April 21, 2014
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Glossary

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A

Active Security A security eligible for the OTC Bulletin Board (OTCBB) that meets the frequency of quotation requirement (see SEC Rule 15c2-11) or the so-called "piggyback" exception (see SEC Rule 15c2-11(f)(3)). Once the frequency of quotation or piggyback exception has been satisfied, authorized participants may register on-line in a security. As long as the security remains active, any participant may quote the security without a Form 211 submission.

American
Depositary
Receipt
(ADR)
A U.S. security that is a repackaged foreign security. A U.S. bank creates an ADR based on evidence of ownership of a specified number of shares in the foreign security, while the underlying shares are held in a depositary in the issuing company's home country. U.S. investors may buy shares in the foreign company in the form of an ADR. The certificate, transfer, and settlement practices for ADRs are identical to those for U.S. securities. U.S. investors often prefer ADRs over the direct purchase of foreign shares because of the ready availability of price information, lower transaction costs, and timely dividend distribution. Additionally, some U.S. investment institutions are not permitted to invest in non-U.S. securities, but may invest in ADRs.

Ask (Offer) Price The price at which a market maker is willing to sell a security.

B

Best Ask The lowest quoted offer of all competing Market Makers to sell a particular stock at any given time.

Best Bid The highest quoted bid of all competing Market Makers to buy a particular stock at any given time.

Best Execution FINRA Rule 5310 (Best Execution and Interpositioning) The obligation of Market Makers, broker/dealers, and others to execute customer orders at the best price available at the time the trade is entered.

Bid(or Buy) Price The price at which a Market Maker is willing to buy a security.

Blue-Sky Laws State laws that require issuers of securities to register their offerings with the state before they can be sold to its residents. Most blue-sky laws include provisions relating to fraudulent activities and the licensing of securities professionals. Each state has a regulatory agency that administers the law -- typically known as the State Securities Commissioner. National Market securities, subject to higher qualifications standards, are exempted from registration requirements under most states' blue-sky laws as are those listed on exchanges. OTCBB issuers are not exempt from Blue Sky registration requirements.

C

Common Stock A class of securities representing ownership and control in a corporation and that may pay dividends as well as appreciate in value.

CUSIP Number A unique nine-character alpha/numeric code assigned to a security by Standard & Poor's Corporation, which appears on the face of each certificate. The primary use of the number is to expedite the clearance and settlement process. CUSIP stands for Committee on Uniform Security Identification Procedures. The telephone number for the CUSIP Service Bureau is (212) 438-6500.

D

Depositary Bank When a company decides to issue American Depositary Receipts, it appoints an authorized depositary, normally part of a large U.S. banking institution or trust company.

Direct Participation Program (DPP) An investment program enabling investors to directly participate in the cash flow and tax benefits of the partnership invested in by the investor, typically a form of passive investment. Also called a Limited Partnership.

E

Eligible Security A security for which one or more Market Makers has received clearance to quote the issue on the OTCBB in the last 30 days. Securities receive eligible status if they are cleared following the filing of a Form 211 or a 15c2-11 Exemption Form. A frequency of quotation test (see also "Active Security") is administered during the eligible period. Until the test is satisfied, any other Market Maker that wishes to quote the issue must also submit a completed Form 211.

F

Firm Quotation FINRA Rule 5220.01(Firmness of Quotations) sets forth the requirement that a Market Maker execute an order from another broker/dealer at its displayed price for the normal unit of trading, or for its displayed size, whichever is greater.

H

Halts FINRA will review and evaluate available information to determine whether a trading and quotation halt in an OTC Equity Security is appropriate under the terms of FINRA Rule 6440 (Trading and Quotation Halts in OTC Equity Securities).

In addition to the authority granted by FINRA Rule 6440, FINRA will suspend trading in an OTC Equity Security in conjunction with an SEC-initiated trading suspension.

FINRA Rule 5260 (Prohibition on Transactions, Publication of Quotations, or Publication of Indications of Interest During Trading Halts)sets forth the prohibition on a member directly or indirectly, effecting any transaction or publishing a quotation, a priced bid and/or offer, an unpriced indication of interest (including "bid wanted" and "offer wanted" and name only indications),or a bid or offer accompanied by a modifier to reflect unsolicited customerinterest, in any security as to which a trading halt is currently in effect.


I

Indication of Interest Non-firm expressions of trading interest that contain one or more of the following elements:security name, side, capacity and/or price.

Ineligible Security Securities not eligible to be quoted on the OTCBB. A Form 211 and two copies of the issuer's information must be filed with the FINRA OTC Compliance Unit no less than three business days prior to the publication on the OTCBB in order to obtain clearance that would grant the security OTCBB-eligible status.

Inside Market The highest bid and the lowest ask (offer) prices among all Market Makers competing in a security; the best bid and ask prices for a security (see also "Best Bid" and "Best Ask").

L

Level I, II, III Subscriptions Trading firms interested in participating in the OTCBB choose between the following three subscription levels, depending on the functionality required: viewing market information, reporting trades, or entering quotes in OTCBB securities.

  • Level I Subscription
    Level I disseminates OTCBB and NASDAQ quote data worldwide through a variety of participating market data vendors.

  • Level II Subscription
    Level II allows for querying and order-entry of trades on The NASDAQ Stock Market by FINRA member firms through either a NASDAQ Workstation or a private trading service device. Subscribers can:

    • Access OTCBB information.
    • View:
      • daily statistical and index-related information;
      • share and dollar volume leaders, net gainers and losers;and
    • Report trades in OTCBB stocks within 30 seconds of execution.

  • Level III Subscription
    Level III provides all the functionality of a Level II subscription, plus the capability to enter quotations for individual securities through a NASDAQ Workstation. Subscribers can:
    • Enter, retrieve, monitor, and adjust quotations in response to changing market conditions for OTCBB securities.
    • Report, compare, and clear trades through automated services.

Limit Order A Limit Order is an order to buy or sell a stock at a customer-specified price.

Limit Order Display The Limit Order Display Rules generally require a market maker that receives a customer limit order priced at or better than its current quote and that does not immediately execute the order, to display the order to the entire marketplace. Alternatively, the Market Maker can choose to send the order to another Market Maker or ECN for display, consistent with the rules. Regulation NMS Rule 604 sets forth the display requirement for NMS Securities and FINRA Rule 6460 sets forth the display requirement for OTC Equity Securities, including those quoted on the OTCBB.

Limit Order Protection (Manning) The Limit Order Protection Rule, FINRA Rule 5320(Prohibition Against Trading Ahead of Customer Orders), generally provides that a member firm that accepts and holds an order in an equity security from its own customer(or customer of another broker-dealer)without immediately executing the order is prohibited from trading that security on the same side of the market for its own account at a price that would satisfy the customer order, unless it immediately thereafter executes the customer order up to the size and at the same or better price which it traded for its own account.

Locked or Crossed Quotations A condition, where the ask price of one Market Maker in a given security is the same price or lower than the bid price of another Market Maker, thereby producing locked or crossed quotations, respectively. FINRA Rule 6437(Prohibition from Locking or Crossing Quotations in OTC Equity Securities), generally requires that members implement policies and procedures that reasonably avoid displaying, or engaging in a pattern of practice of displaying locking or crossing quotations in any OTC Equity Security.

M

Market Makers FINRA Rule 6420(f)(Definitions) provides that an "OTC Market Maker" is a member of FINRA that holds itself out as a market maker by entering proprietary quotations or indications of interest for a particular OTC Equity Security in any inter-dealer quotation system, including any system that the SEC has qualified pursuant to Section 17B of the Exchange Act. A member is an OTC Market Maker only in those OTC Equity Securities in which it displays market making interest via an inter-dealer quotation system.

Market Order A Market Order is an unpriced order to buy or sell a security at the current market price of the security.

Minimum Quote Size Requirements FINRA Rule 6433(Minimum Quotation Size Requirements for OTC Equity Securities) sets forth the minimum sizes at which an OTC Market Maker is permitted to display quotations on an inter-dealer quotation system. The required minimum quotation size varies depending on the price of the stock.

O

Over-the-Counter Equity Security (OTC Equity Security)
(OTC)
FINRA Rule 6420(e)(Definitions) provides that an OTC Equity Security is any equity security that is not an "NMS stock" as that term is defined in Rule 600(b)(47) of SEC Regulation NMS; provided, however, that the term "OTC Equity Security" shall not include any Restricted Equity Security.

OTCBB An interdealer quotation system for unlisted, over-the-counter securities. The OTC Bulletin Board or "OTCBB" allows Market Makers to display firm prices for domestic securities, foreign securities, and ADRs that can be updated on a real-time basis. The OTCBB also permits the display of non-firm prices for DPPs and unpriced indications of interest.

Other-OTC OTC securities that are not quoted on the OTCBB. Other-OTC securities may or may not be quoted on another interdealer quotation system, or IDQS.

P

Penny Stock Penny Stocks are, generally speaking, those securities that are not listed on a national securities exchange and are priced under $5. There are exclusions for securities of issuers that have net tangible assets greater than $2 million if they have been in operation at least three years or greater than $5 million if in operation less than three years. Securities of issuers with average revenue of at least $6 million for the last three years are also not considered penny stocks. For a complete definition of a Penny Stock, see SEC Rule 3a51-1. OTCBB securities are considered penny stocks unless they qualify for one of the exclusions.

Penny Stock Rules SEC Rule 15g-9, known as the Penny Stock Rules, is designed to prevent deceptive or manipulative practices. It provides that a broker cannot sell a Penny Stock to any person unless it has approved that person's account for penny stock transactions and the broker/dealer has received in writing from customer agreement to the transaction. Approving an account includes, among other things, reviewing the customer's financial data and determining the customer's suitability, including the capability to evaluate the risks of trading in penny stocks. Some types of transactions in penny stocks are exempt from these rules. Exempt transactions include those with an established customer (a customer of more than one year or one who has made at least three separate penny stock purchases) and transactions in which the customer is an institutional investor.

Preferred Stock A security that usually pays a fixed dividend and gives the holder a prior claim on corporate earnings and assets over holders of common stock.

S

Short Interest Generally considered to be the total number of shares in a security that have resulted from a "short sale" as that term is defined in Rule 200(a) of SEC Regulation SHO. FINRA members are required to report short interest pursuant to FINRA Rule 4560(Short-Interest Reporting)

Spread The difference between the price at which a Market Maker is willing to buy a security, called a bid price, and the price at which the Market Maker is willing to sell it, called an ask price. The spread narrows or widens according to the supply and demand for the security being traded.

T

Transfer Agent An agent that maintains records of stock and bond owners in order to cancel and issue certificates, and resolve problems arising from lost, destroyed, or stolen certificates. A corporation usually appoints a commercial bank, although it may also serve as its own transfer agent.

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