OTC Equity Halts and Quotation Suspension

The OTC equity trading and quotation halt rule sits outside the national market system (NMS) stock market, and runs on FINRA's own authority rather than a listing exchange's. The quotation and reporting suspensions in this lesson reach a firm's access to a facility rather than a security's trading, and a security eligible for quotation on the Alternative Display Facility (ADF) is an NMS stock.

What Is an OTC Equity Security?

An OTC equity security is any equity security that is not an NMS stock as that term is defined in the Regulation NMS definitions, provided, however, that the term does not include any restricted equity security.

Quoting an OTC equity security in the first place is covered in the unit on non-listed and penny stocks.

On What Three Bases May FINRA Halt an OTC Equity Security?

In circumstances in which it is necessary to protect investors and the public interest, FINRA may direct members to halt trading and quotations in OTC equity securities on any of three bases.

• A foreign regulatory halt. The OTC equity security, or the security underlying an American Depository Receipt (ADR) that is an OTC equity security, is listed on or registered with a foreign securities exchange or market, and that exchange, that market, or the regulatory authority overseeing the issuer, exchange or market halts trading for regulatory reasons because of public interest concerns or for news pending.
• The proviso inside that first basis. FINRA will not impose a trading and quotation halt where the foreign regulatory halt was imposed solely for a regulatory filing deficiency, or operational reasons.
• A derivative halt. The OTC equity security, or the security underlying such an ADR, is a derivative or component of a security listed on or registered with a national securities exchange or a foreign securities exchange or market, and that market imposes a trading halt in the listed security.
• An extraordinary event halt. FINRA determines that an extraordinary event has occurred or is ongoing that has had a material effect on the market for the OTC equity security or the security underlying such an ADR, or has caused or has the potential to cause major disruption to the marketplace or significant uncertainty in the settlement and clearance process.

Exam Tip: Gotchas

• A foreign halt is not automatically a FINRA halt. Where the foreign action was taken solely for a filing deficiency or for operational reasons, the proviso keeps FINRA out.
• The extraordinary event basis reaches potential harm. A disruption that has not yet happened satisfies the test where the event has the potential to cause it, so an answer requiring realized damage is too narrow.

How Does a Foreign Regulatory or Derivative Halt Start and End?

FINRA will promptly initiate a trading and quotation halt in the OTC equity security on notice of a foreign regulatory halt or derivative halt from any of three sources:

• The national or foreign securities exchange or market on which the security, or the security underlying the ADR, is listed or registered;
• A regulatory authority overseeing that issuer, exchange or market; or
• Another reliable third-party source where FINRA can validate the information provided.

The commencement of that halt is effective simultaneous with the issuance of appropriate public notice by FINRA.

After initiating a halt on either of those two bases, FINRA may continue the halt in trading and quoting in the OTC market until such time as FINRA receives notice that the applicable regulatory authority has or intends to resume trading in the security.

Whatever the basis, FINRA shall disseminate appropriate public notice that a trading and quotation halt initiated under the rule is no longer in effect.

Exam Tip: Gotchas

• A third-party source counts only where FINRA can validate what it says. The rule qualifies that source twice, as reliable and as one whose information FINRA can validate, before it will act on it.
• The end of a foreign or derivative halt does not need the foreign market to reopen. Notice that the authority intends to resume trading is enough to let FINRA stop continuing the halt.

How Long Can an Extraordinary Event Halt Run?

After FINRA initiates an extraordinary event halt, trading and quotations in the OTC market may resume at the earlier of two moments: when FINRA determines that the basis for the halt no longer exists, or when ten business days have elapsed from the date FINRA initiated the halt, whichever occurs first.

FINRA may also determine to extend an extraordinary event halt for subsequent periods of up to 10 business days each, where at the time of the extension FINRA finds that the extraordinary event is ongoing and determines that continuation beyond the prior 10 business day period is necessary in the public interest and for the protection of investors.

FINRA imposes an extraordinary event halt where it determines, in its discretion, based on the facts and circumstances of the particular event, that halting trading is the appropriate mechanism to protect investors and ensure a fair and orderly marketplace. As a general matter, FINRA does not favor imposing such a halt and will exercise the authority in very limited circumstances.

Exam Tip: Gotchas

• The ten business days caps each period, not the halt. Extensions of up to 10 business days each can carry the halt well past ten days, so long as FINRA makes the two findings each time.
• The ten-day cap and the determination are alternatives, and the earlier one wins. Trading and quotations may resume once FINRA finds the basis gone, even on day two, because the rule says whichever occurs first.

What May a Member Not Do During an OTC Halt?

Where a security is subject to a trading and quotation halt initiated under this rule, it is deemed conduct inconsistent with just and equitable principles of trade and a violation of the standards of commercial honor rule for a member to do either of the following:

• Effect, directly or indirectly, a trade in the security; or
• Publish, in any quotation medium, any of these: a quotation; a priced bid and/or offer; an unpriced indication of interest (IOI), including "bid wanted" and "offer wanted" indications; or a bid or offer accompanied by a modifier to reflect unsolicited customer interest.

A quotation medium is defined broadly. It means any system of general circulation to brokers or dealers that regularly disseminates quotations of identified brokers or dealers, or any publication, alternative trading system or other device that is used by brokers or dealers to disseminate quotations to others.

Where FINRA halts off-exchange trading in all NMS stocks under the market-wide circuit breaker halt rule, it also shall halt trading in all OTC equity securities until that circuit breaker is no longer in effect for NMS stocks.

Members must halt quoting and trading in all OTC equity securities as of the time the market-wide trading halt in NMS stocks is publicly disseminated. The circuit breaker levels and durations are covered in the lesson on market-wide circuit breakers.

Exam Tip: Gotchas

• An unpriced indication of interest is a publication the halt reaches. A firm that puts out a bid wanted with no price attached has published in a quotation medium just as surely as one that posts a two-sided market.
• The two named indications are examples, not a closed pair. This halt reaches any unpriced indication of interest, and it names "bid wanted" and "offer wanted" with the word including, so a name only indication is inside it too.

When Can FINRA Suspend a Firm's Access to Quoting or Reporting?

Three separate rules let FINRA act against a firm's access rather than against a security. Each is triggered by violations of applicable requirements or prohibitions.

The Nasdaq facility rule adds one sentence the others do not have. For avoidance of doubt, any determination by FINRA to suspend, limit, prohibit, or terminate a participant's ability to use the services of one of the two FINRA/Nasdaq Trade Reporting Facilities will apply equally to the other FINRA/Nasdaq Trade Reporting Facility with respect to that participant.

Exam Tip: Gotchas

• The facility rules point at the Code of Procedure and the quotation rule does not. Only the two Trade Reporting Facility rules say the action follows those disciplinary procedures.
• The cross-facility sentence names four actions where the first sentence names five. It carries suspend, limit, prohibit and terminate, and leaves out condition, which is the kind of wording detail a stem can turn on.

What Should You Check on Exam Day?

• Identify the halt basis first; the foreign and derivative bases end on notice that the applicable regulatory authority has or intends to resume trading in the security, and only the extraordinary event basis has a day count.
• Read the ten-business-day figure as a per-period ceiling, then look for FINRA's two findings supporting any extension.
• Confirm the foreign halt was not imposed solely for a filing deficiency or operational reasons before letting FINRA halt.
• During an OTC halt, treat an unpriced bid wanted or offer wanted in any quotation medium as a violation, not just a live two-sided quotation.
• On an access suspension, check which facility is named and whether the question is about entering quotations or about using trade reporting services.