Can Brokers Recommend OTC Stocks?
A common question of microcap management teams looking to increase their shareholder base is; “Can Brokers Recommend OTC Stocks?“
The short answer is: YES!
According to Fuchs, FINRA Rule 2114 (Recommendations to Customers in OTC Equity Securities (The OTC Rec Rule)) reads as follows:
“No member or person associated with a member shall recommend that a customer purchase or sell short any OTC Equity Security, unless the member has reviewed the current financial statements of the issuer, current material business information about the issuer, and made a determination that such information, and any other information available, provides a reasonable basis under the circumstances for making the recommendation.”
So, it looks like brokers can recommend OTC stocks if they have reviewed a companies public informationand determine that the information provides “a reasonable basis under the circumstances for making the recommendation.”
While FINRA Rule 2114 is a great example of a grey area, there are a number of exemptions that allow brokers to recommend OTC stocks without entering a grey area.
3 important exemptions to the OTC Rec Rule are:
1. Price Exemption: 603 Securities
2. Asset & Shareholder Equity Exemption: 631 Securities
3. Bank/Insurance Company Exemption: 711 Securities