DD Support Board and Research Team

[janice shell]

Is OTCM doing anything different with the Expert Market than hundreds of other individuals and entities do by, for example, assigning grades to stocks and mutual funds or sorting them into various categories. As almost any issue of a financial magazine or TV show does?

Yes. OTCM's "tiers" or "markets" are its own invention. But the "Expert Market" is not one of them. The stocks on it are stocks that for one reason or another have been dumped to the Grey Market. The Grey Market is where stocks go if they haven't had published quotes for four trading sessions. That can happen either because of an SEC or FINRA suspension, or because they're so illiquid all their MMs lose interest and go away. And that is made possible by Rule 15c2-11.

It's an SEC thing, not an OTC Markets thing.

Now, in my last post I brought up the question of OTC Markets' request for the exemptive relief it needs to operate the Expert Market as it wants to operate it. (And as it's actually been operating it for about two years.)

I said I didn't know what the SEC's response was, but I've found more information on that. Rather oddly, OTC Markets sent its request for exemptive relief to the Division of Trading and Market on 21 December, 2020:

https://www.sec.gov/rules/exorders/2012/34-90769-exemptive-request.pdf

Coincidentally or not, the next day--22 December 2020--the SEC gave "Notice of Proposed Conditional Exemptive Order Granting a Conditional Exemption from the Information Review Requirement of Amended Rule 15c2-11(a)(1)(i) and the Recordkeeping Requirement of Amended Rule 15c2-11(d)(1)(i)(A) under the Securities Exchange Act of 1934 for Certain Publications or Submissions of Broker-Dealer Quotations on an Expert Market":

https://www.sec.gov/rules/exorders/2020/34-90769.pdf

https://www.sec.gov/rules/exorders/exordersarchive/exorders2020.htm

In the Notice, the SEC explains the need for exemptive relief, and then further explains that OTC Markets/OTC Link has already requested it "on behalf of certain broker-dealers". (OTC Markets did not name those broker-dealers in its request.)

For those of you who may have been wondering how OTCM will make money on the Expert Market:

Under the proposed exemptive relief, all entities that distribute OTC Markets Group’s market data, including Subscribers, would be required to enter into a Market Data Distribution Agreement (“MDDA”) directly with OTC Markets Group. OTC Markets Group would control which market data distributors are permitted to receive market data, and the MDDA would require each such market data distributor to report all end-users to OTC Markets Group. OTC Markets Group would distribute quotations published or submitted on the Expert Market to market data distributors that agree to the MDDA’s contractual and data access restrictions that limit the distribution and display of quotations to certain eligible investors, as described below. Accordingly, real-time and delayed quotations14 published or submitted on the Expert Market would not be permitted to be distributed or displayed to the general public. Further, pursuant to the MDDA, market data distributors must require any person to whom they distribute quotations published or submitted on the Expert Market that is not party to the MDDA to agree, by contract, not to distribute such quotations to any person that is not a permitted recipient as described herein.

This is also interesting:

In addition, OTC Link LLC would remove from the Expert Market quotations for any security that fits within the following two categories: (1) any security of an issuer that is the subject of a registration revocation or trading suspension order issued by the Commission pursuant to Section 12(j) or 12(k) of the Exchange Act, respectively; and (2) any security of an issuer that OTC Link LLC has identified as “defunct” (i.e., it has ceased operations, ceased to exist, or has failed to respond to inquiries by OTC Link LLC). Once the applicable Section 12(k) trading suspension order terminates or the subject security is re-registered with the Commission following an applicable Section 12(j) revocation order, in order to be quoted on the Expert Market, the subject security must either (1) gain and then lose eligibility to be quoted in reliance on the piggyback exception or (2) be issued in conjunction with a Chapter 11 bankruptcy plan and be quoted on the Expert Market in accordance with the timing requirements discussed above.23

If I'm not mistaken, there are currently quite a few Expert Market issuers that are awaiting finalization of their revocation of registration.

And this is annoyingly smug:

Further, the Commission preliminarily believes that requiring OTC Link LLC to flag on its website any “formerly suspended” security for such period of time as set forth in OTC Link LLC’s policies and procedures (which would be for two years following the applicable trading suspension) would help to promote investor protection.37 Such a flag would serve as a notice to market participants that there was, in the recent past, the presence of any number of factors (such as uncertainty about the accuracy of publicly available issuer information or questions about trading in the issuer’s security) that led the Commission to conclude that it was in the public interest and for the protection of investors to suspend trading in the security.38

Do they really not understand that penny plungers will buy anything that's being pumped? And that the past is prologue?

As always, the SEC requested comment. The comment period was supposed to close on 11 February, but commenters, including OTC Markets, are still going at it:

https://www.sec.gov/comments/s7-23-20/s72320.htm

This comment is from OTC Markets' first contribution, from 11 February 2021:

https://www.sec.gov/comments/s7-23-20/s72320-8365682-229198.pdf

As described above, the Expert Market offers an alternative to the grey market: a regulated trading venue where qualified investors can value these securities, access transparent price discovery and receive best execution through their FINRA member broker-dealer. Regulators can gain valuable insight into quotation activity that would otherwise be hidden in the opaque grey market.

Why is that desirable? As with many of the comments to the original proposed amendments to Rule 15c2-11, a number of people rhapsodize about the Wonderful Buying Opportunities sniffed out by seasoned market veterans like them. I honestly don't know what stocks they're talking about. All I see on the Expert or Grey Market is junk. One commenter raises a valid point: if the Expert Market becomes "real" (he doesn't seem to understand it already is), then perhaps more companies will decide to deregister, and subsequently offer no disclosure at all, just because it's easier. He's right. That's bound to happen. And it's why the SEC offers a sunset provision, but of course none of the commenters wants it.

Nowhere in all this does anyone--the SEC, OTC Markets, or most of the commenters--that these Grey/Expert companies are perfectly free to get back in the game simply by finding an MM--or OTC Markets itself--to submit a new Form 211 to FINRA. Wouldn't it be better for both the SEC and OTC Markets to encourage that?

More from OTC Markets:

Another commenter noted that it is “not clear how a security that is already in the grey market can graduate to the Expert Market”, suggesting that moving grey market securities to the Expert Market could benefit existing shareholders in these securities and help prevent fraud.7 While the Commission could consider the benefits of permitting certain grey securities to “graduate” to the Expert Market, we support the framework of the current Proposed Order, which would result in an Expert Market that is designed to allow broker-dealer proprietary quotes in securities that fall from the publicly quoted “lit” market rather than proprietary quotes in all grey market securities.8

That is EXACTLY WHAT HAPPENS NOW: these companies hit the Greys, and either when their suspension is up, or, in the case of companies that have lost their MMs, a few days after that happens, they're magically "graduated" to the Expert Market.

OTC Link LLC supports the obligation to remove “defunct” issuers from the group of securities that are eligible for proprietary quotations on the Expert Market. In response to comments expressing concern around the methods of determining whether the issuer of a security is “defunct”,9 we believe that “defunct” companies should only include those that OTC Link LLC has reason to believe are no longer existing or functioning. The failure to respond to inquiries alone should not lead to the conclusion that the issuer is “defunct”.

Really? And why not?

Now here's something genuinely interesting from OTC Markets, from its letter of 15 July, only a few days ago:

https://www.sec.gov/comments/s7-23-20/s72320-9065929-246449.pdf

As the Rule’s September 28, 2021 compliance date approaches, we are taking this opportunity to urge the Commission to act quickly to adopt the proposed conditional order granting an exemption from Rule 15c2-11 for quotations published in an “Expert Market” (the “Proposed Order”).

On the compliance date, approximately 2,800 securities will be removed from the publicly quoted market. This group of securities represents more than $190 billion in shareholder value that stands to be significantly diminished if the Proposed Order is not adopted before the September compliance date.

Excuse me, but isn't the removal of these junk companies the POINT of the amendments to Rule 15c2-11? To encourage greater transparency, and some what more enthusiastic disclosure? C'mon, kids! That $190 billion is not real money. Time for the stuckholders who plunged on these stocks to stop waiting for a miracle, and move on to investments that may actually do well for them someday.

The Proposed Order was published on December 22, 2020 and the comment period ran until February 11, 2021. All comments received were in favor of the Proposed Order.7

Oh ffs. Only FIVE comments were received before 11 February, probably because not all that many people regularly check the Exchange Act Notices and Orders Archive page.

From yet another letter by Zinn of OTC Markets, also from 15 July:

OTC secondary trading in “No Information” companies exists largely for the benefit of minority, non-affiliate investors seeking pricing and liquidity options. Shareholders in these dark and defunct companies will see their holdings drastically depreciate and will be more susceptible to fraud and manipulation on the murky grey market. The Commission has acknowledged that “investors in securities that migrate to the grey market (as a result of the amendments) may be more susceptible to fraud and less efficient pricing, and [...] may lack electronic mechanisms to facilitate best execution.”3

Once more, isn't that the PURPOSE of these amendment? To get rid of that kind of junk forever?

While some of these companies will undertake efforts to meet the Rule’s new ongoing disclosure requirements, many will use this as an opportunity to strategically freeze out minority shareholders and empower insiders to buy shares at a discount on the grey market – where trades occur over the phone and pricing information is scarce.4

If that's what they want, those companies could go private.

And why the scare tactics from OTC Markets? What's really going on here is that OTCM wants to weaken the new Rule 15c2-11. And the SEC appears to be going along with that enthusiastically.