Author Topic: Proposed new SEC rules for OTC securities, relevant for us?  (Read 2205 times)

writser

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Proposed new SEC rules for OTC securities, relevant for us?
« on: September 27, 2019, 11:32:42 AM »
I came across this today: https://www.sec.gov/news/press-release/2019-189 . The SEC is proposing changes to rule 15c2-11 which would make it more difficult for brokers to offer quotes on OTC stocks without current financials or shell companies. At this point it's not completely clear how exactly the rules will change (and if they will change), so this is all a bit speculative but any thoughts on how this would affect CAOX, PDER, PDRX and other OTC forum favorites? I guess that for some companies it will act as a pressure to start filing but for other companies (like CAOX?) it might imply that liquidity will dry up even more (if that is possible ..).

Still some open questions. What exactly is "publicly available"?

Also, I'm not an expert on piggy-backing. Can somebody explain to me: if I enter an order for CAOX in my brokerage account, does that also fall under rule 15c2-11? I.e. can't IB / TDAM / Schwab publish my price if they are not allowed to piggyback anymore? Or does that rule only hold for prop orders and can they still publish customer flow? I'm afraid it's probably the former.



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Foreign Tuffett

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Re: Proposed new SEC rules for OTC securities, relevant for us?
« Reply #1 on: October 02, 2019, 05:36:16 PM »
Bumping this, as it has the potential to be problematic for many of us COB&Fers.




benhacker

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Ben Hacker
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Spekulatius

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Re: Proposed new SEC rules for OTC securities, relevant for us?
« Reply #4 on: October 09, 2019, 12:56:53 PM »
https://twitter.com/alluvialcapital/status/1181996148720058373

Make your voice heard.

Done. On the other side, forced sales sounds interesting too. There could be real bargains to be had, if funds owning these buggers can’t hold them any more, because the value is unknown. A private investor would need to be willing to hold them for a decade.

< Corrected for grammar >
« Last Edit: October 09, 2019, 05:16:33 PM by Spekulatius »
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mjohn707

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Re: Proposed new SEC rules for OTC securities, relevant for us?
« Reply #5 on: October 09, 2019, 04:36:29 PM »
Done, and copy attached:

Dear SEC Staff,

I have read with the greatest excitement the SEC’s proposed changes to 17 CFR 240,15c2-11, and I urge the SEC to please approve these amendments as quickly as possible, as they will no doubt have a salutary effect for investors and their hard-won capital.  I additionally have great faith that the SEC, acting with their usual wisdom and foresight, has carefully weighed the potential positives and negatives of this proposal, and I imagine it will be almost a chore to retrod arguments and points that that were already more eloquently stated, subtly argued, and augustly disposed of within the agency.  And yet still as they say, out of the abundance of the heart the mouth speaketh, and I hope these quick thoughts might be of no great trouble, even if not of any great value.  Take them as you might as a recitation of simple facts by a child, with a pat on the head and the patience we owe to all those in our charge.

The SEC was established with a goal no doubt originally, and who can really recall exactly what it was, but it was likely something to the effect of protecting the capital markets against bad-faith actors, and allowing smaller investors, those without institutional access to trust and participate in the growth of the economy.  We are of course all born with burdens to overcome, and it is clear that the SEC recognizes that their own burden was a mission improperly or inadequately stated, or perhaps just due for a sort of evolution to fit our modern circumstances.  Either way, it is undoubtedly a fundamental truth that the most dangerous actor in the modern capital markets is no longer the penny-stock promoter or the speculative operator raising money from the unsophisticated, but is actually instead the investor themself, who has over a great deal of time repeatedly demonstrated that they are incapable of making prudent decisions with their own money.  A brief list of examples follows.

Funding Whitney Tilson’s hedge fund
Participating in Tesla capital raises
Investing in Enron shares
Investing with Sanda Biglari
Cheerfully paying 2 & 20 for investment advice

I could list page after page of additional examples.  Fundamentally the agency must understand that the goal of any new regulations must ultimately be to protect the investor from the greatest danger to capital formation in these benign markets, which is the investor's own poor decision making.  And since the SEC’s mission, the very reason for the agency’s existence, is to protect investor capital, it must follow logically that the agency must seek to restrict, to the greatest extent possible under law, the ability of investors to make their own decisions.  And fundamentally it must also follow that any rule that restricts an investor from making their own decisions must be deserved, reasonable, and inarguably correct.

The proposed changes to 17 CFR 240,15c2-11 would eliminate trading in a huge number of non-reporting OTC securities, making these securities almost impossible to trade.  Such a change would be tremendously helpful for investors, as it would eliminate at least one potential venue to continue to make poor investment decisions.  Some would even argue that it would be wise if the rule could potentially be expanded at a later date to include a greater range of securities, perhaps to some or even most of the securities that trade in the more liquid markets as well.  Any proposal or change to this effect, of potentially eliminating trading in a greater number or even all listed securities would no doubt be a tremendous outcome for greater investment protection, as it would come closer to achieving the agency’s true goal of protecting the investor from themself more completely.  And certainly the agency could at least study the potential effects and benefits a wider ban would have for the investing public, but we must understand that the work of good governance is not completed in a day, and patience and small steps must be the order of everything.

If for some reason these changes cannot be made, I would ask the SEC to implement some sort of rule, the nature of which is not particularly important, that will limit the options that investors have.  Anything that restricts the ability of investors to make their own poor decisions about their capital will only be to their eventual benefit.

Regards,

mjohn707
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« Last Edit: October 09, 2019, 04:39:10 PM by mjohn707 »
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Foreign Tuffett

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Re: Proposed new SEC rules for OTC securities, relevant for us?
« Reply #6 on: October 10, 2019, 09:24:36 AM »
writser

The below is from page 118 of the full proposed rule document.

The Commission proposes to define the term “publicly available” to mean available on EDGAR or on the website of a qualified IDQS, a registered national securities association, the issuer, or a registered broker-dealer. Further, publicly available shall not mean where access to proposed paragraph (b) information is restricted by user name, password, fees, or other constraints

My interpretation (not legal advice) is that companies like PDRX that post annual reports on their websites or otcmarkets.com would pass this test. However, the dark companies that only mail/email out their financials would not.

I think that in practice, many brokers will stop allowing retail customers to buy any and all dark companies if this rule goes through. Merrill already did this last year.

Spekulatius

Yeah, I think that since this rule will (I think?) turn many dark companies into Level 2 assets, even small funds/SMAs able to own illiquid stocks will have a tough time owning them.

mjohn707

Ha ha ha. Well put.

benhacker

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Re: Proposed new SEC rules for OTC securities, relevant for us?
« Reply #7 on: October 10, 2019, 10:43:27 AM »
Spek, I'd be curious which of us long term investors, with our own money, would be ok to lock up $$$ in private companies where we are minorities?

In principal, not different than how we *should* think about investing.  In practice, quite different IMO.

private businesses (even vs. truly illquid ones) should trade with a liquidity discount....

I have 1% of my assets in a liquidating co (non-traded completely) and 3% in firm(s) that could (maybe) become unquoted per the above rule.  I'm a very long term investor, but for my clients, it's hard to say "yeah, you can move your money, but XYZ Co, that shit is now private..." :)

Certainly, individuals can do what they please, but I think most of us would rightly hesitate giving up tradeability...
Ben Hacker
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Spekulatius

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Re: Proposed new SEC rules for OTC securities, relevant for us?
« Reply #8 on: October 11, 2019, 08:17:44 AM »
Spek, I'd be curious which of us long term investors, with our own money, would be ok to lock up $$$ in private companies where we are minorities?

In principal, not different than how we *should* think about investing.  In practice, quite different IMO.

private businesses (even vs. truly illquid ones) should trade with a liquidity discount....

I have 1% of my assets in a liquidating co (non-traded completely) and 3% in firm(s) that could (maybe) become unquoted per the above rule.  I'm a very long term investor, but for my clients, it's hard to say "yeah, you can move your money, but XYZ Co, that shit is now private..." :)

Certainly, individuals can do what they please, but I think most of us would rightly hesitate giving up tradeability...

Yes, if you manage money for others and hold shares in noinfo stocks, you are between a rock and a hard place. As you stated, an individual investor can do as he pleases.

I don’t like this rule either,  that’s why I wrote a comment email to the SEC as well, but then again, if it causes forced sales, I am willing to take the other side and buy some shares at deep discounts to prevailing prices ( let’s say 30% below prevailing prices) and see what happens. 🤷🏻‍♂️
« Last Edit: October 11, 2019, 01:04:50 PM by Spekulatius »
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LongHaul

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Re: Proposed new SEC rules for OTC securities, relevant for us?
« Reply #9 on: October 15, 2019, 07:14:18 AM »
Feel free to call a WSJ reporter.  They are generally looking for stories and this might get their interest for a story.
Not sure which reporter would be a good fit but perhaps one that has covered similar regulation.

WSJ Newsroom: 212-416-2000