FINRA Proposes Expansion of Inter-Dealer Quotation System
Commentary by Steven Lofchie
FINRA requested comments on proposed rule amendments that would establish a FINRA-sponsored inter-dealer quotation facility for all OTC equity securities. Comments on the proposal must be submitted by November 29, 2016.
The FINRA proposal would, among other things, "expand the universe of securities that are eligible to be quoted" on its FINRA-operated inter-dealer quotation system, better known as the OTC Bulletin Board Service (the "OTCBB"). Eligible securities would include any OTC equity security whether or not the issuer is a reporting company (which currently it is required to be before an OTC equity security may be quoted on the OTCBB). The expanded facility is intended to provide an alternative venue for the display of quotations in OTC equity securities in the event of the technological failure of other inter-dealer quotation systems. FINRA believes that making the system available in order to maintain trading will prevent trading disruptions in all but extraordinary circumstances.
Firms will be required to implement testing procedures to confirm that trades may be effected through the system.
Commentary
The notice implies that FINRA does not expect the system to be used for trading in the absence of problems elsewhere. Even so, firms should review the notice in order to determine whether the OTCBB's testing requirements will be burdensome.
FINRA's inclusion of non-SEC reporting issuers in its trading system has policy implications, since FINRA is acting on behalf of the SEC. For the past several years, FINRA and the SEC have made it more difficult for investors to trade non-reporting securities, perhaps as a way to induce the issuers of such securities to register. This rule change may indicate a change in that policy.