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Proposed Regulations for Retirement Accounts to Impact Microcap Investors

OTC companies represent over half of all public companies in the United States. A majority of OTC companies are microcaps. Over the past few days I learned of new proposed regulations for retirement accounts including IRAs that could have significant impacts upon the OTC and microcap community. The U.S.

OTC companies represent over half of all public companies in the United States. A majority of OTC companies are microcaps. Over the past few days I learned of new proposed regulations for retirement accounts including IRAs that could have significant impacts upon the OTC and microcap community.

The U.S. Department of Labor (“DOL”) has proposed a new set of rules with the goal of reducing conflicts of interest between financial firms and retail investors who are seeking investment advice. Among other things, the DOL is seeking to establish a “best interest” standard for financial firms when they advise certain retirement plans and Individual Retirement Accounts (“IRAs”). This is an excellent goal but the implementation will have significant impacts upon retail investors if the proposed regulations are implemented as they currently are stated. The text for the two main proposals, which are lengthy and complicated, can be found here and here.

Under the proposed rules, it likely will be more difficult for individual investors to hold OTC Securities in an IRA. It is difficult to assess exactly how the proposed regulations might be implemented by each broker due to the complexity of regulations and the variety of ways that brokers may respond to the proposed regulation if enacted. However, possible outcomes that retail investors may experience at their broker if the regulations are enacted as proposed are that OTC securities will not be allowed in their IRAs; the support, information resources, and tools available to individual investors holding OTC securities in their IRAs will be greatly reduced; or a higher cost fee-based investment advisory account will be required in order to hold OTC securities. The irony in the last possible outcome is that the purpose of this set of regulations is to improve returns by reducing fees that retirement investors pay to their brokerages.

The biggest cause of the problems identified in the paragraph above stems from one of the proposals called the Best Interest Contract Exemptions (BICE) which allows brokers to charge commissions and and receive compensation as they have in the past. One provision of BICE is that it limits the type of assets that can be held in an IRA to: “bank deposits, CDs, shares or interests in registered investment companies, bank collective funds, insurance company separate accounts, exchange-traded REITs, exchange-traded funds, corporate bonds offered pursuant to a registration statement under the Securities Act of 1933, agency debt securities as defined in FINRA Rule 6710(l) or its successor, U.S. Treasury securities as defined in FINRA Rule 6710(p) or its successor, insurance and annuity contracts (both securities and non-securities), guaranteed investment contracts, and equity securities within the meaning of 17 CFR 230.405 that are exchange-traded securities within the meaning of 17 CFR 242.600.” Currently, IRAs allow a broader range of products to be held than this limited list. Three specific examples of what would be prohibited in BICE accounts are OTC securities, exchange-traded options, and futures.

I find it very concerning that this new regulation if enacted as proposed will have negative effects upon anyone that wants to own OTC securities in an IRA. Not being able to trade OTC securities from my IRA would be a disaster for me as a large and growing percentage of my assets are contained in IRA accounts and they largely contain OTC securities. Likewise, I don’t want to either pay more so that I can trade OTC securities or lose access to the broad array of features currently offered by brokers.

This proposed new regulation has had little in the way of discussion by the media. To the best of my knowledge, the impact to OTC securities hasn’t been discussed by the media and has only been minimally mentioned in a few comments to the Department of Labor. I’m raising this concern so that the microcap community is aware of the issue and can provide feedback to the Department of Labor so that they are aware of the impact that this proposed regulation would have on many investors.

To this end, we have submitted comments to the Department of Labor which are shown below:

Click To View Comment

As a reader you can help this cause in two ways. First, submit you own comments to the Department of Labor. Secondly, you can make other microcap investors aware of this issue by distributing a link to this article so that they can act as well. The easiest way to submit your comments to the DOL is to go to this link and submit them. A sample comment that you could use is as follows:

I have become aware of new regulations in ZRIN 1210-ZA25 that will impact the assets I hold in my retirement account (IRA). Specifically, I’m concerned that I may be limited in the type of assets I hold in my IRA due to the definition of assets in the proposed Best Interest Contract Exemption (BICE).

I have invested in OTC securities which I independently selected through my retirement account and am concerned that I will not be able to have those securities in my account in the future should my broker need to invoke BICE to continue servicing my account. My retirement account is my hard earned money which I believe I should be able to invest in any type of asset which supports my needs. I don’t want my freedom restricted by this new rule.

I request that you change BICE such that all assets are allowed in retirement accounts as they currently are in an IRA. Specifically, I want to make sure that OTC securities are allowed in BICE as they have proven to be a good area for me to invest my retirement funds.

The deadline for comments is September 24, 2015. So please act quickly to let the DOL know your thoughts.

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