Securities regulators in B.C. are looking to combat possible market abuse by boosting reporting requirements on dealers that trade in the U.S. over-the-counter (OTC) markets.
The B.C. Securities Commission (BCSC) is proposing amendments to its registration rules for firms that trade in U.S. OTC markets. Among other things, the proposed amendments would expand reporting requirements for investment dealers.
“The proposed amendments further address the risk of abusive practices in U.S. OTC markets involving an investment dealer with a B.C. office,” the regulator says. Firms may have to increase their monitoring activity in order to comply with enhanced reporting requirements, it says, “This will give investment dealers and regulators more information about trading in securities of specified OTC issuers.”
The expanded requirements would require firms to report information on: clients’ jurisdictions, when investment dealers refuse to accept securities of specified OTC issuers; significant client holdings of shares in specified OTC issuers; and, significant trading in a specified OTC issuer that is facilitated by an investment dealer.
The regulator says that identifying the jurisdictions linked to a person that attempts to deposit securities of a specified OTC issuer will help investment dealers identify risk, as jurisdictions that allow secrecy may facilitate abusive trading practices.
“This reduces the likelihood of abusive practices occurring through the investment dealer. For regulators, knowing the jurisdictions linked to these arrangements helps identify higher-risk jurisdictions,” it notes.
Additionally, it says that reporting significant client holdings will require investment dealers to identify which of its clients control a concentration of securities in a specified OTC issuer.
“Large holdings that meet or exceed the concentration threshold may reveal insider-like influence over an issuer. Identifying those with significant holdings will help investment dealers focus on those whose trading may increase risk to the dealer, the public, and the market,” it says.
These reporting requirements would also identify how close client holdings of a specified OTC issuer are to the concentration limits. “Requiring investment dealers to report the three highest-percentage client holdings that are under the concentration threshold decreases the likelihood of a client avoiding reporting by maintaining holdings just below that threshold,” it notes.
Finally, reporting significant trading in a specific OTC issuer focuses dealers on risks across the firm, the BCSC says. “Significant, short-term spikes in trading, originating from one or multiple accounts, may indicate abusive practices,” it notes. “Identifying trading patterns will direct investment dealer attention to this risk. The significant trading reporting will also identify major trends over months.”
The BCSC is also proposing to require electronic filing of this reporting. This requirement would be in effect for three years, and then the regulator will reassess its impact. It also says that it plans to survey dealers about their experience complying with these conditions before it finalizes the proposed conditions and the order requiring electronic filing.
Comments on the proposed amendments are due by Oct. 30th.