The regulatory framework on Wall Street is always changing. Take the SEC’s decision to vote on whether to solicit feedback on how to improve the quarterly reporting of earnings, a practice that has been firmly in place since 1970.
Between the CFPB, CFTC, FDIC, OCC, SEC, Federal Reserve, and a dozen other federal agencies (not to mention Congress) there’s a near-constant stream of updates to what can at times be an admittedly confusing web of regulations and enforcement that market participants have to stay on top of. Complicating matters, different sets of regulations apply to different market participants.
With the year coming to a close, here are four regulatory initiatives on OTC Markets Group’s agenda right now.
Protecting investors is, of course, a regulator’s primary focus. This is especially true on the retail side of the market, where investors may lack the time, money, and research skills needed to do as much due diligence as the larger institutions. So, how can retail investors be best protected from fraud in the capital markets?
- Increasing paid stock promotion disclosures to include the identity and nature of the promoter/promotion and the amount paid.
- Increasing disclosure from powerful market participants by increasing the disclosure requirements of transfer agents, insiders, affiliates and institutional positions in OTC securities. For example, institutional investment managers should disclose holdings of all publicly-traded equities, including significant short positions.
- Limiting anonymous Objecting Beneficial Owner (OBO) accounts for company affiliates, which would give both investors and the company itself greater insight into who holds a company’s shares.
- Allowing broker-dealers to limit access to certain securities to customers based on experience and data-driven risk profiles.
Increasing Access to Capital
Regulation A+ allows companies to raise up to $50M in a “public” offering that is generally more cost-effective than a traditional IPO. As originally enacted, Regulation A+ was not available to SEC reporting issuers.
In June of 2016, OTC Markets Group filed a Petition for Rulemaking requesting that SEC reporting companies be permitted to offer securities using Regulation A+. In March, based in large part on this Petition for Rulemaking, Section 508 of the Economic Growth, Regulatory Relief and Consumer Protection Act (S.2155), was signed into law. Once the SEC has completed its required rulemaking under the rule, SEC reporting companies will be able to raise capital using Regulation A+.
Blue Sky Exemptions
In addition to federal securities laws, issuers must also comply with state ‘Blue Sky’ Laws (state regulations governing the offering and sale of securities). Companies not listed on an exchange must comply with individual Blue Sky laws regarding secondary trading regulations, which can be costly and time-consuming. OTC Markets Group has been working with individual state regulators and the National Association of State Securities Administrators (NASAA) to achieve Blue Sky exemptions for securities on the OTCQX and OTCQB markets.
As of November 31, 2018, 33 states have recognized exemptions for securities on the OTCQX Market and 30 states for the OTCQB Market. These exemptions are based in large part on the disclosure that OTCQX and OTCQB companies make available on the OTC Markets website.
Increasing Access to Employee Stock Ownership Plans
OTC Markets Group is also advocating for common-sense legislative amendments to outdated regulations, including creating a pathway for companies on the OTCQX and OTCQB markets to offer Employee Stock Ownership Plans (ESOPs). Current IRS regulations force public companies quoted on the premium OTCQX and OTCQB Markets to treat their stock as “private” for ESOP purposes. OTC Markets Group is advocating for changes to the current IRS regulations which would allow these companies to use their public price in offering ESOPs to their employees.
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