FINRA Rule 2114, which is titled "Recommendations to Customers in OTC Equity Securities."
Here's what you need to know about FINRA Rule 2114:
Purpose: This rule aims to protect investors by requiring FINRA member firms and their associated persons to conduct careful due diligence before recommending the purchase or short sale of certain over-the-counter (OTC) equity securities.
Application: The rule applies to OTC equity securities that are not listed on a major exchange like Nasdaq or a national securities exchange, or listed on a regional exchange but do not qualify for dissemination of transaction reports via the Consolidated Tape. These types of securities often have less information available publicly and may be more susceptible to fraud or manipulation.
Requirements: Before recommending an OTC equity security, the member firm or associated person must:
Review the issuer's current financial statements: This includes balance sheets, income statements, and other publicly available financial reports.
Review current material business information about the issuer: This could include news articles, press releases, analyst reports, and other relevant information.
Make a determination that the information reviewed provides a reasonable basis for making the recommendation: This means carefully considering all available information and assessing the risks and potential rewards of the investment.
Exemptions: The rule does not apply to:
Recommendations to sell long positions.
Recommendations to institutional accounts, qualified institutional buyers, or qualified purchasers defined by specific regulations.
OTC equity securities with a bid price of at least $50 per share.
Significance: FINRA Rule 2114 helps to ensure that investors in OTC equity securities receive informed recommendations based on proper due diligence. This contributes to fairer and more efficient markets by protecting investors from potential risks associated with less-liquid and less-transparent securities.