SEC Amends OTC Market Regulatory Structure to Enhance Investor Protection


The US regulator SEC has amended OTC market regulatory structure. The updated rules enhanced market disclosure and also investor protection in the OTC market.

September 17, 2020 | AtoZ Markets – The U.S. Securities and Exchange Commission (SEC), has amended its rules in order to add a few important components. According to the announcement made on Wednesday, the move comes in relation to its market regulatory structure for over-the-counter (OTC) offerings.

SEC updates market regulatory structure & investor protection

These updated rules enhanced two critical facets of the regulatory framework. investor protection, and market disclosure within the OTC markets.

As per the regulator, retail investors are the primary owner of securities they trade within the OTC market. Broker-dealers, in turn, provide access to these OTC securities, primarily serving the role of a gatekeeper in these transactions.

With the newly-amended laws, none of the broker-dealers will be able to publish quotations for a security of an issuer, should the current issuer information not be publicly available. There are, however, a few exceptions to this rule.

Moreover, the SEC now requires broker-dealers to review the basic information of the issuer before taking any quotations regarding OTC instruments.

The chairman of SEC, Jay Clayton gave a statement about this regulatory change.  He claimed that the improvements to Rule 15c2-11 have long since been overdue, and focus on the retail investor in said improvements.

Clayton highlighted the various technological advancements that have taken place since the rule was amended prior, which allows the SEC to mandate more from the OTC market. In particular, the chairman highlights how information must now be more timely in the market, which allows investors to make decisions that are better informed.

Alongside this, the improvements will see a reduction in fraud, in a market, Clayton highlights to have a very high presence of retail traders. Clayton explained that various frauds, such as pump-and-dump schemes, are sadly quite common in the OTC space.

 The amendments minimizes market manipulation & fraud

Before the amendment, the SEC noted that broker-dealers were capable of maintaining a quoted market in perpetuity. This can occur even if now information about the issuer is available, or even if the issuer itself is non-existent.

According to the SEC, these amendments within the OTC market would result in increased efficiency would. What is more, the amendments would minimize market manipulation and fraud.

Brett Redfearn, the Director of the Trading and Markets Division of the SEC stated that these amendments strike a balance between providing new exceptions. According to him, the amendments would promote critically important investor protections. This, Redfearn said, will make it easier for specific securities to develop a quoted market, as well.

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