OTC Markets Unveils ‘Blue Sky’ Compliance Dataset for OTC Securities

New York-based over-the-counter equities market operator OTC Markets has released the Blue Sky Data Product to help broker-dealers and investment advisors ensure their research and recommendations are compliant with regulatory requirements around unlisted securities in each US state, jurisdiction, and territory. 

“Blue Sky” laws govern what activities brokers can perform in certain OTC securities, and are set on a state-by-state level. Brokers require exemptions from each state to solicit or provide services like research in OTC securities. And while OTC Markets is working with states to obtain exemptions for the OTC securities traded on its platforms—and has obtained exemptions from 37 states for its OTCQX market and 33 states for its OTCQB market so far—brokers have generally needed to obtain individual exemptions, or to simply not provide research on OTC securities, which inhibits liquidity in these stocks, says Matthew Fuchs, EVP of market data and strategy at OTC Markets Group.

The Blue Sky Data Product evaluates state rules for each security—covering 16,000 equities and 80,000 OTC fixed income securities—and identifies whether an exemption exits for OTC securities in each state, using a rules engine built by OTC Markets to catalog the inconsistencies between each state. OTC Markets then makes the data available via its Canari front end, and in a flat text file that firms can capture into their databases to identify which securities they can solicit business for or discuss with clients, and use in their order management systems to block solicitation in any non-exempt securities.

“This is a way to simplify and automate a complex, manual, and costly regulatory regime, reduce costs, and help issuers leverage broker and wealth management platforms to help tell their story,” Fuchs says.

Many of the exceptions depend on disclosure, and on demonstrating that disclosures are available and current, Fuchs says. “So we show how, to be part of our markets, companies must make disclosures available via our website… and we ask states to create an exception,” he says.

Users of the product are expected to be compliance analysts, or legal or risk professionals, rather than trading desks deciding who they can approach to trade certain securities. OTC Markets will also make the data available to issuers of OTC securities so they can see where exemptions exist and target investor relations activities accordingly.

“The benefits for issuers are that they can use broker-dealers to provide research … to attract a more diverse investor base, and also attract more liquidity,” Fuchs says. “In the short term, we are trying to solve a tangible problem. The long-term goal is to make working with OTC securities from a compliance and risk perspective on-par with the listed world. We want to provide compliance analysts with the data to evaluate risk and reduce friction in the OTC space. This will help issuers, participants, and will make the market more liquid overall.”