemptions that may or may not apply to OTC equity securities.
Data Trend 1 | Disclosure & OTC Markets Tiers
The most striking and logical insight gathered from reviewing blue sky data across the entire equities market is the correlation between the OTC Markets tier structure and the average number of exempt jurisdictions for securities within the respective tiers. This makes sense as many of the blue sky exemptions are disclosure-based (e.g. SEC Reporting, Manual Disclosure Exemptions); Disclosure is also the underlying foundation for the OTC Markets tier structure. OTC Markets Group continues to actively pursue OTCQX and OTCQB specific blue sky exemptions, with 37 states currently offering a tier-based exemption. The data below corroborates both assertions:
Data Trend 2 | OTC Tiers & Canadian Cross Traded Securities
The above trend is even more pronounced when looking at Canadian cross-traded securities. There are over 1500 Canadian-listed securities actively quoted on either the OTCQX, OTCQB or the Pink markets. Since these securities are not SEC reporting, they cannot avail themselves of one of the most prevalent Blue Sky exemptions. Additionally, while 22 states have a specific TSX (Main Board) exemption, only two states have a similar exemption for TSX Venture and none of the states have a Canadian Securities Exchange (CSE) exemption.
This situation creates the sizeable difference between the exemption number for Pink companies and OTCQX/OTCQB companies for TSX-V and CSE cross-listed.
Data Trend 3 | Non-Holding Company Banks Thread the Needle
There are only 12 securities out of approx. 16,000 OTC equities which qualify for an exemption in all 54 jurisdictions. All of these securities are community banks which are NOT bank holding companies. The majority of jurisdictions have a bank-specific exemption, but many of those exemptions do not apply to Bank Holding Companies. The bank specific exemptions plus OTCQX/OTCQB exemptions have allowed these securities to thread the needle.
All three of these trends illustrate how broker-dealers can marry Blue Sky compliance data with OTC Markets tier and other pertinent reference data points (e.g. Foreign Exchange) to create more targeted processes and policies. Additionally, this type of in-depth analysis can also create additional investment opportunities for those firms who focus on specific sectors such as community banks.
For more information on the analyses presented or on the Blue Sky Compliance data product, please email firstname.lastname@example.org.
- All Data references as of September 15, 2020