[Federal Register Volume 84, Number 210 (Wednesday, October 30, 2019)]
[Proposed Rules]
[Pages 58206-58266]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21260]
[[Page 58205]]
Vol. 84
Wednesday,
No. 210
October 30, 2019
Part II
Securities and Exchange Commission
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17 CFR Parts 230 and 240
Publication or Submission of Quotations Without Specified Information;
Proposed Rule
Federal Register / Vol. 84 , No. 210 / Wednesday, October 30, 2019 /
Proposed Rules
[[Page 58206]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230 and 240
[Release No. 34-87115; File No. S7-14-19]
RIN 3235-AM54
Publication or Submission of Quotations Without Specified
Information
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule and concept release.
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SUMMARY: The Securities and Exchange Commission (the ``SEC'' or the
``Commission'') is proposing amendments to 17 CFR 240.15c2-11 (the
``Rule'') under the Securities Exchange Act of 1934 (the ``Exchange
Act''). The Rule governs the publication of quotations for securities
in a quotation medium other than a national securities exchange, i.e.,
over-the-counter (``OTC'') securities. The Commission is proposing to
provide greater transparency to investors and other market participants
by requiring that information about the issuer and the security be
current and publicly available; limit certain existing exceptions to
the Rule, including the ``piggyback exception,'' to provide greater
protections to retail investors; reduce regulatory burdens on broker-
dealers for the publication of quotations of certain OTC securities
that may be less susceptible to potential fraud and manipulation, such
as securities of certain issuers with higher capitalization and
securities that were issued in underwritten offerings; and streamline
the Rule, remove obsolete provisions without undermining the important
investor protections of the Rule, and make technical, non-substantive
changes. The Commission is also seeking comment about information
repositories.
DATES: Comments should be received by December 30, 2019.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
Send an email to [email protected].
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-14-19. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
internet website (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549, on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
All comments received will be posted without change. Persons submitting
comments are cautioned that the Commission does not redact or edit
personal identifying information from comment submissions. Commenters
should submit only information that they wish to make available
publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: John Guidroz, Branch Chief, Laura
Gold, Special Counsel, Theresa Hajost, Special Counsel, Quinn Kane,
Attorney-Advisor, Sam Litz, Attorney-Advisor, Aaron Washington, Special
Counsel, Elizabeth Sandoe, Senior Special Counsel, Timothy M. Riley,
Branch Chief, Josephine Tao, Assistant Director, Office of Trading
Practices, and Mark Wolfe, Associate Director, Office of Derivatives
Policy and Trading Practices, Division of Trading and Markets,
Securities and Exchange Commission, 100 F St. NE, Washington, DC 20549,
at (202) 551-5777.
SUPPLEMENTARY INFORMATION: The Commission is proposing for comment
amendments to Rule 15c2-11 [17 CFR 240.15c2-11] under the Securities
Exchange Act of 1934 [15 U.S.C. 78a et seq.]; and a conforming
amendment to 17 CFR 230.144(c)(2) under the Securities Act of 1933 [15
U.S.C. 77a et seq.].
Table of Contents
I. Executive Summary
A. Introduction
1. Existing Rule
2. Overview of Proposed Amendments
3. Intended Objectives
B. Summary of Proposed Amendments
II. Background
A. Regulatory Approaches To Combating Retail Investor Fraud
B. OTC Market Developments
C. Prior Rule 15c2-11 Proposals
III. Discussion of Proposed Amendments
A. Proposed Amendments to the Information Review Requirement
1. Existing Information Review Requirement
2. Proposed Amendments to the Information Review Requirement
(a) Revisions to the Review Requirement
(b) Require Current and Publicly Available Issuer Information
(c) Reorganize the Reporting Issuer Information
(d) Current Reports
(e) Expand Catch-All Issuer Information
(f) Modify Requirement To Make Catch-All Issuer Information
Available Upon Request
(g) Clarify the Application of the Catch-All Issuer Provision
B. Proposed Amendments to Supplemental Information
1. Existing Supplemental Information Requirement
2. Proposed Amendments to Supplemental Information
(a) Supplemental Information for Qualified IDQSs
(b) Supplemental Information for Company Insiders' Transactions
C. Proposed Amendments to the Piggyback Exception
1. Existing Piggyback Exception and Fraudulent Activity
2. Proposed Amendments to the Piggyback Exception
(a) Current and Publicly Available Information for Catch-All
Issuers
(b) Two-Way Priced Quotations
(c) After a Trading Suspension
(d) Shell Companies
(e) Frequency Requirements for the Piggyback Exception
(f) General Request for Comment Regarding the Piggyback
Exception
D. Proposed Amendments to the Unsolicited Quotation Exception
1. Existing Unsolicited Quotation Exception
2. Proposed Amendments to the Unsolicited Quotation Exception
(a) Current and Publicly Available Information
(b) Company Insiders
E. Proposed New Exceptions To Reduce Burdens
1. ADTV and Asset Tests
(a) ADTV Test
(b) Asset Test
2. Underwritten Offerings
3. Qualified IDQS Complies With the Information Review
Requirement
F. Proposed New Exception for Relying on Determinations by a
Qualified IDQS or a Registered National Securities Association
G. Proposed Amendments to the Recordkeeping Requirement
1. Existing Recordkeeping Requirement
2. Proposed Amendments to the Recordkeeping Requirement
(a) Recordkeeping Requirement Upon Publication or Submission of
Quotations
[[Page 58207]]
(b) Recordkeeping Requirement for Relying on an Exception
H. Proposed Amendments to the Rule's Definitions
1. Current
2. Shell Company
3. Publicly Available
4. Qualified Interdealer Quotation System
I. Proposed Amendment to the Nasdaq Security Exception
J. Proposed Amendments to the Furnishing Requirement and Annual,
Quarterly, and Current Reports of Reporting Issuers
1. Proposed Amendment To Remove Furnishing Requirement for
Catch-All Issuer Information
2. Proposed Amendments To Obtain Annual, Quarterly, and Current
Reports Directly From the Issuer
K. Proposed Amendment to Commission Exemptions From Rule 15c2-11
L. Proposed Amendment To Remove Preliminary Note
M. Technical Amendments to Rule Text
IV. Conforming Rule Change and General Request for Comment
A. Proposed Conforming Amendments to Cross-References in Rule
144(c)(2)
B. General Request for Comment
V. Proposed Guidance
A. Source Reliability
B. Information Review Requirement
VI. Concept Release
A. Information Repositories
VII. Paperwork Reduction Act Analysis
A. Background
B. Respondents Subject to the Rule
C. Summary of Collections of Information
1. Burden Associated With the Initial Publication or Submission
of a Quotation in a Quotation Medium
(a) Proposed Amendments to the Piggyback Exception
(b) Other Proposed Amendments
2. Other Burden Hours
3. Collection of Information Is Mandatory
4. Confidentiality
5. Retention Period of Recordkeeping Requirement
D. Request for Comment
VIII. Economic Analysis
A. Background
B. Baseline and Affected Parties
C. Discussion of Economic Effects
1. Effects of Rule 15c2-11 Amendments
(a) Making Proposed Paragraph (b) Information Current and
Publicly Available
(b) Proposed Amendments to Rule 15c2-11 Exceptions
(c) Proposed New Exceptions to Rule 15c2-11 To Reduce Burdens
2. Efficiency, Competition, and Capital Formation
D. Reasonable Alternatives
1. Eliminating the Piggyback Exception
2. Eliminating the Piggyback Exception for Shell Companies After
Reverse Mergers
3. Alternative Thresholds for Exceptions
4. Quotations With Either Bid or Ask Prices for Piggyback
Exception
5. Alternative Disclosure Frequency
E. Request for Comment
IX. Regulatory Flexibility Act Certification
X. Consideration of Impact on the Economy
XI. Statutory Basis and Text of Proposed Rules
XII. List of Subjects
I. Executive Summary
A. Introduction
Securities that trade on the OTC market are primarily owned by
retail investors. Many issuers of quoted OTC securities publicly
disclose current information about themselves. However, in other cases,
there is no or limited current public information available about
certain issuers of quoted OTC securities to allow investors or other
market participants to make informed decisions regarding company
fundamentals. The absence of current public information about such
issuers can contribute to incidents of fraud and manipulation. The
existing Rule is designed to ensure that a broker-dealer reviews basic
information about a security and issuer prior to publishing a quotation
in the OTC market. In practice, however, the Rule's exceptions permit
broker-dealers to publish quotations in perpetuity even when there is
no or limited current information about the issuer available to the
public or the broker-dealer, and even when the issuer no longer exists
or has ceased operations. The proposed amendments are intended to
modernize the Rule and in so doing better protect retail investors from
incidents of fraud and manipulation in OTC securities, particularly
securities of issuers for which there is no or limited publicly
available information, and facilitate more efficient trading in certain
more widely followed OTC securities.
1. Existing Rule
Adopted in 1971 \1\ and last substantively amended in 1991,\2\ Rule
15c2-11 governs the publication and submission of quotations by a
broker-dealer in a quotation medium for securities that are not listed
on a national securities exchange.\3\ In general terms, a quotation
medium is an electronic communications network or other device used by
broker-dealers to indicate interest to others in transacting in a
security.\4\
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\1\ See Initiation or Resumption of Quotations by a Broker or
Dealer Who Lacks Certain Information, Exchange Act Release No. 9310
(Sept. 13, 1971), 36 FR 18641 (Sept. 18, 1971).
\2\ See Initiation or Resumption of Quotations Without Specified
Information, Exchange Act Release No. 29094 (Apr. 17, 1991), 56 FR
19148 (Apr. 25, 1991) (``1991 Adopting Release'').
\3\ A ``national securities exchange'' is a securities exchange
that has registered with the SEC under Section 6 of the Exchange
Act.
\4\ A ``quotation'' is defined as any bid or offer at a
specified price with respect to a security, or any indication of
interest by a broker or dealer in receiving bids or offers from
others for a security, or any indication by a broker or dealer that
advertises its general interest in buying or selling a particular
security. Exchange Act Rule 15c2-11(e)(3). A ``quotation medium'' is
defined as ``any publication or electronic communications network or
other device that is used by broker-dealers to make known to others
their interest in transactions in any security, including offers to
buy or sell at a stated price or otherwise, or invitations of offers
to buy or sell.'' Exchange Act Rule 15c2-11(e)(1). The OTC market
consists of quotation mediums and interdealer quotation systems
(``IDQSs'') where broker-dealers actively publish quotations. An
IDQS is a type of quotation medium and is defined as ``any system of
general circulation to brokers or dealers which regularly
disseminates quotations of identified brokers or dealers.'' Exchange
Act Rule 15c2-11(e)(2). A quotation medium is an IDQS only if
quotations in its system are attributed to a broker-dealer that is
fully identified in such system.
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Issuers of quoted OTC securities may range from large foreign
issuers to small domestic companies, and some quoted OTC securities are
thinly traded.\5\ Information about these types of issuers is often
limited, particularly when they are not subject to the Commission's
periodic disclosure requirements.\6\ A lack of current and publicly
available information about an issuer can hinder an investor's ability
to evaluate an issuer's security, thereby potentially preventing the
investor from making an informed investment decision. In addition, an
increased potential for fraud and manipulation exists when securities
trade in the absence of information about the issuer.
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\5\ See generally Stock Screener, OTC Mkts. Grp. Inc., https://www.otcmarkets.com/research/stock-screener (last visited Aug. 5,
2019) (``OTC Markets Stock Screener'') (providing market activity
data for securities that are quoted on OTC Link ATS).
\6\ An analysis of quoted OTC securities using Bloomberg's
equity screening tool identified 2,007 securities for which
quotations are published in an IDQS that have a three-month daily
average dollar trading volume of less than $1,000. According to the
OTC Markets Stock Screener, and based on the tier on which they are
quoted in OTC Markets Group's system, such issuers do not provide
current and publicly available information. See id. OTC Markets
Group's ``Pink: No Information'' category contains ``companies that
are not able or willing to provide current disclosure to the public
markets--either to a regulator, an exchange or OTC Markets Group.
This category includes defunct companies that have ceased operations
as well as `dark' companies with questionable management and market
disclosure practices.'' See generally Information for Pink
Companies, OTC Mkts. Grp. Inc., https://www.otcmarkets.com/corporate-services/information-for-pink-companies (last visited July
12, 2019) (describing characteristics and requirements of each
category of Pink companies).
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Because broker-dealers play an integral role in facilitating
investor access to OTC securities and serve an important gatekeeper
function under Rule 15c2-11, it is important that a broker-dealer
reviews key, basic information about an issuer before initiating a
quoted market to solicit retail investors to purchase and sell a
security in the OTC market. The existing Rule prohibits a broker-dealer
from publishing any quotation for a security in a quotation medium
without first
[[Page 58208]]
reviewing certain information about the relevant issuer.\7\ Under the
existing Rule, a broker-dealer must have a reasonable basis for
believing that the information about the issuer that it reviewed is
accurate in all material respects and from a reliable source. The
information review requirement is designed to help ensure that a quoted
market for a security is less susceptible to fraudulent or manipulative
schemes.\8\
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\7\ Information about the issuer may include a prospectus; an
offering circular; periodic reports; and various financial
information regarding the issuer, such as the issuer's balance
sheet, profit and loss statement, and retained earnings statement.
\8\ See 1991 Adopting Release at 19152 n.43 (``Rule 15c2-11 was
adopted under Section 15(c)(2) of the Exchange Act, 15 U.S.C.
78o(c)(2), among other sections. Section 15(c)(2) provides the
Commission with broad authority to promulgate rules that prescribe
means reasonably designed to prevent fraudulent, deceptive, or
manipulative acts or practices in the over-the-counter securities
markets.''). For purposes of this release the term ``information
review requirement'' shall refer to the requirement for broker-
dealers and other entities subject to the existing and proposed Rule
to review certain issuer information, as described in the Rule,
before publishing a quotation for a security, when no exception is
available on which a broker-dealer may rely.
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While existing Rule 15c2-11 contains a requirement to review
certain information, the Rule also provides exceptions from that
requirement. Once a broker-dealer has published a quotation pursuant to
the Rule, under specified exceptions to the Rule, other broker-dealers
may publish quotations for that security (without being subject to the
Rule's information review requirement). The Commission is concerned
that market participants can take advantage of such exceptions from the
information review requirement to the detriment of retail investors.
For example, an active trading market, built upon broker-dealers'
quotations, can give the market for the securities an appearance of
credibility. Such a situation can facilitate the purchase or sale of
securities even when there is no or limited current issuer information
publicly available to investors. Without current public information
about an issuer, it is difficult for an investor or other market
participant to evaluate the issuer and the risks involved in purchasing
or selling its securities.
When there is little or no current information about an issuer
available to investors, they can fall victim to fraudsters that make
false and misleading statements about an issuer to promote sales of a
security. Without current public information about an issuer, investors
may not have the ability to assess the validity of the claims in a
promotion campaign due to the lack of information against which to
compare the claims. A fraudster's promotional campaign with false
claims and published quotations may generate trading volume for a
thinly-traded security and the security's market price may rise to an
artificially high level (``pumping'' the security). However, when the
fraudster ceases its promotional campaign, the market price of the
security may drop due to the fraudster selling its shares into the
market it created by ``pumping'' the share prices up with false claims
(``dumping'' the security). The remaining investors may be left owning
an essentially worthless security or one for which the price is
artificially inflated.
2. Overview of Proposed Amendments
The proposed amendments to Rule 15c2-11 are a part of the
Commission's ongoing effort to better address risks to retail investors
and promote market efficiency. The proposed amendments seek to better
protect retail investors from incidents of fraud and manipulation in
OTC securities, by requiring that certain issuer information the
broker-dealer is required to review be current and publicly available,
while modernizing the Rule to be more efficient and effective.
First, the proposed amendments would provide greater transparency
to the investing public regarding issuers of OTC securities by
requiring that certain information about the issuer and the security be
current and publicly available before a broker-dealer can publish a
quote for the security. This proposed amendment would allow retail
investors to more easily access basic information about an issuer.
Additionally, the proposed amendments would require that information be
current and publicly available before a broker-dealer may rely on
certain exceptions from the review requirement. In the absence of
current and publicly available information, such exceptions would
either be unavailable or more limited.
Second, the Commission is proposing to modify existing exceptions
and, taking into consideration the evolution of the OTC market over the
past 30 years, add several new exceptions. The Commission is proposing
to limit eligibility for an existing exception, commonly known as the
``piggyback exception,'' which allows broker-dealers to publish
quotations for a security in reliance on the quotations of another
broker-dealer that initially performed the review of the issuer's
information. Under its existing formulation, this exception has been
used by broker-dealers to continuously quote a security over many
years, even when the issuer of the security no longer exists. The
proposed amendments would limit the use of the exception in
circumstances where issuer information is not current and publicly
available.
The proposal would also limit the use of the existing unsolicited
order exception for quotations on behalf of company insiders if
information about the issuer is not current and publicly available.\9\
This proposed revision is designed to help prevent the use of
unsolicited orders by company insiders to facilitate a scheme that can
harm retail investors, such as a ``pump-and-dump'' scheme.
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\9\ For purposes of this release, ``company insider'' refers to
any officer or director of the issuer, or persons that perform a
similar function, as well as any person who is, directly or
indirectly, the beneficial owner of more than 10 percent of the
outstanding units or shares of any class of any equity security of
the issuer.
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The proposal would add an exception to allow broker-dealers to
publish quotations of securities, without being required to conduct the
information review required by the existing Rule, of certain issuers
with significant assets and trading volume. The Commission believes
that these types of issuers tend to be less susceptible to the type of
fraud that the Rule is designed to prevent. The proposal would also add
a new exception to reduce the burdens on broker-dealers that are
quoting securities that were issued in an underwritten offering where
the broker-dealer served as the underwriter. When a broker-dealer
underwrites an offering of securities, it generally conducts a review
of the same information that it must examine under the Rule. Thus, the
Commission believes that continuing to require the broker-dealer to
conduct a review under the Rule in this circumstance is redundant and
unnecessary.
The Commission is also proposing new exceptions that would provide
relief from the review requirement of the Rule, to permit a regulated
entity, namely a qualified IDQS that meets the definition of an ATS, to
conduct the information review that is currently only permitted to be
conducted by broker-dealers that publish or submit quotations. A
qualified IDQS or a national securities association also would be able
to determine whether certain exceptions for broker-dealers are
available. Finally, the proposed amendments would require that a
broker-dealer, qualified IDQS, or registered national securities
association keep records regarding the basis of its reliance on, or
determination of availability of, any exception to the Rule
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to aid in Commission oversight of compliance with the Rule.
Finally, the Commission is proposing amendments to streamline the
existing Rule, remove obsolete provisions without undermining the
important investor protections of the Rule, and make technical, non-
substantive changes. With respect to streamlining, the proposal would
permit a broker-dealer to provide to an investor that requests issuer
information appropriate instructions regarding how to obtain such
information electronically. Finally, the Commission is proposing to
remove paragraphs that have become obsolete. The proposal would remove
an exception for quotations of Nasdaq securities because Nasdaq is now
registered with the Commission as a national securities exchange. The
Commission also proposes to remove a requirement that a broker-dealer
send information to certain systems that disseminate quotation
information because the Commission understands that such entities no
longer rely on the broker-dealer sending such information. Further, the
proposal would remove a requirement that a broker-dealer make an
arrangement to receive certain issuer information that is now available
on the Commission's Electronic Data Gathering, Analysis and Retrieval
System (``EDGAR'').
3. Intended Objectives
The proposed amendments are intended to promote investor
protection, preserve the integrity of the OTC market, and promote
capital formation for issuers that provide current and publicly
available information to their investors. First, the proposed
amendments are designed to provide the following benefits to investors,
particularly retail investors. The proposed amendments would promote
the public availability of current information about issuers with
securities that are quoted in the OTC market. This should facilitate an
investor's access to information about an issuer so that an investor is
better able to understand and evaluate the issuer and the issuer's
security prior to making an investment decision. The proposed
amendments should also help promote a more level playing field so that
all investors, not just company insiders and investors with a
relationship with the issuer, have access to current issuer
information. Further, the proposed amendments are intended to reduce
the occurrence of investors making investment decisions based on false
or misleading statements spread by fraudsters.
Second, the proposed amendments are intended to preserve the
integrity of the OTC market. The proposed amendments would prohibit
broker-dealers from continuing to quote a security in the absence of
current and publicly available information about the issuer, which
could reduce the risk of fraud and manipulation in this market. In
addition, current and publicly available information about issuers
would help to improve pricing efficiency in the OTC market.
Third, the proposed amendments are designed to promote capital
formation for issuers that provide current and publicly available
information to their investors. A hallmark of public markets in the
United States is disclosure provided by issuers to investors. Investors
that have access to current and publicly available issuer information
are better equipped to make informed decisions about how to allocate
their capital. Additionally, the proposed amendments broaden the type
of entities that are permitted to conduct the information review
required by the Rule while imposing requirements on those entities to
help promote the accuracy of such information as well as help ensure
that it is current. This may make it easier for issuers to identify a
market participant that is willing and able to conduct the review in
order to establish a quoted market for the issuer's securities.
Further, as discussed above, the proposal would add certain specified
exceptions from the requirement to conduct the information review under
the proposed Rule and allow broker-dealers to start a quoted market for
the securities of certain issuers where there is less concern regarding
fraud or manipulation, which could reduce costs for broker-dealers
seeking to establish a quoted market. These new exceptions would
provide investors with more choices in the OTC market.
B. Summary of Proposed Amendments
The Commission proposes to strengthen the existing Rule as follows:
Require the documents and information that a broker-dealer
must obtain and review under the Rule to be current and publicly
available; \10\
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\10\ Currently, this information is required by existing
paragraph (a), but the existing Rule does not require this
information to be made publicly available. Under this proposal, the
required information would be included in proposed paragraph (b) and
would be known as ``proposed paragraph (b) information.'' Throughout
this release, when the Commission references text from existing
provisions of Rule 15c2-11, the Commission will use the terms
``paragraph,'' ``Rule,'' ``existing paragraph,'' or ``existing
Rule.'' When the Commission references rule text that the Commission
is proposing to adopt, the Commission will use the terms ``proposed
Rule'' or ``proposed paragraph.''
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Amend the ``piggyback exception,'' which is conditioned on
continuous and frequent quotations, to:
[cir] Require issuer information to be current and publicly
available;
[cir] Eliminate the ability of a broker-dealer to rely on the
exception unless there are two-sided quotations that are published in
an interdealer quotation system at specified prices;
[cir] Eliminate the ability of broker-dealers to rely on the
exception during the first 60 calendar days after the termination of a
Commission trading suspension under Section 12(k) of the Exchange Act;
[cir] Eliminate the ability of broker-dealers to rely on the
exception for securities of ``shell companies;'' \11\ and
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\11\ When used in this Release, the term ``shell company'' means
an issuer, other than a business combination related shell company,
as defined in Rule 405 of Regulation C, or an asset-backed issuer as
defined in Item 1101(b) of Regulation AB, that has (1) no or nominal
operations and (2) either (i) no or nominal assets, (ii) assets
consisting solely of cash and cash equivalents, or (iii) assets
consisting of any amount of cash and cash equivalents and nominal
other assets. The Commission is proposing to add this definition of
shell company in proposed paragraph (e)(8). See Proposed Rule 15c2-
11(e)(8).
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[cir] Remove the requirement that a security be quoted for 12
business days during the previous 30 calendar days;
Require that certain issuer information be current and
publicly available for a broker-dealer to rely on the unsolicited
quotation exception to publish quotations by or on behalf of company
insiders; and
Require documentation to support a broker-dealer's
reliance on exceptions to the Rule.
The Commission also is proposing to reduce burdens on broker-
dealers publishing quotations of securities of OTC issuers by providing
new exceptions for broker-dealers to:
Publish quotations for securities of well-capitalized
issuers with actively traded securities;
Publish quotations for securities where a qualified
interdealer quotation system (``qualified IDQS''), conducts the
proposed Rule's required review and makes known to others the quotation
of a broker-dealer relying on the exception; \12\
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\12\ The Commission is proposing to define a qualified IDQS as
any interdealer quotation system that meets the definition of an
alternative trading system under Rule 300(a) of Regulation ATS and
operates pursuant to the exemption from the definition of an
``exchange'' under Rule 3a1-1(a)(2) of the Exchange Act. See
Proposed Rule 15c2-11(e)(5). The Commission believes that the
requirements of Regulation ATS, as applicable to qualified IDQSs,
would provide investor protections through, for example, Commission
oversight. See infra Part III.H.4.
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[[Page 58210]]
Rely on publicly available determinations by a qualified
IDQS or a registered national securities association that the
requirements of certain exceptions have been met; and
Publish quotations for a security without complying with
the information review requirement if that broker-dealer was named as
an underwriter in the security's registration statement or offering
circular.
The Commission is proposing amendments to streamline certain
requirements of the existing Rule that would:
Modify the requirement that a broker-dealer make the
information that it obtained and reviewed ``reasonably available upon
request'' to investors seeking such information to permit the broker-
dealer to direct the investors to the publicly-available information
upon which the broker-dealer relied to comply with the information
review requirement;
Remove the Nasdaq security exception in light of Nasdaq's
registration as a national securities exchange;
Provide new definitions and make other technical, non-
substantive changes to the Rule; and
Remove the paragraphs regarding furnishing information to
an IDQS and how a broker-dealer obtains annual, quarterly, and current
reports filed by an issuer with the Commission.
Finally, the Commission is seeking comment about information
repositories and a possible regulatory structure for such entities.
II. Background
A. Regulatory Approaches To Combating Retail Investor Fraud
A core mission of the Commission is protecting investors. This
proposal continues the Commission's focus on protecting retail
investors from fraud and manipulation.\13\ Over the past several years,
the Commission has brought hundreds of enforcement actions involving
OTC securities or their issuers, including for alleged violations of
the antifraud, reporting, and registration provisions of the federal
securities laws. Many of these cases have involved dozens of OTC
securities and tens of millions of dollars in investor harm.
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\13\ See Speech, Chairman Jay Clayton, Remarks on the
Establishment of the Task Force on Market Integrity and Consumer
Fraud (July 11, 2018), https://www.sec.gov/news/speech/task-force-market-integrity-and-consumer-fraud (``Serving and protecting Main
Street investors is my main priority at the SEC.'').
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In addition to enhancing efforts to detect and address fraudulent
conduct that has already occurred, such as through the Commission's
examination and enforcement programs, the Commission has also been
proactive in taking measures that are designed to prevent fraudulent
activity before it occurs. Specifically, the Commission has developed
initiatives that focus on investor education and research tools that
can help investors to make better-informed investment decisions and
avoid investing in fraudulent schemes.
For example, the Commission launched the ``SEC Action Lookup for
Individuals'' (``SALI''), an online search feature that enables retail
investors to research whether persons trying to sell them investments
have a judgment or order entered against them in an enforcement
action.\14\ SALI is intended to help retail investors avoid financial
fraud. The Commission also participates in a joint agency task force,
spearheaded by the Department of Justice, on market integrity and
consumer fraud,\15\ and the Commission's Division of Enforcement formed
the Retail Strategy Task Force as well. The Retail Strategy Task Force
draws on expertise throughout the Commission to develop strategies and
techniques for addressing the types of activities that harm retail
investors, including microcap pump-and-dump schemes.\16\
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\14\ See Press Release, SEC Launches Additional Investor
Protection Search Tool (May 2, 2018), https://www.sec.gov/news/press-release/2018-78.
\15\ See, e.g., Public Statement, Chairman Jay Clayton, Opening
Remarks at the SEC Staff Roundtable on Regulatory Approaches to
Combating Retail Investor Fraud (Sept. 26, 2018), https://www.sec.gov/news/public-statement/clayton-opening-remarks-investor-fraud-roundtable.
\16\ See Press Release, SEC Launches Enforcement Initiative to
Combat Cyber-Based Threats and Protect Retail Investors (Sept. 25,
2017), https://www.sec.gov/news/press-release/2017-176.
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Last year, the Commission's Division of Trading and Markets hosted
a roundtable on ``Regulatory Approaches to Combating Retail Fraud''
(the ``Roundtable'').\17\ The Roundtable featured panel discussions
about schemes that target retail investors and possible approaches to
combat retail investor fraud.\18\ The effectiveness of Rule 15c2-11 was
a topic of discussion at one panel where panelists stated that the
current operation of the Rule in certain circumstances may result in
retail investors having little or no information about a company.\19\
This lack of current and publicly available information about a company
particularly disadvantages retail investors in comparison to other
market participants.\20\
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\17\ See, e.g., Press Release, SEC Staff to Host Roundtable on
Regulatory Approaches to Combating Retail Investor Fraud (Sept. 18,
2018), https://www.sec.gov/news/press-release/2018-200.
\18\ See, e.g., Transcript of Roundtable on Regulatory
Approaches to Combatting Retail Fraud (Sept. 26, 2018), https://www.sec.gov/spotlight/equity-market-structure-roundtables/retail-fraud-round-roundtable-092618-transcript.pdf (``Roundtable
Transcript'').
\19\ See id; see also Speech, Chairman Jay Clayton & Dir. Brett
Redfearn, Equity Market Structure 2019: Looking Back & Moving
Forward, Remarks at Gabelli School of Business, Fordham University,
n.16 (Mar. 8, 2019) (``Equity Market Structure Speech'') https://www.sec.gov/news/speech/clayton-redfearn-equity-market-structure-2019.
\20\ See Equity Market Structure Speech, supra note 19.
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Indeed, as the Chairman has stated, the lack of publicly available
information about certain issuers ``can be fertile ground for fraud.''
\21\ Studies have noted instances of fraud and manipulation in cases
involving OTC securities.\22\ A majority of the enforcement cases
involving OTC securities has involved delinquent filings, which result
in a lack of current, accurate, or adequate information about an
issuer.\23\ In fact, during the last four years, the SEC has issued
orders suspending or revoking the registrations of over 1,100 issuers
pursuant to its authority under Section 12(j) of the Exchange Act for
issuers with delinquent filings.\24\ The Commission has temporarily
suspended trading in the securities of over 900 issuers under
[[Page 58211]]
Section 12(k) of the Exchange Act because of potentially manipulative
or deceptive activity or questions about the accuracy and adequacy of
publicly disseminated information.\25\
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\21\ Id.
\22\ For example, one study analyzed 142 stock manipulation
cases, including pump-and-dump cases, in SEC litigation releases
from 1990 to 2001 and found that 48 percent involved OTC securities,
while 17 percent involved securities listed on national exchanges.
See Rajesh Aggarwal & Guojun Wu, Stock market manipulations, 79 J.
Bus. 1915 (2006). A more recent study looked at 150 pump-and-dump
manipulation cases between 2002 and 2015 and found that 86 percent
of these cases involved OTC securities. See Thomas Renault, Market
manipulation and suspicious stock recommendations on social media,
Universit[eacute] Paris I Panth[eacute]on-Sorbonne--Centre
d'Economie de la Sorbonne, Working Paper (2018), available at
https://ssrn.com/abstract=3010850.
\23\ For instance, one study looked at a broad sample of
securities cases between January 2005 and June 2011 and identified
1,880 cases involving OTC securities and 1,157 cases involving
securities listed on exchanges in the United States. Of the OTC
securities cases, the majority--1,148 cases, or 61 percent--were
related to delinquent filings, 151 (eight percent) were related to a
pump-and-dump scheme, 159 (eight percent) were related to financial
fraud, 12 (one percent) were related to insider trading, and 212 (11
percent) were related to other fraudulent misrepresentation or
disclosure. See Douglas J. Cumming & Sofia Johan, Listing standards
and fraud, 34 Managerial & Decision Econ. 451-70 (2013).
\24\ Administrative Proceedings (2019), https://www.sec.gov/litigation/admin.shtml; Annual Report, SEC, Div. Enforcement, 20
(2018), https://www.sec.gov/files/enforcement-annual-report-2018.pdf; Addendum to Annual Report, SEC, Div. Enforcement, 3
(2017), https://www.sec.gov/files/enforcement-annual-report-2017-addendum-061918.pdf; Select SEC and Market Data Fiscal 2016, 3
(2016), https://www.sec.gov/files/2017-03/secstats2016.pdf.
\25\ See Trading Suspensions (2019), https://www.sec.gov/litigation/suspensions.shtml; Annual Report, SEC, Div. Enforcement,
5 (2018), https://www.sec.gov/files/enforcement-annual-report-2018.pdf; Addendum to Annual Report, SEC, Div. Enforcement, 2
(2017), https://www.sec.gov/files/enforcement-annual-report-2017-addendum-061918.pdf; Select SEC and Market Data Fiscal 2016, 2
(2016), https://www.sec.gov/files/2017-03/secstats2016.pdf.
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B. OTC Market Developments
The OTC market provides numerous benefits for investors. For
instance, some highly capitalized foreign securities are quoted on this
market. Other foreign companies are also quoted on this market in the
form of American Depository Receipts, providing investors with easy
access to such foreign securities. The OTC market also can provide
opportunities for retail investors to find securities of domestic
issuers with future growth potential. Additionally, some larger U.S.
companies may trade on the OTC market for various reasons.\26\ Further,
this market can offer a starting point for smaller issuers, as it may
be difficult for a company just starting out to meet exchange listing
requirements or pay listing fees. However, because stocks quoted on
this market can be less liquid, have lower capitalization, and provide
less transparency than exchange-listed securities, it can be easier for
unscrupulous persons to find ways to abuse such securities.
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\26\ See, e.g., Peter Leeds, Famous Companies Traded as Penny
Stocks, The Balance (June 25, 2019), https://www.thebalance.com/famous-companies-traded-as-penny-stocks-2637058.
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When a broker-dealer publishes or submits a quotation for a
security in a quotation medium, the broker-dealer may facilitate the
creation or appearance of a market for the security, thereby increasing
the security's availability and accessibility to investors. A broker-
dealer's quotations could create the false appearance of an active
market, including affecting the pricing, rather than an actual market
that is based on independent forces of supply and demand. Thus, to help
prevent fraud and manipulation,\27\ existing Rule 15c2-11 prohibits
broker-dealers from publishing or submitting quotations in OTC
securities in the absence of accurate information about the issuers of
such securities, unless an exception applies.\28\
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\27\ See Initiation or Resumption of Quotations Without
Specified Information, Exchange Act Release No. 21470 (Nov. 8,
1984), 49 FR 45117 (Nov. 15, 1984) (``1984 Adopting Release''); see
also Publication or Submission of Quotations Without Specified
Information, Exchange Act Release No. 41110 (Feb. 25, 1999), 64 FR
11126 (Mar. 8, 1999) (``1999 Reproposing Release'') (``Rule 15c2-11
is intended to prevent broker-dealers from becoming involved in the
fraudulent manipulation of OTC securities. However, even if a
broker-dealer technically complies with the Rule's requirements, it
could be subject to liability under other antifraud provisions of
the securities laws, such as Rule 10b-5, if it publishes quotations
as part of a fraudulent or manipulative scheme.'').
\28\ See 1991 Adopting Release at 19149-52.
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Under existing Rule 15c2-11, a broker-dealer seeking to publish or
submit a quotation in any quotation medium, including in an IDQS, must
comply with the existing Rule's information review requirement for each
quotation, unless it qualifies for an exception. Thus, generally, a
broker-dealer must obtain and review information about the issuer
enumerated in paragraph (a) of the existing Rule, such as basic
financial information, and maintain records of the information that it
reviewed. Certain exceptions to the Rule permit broker-dealers to
publish or submit quotations without complying with the information
review requirement. For instance, once a security has become eligible
for the piggyback exception, any broker-dealer can quote the security
without complying with the information review requirement so long as
the requirements of the exception are met.\29\
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\29\ The piggyback exception presumes that regular and frequent
quotations for a security generally (1) reflect market supply and
demand and the available information about the security and its
issuer and (2) are based on independent, informed pricing decisions.
See 1984 Adopting Release at 45121; see also 1999 Reproposing
Release at 11126.
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The OTC market has changed significantly since the Rule was adopted
in 1971 and was last substantively amended in 1991. For example, the
existing Rule was last substantively amended prior to the widespread
use of the internet, when it was significantly more difficult to obtain
information on issuers of OTC securities and to continuously update and
widely disseminate quotations for OTC securities. The internet and
other forms of electronic communication have made it less costly and
less burdensome to access, update, and disseminate information on a
global scale. Marketplaces have developed platforms that collect and
provide information to the public through easily accessible websites,
including information regarding the risks involving certain quoted OTC
securities.\30\ In light of these developments, the Commission
preliminarily believes that it is appropriate to update and modernize
the Rule.
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\30\ At least one IDQS, OTC Markets Group, has voluntarily
implemented measures to warn investors about the risks involving
certain securities by using easy to identify symbols, such as stop
signs and skull and crossbones, to indicate that specific securities
present risks or there is a lack of information about them. See
Compliance Flags, OTC Mkts. Grp. Inc., https://www.otcmarkets.com/files/OTCM%20Compliance%20Flags.pdf (last visited Sept. 23, 2019)
(describing designators and flags ``to help identify opportunity and
quantify risk'').
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C. Prior Rule 15c2-11 Proposals
The Commission proposed to amend Rule 15c2-11 in February 1998 \31\
and re-proposed amendments to the Rule in February 1999.\32\ Among
other things, both the 1998 Proposing Release and the 1999 Reproposing
Release would have eliminated the existing Rule's piggyback exception
and required broker-dealers to publish priced quotations as well as
obtain updated information about the issuer annually.\33\
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\31\ Publication or Submission of Quotations Without Specified
Information, Exchange Act Release No. 39670 (Feb. 17, 1998), 63 FR
9661 (Feb. 25, 1998) (``1998 Proposing Release'').
\32\ 1999 Reproposing Release at 11124.
\33\ The 1999 Reproposing Release also included an Appendix. The
Appendix was intended to supplement the guidance from the 1991
Adopting Release (which was incorporated into the Rule through the
Preliminary Note) by providing additional guidance on, among other
things, ``red flags'' concerning the issuer that broker-dealers
should consider as part of the information review requirement. See
id., 1999 Reproposing Release at 11145.
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Commenters on the 1999 Reproposing Release stated that the adoption
of the proposed amendments, including elimination of the piggyback
exception, would severely constrain liquidity in the OTC market
resulting in less competitive pricing, impair access to capital by
issuers, and increase compliance costs for broker-dealers. Commenters,
however, were generally supportive of certain proposed new exceptions
in the 1999 Reproposing Release. Specifically, commenters were in favor
of proposed new exceptions to exclude larger issuers and more liquid
securities that are not prone to the abuses that are more likely in the
microcap market. The Commission did not take further action on the
proposals.
III. Discussion of Proposed Amendments
A. Proposed Amendments to the Information Review Requirement
1. Existing Information Review Requirement
The existing Rule requires that a broker-dealer review certain
information about the issuer of an OTC security prior to publishing a
quotation for such security. The Rule requires that the broker-dealer
form a reasonable basis for believing that such information about
[[Page 58212]]
the issuer is accurate in all material respects and from a reliable
source.
Currently, Rule 15c2-11(a) requires that, prior to initially
publishing or submitting quotations for a security in a quotation
medium when no exception to the information review requirement is
available (the ``initial publication or submission''), a broker-dealer
must have in its records the information and documentation specified in
Rule 15c2-11(a)(1)-(5) (the ``paragraph (a) information'').\34\ In
addition, the broker-dealer must have a reasonable basis under the
circumstances, based on a review of paragraph (a) information and any
other supplemental information required by Rule 15c2-11(b) (the
``paragraph (b) information''), to believe that the information is
accurate in all material respects and from a reliable source.\35\
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\34\ Exchange Act Rule 15c2-11(a).
\35\ Id. To simplify the structure of the existing Rule, the
Commission proposes to separate the activities constituting the
review requirement from the specific list of information to be
reviewed.
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The existing Rule requires particular information depending on the
regulatory status of the issuer--i.e., whether the issuer (1) filed a
registration statement under the Securities Act of 1933 (``Securities
Act'') (a ``prospectus issuer''), (2) filed a notification under
Regulation A \36\ (a ``Reg. A issuer''), (3) is subject to the Exchange
Act's or Regulation A's periodic reporting requirements or is the
issuer of a security covered by Section 12(g)(2)(B) or (G) of the
Exchange Act (a ``reporting issuer''), (4) is a foreign private issuer
that is exempt from registration under Exchange Act Section 12(g)
pursuant to Rule 12g3-2(b) (an ``exempt foreign private issuer''), or
(5) is an issuer that does not fall within one of these categories (a
``catch-all issuer'').\37\ Depending on the circumstances, statutes or
Commission rules also require the paragraph (a) information for
prospectus issuers, Reg. A issuers, and reporting issuers to be made
publicly available, either by prospectus, offering circular, or
periodic reports.\38\ Similarly, exempt foreign private issuers are
required, among other things, to publish certain information in order
to be exempt from the requirement to register a class of equity
securities under Section 12(g) of the Exchange Act. In contrast, the
information that is required under paragraph (a)(5) of the existing
Rule for catch-all issuers generally is not subject to similar
statutory or rule-based disclosure and reporting requirements.
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\36\ See Rules 251 through 263 of Regulation A.
\37\ See Exchange Act Rule 15c2-11(a)(1) (an issuer that has
filed an effective registration statement under the Securities Act),
(a)(2) (an issuer that has filed a notification under Regulation A
and was authorized to commence an offering), (a)(3) (an issuer that
is required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act or pursuant to Regulation A, or an issuer of a security
covered by Section 12(g)(2)(B) or (G) of the Exchange Act), (a)(4)
(a foreign private issuer that is exempt from registering a class of
equity securities under Section 12(g) of the Exchange Act pursuant
to Rule 12g3-2(b) thereunder), (a)(5) (an issuer that does not fall
within any paragraphs (a)(1) through (a)(4)). For example, the Rule
sets out the specific information requirements for Reg. A issuers,
but these information requirements are specific to Rule 15c2-11 and
do not supplant the requirements in Rule 144(c) for adequate current
public information. See, e.g., Amendments for Small and Additional
Issues Exemptions Under the Securities Act (Regulation A),
Securities Act Release No. 9741 (Mar. 25, 2015), 80 FR 21806, 28151
(Apr. 20, 2015).
\38\ See, e.g., Securities Act Section 7 (information required
in registration statement); Securities Act Section 10 (information
required in prospectus); Exchange Act Section 12(b) (information
required to register a security on a national securities exchange);
Exchange Act Section 13 (periodic and other reports); Securities Act
Rule 257 of Regulation A (periodic and current reporting); Exchange
Act Rule 13a-1 (annual reports); Exchange Act Rule 13a-13 (quarterly
reports).
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Under the existing Rule, catch-all issuer information that a
broker-dealer obtains and reviews for the information review
requirement is not required to be publicly available. Instead, Rule
15c2-11(a)(5) requires a broker-dealer that publishes or submits
quotations for a security of a catch-all issuer when no exception is
available to make such information reasonably available upon request to
a person expressing an interest in a proposed transaction in the
security with that broker-dealer.\39\ The Commission believes that
enhancing the Rule's investor protections to require basic issuer
information to be publicly available \40\ in order for a broker-dealer
to publish or submit a quotation when no exception to the information
review requirement is available for an OTC security and to publish
quotations throughout the life of the quoted market for the security
could help investors to make better-informed investment decisions.\41\
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\39\ Exchange Act Rule 15c2-11(a)(5).
\40\ See Proposed Rule 15c2-11(e)(4). Publicly available would
be defined to mean available on EDGAR or on the website of a
qualified IDQS, a registered national securities association, the
issuer, or a registered broker-dealer, so long as access is not
restricted by user name, password, fees, or other restraints. As
discussed below, this requirement also would apply to a qualified
IDQS under proposed paragraph (a)(2).
\41\ See, e.g., Joshua T. White, Outcomes of Investing in OTC
Stocks, 10 (Dec. 16, 2016), https://www.sec.gov/files/White_OutcomesOTCinvesting.pdf (``Academic studies point to a lack
of information produced by OTC Companies as one determinant of
negative and volatile OTC stock returns.'').
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2. Proposed Amendments to the Information Review Requirement
(a) Revisions to the Review Requirement
The Commission is proposing changes to the existing Rule's
information review requirement, which requires broker-dealers to review
certain information prior to publishing a quotation in an OTC
security.\42\ Specifically, the proposed Rule would (1) restructure the
review requirement into paragraphs and re-letter such paragraphs
accordingly, (2) require that certain issuer information be current and
publicly available, and (3) permit additional market participants to
perform the required review. Combined, these proposed amendments are
intended to, among other things, promote better-informed investment
decisions by increasing investors' opportunity for access to current
information, and facilitate capital formation by allowing more market
participants to perform the required review with respect to the
proposed Rule so that quotations can be initiated and investors can buy
and sell OTC securities.
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\42\ See infra Part V.
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The Commission is proposing to restructure the review requirement
and include the requirement as applicable to broker-dealers in proposed
paragraph (a)(1).\43\ The Commission is proposing to separate each
element of existing paragraph (a) into separate paragraphs and re-
letter the paragraphs accordingly. Proposed paragraph (a)(1)(i) would
contain the existing requirement that a broker-dealer have in its
records the documents and information required by the Rule. Proposed
paragraph (a)(1)(iii) would contain the existing requirement that the
broker-dealer, based upon a review of certain required information,\44\
together with any other required documents and any supplemental
information,\45\ have a
[[Page 58213]]
reasonable basis under the circumstances for believing that the
information required to be reviewed is accurate in all material
respects and from a reliable source.
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\43\ The term ``review requirement'' refers to the requirements
under proposed paragraph (a).
\44\ Note that, generally, the existing Rule's provisions would
be re-lettered to conform with these changes, so that required
information in existing paragraph (a) would be re-lettered to
proposed paragraph (b). Proposed paragraph (b) information would
include the information required to be reviewed by the regulated
entity, such as a prospectus, an offering circular, periodic
reports, or information specified in paragraph (b), to quote a
security of different types of issuers, i.e., prospectus issuers,
Reg. A issuers, reporting issuers, exempt foreign private issuers,
and catch-all issuers.
\45\ Existing paragraph (b), which would be re-lettered to
proposed paragraph (c), would include supplemental information
(including information about the person on whose behalf the
quotation is being submitted, trading suspensions within the prior
12 months, any other material information) that would also be
required to be reviewed by a regulated entity.
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As discussed below, the Commission is proposing a new paragraph
(a)(1)(ii) to add a new requirement that the issuer information
required to be reviewed (except for information required by proposed
paragraphs (b)(5)(i)(N) through (P)) must be current and publicly
available.\46\
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\46\ See Proposed Rule 15c2-11(a)(1)(ii).
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The proposed Rule would not require a qualified IDQS to comply with
the information review requirement as a condition to the qualified
IDQS's making known to others the quotation of a broker or dealer that
is published or submitted, unless it is published or submitted by a
broker-dealer relying on paragraph (f)(7). The proposed Rule would
permit a qualified IDQS to make known to others the publication or
submission of quotations of a broker-dealer that relies on a qualified
IDQS's compliance with the information review requirement pursuant to
proposed paragraph (f)(7). The qualified IDQS requirements under
proposed paragraph (a)(2) would mirror the requirements for broker-
dealers under proposed paragraph (a)(1). The Commission is proposing to
add this provision for qualified IDQSs because the Commission is
proposing to except broker-dealers from the information review
requirement where (1) a qualified IDQS complies with the information
review requirement and (2) the broker-dealer relies on the qualified
IDQS's review to publish or submit a quotation for that security.\47\
Accordingly, the qualified IDQS would be required to have in its
records proposed paragraph (b) information, excluding proposed
paragraphs (b)(5)(i)(N) through (P) as explained below, except where
the qualified IDQS has knowledge or possession of information set forth
in proposed paragraphs (b)(5)(i)(N) through (P).\48\ In addition, the
proposed amendments would require that proposed paragraph (b)
information, excluding proposed paragraphs (b)(5)(i)(N) through (P), be
current and publicly available.
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\47\ See Proposed Rule 15c2-11(f)(7).
\48\ See Proposed Rule 15c2-11(a)(2). Proposed paragraphs
(b)(5)(i)(N) through (P) would include information about whether the
broker-dealer or its associated person is affiliated with the
issuer; whether the quotation is being published or submitted on
behalf of any other broker-dealer (if so, the name of such broker-
dealer); and whether the quotation is being submitted or published
(directly or indirectly) by or on behalf of the issuer or certain
persons associated with the issuer and, if so, the name of such
person, and the basis for any exemption. A qualified IDQS might not
have knowledge or possession of information set forth in proposed
paragraphs (b)(5)(i)(N) through (P) because this information
pertains to individual quotations and broker-dealers and is not
issuer-specific. A qualified IDQS would only be required to have
proposed paragraph (b)(5)(i)(N) through (P) information that has
come to its knowledge or that is in its possession.
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(b) Require Current and Publicly Available Issuer Information
The proposed Rule would require that issuer information relied upon
by a broker-dealer be current and publicly available in order for a
broker-dealer to publish or submit a quotation for that security. The
proposed amendments to the Rule would provide an additional mechanism
through which investors could have access to information about issuers
with securities that are quoted by broker-dealers in the OTC market.
Current and publicly available information could enable retail
investors to make better-informed investment decisions and counteract
misinformation. By requiring that certain issuer information be current
and publicly available before a broker-dealer publishes or submits
quotations in the OTC market without an exception, the proposed
amendments could facilitate investors' research of issuers and their
securities and help investors to be able to make better-informed
investment decisions. The public availability of issuer information
required under proposed paragraph (b) would help to alleviate concerns
that limited or no information for certain issuers of quoted OTC
securities exists or that such information is difficult for retail
investors to find.\49\
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\49\ See, e.g., Ulf Bruggemann et al., The Twilight Zone: OTC
Regulatory Regimes and Market Quality, 31 Rev. Fin. Stud. 898, 907
(2018) (noting difficulties in accessing information about
companies, even information filed with state regulators); Jeff
Swartz, The Twilight of Equity Liquidity, 34 Cardozo L. Rev. 531,
573 (2012) (stating that this situation is particularly problematic
because unsophisticated investors make up a large portion of OTC
market participants); see also Roundtable Transcript, supra note 18,
at 85, 192-93; Michael K. Molitor, Will More Sunlight Fade the Pink
Sheets? Increasing Public Information About Non-Reporting Issuers
with Quoted Securities, 39 Ind. L. Rev. 309, 311, 337 (2006).
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Proposed paragraphs (a)(1)(ii) and (a)(2)(ii) would require that
proposed paragraph (b) information be current and publicly available
for all issuers, without regard to the regulatory category they fall
into, prior to a broker-dealer providing the initial publication or
submission of a quotation for an issuer's OTC security. The Commission
is proposing to exclude from that requirement information identified in
proposed paragraphs (b)(5)(i)(N) through (P) because those paragraphs
refer to information about the quotations and the entities providing
them, not issuer-specific information.\50\
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\50\ See Proposed Rule 15c2-11(b)(5)(i)(N) through (P).
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The Commission is proposing to define the term ``publicly
available'' to mean available on EDGAR or on the website of a qualified
IDQS, a registered national securities association, the issuer, or a
registered broker-dealer.\51\ If such proposed paragraph (b)
information is restricted by user name, password, fees, or other
restraints, it would not be publicly available. The Commission is also
proposing to define ``current'' to mean filed, published, or disclosed
in accordance with the time frames identified in each paragraph (b)(1)
through (b)(5).\52\
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\51\ See Proposed Rule 15c2-11(e)(4).
\52\ See Proposed Rule 15c2-11(e)(1).
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The Commission believes that many issuers already make publicly
available proposed paragraph (b) information that is current because
these issuers have a reporting obligation or voluntarily do so.\53\ The
Commission believes the proposal provides incentives for issuers of
quoted OTC securities that do not currently make proposed paragraph (b)
information publicly available or do not keep such information current
to make such information publicly available and keep it current. Under
the proposal, before a broker-dealer can initiate the publication or
submission of a quotation for an issuer's securities in the OTC market,
or rely on an exception to the information review requirement, proposed
paragraph (b) information must be current and publicly available. The
proposed amendments to the Rule would not preclude others, such as
broker-dealers or investors, from making proposed paragraph (b)
information publicly available, particularly when the information comes
directly from the issuer.\54\
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\53\ The Commission believes that there are some issuers that
voluntarily make publicly available proposed paragraph (b)
information through OTC Markets Group's Alternative Reporting
Standard. See infra Part VIII.
\54\ To the extent an issuer, underwriter, or dealer is
providing consideration to a person to publish proposed paragraph
(b) information, such person may have additional disclosure
obligations under Section 17(b) of the Securities Act.
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The Commission believes that requiring proposed paragraph (b)
information to be current and publicly available in order for a broker-
dealer to initiate and maintain a quoted market for OTC securities
would impose costs but provide significant benefits to investors. In
particular, retail investors, who might not have the same level of
[[Page 58214]]
access to information available to other market participants, such as
those that may have a relationship with the issuer, would benefit from
having access to proposed paragraph (b) information that is current.
The proposed amendments would also help prevent the potential use of a
catch-all issuer as a vehicle to defraud investors by, for example,
changing its business or ownership and ceasing to provide public
information after a market has developed for its securities.
Q1. Should the proposed Rule allow other entities besides a broker-
dealer or qualified IDQS to comply with the information review
requirement? Why, or why not? If a commenter believes an entity should
be added, what entity should be added, and why?
Q2. Should proposed paragraph (b) information meet the definition
of ``publicly available'' if, for example, access to such information
requires payment of a fee or registration and provision of customer
data to be allowed access to such information? Are there any other
potential barriers to accessibility that the Commission should address?
If so, what are they and how should the Commission address them in this
rulemaking?
(c) Reorganize the Reporting Issuer Information
The proposed Rule would simplify the organization of information
regarding reporting issuers by addressing each type of issuer in a
separate paragraph in order to improve readability. The Commission is
proposing to reorganize how the information for reporting issuers is
arranged in paragraph (a)(3) of the existing Rule to group the required
information that a broker-dealer must obtain and review into paragraphs
by the type of issuer. Additionally, the Commission is proposing to
apply paragraph (a)(3), which would be re-lettered to proposed
paragraph (b)(3), to qualified IDQSs that make known to others the
quotation of a broker-dealer pursuant to proposed paragraph (a)(2), so
that the requirements (1) regarding when to obtain reports, and (2) to
have a reasonable basis under the circumstances for believing that the
issuer is current in filing reports, would apply to the qualified IDQS.
The proposed change to the Rule is not intended to change any
substantive obligations for a broker-dealer under the existing Rule.
The reorganization would remove references to Section 12(g)(2)(B),
which exempts from registration under Section 12 of the Exchange Act
securities issued by investment companies registered pursuant to
Section 8 of the Investment Company Act of 1940. Under the existing
Rule, to the extent that an issuer covered by 12(g)(2)(B) has a
reporting obligation under the Exchange Act, a broker-dealer would be
required to comply with the information review requirement and conduct
a review of such issuer's annual, quarterly, and current reports. Given
proposed paragraph (b)(3)(i), which would apply to issuers with a
reporting obligation under Section 13 or 15(d) under the Exchange Act,
the removal of the reference to Section 12(g)(2)(B) would not be a
substantive change.
(d) Current Reports
The Commission is proposing to incorporate into proposed paragraphs
(b)(3)(i) through (iii), with some modification, paragraph (d)(2)(i) of
the existing Rule, which provides a timing requirement for a broker-
dealer to obtain current reports, such as Forms 8-K. The events
triggering an issuer's filing of current reports with the Commission
generally are material events affecting the issuer, such as a change in
control, acquisition or disposition of assets, bankruptcy or
receivership, change in accountants, or resignation of a director.\55\
The existing Rule requires that a broker-dealer obtain all current
reports filed with the Commission by the issuer from the earlier of
five business days before the initial publication or submission of a
quotation or the date of submission of paragraph (a) information
pursuant to applicable rules of the Financial Industry Regulatory
Authority (``FINRA'') or its successor \56\ because the timing of an
event that triggers the filing of a current report is variable and
unknown.\57\
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\55\ 1991 Adopting Release at 19154.
\56\ See Exchange Act Rule 15c2-11(d)(2)(i).
\57\ 1991 Adopting Release at 19154.
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The proposed Rule would require that a broker-dealer or qualified
IDQS obtain all current reports as of a date up to three business days
prior to the initial publication or submission of a quotation.\58\ At
the time that the Commission adopted the existing requirement, it noted
that providing five business days to obtain current reports prior to
publishing a quote should alleviate uncertainties about available
information, given the unpredictable timing of current reports.\59\ The
Commission, however, preliminarily believes that it is appropriate to
shorten the window within which a broker-dealer or qualified IDQS must
obtain current reports from five days to three days because, in
contrast to 1991, current reports are more easily accessible by broker-
dealers or qualified IDQSs on EDGAR and can be obtained in a more
timely manner at low cost. The Commission is also proposing to remove
from the Rule the provision regarding broker-dealers obtaining current
reports five business days prior to the submission of information to
FINRA pursuant to applicable FINRA rules. The Commission believes that
the time period for a broker-dealer to obtain a current report should
directly relate to the initial publication or submission of a quotation
and should not be tied to the submission of information to FINRA
because FINRA may require more time to complete its review of the
proposed paragraph (b)(3) information. For example, a broker-dealer
might file a Form 211 with FINRA that lacks the information that FINRA
requires to process the form, which may delay FINRA's processing of the
form.
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\58\ See Proposed Rule 15c2-11(b)(3). Current reports filed with
the Commission include (1) current reports on Form 8-K pursuant to
Section 13 or 15(d) of the Exchange Act and (2) current reports on
Form 1-U pursuant to Rule 257(b)(4) of Regulation A.
\59\ 1991 Adopting Release at 19154.
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(e) Expand Catch-All Issuer Information
The proposed Rule would require that information about certain
issuers, including issuers that are not required to provide or file
reports to the Commission, be current and publicly available, which is
intended to benefit retail investors' decision-making process.
Additionally, the Commission is proposing to revise some of the
information required by the existing Rule to be reviewed by a broker-
dealer. For example, compared to the existing Rule, the proposed Rule
would require the identification of additional company officers as well
as large shareholders of the company.
The Commission is proposing to amend existing paragraph (a)(5)(xi)
(which would be re-lettered to proposed paragraph (b)(5)(i)(K)), to
require the names of certain persons with relationships to the issuer,
including the chief executive officer and members of the board of
directors, to also require the names of officers or any person who is,
directly or indirectly the beneficial owner of more than 10 percent of
any class of any equity security of the issuer. The Commission proposes
these additions to the list of persons that must be disclosed because
the Commission believes that investors could benefit from knowing the
identity of officers who manage the company as well as the identity of
any large shareholders. For example, investors would be able to
research the background of these persons to determine whether or not
[[Page 58215]]
they have a track record of success as an officer of a corporation,
experience in the industry of the issuer, any criminal convictions, or
any other problems that raise questions about their fitness to be an
officer of the issuer of a quoted OTC security.\60\
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\60\ As a conforming change and to reduce redundancy, the
Commission is also proposing to amend paragraph (b)(5)(i)(P), which
focuses on quotations published by or on behalf of certain company
insiders, to remove the persons enumerated in the paragraph and
cross-reference to paragraph (b)(5)(i)(K).
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The Commission is proposing to incorporate in proposed paragraph
(b) the existing presumption regarding when catch-all issuer
information is ``reasonably current,'' which is presently included in
paragraph (g) of the existing Rule.\61\ Proposed paragraph
(b)(5)(i)(L), which pertains to the issuer's financials, would include
the requirement that the issuer's balance sheet be as of a date that is
less than 16 months before the publication of a quotation.
Additionally, this paragraph would require that the issuer's profit and
loss statement, as well as the retained earnings statement, cover the
12 months preceding the date of the balance sheet. If the balance
sheet, however, is not as of a date less than six months before the
publication of the quotation, the balance sheet would need to be
accompanied by a profit and loss statement and a retained earnings
statement, both for a period from the date of the balance sheet to a
date less than six months before the publication of a quotation.
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\61\ See Exchange Act Rule 15c2-11(g).
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Similarly, the Commission is proposing to incorporate into proposed
paragraph (b)(5) the existing presumption that ``all other information
specified'' under the Rule for catch-all issuers is current if it is as
of a date within 12 months prior to the publication or submission of
the quotation.\62\ Although the Commission is proposing to incorporate
the presumption of ``reasonably current'' from existing paragraph (g),
the Commission is proposing to use instead the term ``current'' in the
context of proposed paragraph (b)(5). The Commission believes that the
word ``reasonably'' is unnecessary in this context because the proposed
Rule specifically enumerates what is current for purposes of catch-all
issuers.
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\62\ See Exchange Act Rule 15c2-11(g)(2).
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(f) Modify Requirement To Make Catch-All Issuer Information Available
Upon Request
The proposed Rule would modernize the Rule to permit broker-dealers
to direct retail investors to electronically available information,
which could make information about an issuer easier to find, compared
to investors locating the information on their own, as discussed below.
Consistent with the Rule's existing requirements, the proposed Rule
would still require that a broker-dealer that complies with the
information review requirement make certain information available to
investors that request such information.\63\ The Commission believes
that the broker-dealer initiating quotations should assist investors in
obtaining catch-all issuer information because the information might be
difficult to find when a quoted market first begins. However, this
requirement would be modified to provide broker-dealers the flexibility
to satisfy this obligation by providing the requesting person with
appropriate instructions regarding how to obtain publicly available
information electronically because the internet provides a cost-
effective means to distribute catch-all issuer information to all
investors, not just those that request such information. This proposed
amendment would not limit other ways in which a broker-dealer could
make information available.
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\63\ Rule 15c2-11(a)(4) and Proposed Rule 15c2-11(b)(4) include
a similar requirement that broker-dealers make proposed paragraph
(b)(4) information available upon request to a person expressing an
interest in a proposed transaction in an exempt foreign private
issuer's security.
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In such instances, to the extent the broker-dealer has information
regarding proposed paragraphs (b)(5)(i)(N) through (P), the broker-
dealer would be required to make such information available to persons
who request the information pursuant to proposed paragraph (b)(5)(ii).
(g) Clarify the Application of the Catch-All Issuer Provision
Consistent with the Commission's efforts to increase transparency
about OTC securities for all investors, the proposed Rule would specify
the required information that a broker-dealer must review depending on
the circumstances and the type of issuer. In particular, the provisions
of proposed paragraph (b)(5) for catch-all issuers would apply to the
security of any issuer that is not included in proposed paragraphs
(b)(1) through (b)(4). Accordingly, if a prospectus issuer, a Reg. A
issuer, a reporting issuer, or an exempt foreign private issuer does
not fit within the provisions of proposed paragraphs (b)(1) through
(b)(4), the issuer would be, for purposes of the proposed Rule, a
catch-all issuer.
The provisions of proposed paragraphs (b)(1) and (b)(2) include
specific time frames during which certain issuer information (i.e., the
issuer's prospectus or offering circular) would be current, and the
provisions of paragraphs (b)(1) and (b)(2) apply to an issuer only
during the time frames that are identified in those paragraphs. For
example, proposed paragraph (b)(1) applies only to an issuer with a
registration statement that has become effective less than 90 calendar
days prior to the day on which a broker-dealer publishes or submits a
quotation. Similarly, proposed paragraph (b)(2) applies only to an
issuer with an offering circular and that has been authorized to
commence its offering less than 40 calendar days prior to the day on
which a broker-dealer publishes or submits a quotation.
When proposed paragraph (b) information is as of a date outside of
the time frames identified in proposed paragraph (b)(1) or (b)(2), such
as when the offering is authorized to commence 100 calendar days before
the publication of a quotation, the issuer is not a prospectus issuer
or a Reg. A issuer under the proposed Rule. At that time, proposed
paragraphs (b)(1) and (b)(2) are no longer applicable and the issuer
may be a reporting issuer or a catch-all issuer, depending on the
issuer's reporting obligation. For example, an issuer that does not
have an ongoing reporting obligation, such as a Reg. A issuer that has
conducted a Tier 1 offering, would be a catch-all issuer, and a broker-
dealer or qualified IDQS would be required to review information
required by proposed paragraph (b)(5) (``proposed paragraph (b)(5)
information'') if the issuer's offering has been authorized to commence
more than 40 calendar days prior to the day on which a broker-dealer
publishes or submits a quotation. If, however, an issuer has an ongoing
reporting obligation, such as an issuer that filed a prospectus more
than 90 calendar days prior to the day on which a broker-dealer
publishes or submits a quotation, that issuer would be a reporting
issuer and a broker-dealer or qualified IDQS would be required to
review proposed paragraph (b)(3) information.
Proposed paragraphs (b)(3) and (b)(4) apply to issuers that have
ongoing disclosure obligations. If the reporting issuer or exempt
foreign private issuer has not filed, published, or disclosed
information that is current within the time frames identified in
proposed paragraphs (b)(3) or (b)(4), respectively, the issuer would
be, for purposes of proposed Rule 15c2-11, a catch-all issuer and,
therefore, quotations of the
[[Page 58216]]
securities of such an issuer would be subject to the provisions of
proposed paragraph (b)(5) until the issuer complies with its Securities
Act or Exchange Act disclosure requirements. Broker-dealers and
qualified IDQSs that comply with the information review requirement for
securities of these issuers would, therefore, need to review proposed
paragraph (b)(5) information for the initial publication or submission
of a quotation. For example, a broker-dealer that complies with the
information review requirement for a reporting issuer that has a
quarterly reporting obligation but has not been timely in its reporting
obligations would need to review the issuer's proposed paragraph (b)(5)
information.
As explained above, the proposed amendment--that the provisions of
proposed paragraph (b)(5) would apply to the publication or submission
by a broker-dealer of the securities of any issuer that is not included
in proposed paragraphs (b)(1) through (b)(4)--would not change any
issuer's statutory or rule-based disclosure obligation. Even if catch-
all issuers are not subject to a statutory or rule-based disclosure
obligation, the proposed Rule would require that catch-all issuer
information be current and made publicly available for a broker-dealer
prior to the initial publication or submission of a quotation for the
security of a catch-all issuer. The proposed amendment to apply the
provisions of proposed paragraph (b)(5) to an issuer that does not fit
within the provisions of proposed paragraphs (b)(1) through (b)(4), if
such issuer's information described in those paragraphs is not current,
would not lead to a lower information review standard. Rather, a
broker-dealer would still need to have a reasonable basis under the
circumstances for believing that the proposed paragraph (b)
information, based on a review of such information, together with any
supplemental information required by proposed paragraph (c), is
accurate in all material respects and from a reliable source. For
example, regardless of whether a broker-dealer is complying with the
information review requirement for the security of a reporting issuer
under proposed paragraph (b)(3) or a catch-all issuer under proposed
paragraph (b)(5), the required review standard is the same.
Under the existing Rule, an issuer's periodic report or statement
is ``reasonably available'' when the report or statement is filed with
the Commission.\64\ The Commission proposes to delete the ``reasonably
available'' provision because proposed paragraph (b)(5), and its
application to any issuer that is not included in proposed paragraphs
(b)(1) through (b)(4) due to a delinquent filing or otherwise, renders
redundant the ``reasonably available'' provision.
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\64\ Exchange Act Rule 15c2-11(a)(5).
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Proposed paragraph (b)(5) would classify catch-all issuers the same
way as does the existing Rule. Specifically, if a reporting issuer has
timely filed reports with the Commission, the issuer is, for purposes
of existing Rule 15c2-11, a reporting issuer. For purposes of the
proposed Rule, if the issuer's periodic reports or statements are not
timely filed with the Commission, the issuer would be a catch-all
issuer and a broker-dealer would need to comply with proposed paragraph
(b)(5).
While the Commission welcomes any public input on the proposed
amendments, including input regarding the publication of proposed
paragraph (b) information, the Commission asks commenters to consider
the following questions:
Q3. Should the requirement to obtain current reports filed by a
reporting issuer be less than, or more than, the three days as proposed
in proposed paragraph (b)(3)? Why or why not? What would be the
appropriate number of days for a broker-dealer or qualified IDQS to
obtain current reports in advance of publishing or submitting a
quotation or submitting paragraph (b)(3) information to a registered
national securities association? Should the requirement to obtain
current reports include reports furnished to, rather than solely filed
with, the Commission?
Q4. Are there any advantages or disadvantages regarding the various
permitted means of making proposed paragraph (b) information publicly
available? If so, what are they? Are there other means of making
proposed paragraph (b) information publicly available and easily
accessible by investors, particularly retail investors, or should any
of the proposed means be modified or eliminated? What are the potential
costs to issuers, particularly small businesses, of requiring that
information, including proposed paragraph (b)(5) information that is
current, be made publicly available in a way that would be easily
accessible to investors, particularly retail investors?
Q5. Are there any data privacy concerns the Commission should
address with regard to issuers' proposed paragraph (b) information
being made publicly available by someone other than the issuer? Please
give examples of any concerns and how the Commission might address them
in this rulemaking.
Q6. Are there any circumstances where proposed paragraph (b)
information is unnecessary for an investor to be able to make an
informed investment decision? What are they?
Q7. Do commenters agree that the Commission should remove
references to Section 12(g)(2)(B) of the Exchange Act in proposed
paragraph (b)(3)? Why or why not?
Q8. A person may violate the antifraud provisions of the securities
laws by knowingly or recklessly disseminating, publishing, or
republishing false or misleading information. This may include publicly
available information (such as proposed paragraph (b) information), if
the person knew, or was reckless in not knowing, that the information
was materially false or misleading and nevertheless used that
information to establish or maintain a quoted market for a security.
Are there other alternatives, or additional or different approaches,
that the Commission should adopt as a means reasonably designed to
prevent persons from knowingly or recklessly using false information
published or provided by another person to establish a quoted market
for an OTC security? Commenters are invited to comment regarding any
additional actions the Commission could take to further preserve the
integrity of the OTC market.
Q9. Should proposed paragraph (b)(5) also require the ticker symbol
of the security being quoted?
Q10. Currently, paragraph (a)(5)(ii) requires the address of the
issuer's principal executive offices. Should proposed paragraph
(b)(5)(i)(B) also require the address of the issuer's principal place
of business if that address differs from the address of the issuer's
principal executive offices?
Q11. Should proposed paragraph (b)(5)(i)(K) require additional
information to help accurately identify individuals listed in proposed
paragraph (b)(5)(i)(K), such as job title? Why or why not?
Q12. Should changes be made to proposed paragraph (b)(5)(i)(K) to
include additional parties or persons, such as affiliates of the
issuer, or promoters? For example, should proposed paragraph
(b)(5)(i)(K) include the word ``affiliate'' as defined in Securities
Act Rule 144(a)(1)? Please explain. Conversely, are there persons
included in proposed paragraph (b)(5)(i)(K) that commenters believe
should not be included? Please explain. Should the proposed Rule
include a definition of beneficial owner? If so, how should the
proposed Rule define beneficial owner? Should the definition
[[Page 58217]]
of beneficial owner be defined by total voting power? If the proposed
Rule used total voting power to define beneficial ownership, should the
proposed Rule calculate total voting power to include all securities
for which the person, directly or indirectly, has or shares voting
power, which includes the power to vote or to direct the voting of such
securities, and any shares or units of which the person has the right
to acquire voting power within 60 days, including through the exercise
of any option, warrant or right, the conversion of a security, or other
arrangement, or, if securities are held by a member of the family,
through corporations or partnerships, or otherwise in a manner that
would allow a person to direct or control the voting of the securities
(or share in such direction or control as, for example, a co-trustee)?
Should the method of determining the amount of beneficial ownership set
forth in Exchange Act Rule 13d-3 be incorporated into paragraph
(b)(5)(i)(K)? Please explain.
Q13. In addition to the information that is proposed to be required
under proposed paragraph (b)(5), is there other information relating to
an issuer or the trading of an issuer's security in the OTC market that
could help investors to make better-informed investment decisions and,
therefore, should be required to be made publicly available under
proposed paragraph (b)(5)? If so, please describe this information and
how it could be useful to investors.
Q14. Are there any concerns with the proposal to require that the
information specified in proposed paragraph (b)(5)(i)(K) be publicly
available, in particular, the name of any officer as well as any person
who is, directly or indirectly, the beneficial owner of more than 10
percent of the outstanding units or shares of any class of any equity
security of the issuer? Please explain. If yes, how should those
concerns be resolved? Should proposed paragraph (b)(5)(i)(K) require a
higher, or lower, percentage of beneficial ownership of the outstanding
units or shares of any class of any equity security of the issuer? If
so, what percentage of beneficial ownership should proposed paragraph
(b)(5)(i)(K) use and why?
Q15. Is it useful to continue to require that the broker-dealer
initiating the publication or submission of a quotation make the
information it obtains and reviews reasonably available to an investor
upon request even if such information must also be made publicly
available, as proposed? Should this existing requirement be modified to
require that any broker-dealer quoting the security must, upon request,
instruct an investor as to how to access such information?
Q16. Are the time frames in proposed paragraph (b)(5)(i)(L)
regarding when the balance sheet, profit and loss statement, and
retained earnings statement would be current for purposes of this
section clear? If not, how should the proposed Rule be modified to
clarify the time frames for the balance sheet, profit and loss
statement, and retained earnings statement? Please explain. How do
broker-dealers calculate the dates for which the issuer's balance
sheet, profit and loss statement, and retained earnings statement are
reasonably current under existing paragraph (g)(1)? Is it difficult for
broker-dealers to determine what information they need to review under
existing paragraph (g)(1)? If so, please explain. Would the proposed
Rule make it more difficult for broker-dealers to determine what
information they need to review under proposed paragraph (b)(5)(i)(L)?
Please explain.
Q17. Are there ways to reduce the administrative burdens associated
with the proposed Rule? In particular, are there changes to proposed
paragraph (b)(5)(i)(L) that would ease compliance with the proposed
Rule without minimizing investor protection? If so, please explain.
Q18. Are there more streamlined requirements that could be used in
the proposed Rule? In particular, could the financial statement
requirements in proposed paragraph (b)(5)(i)(L) be simplified while
remaining consistent with the Rule's objective? Should the timing
requirements associated with the financial statements included in
proposed paragraph (b)(5)(i)(L) be simplified (e.g., all financial
statements must be ``as of'' a date within 12 calendar months before
the publication or submission of a broker-dealer's quotation)? If so,
please explain.
Q19. How, and to what extent, would these proposed amendments
affect liquidity, transparency, and capital formation, particularly for
small issuers?
B. Proposed Amendments to Supplemental Information
1. Existing Supplemental Information Requirement
The existing Rule requires that a broker-dealer consider
supplemental information about the issuer of an OTC security when
evaluating whether the required information is materially accurate. In
particular, paragraph (b) of the existing Rule requires a broker-dealer
that complies with the information review requirement to have in its
records (1) a record of the circumstances involved in the submission or
publication of such quotation,\65\ including the identity of the person
or persons for whom the quotation is being submitted or published and
any information regarding the transactions provided to the broker-
dealer by such person or persons; (2) a copy of any trading suspension
order or public release announcing such suspension issued by the
Commission pursuant to Section 12(k) of the Exchange Act during the 12
months preceding the date of the publication or submission of the
quotation; and (3) a copy or a written record of any other material
information (including adverse information) regarding the issuer which
comes to the broker's or dealer's knowledge or possession before the
publication or submission of the quotation.
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\65\ The existing Rule includes a typographical error, stating
that the broker-dealer must keep a record of the circumstances
involved in the ``submission of publication of such quotation.''
Exchange Act Rule 15c2-11(b)(1). The rule text should instead say
``submission or publication of such quotation.'' The Commission is
proposing to correct this error as part of its proposed technical
edits, as described further below. For purposes of discussion, the
Commission will use ``or'' rather than ``of'' when discussing the
provisions of proposed paragraph (c).
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2. Proposed Amendments to Supplemental Information
Existing paragraph (b) would be re-lettered to proposed paragraph
(c) and further amended to (1) add qualified IDQSs to the list of
market participants that must have in their records supplemental
information as specified by the Rule, and (2) revise the supplemental
information that broker-dealers and qualified IDQSs must have in their
records of a transaction involving company insiders.
(a) Supplemental Information for Qualified IDQSs
The proposal would extend the existing obligations regarding
consideration of supplemental information to cover all market
participants that conduct the required review, including broker-dealers
and qualified IDQSs. This proposal is intended to preserve the
integrity of the OTC market and to promote investor protection by
helping to ensure that market participants consider material
information prior to the beginning of a quoted market.
In light of the proposed review requirement for qualified IDQSs
contained in proposed paragraph (a)(2), the Commission is proposing to
add qualified IDQSs to the list of market participants that are
required to have in
[[Page 58218]]
their records the supplemental documents required by proposed paragraph
(c). Proposed paragraph (a) would require, therefore, that both broker-
dealers and qualified IDQSs have a reasonable basis under the
circumstances for believing, based on a review of proposed paragraph
(b) information, together with any supplemental information required by
proposed paragraph (c), that the proposed paragraph (b) information is
accurate in all material respects.
Similar to the existing Rule, proposed paragraph (c) would not
require a broker-dealer or qualified IDQS to affirmatively seek
additional information about the issuer. The proposed Rule would
require, however, the broker-dealer or qualified IDQS to retain a copy
or a written record of material information, including adverse
information, regarding the issuer that comes to the knowledge or
possession of the broker, dealer, or qualified IDQS before the initial
publication or submission of a quotation.\66\
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\66\ Proposed Rule 15c2-11(c)(3); see 1991 Adopting Release at
19151 n.28.
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In addition to applying to broker-dealers that provide the initial
publication or submission of quotations for a an OTC security, proposed
paragraph (c) would also apply to qualified IDQSs that make known to
others the quotation of a broker-dealer pursuant to proposed paragraph
(a)(2). If the provisions of proposed paragraph (c) were not to apply
to a qualified IDQS, the qualified IDQS would not need to consider
material information (including adverse information) of which it has
knowledge or possession. This modification to the Rule is designed to
help ensure that all market participants that comply with the
information review requirement would be subject to the same
requirements regarding supplemental information under the Rule,
including any adverse information regarding the issuer in the market
participant's knowledge or possession.
The Commission anticipates that, similar to a broker-dealer that
conducts the required review, a qualified IDQS would be able to obtain
the supplemental information required by proposed paragraph (c) for it
to have in its records from several sources, including the issuer,
broker-dealers, or investors that desire a quoted market for an OTC
security. For example, a qualified IDQS might have a relationship with
the issuer, such that it may obtain supplemental information directly
from the issuer. Or, if a broker-dealer or investor requests that the
qualified IDQS conduct the review in proposed paragraph (a)(2), the
broker-dealer or investor could supply the qualified IDQS with
supplemental information.
(b) Supplemental Information for Company Insiders' Transactions
The proposal would require that company insiders be identified. The
knowledge that a quotation is by or on behalf of a company insider
could aid investors by alerting the broker-dealer conducting the
required review to the possibility that the quotation is being made on
behalf of a person who may have a heightened incentive to manipulate
the price of the security.
The Commission is proposing to require, in proposed paragraph
(c)(1), that the broker-dealer or qualified IDQS have a record of
instances when the person or persons for whom the initial publication
or submission of a quotation is being published is the issuer, chief
executive officer, a member of the board of directors, officer, or any
person, directly or indirectly, who is the beneficial owner of more
than 10 percent of the outstanding units or shares of any class of any
equity security of the issuer. The Commission believes that whether a
quotation is being published or submitted by a broker-dealer on behalf
of a company insider is important supplemental information for the
broker-dealer or qualified IDQS to evaluate because a company insider
might be able to influence or control the issuer of an OTC security.
Additionally, proposed paragraph (c)(1) would require broker-
dealers and qualified IDQSs to retain a record of any information
regarding the transactions provided to the broker-dealer or qualified
IDQS by any person for whom the quotation is being published or
submitted. Circumstances may arise in which a qualified IDQS does not
have the supplemental information listed in proposed paragraph (c)(1)
because such information is specific to a quotation or a transaction,
and the qualified IDQS might not be involved in the publication or
submission of a quotation or a transaction in such security. However,
if a person provides this information to a qualified IDQS (e.g., the
person provides information to the qualified IDQS for the qualified
IDQS to comply with the information review requirement), the qualified
IDQS would be required to create a record of any information regarding
such transactions.
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q20. Proposed paragraph (c) would require that a broker-dealer
submitting or publishing a quotation or any qualified IDQS that makes
known to others the quotation of a broker-dealer pursuant to proposed
paragraph (a)(2) have in its records documents and information
concerning company insiders, trading suspensions, and any other
material information regarding the issuer that comes to the knowledge
or possession of the broker-dealer or qualified IDQS before the initial
publication or submission of a quotation. Are there other documents and
information that the broker-dealer or qualified IDQS should be required
to have in its records? Please explain.
Q21. Currently, paragraph (b)(3) of the Rule requires that a
broker-dealer submitting or publishing a quotation have in its records
documents and information regarding material information (including
adverse information) regarding the issuer which comes to the broker-
dealer's knowledge or possession before the initial publication or
submission of the quotation. We seek comment concerning the type of
such information that most often falls within this existing paragraph
and frequency of such occurrences.
Q22. Should proposed paragraph (c) require that a broker-dealer or
qualified IDQS, affirmatively seek additional information about the
issuer? Please explain. Should proposed paragraph (c)(3) use the terms
``actual knowledge'' or ``physical possession'' instead of the terms
``knowledge or possession''? Please explain.
C. Proposed Amendments to the Piggyback Exception
1. Existing Piggyback Exception and Fraudulent Activity
Currently, broker-dealers do not have to comply with the Rule's
information review requirement if they can rely on the piggyback
exception. Under the existing piggyback exception, the Rule's
provisions do not apply when a broker-dealer publishes or submits, in
an IDQS, a quotation for an OTC security that was already the subject
of regular and frequent quotations in that IDQS (i.e., quotations must
have appeared on each of at least 12 days during the previous 30
calendar days, with no more than four consecutive business days in
succession without a quotation).\67\ Once
[[Page 58219]]
these requirements are met, a broker-dealer can ``piggyback'' on either
its own or other broker-dealers' previously published quotations.\68\
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\67\ A broker-dealer may rely on the piggyback exception for a
submission or publication concerning a security only where that
submission or publication is made in an IDQS. Exchange Act Rule
15c2-11(f)(3). If a broker-dealer cannot rely on the piggyback
exception or any other exception to the Rule, the broker-dealer must
comply with the Rule for each quotation prior to publishing or
submitting such quotation in a quotation medium.
\68\ Exchange Act Rule 15c2-11(f)(3); 1991 Adopting Release at
19156.
---------------------------------------------------------------------------
There are three ways that a broker-dealer can rely on the piggyback
exception to publish or submit quotations under the existing Rule.
First, a broker-dealer can rely on the exception if (1) the IDQS
identifies unsolicited customer quotations for a security as such and
(2) the security is continuously quoted on each of at least 12 days
within the first 30 calendar days after the initial publication of
quotations, with no more than four business days in succession without
a quotation.\69\ Second, a broker-dealer can rely on the exception if
(1) the IDQS does not identify unsolicited orders for a security as
such and (2) the security has been the subject of both bid and ask
quotations at specified prices on each of at least 12 days within the
first 30 calendar days after the initial publication of quotations,
with no more than four business days in succession without a
quotation.\70\ Third, once eligibility for the piggyback exception is
established, a market maker may continue to publish or submit
quotations in the IDQS pursuant to the exception until it stops quoting
or ceases acting as a market maker in that security.\71\ Under the
piggyback exception, in these three circumstances, broker-dealers may
publish or submit quotations without complying with the existing Rule's
information review requirement.
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\69\ See Exchange Act Rule 15c2-11(f)(3)(i).
\70\ See Exchange Act Rule 15c2-11(f)(3)(ii).
\71\ See Exchange Act Rule 15c2-11(f)(3)(iii).
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As a result of the piggyback exception, the first broker-dealer
publishing or submitting a quotation for a security is the only one
that has to comply with the Rule's information review requirement;
thereafter, any other broker-dealer can publish or submit quotations
for the security indefinitely, without complying with the information
review requirement, so long as the security is quoted in an IDQS on
each of at least 12 days within the previous 30 calendar days, with no
more than four consecutive business days without any quotations.\72\
Consequently, broker-dealers can rely on the piggyback exception to
publish or submit quotations for a security of a company that no longer
makes information publicly available or that has ceased operations and
no longer exists.\73\
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\72\ See 1999 Reproposing Release at 11146.
\73\ See Exchange Act Rule 15c2-11(f)(3)(i) and (ii); see also
Order of Trading Suspension (May 14, 2012), available at https://www.sec.gov/litigation/suspensions/2012/34-66980-o.pdf; Press
Release, SEC Microcap Fraud-Fighting Initiative Expels 379 Dormant
Shell Companies to Protect Investors From Potential Scams (May 14,
2012), https://www.sec.gov/news/press-release/2012-2012-91htm.
---------------------------------------------------------------------------
By relying on the existing piggyback exception to publish or submit
quotations for securities of companies that no longer make information
publicly available or that no longer exist, broker-dealers may sustain
the false appearance of an active market in the securities of these
issuers. In some cases, broker-dealers intentionally participate in
improper activities. For example, unscrupulous company insiders may
participate with a broker-dealer to publish quotations to perpetuate
the company insiders' fraud, or fraudsters may usurp the identity of
defunct or inactive publicly traded corporations.\74\
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\74\ See Order of Suspension of Trading, Exchange Act Release
No. 57486 (Mar. 13, 2008) (suspending securities of 26 companies).
The Commission ordered the suspensions because of questions
regarding the adequacy and accuracy of information pertaining to
their status as publicly traded companies. Press Release, SEC
Suspends Trading of 26 Companies to Combat Corporate Hijackings
(Mar. 13, 2008), https://www.sec.gov/news/press/2008/2008-41.htm
(describing how the Commission suspended trading in the securities
of 26 companies that ``appear to have usurped the identity of
defunct or inactive publicly-traded corporations using a tactic
known as corporate hijacking'').
---------------------------------------------------------------------------
Another example of improper activity that arises in part due to
broker-dealers' ability to rely indefinitely on the piggyback exception
for these types of companies is the pump-and-dump scheme. By publishing
quotations, a broker-dealer raises the public profile of a security and
makes the security more accessible to investors.\75\ A broker-dealer
that publishes quotations in response to increased demand for the
security may further facilitate the generation of fictitious demand,
potentially helping perpetuate the fraud.\76\ For example, unscrupulous
market participants can create interest in a quoted OTC security by
issuing false or misleading statements into the marketplace. Broker-
dealers' continuous quotations for the security help create the
appearance of an active market, seemingly ``validating'' the price of
an essentially worthless or artificially inflated security.\77\ As the
security rises in price, the perpetrators of the fraud liquidate their
stake at an inflated price. Once the perpetrators have cashed out and
abandoned the security, the market price collapses, and innocent
investors are left holding securities with little or no value.\78\
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\75\ Using data on daily dollar trading volume for quoted OTC
securities, the Commission observes that securities with published
two-way priced quotations were 3.34 times more likely to have
reported a positive dollar trading volume on a given day in 2018
relative to securities with only one-way priced or unpriced
published quotations. In addition, for those that were traded,
quoted OTC securities with two-way priced quotations reported on
average 3.05 times greater dollar trading volume than securities
with only one-way priced or unpriced published quotations. See infra
note 234 for a description of OTC securities data sources.
\76\ See 1999 Reproposing Release at 11126.
\77\ See id., 1999 Reproposing Release at 11125.
\78\ Tao Li et al., Cryptocurrency Pump-and-Dump Schemes (Feb.
2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3267041.
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2. Proposed Amendments to the Piggyback Exception
The amendments that the Commission is proposing are designed to
help curtail the use of the piggyback exception in connection with
potential manipulative and fraudulent schemes that are facilitated
through having false, stale, or misleading information in the OTC
market. The proposed amendments seek to address, among other things, a
particular vulnerability of the existing piggyback exception: Once
publications or submissions of quotations for securities meet the
requirements of the piggyback exception, broker-dealers may rely on the
piggyback exception to publish or submit quotations for those
securities in perpetuity, even in the absence of current or publicly
available information about the issuer of those securities.
The Commission is proposing amendments to the piggyback exception
that are narrowly tailored to assist in reducing fraudulent and
manipulative activity while allowing broker-dealers to rely on the
piggyback exception when certain additional criteria are met. The
proposed amendments would permit broker-dealers to rely on the
piggyback exception for securities of catch-all issuers only when
information about the issuer is current and made publicly available.
The proposed amendments would also (1) restrict broker-dealers' ability
to rely on the piggyback exception by limiting the exception to
securities that have been the subject of both priced bid and priced ask
quotations in an IDQS, (2) require a cooling-off period following a
trading suspension to establish piggyback eligibility, (3) eliminate
broker-dealers' ability to rely on the piggyback exception to publish
or submit quotations for securities of ``shell companies,'' and (4)
revise the frequency of quotation requirement.
[[Page 58220]]
(a) Current and Publicly Available Information for Catch-All Issuers
The proposal would condition reliance on the piggyback exception by
requiring that information for certain issuers, including issuers that
are not required to provide or file reports to the Commission, be
current and publicly available. This additional transparency is
intended to help retail investors make better-informed investment
decisions and more easily evaluate the issuer, its security, and the
market for the security.
The existing disclosure requirements for prospectus issuers, Reg. A
issuers, reporting issuers, and exempt foreign private issuers specify
that the type of information required by proposed paragraphs (b)(1),
(b)(2), (b)(3), and (b)(4) must be publicly available.\79\ In contrast,
no statute or rule provides that information required by proposed
paragraph (b)(5) must be made publicly available. The Commission
believes that it would be more difficult for pump-and-dump schemes to
succeed if proposed paragraph (b)(5) information, excluding paragraphs
(b)(5)(i)(N) through (P), were current and made publicly available
within six months prior to a broker-dealer's publication or submission
of a quotation in an IDQS in reliance on the piggyback exception. The
public availability of catch-all issuer information that is current
would allow investors, who would not otherwise have access to this
information, the opportunity to review and analyze such information
more easily.
---------------------------------------------------------------------------
\79\ See, e.g., Exchange Act Rule 12g3-2(b).
---------------------------------------------------------------------------
The Commission is proposing to include a proviso in proposed Rule
15c2-11(f)(3)(ii) such that a broker-dealer may rely on the piggyback
exception to publish or submit a quotation for a catch-all issuer only
where proposed paragraph (b)(5) information, excluding paragraphs
(b)(5)(i)(N) through (P), is current and has been made publicly
available within six months before the date of publication or
submission of such quotation. The Commission is proposing to exclude
paragraphs (b)(5)(i)(N) through (P) from the required catch-all issuer
information that must be current and made publicly available for a
broker-dealer to rely on the piggyback exception because such
information pertains to individual quotations and broker-dealers and is
not issuer-specific. In this context, the Commission is specifically
focusing on catch-all issuer information because reporting issuers and
exempt foreign private issuers already are subject to ongoing
disclosure requirements under the federal securities laws.\80\
---------------------------------------------------------------------------
\80\ See Proposed Rule 15c2-11(f)(3); supra note 38. As
discussed above, the provisions of proposed paragraphs (b)(1) and
(b)(2) include specific time frames during which certain issuer
information (i.e., the issuer's prospectus or offering circular)
would be current, and the provisions of paragraphs (b)(1) and (b)(2)
apply only during the time frames that are identified in those
paragraphs. After such time has elapsed, the issuer would be either
a reporting issuer or a catch-all issuer, for purposes of the Rule,
depending on the issuer's regulatory status. See supra Part
III.A.2.g.
---------------------------------------------------------------------------
As discussed above, however, an issuer that does not comply with
its ongoing reporting or disclosure obligations would be, for purposes
of proposed Rule 15c2-11, a catch-all issuer because that issuer would
no longer fit within the provisions of proposed paragraphs (b)(3) or
(b)(4). Thus, if a reporting issuer or exempt foreign private issuer
fails to comply with its ongoing reporting or disclosure obligations, a
broker-dealer may not rely on the piggyback exception to publish or
submit quotations for a security of the issuer, unless the proposed
paragraph (b)(5) information is otherwise current and made publicly
available.\81\ In this circumstance, a broker-dealer would need to
ensure that proposed paragraph (b)(5) information were both current and
made publicly available before it could rely on the piggyback
exception.\82\ A delinquent reporting issuer or an exempt foreign
private issuer that has not made timely disclosure under Rule 12g3-2(b)
would continue to be a catch-all issuer until the reporting issuer
files or the exempt foreign private issuer timely publishes the
required information within the time frames identified in proposed
paragraph (b)(3) and (b)(4), respectively (e.g., the reporting issuer
is timely under the federal securities laws with respect to its
obligation to file periodic and current reports after it has filed its
most recent annual report).
---------------------------------------------------------------------------
\81\ See supra Part III.A.2.g.
\82\ See supra Part III.A.2.g.
---------------------------------------------------------------------------
Requiring that proposed paragraph (b)(5) information, excluding
paragraphs (b)(5)(i)(N) through (P), be current and made publicly
available within the six months before the date of publication or
submission of a quotation in an IDQS for a broker-dealer to rely on the
piggyback exception would effectively require the publication of
proposed paragraph (b)(5) information semiannually. This proposed
requirement would help to improve transparency of information about
catch-all issuers and, therefore, should aid investors in making
investment decisions. As proposed, if catch-all issuer information were
no longer current or made publicly available, broker-dealers would no
longer be able to rely on the piggyback exception to quote the security
of that issuer. In such case, broker-dealers would need to comply with
the proposed Rule for each and every publication or submission of a
quotation, unless another exception to the Rule applies.
The Commission believes that investors would benefit from the
information, and that the new requirement would not impose an undue
burden on broker-dealers. To mitigate the potential costs and burdens
that this proposal might have on broker-dealers, however, the
Commission is also proposing a new exception that would permit broker-
dealers to rely on third party determinations that the requirements of
an exception are met.\83\
---------------------------------------------------------------------------
\83\ See Proposed Rule 15c2-11(f)(8).
---------------------------------------------------------------------------
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q23. Certain issuers choose not to have reporting obligations for
business purposes. The proposal, however, would require proposed
paragraph (b)(5) information from a catch-all issuer, excluding
paragraphs (b)(5)(i)(N) through (P), to be current and made publicly
available within six months before the date of publication or
submission of the broker-dealers' quotation in order for broker-dealers
to rely on the piggyback exception to publish or submit quotations for
the security of a catch-all issuer. Is six months the appropriate time
frame within which a market participant must have published proposed
paragraph (b)(5) information, excluding paragraphs (b)(5)(i)(N) through
(P)? If so, why? If six months is too short or too long of a time
frame, what should the time frame be and why? What are the potential
costs and benefits to small issuers of this requirement? For reporting
issuers that are delinquent in their reporting obligations (and are
treated as catch-all issuers), should the piggyback exception require a
shorter time frame, such as four months, for current information? Are
there alternative methods that could be used that would protect
investors while minimizing costs to issuers and broker-dealers?
Q24. Would the six month time frame place an undue burden on small
issuers? Would the six month time frame discourage small issuers from
raising capital in the public markets? What are the potential costs and
benefits to small issuers of this six month time frame? What
alternative methods could be used to encourage quoted public
[[Page 58221]]
markets for securities of start-ups while also distinguishing them from
entities that are potential vehicles for fraudulent activity?
Q25. Are there alternatives to limiting reliance on the piggyback
exception to publish or submit quotations for securities of catch-all
issuers when information is no longer made publicly available or
current that would benefit investors of quoted OTC securities? If so,
what are they?
Q26. Should the piggyback exception not apply to publications or
submissions of quotations for securities of issuers that have declared
bankruptcy, filed for corporate dissolution, or otherwise taken steps
to wind down their business? Why or why not?
Q27. Should the piggyback exception not apply to publications or
submissions of quotations for securities of issuers that have undergone
a re-organization, any major mergers and acquisitions, reverse mergers,
or other significant restructuring that affects their business or
management? Why or why not?
Q28. As proposed, a reporting issuer that is not current in its
filing obligations would become subject to proposed paragraph (b)(5),
and broker-dealers could continue to quote the issuer's security if the
proposed paragraph (b)(5) information were current and made publicly
available within six months of the date of the publication or
submission of the quotation. Should broker-dealers be prohibited from
relying on the piggyback exception to publish or submit quotations for
the securities of delinquent reporting companies? Why or why not? Are
there any circumstances that would make it difficult for a broker-
dealer that relies on the piggyback exception to know the issuer's
regulatory status and identify which provision of proposed paragraph
(b) applies? Please explain.
(b) Two-Way Priced Quotations
To further the Commission's goal of enhancing investor protection,
the piggyback exception would be available only for securities that
have both an offer to buy and offer to sell at specified prices. The
Commission believes this is a characteristic of an independent and
liquid market. The Commission proposes to amend the piggyback exception
in proposed paragraph (f)(3)(i)(A) to allow broker-dealers to piggyback
only on quotations for securities that have been the subject of both
bid and ask quotations in an IDQS at specified prices--two-way priced
quotations--but not on unpriced quotations.\84\ Because two-way priced
quotations are evidence of market interest in a security,\85\ the
Commission believes that two-way priced quotations are appropriate to
support broker-dealers' reliance on the piggyback exception (i.e., by
entering priced quotations, the broker-dealer provides substantive
market information concerning its view about the value of the
security).
---------------------------------------------------------------------------
\84\ Paragraph (f)(3)(ii) of the Rule requires, and Proposed
Rule 15c2-11(f)(3)(i)(B) would require, publications of quotations
concerning a security to have been the subject of both bid and ask
quotations in an IDQS at specified prices for a broker-dealer to
rely on the piggyback exception. See Exchange Act Rule 15c2-
11(f)(3)(ii); Proposed Rule 15c2-11(f)(3)(i)(B).
\85\ See 1984 Adopting Release at 45121 (stating that the
historical basis for the piggyback provision is that ``regular and
continual priced quotations are an appropriate substitute for
information about the issuer which would otherwise be relevant in
establishing a quotation''); see also Therese H. Maynard, What is an
``Exchange?''--Proprietary Electronic Securities Trading Systems and
the Statutory Definition of an Exchange, 49 Wash. & Lee L. Rev. 833,
847 (1992) (citing Norman S. Poser, Restructuring the Stock Markets:
A Critical Look at the SEC's National Market System, 56 N.Y.U. L.
Rev. 883, 900, 907-10, 920-21 (1981)) (explaining that publishing
the prices at which broker-dealers are willing to buy and sell the
stocks that they maintain in inventory is one of the principal ways
that broker-dealers attract business in the form of a stream of
orders for execution out of their inventory).
---------------------------------------------------------------------------
The piggyback exception is premised on the recognition of supply
and demand.\86\ The Commission believes that unpriced quotations may
signal only that a broker-dealer is interested in buying or selling the
security, rather than that market demand for the security actually
exists. This proposed amendment, therefore, would conform proposed
paragraph (f)(3)(i)(A) to existing paragraph (f)(3)(ii) with respect to
the requirement that the security be the subject of both bid and ask
quotations in an IDQS at specified prices.
---------------------------------------------------------------------------
\86\ See 1984 Adopting Release at 45121.
---------------------------------------------------------------------------
As proposed, once a broker-dealer publishes or submits the initial
two-way priced quotations continuously for the requisite period of
time, the initiating broker-dealer and other broker-dealers would be
able to rely on the piggyback exception in proposed paragraph
(f)(3)(i)(A) for priced quotations. Proposed paragraphs (f)(3)(i)(A)
and (f)(3)(i)(B) would require the security to have been the subject of
both bid and ask quotations in an IDQS at specified prices. Although
the exception would permit broker-dealers to quote on either side once
piggyback eligibility is established, a security must be the subject of
both bid and ask quotations at specified prices (i.e., two-way priced
quotations), in the IDQS, within the previous 30 calendar days, with no
more than four business days in succession without such a quotation,
for a broker-dealer to establish reliance on the piggyback exception.
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q29. How, and to what extent, would these proposed amendments
affect liquidity, transparency, and capital formation, particularly for
small issuers?
Q30. Do unpriced quotations provide any market signals that would
warrant the continued reliance on the piggyback exception based on
unpriced quotations? If so, what are they?
Q31. Should broker-dealers be permitted to rely on the piggyback
exception if only a priced bid or a priced ask (i.e., only a one-sided
quotation) is published? Why or why not?
(c) After a Trading Suspension
The Commission is proposing that the piggyback exception would not
be available to a broker-dealer until 60 days after the expiration of a
trading suspension. The proposal is intended to provide enough time for
investors to consider new or additional information that may arise in
the period following the conclusion of the issuer's trading suspension.
The Commission may suspend trading in any security for up to ten
trading days if, in its opinion, the public interest and the protection
of investors so require.\87\ The Commission has, at times, suspended
trading concurrently with instituting enforcement actions alleging that
an issuer has failed to comply with periodic reporting requirements or
engaged in deceptive or manipulative conduct.\88\ The Commission has
also suspended trading in the presence of rumors and speculation in the
marketplace.\89\ Temporary trading suspensions are a powerful tool for
``alert[ing] the investing public that there is insufficient public
information about
[[Page 58222]]
the issuer upon which an informed investment judgment can be made or
that the market for the securities may be reacting to manipulative
forces or deceptive practices.'' \90\
---------------------------------------------------------------------------
\87\ See Exchange Act Section 12(k)(1).
\88\ See In re Bravo Enters. Ltd., Exchange Act Release No.
75775, 5 n.14 (Aug. 27, 2015); see also SEC v. ZipGlobal Holdings,
Inc., Litigation Release No. 23078, 2014 WL 4384124, at *2 (Sept. 4,
2014); In re Vida Life Int'l Ltd., Release No. 72698, 2014 WL
3725012, at *1 (July 29, 2014).
\89\ See In re Bravo Enters. Ltd., Exchange Act Release No.
75775, 5 n.17 (citing Andros Isle Dev. Corp., Exchange Act Release
No. 57486, 2008 WL 762964, at *1 (Mar. 13, 2008) (``[c]ertain
persons appear to have usurped the identity of 26 defunct or
inactive publicly traded corporations''); Power Conversion, Inc.,
Exchange Act Release No. 10002, 1973 WL 149518, at *21 (Feb. 12,
1973) (trader was ``involved in a scheme to defraud and manipulate
the market'' in the issuer's securities)).
\90\ Rules of Practice, Exchange Act Release No. 35833 (June 9,
1995), 60 FR 32738, 32787 (June 23, 1995) (adoption of amendments).
---------------------------------------------------------------------------
Further, the Commission has stated that ``information in trading
suspension orders is important for broker-dealers because they will be
apprised of questions the Commission has raised regarding the issuer or
its securities that should be considered when they determine to publish
quotations.'' \91\ Among other things, a Commission trading suspension
could indicate that there is a lack of information about the company
(e.g., the company is delinquent in its filings of required reports),
uncertainty as to the accuracy of publicly available information, or
questions about the trading in the stock.
---------------------------------------------------------------------------
\91\ 1991 Adopting Release at 19154.
---------------------------------------------------------------------------
A trading suspension that exceeds more than four successive
business days (e.g., five business days in succession without a
quotation) will eliminate broker-dealers' ability to rely on the
piggyback exception to publish or submit quotations for that security
once the trading suspension ends.\92\ Further, quoting activity under
the piggyback exception does not automatically resume when a 10-day
suspension ends. Under the existing Rule, a broker-dealer must comply
with the information review requirement before it can re-establish the
ability to rely on the piggyback exception, unless the broker-dealer
can rely on another exception to the Rule.\93\ However, the existing
Rule permits a broker-dealer to begin the process of re-establishing
piggyback eligibility immediately after the conclusion of the trading
suspension if the broker-dealer complies with the information review
requirement.\94\
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\92\ See Exchange Act Rule 15c2-11(f)(3)(i) and (ii).
\93\ See Exchange Act Rule 15c2-11(a) and (f).
\94\ See Exchange Act Rule 15c2-11(a) and (f)(3)(i) through
(ii).
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The Commission proposes to amend the Rule by adding a proviso to
proposed paragraph (f)(3)(ii) so that a broker-dealer would not be able
to rely on the piggyback exception until 60 calendar days after the
expiration of a trading suspension order issued by the Commission
pursuant to Section 12(k) of the Exchange Act.\95\ This means that, if
a broker-dealer were to perform the required review and begin to
publish or submit quotations upon the expiration of a Commission-
ordered trading suspension (e.g., on April 1), the 30 calendar days
following the expiration of the trading suspension would not count
toward establishing piggyback eligibility. Instead, the broker-dealer's
quotations that are published on days 31 through 60 (i.e., May 1
through May 30) would count toward meeting the piggyback exception's
frequency of quotations requirement. In this scenario, on day 61 (i.e.,
on May 31), after the expiration of the trading suspension, assuming
that the frequency of quotation requirements have been satisfied, other
broker-dealers would be able to rely on the piggyback exception to
publish quotations.
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\95\ See Proposed Rule 15c2-11(f)(3)(ii). Commission orders
pertaining to trading suspensions issued under Section 12(k) of the
Exchange Act are available through the Commission's website at
https://www.sec.gov/litigation/suspensions.shtml. While the
Commission is not proposing to require that the broker-dealer obtain
and review any trading suspension for a foreign security that was
issued by a foreign financial regulatory authority, this information
must be taken into account by the broker-dealer if it comes to the
broker-dealer's knowledge or possession at the time that a review is
required. See Proposed Rule 15c2-11(a)(1) and (c)(3).
---------------------------------------------------------------------------
The limitation of 60 calendar days in the proposed proviso is
intended to incorporate the 30-day timing requirement of the existing
piggyback exception and to reflect the specific policy rationale behind
the piggyback exception: Regular and frequent quotations, including
regular and frequent two-sided market making, reflect independent
supply and demand forces, thereby indicating that sufficient
information about the issuer of the quoted security is reaching the
marketplace.\96\ A trading suspension order issued by the Commission
pursuant to Section 12(k) of the Exchange Act can serve as a signal of
insufficient public information about the issuer upon which an informed
investment judgment can be made. In the case of a formerly suspended
security, adding 30 days to the piggyback exception's existing timing
requirement of 30 days would help to ensure that regular and frequent
quotations reflect independent supply and demand forces, thereby
indicating that sufficient information about the issuer of the quoted
security is reaching the marketplace.
---------------------------------------------------------------------------
\96\ See 1984 Adopting Release at 45121. The existing piggyback
exception has a timing requirement of 30 calendar days after
initiation (or resumption) of quotations. See Exchange Act Rule
15c2-11(f)(3)(i) and (ii).
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Further, the Commission believes that a longer period of 60
calendar days should provide investors with a better opportunity to
consider new or additional information that may arise in the period
following the conclusion of the issuer's trading suspension. The
Commission believes that this proposed limitation would help to ensure
that regular and frequent quotations for the securities of formerly
suspended issuers generally reflect market supply and demand and are
based on informed pricing decisions rather than on pricing decisions
that are based on information that is no longer accurate or that
(potentially) had led the issuer to be suspended.
(d) Shell Companies
The proposed amendments to the piggyback exception would prohibit
broker-dealers from relying on the piggyback exception for shell
companies. This proposed amendment is intended to help retail investors
by preventing shell companies, which can be used as vehicles for fraud,
from maintaining a quoted market. Currently, the piggyback exception
may result in broker-dealers contributing to a quoted market in
securities of shell companies, which may collaterally facilitate
fraudulent and manipulative schemes involving ``shell factories.'' \97\
Specifically, offering documents or other filings for some shell
companies may contain false or misleading statements regarding the
company's business plan; its officers, directors, nominees, and
shareholders; or control of the company. The Commission does not
believe that securities of shell companies should be continuously
quoted pursuant to an exception that presumes that sufficient
information about the issuer of the quoted security is reaching the
marketplace.\98\ A continuously quoted market can increase the share
price of a shell company that may have been promoted using inaccurate
or misleading representations and could allow fraudsters to more easily
fool new investors into believing there is an active and independent
market for its security.
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\97\ In a shell factory scheme, fraudsters typically create and
sell securities of numerous purportedly actual public companies that
are, in fact, shams. In furtherance of such schemes, fraudsters file
false and misleading registration statements that falsely depict
startup companies' operations and expected profits to convince
investors to purchase these companies' securities. To add value to
the shell companies as reverse merger candidates, fraudsters solicit
broker-dealers to file false Forms 211 with FINRA, without complying
with the provisions of Rule 15c2-11, for the securities of the shell
company to be quoted and traded in the OTC market. The fraudsters
sell the startup companies as empty shells rather than implementing
the business plans of such companies.
\98\ See 1984 Adopting Release at 45121.
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To become a company with a publicly quoted market, a private
company may engage in a reverse merger with a publicly traded shell
company. In this
[[Page 58223]]
manner, the private company obtains the benefits of a public market for
its securities. The company that emerges from a reverse merger could be
a completely different company than the shell company that existed
before the merger took place. Very often, when the shell company is not
a reporting company, there is no or limited publicly available
information about the post-merger company.\99\
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\99\ Item 5.06 of Form 8-K requires disclosure of the material
terms of a completed transaction that has the effect of causing a
company to cease being a shell company, and Items 2.01(f) and
9.01(c) together require filing Form 10 level information within
four business days after completion of the transaction. In addition,
entry into the agreement may trigger Form 8-K Item 1.01 (Entry Into
a Material Definitive Agreement), and the completion of the
transaction may trigger Form 8-K Item 5.01 (Changes in Control of
Registrant). Exchange Act Rules 13a-19 and 15d-19 impose disclosure
requirements comparable to Item 5.06 of Form 8-K on foreign private
issuers that complete transactions in which they cease to be shell
companies.
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Although reverse mergers can take place for valid, non-fraudulent
purposes, the Commission has noted that unregistered ``reverse
mergers'' between privately held companies and publicly traded shell
companies ``commonly are used to develop a market for the merged
entity's securities, often as part of a scheme to `pump-and-dump' those
securities.'' \100\ Numerous enforcement actions over the past several
years have involved fraud arising from shell companies, often in the
context of reverse mergers.
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\100\ Registration of Securities on Form S-8, Securities Act
Release No. 7646 (Feb. 25, 1999), 64 FR 11103, 11106 (Mar. 8, 1999).
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The proviso in proposed paragraph (f)(3)(ii) would prohibit broker-
dealers from relying on the piggyback exception to publish or submit
quotations for securities of an issuer that meets the proposed
definition of ``shell company'': Any issuer, other than a business
combination related shell company as defined in Rule 405 of Regulation
C, or an asset-backed issuer, as defined in Item 1101(b) of Regulation
AB, that has (1) no or nominal operations and (2) either (i) no or
nominal assets, (ii) assets consisting solely of cash and cash
equivalents, or (iii) assets consisting of any amount of cash and cash
equivalents and nominal other assets.\101\ The proposal should not
prohibit reliance on the piggyback exception for quotations of startup
companies or companies with a limited operating history.\102\ When
reliance on the piggyback exception initially is established to publish
or submit quotations for the securities of a startup company, the
company may, indeed, be a company with a limited operating history
without meeting the proposed definition of ``shell company.'' Over
time, however, that company might become a shell company within the
definition under the proposed Rule if, for example, the issuer
continues to have minimal assets and liabilities without conducting any
operations. Under the proposed amendment, broker-dealers would need to
remain vigilant regarding whether they may rely on, or continue to rely
on, the piggyback exception if the issuer of that security becomes a
shell company.
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\101\ See infra Part III.H.2; Proposed Rule 15c2-11(e)(8).
\102\ See Revisions to Rules 144 and 145, Securities Act Release
No. 8869 (Dec. 6, 2007), 72 FR 71546, 71557 n.172 (Dec. 17, 2007).
The Commission has stated that startup companies that have limited
operating history do not meet the condition of having ``no or
nominal operations'' for the purposes of Rule 144(i)(1)(i). See id.
The Commission also believes that this statement is appropriate in
the context of broker-dealers determining whether a company fits
within the meaning of ``shell company'' as defined in Proposed Rule
15c2-11(e)(8) when deciding whether they may rely on the piggyback
exception.
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The Commission is mindful that the proposal could increase burdens
for broker-dealers in determining whether the issuer has become a shell
company within the proposed definition. To mitigate costs associated
with this determination, the Commission proposes to allow broker-
dealers to rely on a publicly available determination by a qualified
IDQS or by a registered national securities association that the
securities are eligible for the piggyback exception, as discussed
further below.\103\
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\103\ See infra Part III.F; Proposed Rule 15c2-11(f)(8).
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While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q32. Should broker-dealers be prohibited from relying on the
piggyback exception to publish or submit quotations for securities of
shell companies? Why or why not?
Q33. Are there specific types of shell companies that participate
in reverse mergers and act as the surviving company such that broker-
dealers should be able to rely on the piggyback exception to publish or
submit quotations for securities of these shell companies? If so, how
should the Commission define such shell companies?
Q34. How, and to what extent, would these proposed amendments
affect liquidity, transparency, and capital formation, particularly for
small issuers?
Q35. Please describe alternative approaches, as well as their costs
and benefits, to address the problems that may arise in the context of
Rule 15c2-11 concerning mergers and acquisitions between shell
companies and private operating companies.
Q36. Is the proposed definition of ``shell company'' appropriate?
Please explain why or why not. Should a definition of ``shell company''
that is different from the one that is being proposed today be used? If
so, please explain and provide examples.
(e) Frequency Requirements for the Piggyback Exception
The proposal would eliminate the 12-day requirement in the
piggyback exception to modernize the existing Rule in alignment with
the current electronic OTC trading market. Currently, a broker-dealer
may rely on the piggyback exception without complying with the Rule's
information review requirement if the publication or submission of a
quotation for a security meets the frequency requirements and is
published in an IDQS on each of at least 12 days within the previous 30
calendar days, with no more than four business days in succession
without a quotation.\104\ The Commission proposes to remove the quoting
frequency requirement of ``12 business days'' in light of the evolution
of the OTC market from a daily paper publication to a dynamic,
electronic trading market. The Commission believes that the 12-day
requirement is no longer necessary with the technological advances that
have taken place since this provision was adopted because it is now
easier for broker-dealers to continuously update and widely disseminate
quotations and information about issuers to investors.\105\ As
proposed, for a broker-dealer to rely on the piggyback exception, the
quoted OTC security would need to be the subject of two-way priced
quotations within the previous 30 calendar days, with no more than four
business days in succession without such a quotation.\106\ The proposed
amendment to remove the 12-day requirement would not alter the existing
exception's provision relating to the absence of quotations, which is
the requirement that no more than four consecutive business days elapse
without a two-way quotation.\107\ For example, if over a 30-calendar-
day window, no quotations were published in an IDQS on Mondays through
[[Page 58224]]
Thursdays but two-way priced quotations were published on each of the
Fridays, broker-dealers would be able to rely on the piggyback
exception.
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\104\ Exchange Act Rule 15c2-11(f)(3)(i) and (ii).
\105\ See infra Part VIII.C.1.b (estimating that only nine of
over 10,000 issuers had fewer than 12 days of published quotations
within 30 previous calendar days, with no more than four business
days in succession without a quotation).
\106\ See Proposed Rule 15c2-11(f)(3)(i)(A) and (B).
\107\ See, e.g., 1984 Adopting Release at 45121.
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While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q37. Commenters are requested to provide views on whether
maintaining the frequency requirements of 30 days and no more than four
business days in succession without a quotation, as proposed, is
necessary or effective to curtail fraud where the piggyback exception
has been implicated. What are the costs and benefits of having these
frequency requirements?
Q38. Should the 12-day requirement in the existing piggyback
exception be retained? Please explain why or why not. What are the
costs and benefits of continuing to require at least 12 days of
quotations within the previous 30 calendar days?
Q39. Please discuss whether and how the elimination of the 12-day
requirement could impact the integrity of the OTC market. In
particular, please discuss whether the elimination of the 12-day
requirement could contribute to a quoting environment that is more
susceptible to fraudulent and manipulative schemes.
Q40. Are there alternative frequency requirements that would be
more effective to achieve the objectives of the proposed Rule? Please
explain.
Q41. We understand that quotations are often automated and can
occur on a daily basis. Are there situations in which quotations that
are published or submitted in reliance on the piggyback exception are
not published or submitted on each trading day within the previous 30
calendar days? Please discuss.
Q42. Prior to the creation of electronic markets for OTC
securities, a broker-dealer that complied with the information review
requirement to initiate the publication or submission of quotations for
a security, in essence, was the sole publisher of quotations for that
security for 30 calendar days of publication, unless another broker-
dealer also complied with the information review requirement for that
security. The Commission understands that the process of initiating
quotations before becoming eligible to rely on the piggyback exception
has had the practical effect of incentivizing one broker-dealer to
undertake the costs associated with initiating quotations for a
security. Once reliance on the piggyback exception is established,
other broker-dealers ride on the coattails of the broker-dealer that
initiated quotations to comply with the Rule's provisions.\108\ Such
costs and effort should be greatly reduced with today's technological
improvements that have streamlined the ability to obtain information
about a company and publish quotations. In light of these
considerations, should the 30-day requirement also be removed? What are
the costs or benefits, if any, of removing the 30-day requirement while
maintaining the no more than four business days in succession without a
quotation requirement?
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\108\ See 1998 Proposing Release at 9664.
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Q43. How, and to what extent, would the elimination of these
frequency requirements help to facilitate or impede liquidity,
transparency, and capital formation, particularly for small issuers?
(f) General Request for Comment Regarding the Piggyback Exception
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q44. Please discuss any concerns with the proposed paragraph
(f)(3)(ii) proviso ``that this paragraph (f)(3) shall apply to a
publication or submission of a quotation concerning a security of an
issuer included in paragraph (b)(5) of this section only where the
information required by paragraph (b)(5) (excluding paragraphs
(b)(5)(i)(N) through (P)) is current and has been made publicly
available within six months before the date of publication or
submission of such quotation'' (emphasis added). In particular, please
discuss whether there is a concern that investors may not have
sufficient notice of a potential loss of a quoted market for a
particular security where the piggyback exception becomes unavailable
due to proposed paragraph (b)(5) information no longer being current
and publicly available (e.g., the information is not updated by the
conclusion of the six-month period). Please discuss any ways to address
the provision of such notice or any other concerns.
Q45. Should proposed paragraph (f)(3)(ii) permit a grace period
during which a security could continue to be quoted in reliance on
proposed paragraph (f)(3) for a certain number of days following the
expiration of such six-month period? What is the appropriate length of
such a grace period? For example, is 15 days an appropriate grace
period, or should such period be longer or shorter? Please explain. If
the piggyback exception were to permit such a grace period, should
proposed paragraph (f)(3)(ii) also include in the proviso, for example,
that ``proposed paragraph (f)(3) shall not apply to the publication or
submission of a quotation concerning a security of an issuer included
in proposed paragraph (b)(5) unless such quotation for such security is
published or submitted in an IDQS that specifically identifies
quotations concerning any security of an issuer for which proposed
paragraph (b)(5) has not been made publicly available within six months
before the date of publication or submission of such quotation''?
Should such notice be in the form of a special ``tag'' on the
quotation, similar to how unsolicited indications of interest are
designated? Alternatively, should a notice be continuously and
prominently posted on the IDQS's website throughout the grace period?
Please explain.
Q46. Alternatively, instead of a grace period, should proposed
paragraph (f)(3)(ii) include in the proviso that ``proposed paragraph
(f)(3) shall not apply to the publication or submission of a quotation
concerning a security of an issuer included in proposed paragraph
(b)(5) unless such quotation for such security is published or
submitted in an interdealer quotation system that specifically
identifies that such proposed paragraph (b)(5) information must be made
current and publicly available within 30 calendar days for this
paragraph (f)(3) to continue to apply''? Please explain.
Q47. To promote consistency in the operation of the proposed Rule
and the expiration of piggyback eligibility, should proposed paragraph
(f)(3)(ii) also include in the proviso that ``proposed paragraph (f)(3)
shall apply to the publication or submission of a quotation concerning
a security of an issuer included in proposed paragraph (b)(5) until the
end of the calendar month in which the proposed paragraph (b)(5)
information ceases to be current and publicly available''? Please
explain.
Q48. Please discuss the advantages or disadvantages of any of the
above-discussed provisos to investors, issuers of OTC quoted
securities, and other market participants. What, if any, impact would
specifically identifying these types of quotations have on liquidity?
Please explain. What would be the costs and benefits of including any
of the above-discussed provisos? Please explain. Are any of these
provisos workable? Are there suggestions to revise the proviso to
improve workability; for example, should a broker-dealer be required to
provide notice to the IDQS that the proposed paragraph (b)(5)
information has not been made publicly available
[[Page 58225]]
and piggyback eligibility is about to expire? Please explain.
Q49. Is there a certain price threshold below which the piggyback
exception should not apply? Why or why not? Commenters are requested to
please provide any data they might have. If so, how should such a price
threshold be measured? For example, should the threshold amount apply
to the 30-day weighted average price of the security if the security is
priced below a certain amount for more than 12 months?
Q50. It is the Commission's understanding that broker-dealers tend
to rely on the exception to the Rule provided in existing paragraph
(f)(3)(i) and that broker-dealers tend not to rely on the exception in
existing paragraphs (f)(3)(ii) and (f)(3)(iii). Should existing
paragraph (f)(3)(ii), which allows broker-dealers to rely on the
piggyback exception to publish or submit quotations in an IDQS that
does not identify unsolicited customer indications of interest, be
eliminated from the Rule? Why or why not? How, and to what extent,
would such elimination affect liquidity, and capital formation,
particularly for small issuers? Should proposed paragraphs (f)(3)(i)(A)
and (f)(3)(i)(B) be combined? Why or why not? Should existing paragraph
(f)(3)(iii), which allows market makers to piggyback off of their own
quotations, be eliminated from the Rule? Why or why not? How, and to
what extent, would such elimination affect liquidity and capital
formation, particularly for small issuers? How would investors be
affected? How, and to what extent, do market participants rely on these
exceptions? Do market participants anticipate relying on them given the
other amendments the Commission is proposing today? Why or why not?
D. Proposed Amendments to the Unsolicited Quotation Exception
1. Existing Unsolicited Quotation Exception
Currently, broker-dealers can publish quotations for unsolicited
customer quotations without complying with the information review
requirement. The existing Rule excepts from the information review
requirement the publication or submission of quotations by a broker-
dealer where the quotations represent unsolicited customer orders.\109\
When the exception was adopted, the Commission stated its belief that
quotations representing unsolicited customer interest presented little
potential for manipulative abuse \110\ because such trading interest
was not initiated by the broker-dealer, and thus the broker-dealer
would not have had a motive to affect the price for the security
involved.\111\ However, this may no longer be the case today. The
Commission is concerned that certain persons may have the incentive to
use the unsolicited quotation exception to avoid the Rule's information
review requirement for improper purposes. As discussed below, the
proposed amendments to the unsolicited quotation exception are designed
to reduce the potential for misuse of this exception.
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\109\ Exchange Act Rule 15c2-11(f)(2).
\110\ See 1984 Adopting Release at 45120.
\111\ Id.; see also Initiation or Resumption of Quotations
Without Specified Information, Exchange Act Release No. 19673 (Apr.
14, 1983), 48 FR 17111, 17113 (Apr. 21, 1983).
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2. Proposed Amendments to the Unsolicited Quotation Exception
Under the proposal, the unsolicited quotation exception would not
be available for company insiders if the information required to be
reviewed under the Rule was not current and publicly available. This
proposed amendment is intended to help retail investors by encouraging
corporate insiders to make publicly available current information about
the company.
To rely on the proposed unsolicited quotation exception, a broker-
dealer would need to determine whether proposed paragraph (b)
information is current and publicly available. If so, a broker-dealer
would not need to determine whether the quotation would be published or
submitted by or on behalf of a company insider (i.e., the chief
executive officer, members of the board of directors, officers, or any
person, directly or indirectly the beneficial owner of more than 10
percent of the outstanding units or shares of any class of any equity
security of the issuer). However, if a broker-dealer that seeks to rely
on the proposed unsolicited quotation exception determines that
proposed paragraph (b) information is not current and publicly
available, such broker-dealer would need to determine whether the
quotation would be published or submitted by or on behalf of a company
insider. As proposed, a broker-dealer may not rely on the unsolicited
quotation exception when (1) the quotation would be published or
submitted by or on behalf of a company insider and (2) proposed
paragraph (b) information is not current and publicly available.
(a) Current and Publicly Available Information
Proposed paragraph (f)(2)(ii) would permit a broker-dealer to
publish or submit a quotation by or on behalf of certain company
insiders in reliance on the unsolicited quotation exception only if
proposed paragraph (b) information is current and publicly available,
as defined under proposed paragraphs (e)(1) and (e)(4), respectively.
This proposed requirement is intended to help prevent the potential
misuse of the unsolicited quotation exception by company insiders who
may take advantage of access to information about the company that is
not available to non-insiders by, for example, creating the appearance
of an active market in quoted OTC securities to entice new investors to
invest, or to facilitate pump-and-dump schemes.
Further, the proposal should encourage greater transparency for
investors. For instance, a company insider may be incentivized to use
his or her status within the company to encourage the issuer to provide
or publish information so that a broker-dealer could rely on the
unsolicited quotation exception. In addition, the proposed amendments
to the Rule would not preclude a company insider from engaging in
trading activity; Rule 15c2-11 applies only to the publication and
submission of quotations in a quotation medium. Thus, the Rule, as
proposed, would not prevent a company insider's purchases or sales in
response to quotations.
(b) Company Insiders
For purposes of proposed paragraph (f)(2)(ii), quotations published
or submitted by or on behalf of company insiders would include
quotations published or submitted, directly or indirectly, by or on
behalf of the chief executive officer, members of the board of
directors, officers, or any person, directly or indirectly, the
beneficial owner of more than 10 percent of the outstanding units or
shares of any class of any equity security of the issuer. Such company
insiders may have a heightened incentive to engage in misconduct to
artificially affect the price and trading volume of an OTC security;
for example, company insiders may stand to profit by selling the
company shares they own during a pump and-dump scheme. Such company
insiders may also have the ability to control or influence the amount
and type of information that an issuer provides to the public.
The chief executive officer, members of the board of directors, and
officers
[[Page 58226]]
have the ability to influence, and, in some cases, control the issuer's
activities, including the extent and use of information it makes
available to the public. The ability to influence or control the
issuer's activities potentially provides persons exercising such
influence or control with both the incentive to use such information to
artificially affect the price of the company's securities as well as
the ability to make information available to investors. Beneficial
ownership of more than 10 percent of an issuer's equity securities
indicates a concentration of ownership that may increase a person's
control over the issuer. Such control may give a person the ability to
influence whether and to what extent there is public information about
the issuer.
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q51. How frequently do broker-dealers rely on the unsolicited
quotation exception? Commenters are requested to please provide data to
support their answer if possible.
Q52. Please discuss whether, and to what extent, the proposed
amendments to the unsolicited quotation exception, if adopted, would
impact liquidity, capital formation, investor protection, and the
integrity of the OTC market or other markets.
Q53. Please discuss whether, and to what extent, the proposed
amendments to the unsolicited quotation exception, if adopted, would
impact company insiders. Please discuss ways to mitigate any undue
impact on company insiders while preventing misuse of the exception to
facilitate fraudulent and manipulative schemes.
Q54. Should the Rule retain the unsolicited quotation exception in
its existing form? Please explain why or why not.
Q55. Is there an alternative way to modify the exception that would
help to prevent misuse of the exception to facilitate fraudulent and
manipulative schemes? If so, please describe specific modifications to
the exception and any resulting benefits and costs.
Q56. Please discuss any advantages and disadvantages of rescinding
the unsolicited order exception.
Q57. The proposed amendments would make the unsolicited quotation
exception unavailable for publications of quotations by or on behalf of
certain persons--the chief executive officer, members of the board of
directors, officers or any person, directly or indirectly, the
beneficial owner of more than 10 percent of the outstanding units or
shares of any class of equity security of the issuer--unless proposed
paragraph (b) information is current and publicly available. Are there
additional persons that should be included in this list (e.g., an
affiliate of the issuer) with respect to the unsolicited quotation
exception? If yes, should such terms be defined? Are there existing
definitions in other rules or regulations that could be used in this
context? Why would the use of such other definitions be appropriate?
Should the limitation of the unsolicited quotation exception for
quotations of beneficial owners be a higher, or lower, percentage of
beneficial ownership of the outstanding units or shares of any class of
any equity security of the issuer? If so, what percentage of beneficial
ownership should the unsolicited quotation exception use and why?
Please explain.
Q58. Please describe how a broker-dealer would determine that a
quotation is made by or on behalf of the chief executive officer,
members of the board of directors, officers or any person, directly or
indirectly, the beneficial owner of more than 10 percent of the
outstanding units or shares of any class of equity security of the
issuer.
Q59. Should beneficial ownership of an issuer's convertible bonds
be included in the calculation of the percentage of ownership for
purposes of determining whether a person is a company insider for
purposes of the proposed unsolicited quotation exception? Please
explain.
E. Proposed New Exceptions To Reduce Burdens
Currently, paragraph (f) of Rule 15c2-11 provides conditional
exceptions to the Rule's information review requirement.\112\ The
Commission is proposing to add three new exceptions to the Rule to
reduce burdens on broker-dealers where the Rule's goals can be achieved
through alternative means, for example, where adequate issuer
information is current and publicly available, or where a regulated
entity performs a similar review of the issuer in connection with an
offering or otherwise complies with the Rule's proposed information
review requirement.\113\ The Commission preliminarily believes that
applying the Rule in these three cases does not further its policy
goals and investor protections.
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\112\ The existing exceptions to the Rule include (1) quotations
of a security admitted to trade on a national securities exchange;
(2) quotations representing a customer's unsolicited indication of
interest; (3) quotations for a security that meets the requirements
of the piggyback exception; (4) quotations for a municipal security;
or (5) quotations of a security that is traded on the Nasdaq Stock
Market, which exception the Commission is proposing to eliminate.
See Exchange Act Rule 15c2-11(f)(1) through (5).
\113\ See Proposed Rule 15c2-11(f)(5) through (7).
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1. ADTV and Asset Tests
The Commission is proposing to add an exception to the Rule to
except a broker-dealer from conducting the information review if the
security is highly liquid and the issuer is well capitalized. This
amendment may provide retail investors with greater price transparency
because securities of issuers that may currently meet the exception,
but are not quoted, may develop a quoted market. Furthermore, this
proposed exception could facilitate capital formation by removing the
required review for securities that are less susceptible to fraud and
manipulation based on liquidity of the securities and size of the
issuer. In addition, fraudulent and manipulative schemes, such as pump-
and-dump schemes, or other abusive activities involving OTC securities,
generally do not involve issuers with substantial assets.\114\
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\114\ For example, the typical pump-and-dump scheme most often
involves issuers with limited assets and thinly traded securities.
See infra note 124.
A 2018 analysis of 318 quoted OTC securities that were the
subject of recent Commission-ordered trading suspensions showed that
the issuers, on average, had approximately $86.14 million in total
assets, with a median of approximately $1.04 million of total
assets. They also had an average of $10.42 million in shareholders'
equity, with a median of approximately negative $0.26 million.
Although the average total assets and shareholders' equity amounts
are higher than the proposed thresholds for the asset test, as of
the date of this proposal, no issuer subject to a trading suspension
satisfied both the ADTV test and the asset test, the combination of
which the Commission is proposing herein.
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The first proposed exception, contained in proposed paragraph
(f)(5), is conditioned on an OTC security satisfying a two-prong test
based on (1) the security's average daily trading volume (``ADTV'')
value during a specified measuring period (the ``ADTV test''); and (2)
the issuer's total assets and unaffiliated shareholders' equity (the
``asset test''). To rely on the proposed new exception from complying
with the Rule's information review requirement, a broker-dealer would
need to determine that both prongs of the exception are met.\115\
Proposed paragraph (f)(5)(ii) would also include a proviso that limits
the availability of the new exception to
[[Page 58227]]
those quoted OTC securities where proposed paragraph (b) information is
current (i.e., in accordance with the proposed definition of current,
which would incorporate time frames identified in proposed paragraphs
(b)(1) through (b)(5)) and publicly available. While the proposed
exception is intended to ease burdens on broker-dealers publishing
quotations for quoted OTC securities, the proviso is designed to limit
the exception to those OTC securities that have greater transparency
and are less likely to be involved in fraudulent and manipulative
conduct in the OTC market.
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\115\ However, as noted below, the excepted broker-dealer would
still be subject to the recordkeeping requirement in proposed
paragraph (d)(2) of the Rule. Additionally, the broker-dealer could
rely on the determination made by an appropriate third party
pursuant to proposed paragraph (f)(8), as discussed below.
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(a) ADTV Test
The first prong of the new exception in proposed paragraph
(f)(5)(i)(A) would except publishing or submitting a quotation for a
security with a worldwide ADTV value of at least $100,000 during the 60
calendar days immediately before the date of publishing such
quotation.\116\ This $100,000 ADTV value threshold, which would need to
be calculated daily using the ADTV value over the preceding 60-
calendar-day measuring period, is intended to mirror the threshold that
is used in Rules 101 and 102 of Regulation M, which, similarly, is
designed to prevent manipulative activities but in connection with a
distribution of securities.\117\ The ADTV value threshold and 60-
calendar-day measuring period also are designed to focus the proposed
exception on the types of securities that typically are not the subject
of Commission-ordered trading suspensions or the subject of fraudulent
and manipulative conduct, including the type of short-term manipulation
that is frequently seen in connection with microcap securities, as a
result of their greater level of OTC market liquidity.\118\
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\116\ See Proposed Rule 15c2-11(f)(5)(i)(A). The proposed
threshold of securities with an ADTV value of $100,000, as well as
$50 million in total assets and $10 million in shareholders' equity,
as discussed below, was suggested by commenters on the Rule's 1999
release and others, including IDQS operators. See, e.g., Letter from
Lee B. Spencer, Jr. & R. Gerald Baker, Securities Secs. Indus.
Ass'n, to Jonathan G. Katz, Sec'y, SEC (May 6, 1999), available at
https://www.sec.gov/rules/proposed/s7599/spencer2.htm (``SIA
Letter''). Commenters on the 1999 Reproposing Release also suggested
reducing the previously proposed ADTV measuring period from six full
calendar months to 60 days as in Regulation M. See id.
\117\ The Commission believes using Regulation M as a model is
appropriate because Regulation M's ADTV standard is relevant for
determining which securities are more difficult to manipulate. See,
e.g., Anti-Manipulation Rules Concerning Securities Offerings,
Exchange Act Release No. 38067 (Dec. 20, 1996), 62 FR 520 (Jan. 3,
1997). Under Regulation M, a security's ADTV value is determined
based solely on information that is publicly available and from a
reasonable source. See supra note 116 and accompanying text.
Regulation M uses a similar ADTV test to support a shorter (one
business day) restricted period for securities with an ADTV value of
at least $100,000 as measured over a 60-day period, if the issuer
has a public float value of at least $25 million. See Rule 100 of
Regulation M. While Regulation M is intended to prevent manipulative
activities during a ``distribution,'' as that term is defined in
Regulation M, the proposed exception would use a similar ADTV value
threshold over a 60-calendar-day measuring period in order to focus
the Rule on more thinly traded, microcap securities that are more
likely to be involved in a short-term price manipulation in the OTC
market. However, the assets prong of the proposed exception,
discussed below, does not use Regulation M's public float test
because public float is based on market prices, which can be
volatile. The asset prong instead uses shareholder equity, which is
book value and is based on information included in the issuer's
audited balance sheet.
\118\ See infra note 254 and accompanying text.
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The Commission believes that the majority of quoted OTC securities
of U.S. companies without a published quotation in an IDQS trade
infrequently and are unlikely to have an ADTV value of $100,000 or more
during the 60-calendar-day measuring period to satisfy the first prong
under proposed paragraph (f)(5)(i)(A). The Commission understands that
quoted OTC securities involved in fraud and manipulation often are
thinly traded and that the ADTV for such securities rarely reaches a
value of $100,000 over an extended period of time. Thus, the Commission
believes that the ADTV test should help to narrowly tailor the
exception to exclude securities that are more likely to be involved in
short-term price manipulation in the OTC market.
To satisfy the proposed ADTV test, a broker-dealer generally would
be able to determine the value of a security's ADTV from information
that is publicly available and that the broker-dealer has a reasonable
basis for believing is reliable.\119\ Generally, any reasonable and
verifiable method may be used (e.g., ADTV value could be derived from
multiplying the number of shares by the price in each trade).\120\
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\119\ For instance, a broker-dealer could rely on trading volume
as reported by self-regulatory organizations (``SROs'') or
comparable entities. Electronic information systems that regularly
provide information regarding securities in markets around the world
also provide a reliable means to determine worldwide trading volume
in a particular security.
\120\ This is similar to the guidance in Regulation M regarding
how to calculate ADTV value. See Anti-manipulation Rules Concerning
Securities Offerings, Exchange Act Release No. 38067 (Dec. 20,
1996), 62 FR 520, 527 (Jan. 3, 1997).
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(b) Asset Test
In addition to the ADTV test (first prong), the Commission is
proposing to include a second prong to the exception in proposed
paragraph (f)(5)(i)(B) that would limit the availability of the
proposed exception to quoted OTC securities of issuers that have at
least $50 million in total assets and unaffiliated shareholders' equity
of at least $10 million (as reflected on the issuer's publicly
available audited balance sheet issued within six months of the end of
the issuer's most recent fiscal year).\121\ The second prong's proposed
combined thresholds (i.e., OTC securities of issuers having at least
$50 million in total assets and unaffiliated shareholders' equity of at
least $10 million) are based on an analysis of quoted OTC securities
that had been the subject of Commission-ordered trading
suspensions.\122\ The asset test is intended to narrowly tailor the
proposed Rule to apply to those securities that the Commission believes
are more likely to be involved in fraudulent or manipulative schemes in
the OTC market. Using ``unaffiliated'' shareholder equity (i.e., equity
that is not owned by shareholders that are affiliated with the issuer)
is intended to further reduce the likelihood of the exception being
applied in cases where there may be a heightened incentive to engage in
fraudulent or manipulative conduct.
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\121\ See Proposed Rule 15c2-11(f)(5)(i)(B).
\122\ See infra note 124 and accompanying text.
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To determine whether publishing or submitting a quotation for a
quoted OTC security of a particular issuer would meet the required
asset test under proposed paragraph (f)(5)(i)(B), a broker-dealer would
need to look to an audited balance sheet issued by the issuer (within
six months of the end of the issuer's most recent fiscal year) that has
been audited by an independent public accountant who has prepared a
report in accordance with the provisions of Rule 2-02 of Regulation S-
X. For exempt foreign private issuers, a broker-dealer would make this
determination using the balance sheet that is prepared in accordance
with a comprehensive body of accounting principles, audited in
compliance with requirements of the country of incorporation, and
reported on by an accountant in good standing under the regulations of
that jurisdiction.\123\
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\123\ This balance sheet may be found in filings with the
Commission on Forms 20-F or 6-K, or publications by the issuer
pursuant to Exchange Act Rule 12g3-2(b) or elsewhere.
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A broker-dealer would be permitted to rely on this exception only
where the issuer's recent publicly available audited balance sheet was
issued within six months from the end of the issuer's most recent
fiscal year. A broker-dealer could use an issuer's audited balance
sheet from the prior fiscal year (i.e., the year before the most recent
fiscal year) until either (1) the issuer issued an audited balance
sheet from the most
[[Page 58228]]
recent fiscal year, or (2) six months have passed after the end of the
issuer's most recent fiscal year, if the issuer still has not issued a
more recent audited balance sheet. The six month period following the
end of the issuer's most recent fiscal year is intended to provide
sufficient time for the issuer's audited balance sheet to be prepared
and issued.
To qualify for the proposed exception, proposed paragraph (b)
information must also be current and publicly available. These timing
requirements should help to ensure that information available to
investors is not stale, and the requirements align with existing
industry standards with respect to when audited balance sheets must be
issued. At the same time, because the typical pump-and-dump scheme
often involves issuers with limited assets (in addition to having
thinly traded securities), the Commission believes that the proposed
two-prong exception (i.e., based on a security's ADTV value and the
issuer's total assets and unaffiliated shareholders equity), should
help to ensure that the Rule's policy goal--of deterring broker-dealers
from commencing quotations for quoted OTC securities that may
facilitate a fraudulent or manipulative scheme--is not undermined.\124\
---------------------------------------------------------------------------
\124\ See, e.g., Andreas Hackethal et al., Who Falls Prey to the
Wolf of Wall Street? Investor Participation in Market Manipulation
(ECGI, Working Paper No. 446, 2019), available at https://ecgi.global/sites/default/files/working_papers/documents/finalleuzmeyermuhnsolteshackethal.pdf (stating that in ``pump-and-
dump'' schemes, promoters often target thinly traded ``penny''
stocks for which limited liquidity leads to fast price increases
when demand rises); see also Michael Hanke & Florian Hauser, On the
effects of stock spam emails, 11 J. Fin. Mkts. 57, 60 (2008).
---------------------------------------------------------------------------
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q60. How would market participants generally calculate ADTV value
for the purposes of this exception? What data sources would they use,
and what is the reliability and availability of these data sources?
Please be specific. Is ADTV value an appropriate measure to use in the
context of measuring a security's susceptibility to fraudulent or
manipulative practices? Why or why not?
Q61. Should proposed paragraph (f)(5) include an additional
requirement that the security that is the subject of the publication or
submission of a quotation meet a certain minimum bid price? Why or why
not? For such a requirement, what would be the appropriate minimum bid
price?
Q62. Should the proposed exception's ADTV test prong, contained in
proposed paragraph (f)(5)(i)(A), also include the ADTV value of
convertible securities where the underlying security satisfies the
proposed ADTV threshold? If so, commenters should explain their
rationale. Should the proposed exception's ADTV test prong, contained
in proposed paragraph (f)(5)(i)(A), exclude trading volume outside the
U.S.? Please explain.
Q63. Should the dollar value of the ADTV test prong of the proposed
exception be higher than $100,000 (e.g., $500,000 or $1 million), or
should it be a lower amount (e.g., $50,000)? Commenters should specify
what the dollar value should be and provide any relevant data or
analysis to support their response. If the proposed exception's ADTV
test prong were adopted, should it be adjusted for inflation going
forward? If yes, how often? Please explain.
Q64. Should the proposed ADTV test measuring period be longer than
60 calendar days (e.g., six months) or shorter (e.g., 30 days)? Should
the length of the measuring period depend on the amount of the value of
ADTV threshold (i.e., should a higher dollar value of ADTV threshold be
allowed but require a shorter measuring period)? Would a shorter
measuring period (e.g., 30 days) be less effective in measuring a
security's susceptibility to fraudulent or manipulative practices? Why
or why not?
Q65. To meet the proposed exception, a broker-dealer would need to
determine the value of a security's worldwide ADTV by doing a daily
calculation over a 60-calendar-day measuring period. Should this
calculation be less frequent? For example, should the proposed
exception be modified to require a calculation done once a month? Would
this alternative ADTV measuring standard be significantly less
burdensome? Would this alternative ADTV measuring standard be as
effective as a daily calculation over a longer period in determining
which securities are less likely to be the subject of a Commission-
ordered trading suspension or involved in manipulative conduct in the
OTC market? Please explain.
Q66. Because a broker-dealer generally would be able to determine
the value of a security's worldwide ADTV from information that is
publicly available and that the broker-dealer has a reasonable basis
for believing is reliable, as discussed above, should the proposed
exception in paragraph (f)(5) be modified so as not to include the
proviso that would limit the availability of the exception to those
quoted OTC securities where proposed paragraph (b) information is
current and publicly available? Would including the proviso render the
exception less effective in focusing the proposed Rule on the more
thinly traded microcap securities that are more likely to be involved
in manipulative conduct in the OTC market? Why or why not?
Q67. Rule 101 of Regulation M includes an exception from the
trading prohibitions in Regulation M for ``actively-traded'' securities
(i.e., securities with a value of ADTV of $1 million or more, using a
two-full calendar month measuring period, if the issuer has a public
float value of at least $150 million). As an alternative, should the
Commission propose an ADTV prong of the exception in proposed paragraph
(f)(5)(i)(A) to parallel the $1 million ADTV threshold of Regulation
M's actively-traded securities exception? Please explain.
Q68. If a quoted OTC security ceases to meet the requirements of
either of the proposed ADTV test or the assets test, and if a broker-
dealer may not rely on the piggyback exception, should the proposed
exception continue for a period of time, such as 10 business days, to
allow for a broker-dealer to review the required issuer information?
Q69. Should the threshold amount for the unaffiliated shareholders'
equity test be higher than $10 million (e.g., $20 million)? If so,
please explain. Are there circumstances under which it may be
appropriate to permit a lower threshold amount? If so, please explain.
Q70. Should the exception in proposed paragraph (f)(5)(i)(B) be
modified to include a public float value test, similar to that
contained in Regulation M, instead of the combined asset test proposed?
If so, should the public float value use Regulation M's $25 million
threshold (for ``actively-traded'' securities) or some higher or lower
amount? Would public float information be easy or difficult to obtain
for broker-dealers trying to rely on this proposed exception?
Q71. Should the unaffiliated shareholders' equity test accommodate
equity that is owned by shareholders that are affiliated with the
issuer? Please explain why or why not. Would including equity that is
owned by shareholders that are affiliated with the issuer increase the
likelihood of the exception being misused or applied in cases where
there may be a greater potential for fraudulent and manipulative
conduct? In making the proposed unaffiliated shareholders' equity
calculation, how difficult or burdensome would it be to identify equity
that is owned by shareholders
[[Page 58229]]
that are affiliated with the issuer? Please explain.
Q72. Would a balance sheet, particularly a balance sheet for a
catch-all issuer, contain sufficient information to permit broker-
dealers to make the proposed unaffiliated shareholders' equity
calculation?
Q73. Should the use of balance sheets of an exempt foreign private
issuer be limited to balance sheets prepared in accordance with U.S.
generally accepted accounting principles (``GAAP'')?
Q74. Should the exception in proposed paragraph (f)(5)(i)(B) be
available to securities that may satisfy the ADTV test, but where the
issuer of the security is a domestic issuer, that is not a prospectus
issuer, Reg. A issuer, or a reporting issuer and there are no publicly
available U.S. GAAP financials (i.e., for purposes of meeting the
proposed assets test in proposed paragraph (f)(5)(i)(B))? Please
explain why or why not.
Q75. The Commission acknowledges that an exception conditioned on
certain value thresholds could induce arbitrage for accounting
purposes. Should the use of balance sheets of an exempt foreign private
issuer that are not prepared in accordance with U.S. GAAP be limited to
balance sheets prepared in accordance with the International Financial
Reporting Standards (``IFRS'') issued by the International Accounting
Standards Board (``IASB'' or ``IFRS-IASB'')? Is there a way to ensure
that a broker-dealer does not ``cherry pick'' from accounting standards
to take only the most beneficial figures from what is available so that
the broker-dealer can rely on an exception conditioned on an asset
test?
Q76. In evaluating foreign currency balance sheets, should the
Commission modify the proposed assets prong of the exception in
proposed paragraph (f)(5)(i)(B) to specify whether the equity balance
is to be measured using today's current exchange rates or the rates in
effect at the balance sheet date? Please explain why or why not.
Commenters are requested to please also explain in their response
whether it is more appropriate to use rates based on balance sheet
date, or date of quotation publication.
Q77. For 20-F issuers filing IFRS-IASB or balance sheets under
another standard that are reconciled to U.S. GAAP, should the proposed
asset test in proposed paragraph (f)(5)(i)(B) be modified to specify
whether the home country numbers or the reconciled numbers may be used
for purposes of determining eligibility under the proposed exception?
Please explain. If not, why not?
Q78. Alternatively, for those issuers not using IFRS-IASB but that
have to reconcile to U.S. GAAP, should the asset test in proposed
paragraph (f)(5)(i)(B) be modified to require such issuers to use the
reconciled number for purposes of determining eligibility under the
proposed exception? Please explain why or why not.
Q79. With respect to issuers that are not prospectus issuers or
reporting issuers, for purposes of determining whether such issuers
would meet the requirements of the proposed assets and the unaffiliated
shareholders' equity prongs in proposed paragraph (f)(5)(i)(B) of the
exception, should the Commission specify that the audit of the balance
sheet may be performed in accordance with either the auditing standards
applicable to such issuers (e.g., the standards of the American
Institute of Certified Public Accountants (``AICPA'') for domestic
issuers or applicable home country standards, which may be the
standards of the International Auditing and Assurance Standards Board
for a foreign issuer) or the standards of the Public Company Accounting
Oversight Board? Please explain why or why not.
Q80. With respect to issuers that are not prospectus issuers or
reporting issuers, should the independence requirements of Rule 2-01 of
Regulation S-X apply to the exception in proposed paragraph
(f)(5)(i)(B)? For example, if a certain issuer is currently only
required to obtain an audit that is subject to the audit and
independence standards of the American Institute of Certified Public
Accountants, should ``independent'' for purposes of this proposed
exception also be determined by the AICPA's independence standards
(i.e., not Rule 2-01)? Please explain why or why not. Commenters should
include in their response whether the proposed exception should
explicitly require the auditor's report, in particular, to be publicly
available.
Q81. Should reliance on the exception be limited to those quoted
OTC securities that satisfy the requirements of just one instead of
both prongs of the proposed exception? Please explain why or why not.
Are there alternative tests that should be considered? If so, please
explain.
Q82. Should the exception be unavailable for securities of
reporting issuers that are delinquent in their reporting obligations?
2. Underwritten Offerings
The proposal would add an exception to the Rule to allow a broker-
dealer to publish a quotation of a security, without conducting the
required information review, for an issuer with an offering that was
underwritten by that broker-dealer. This proposal may potentially
expedite the availability of securities to retail investors in the OTC
market following an underwritten offering, which may facilitate capital
formation.
Broker-dealers that act as underwriters in registered offerings or
offerings conducted pursuant to Regulation A are subject to potential
liability for misstatements and omissions in the related prospectus or
offering circular. In a registered offering, they are subject to
potential liability under Section 11 of the Securities Act for untrue
statements of material facts or omissions of material facts required to
be included in a registration statement or necessary to make the
statements in the registration statement not misleading at the time the
registration statement became effective. In registered offerings and
Regulation A offerings, they are subject to potential liability under
Section 12(a)(2) of the Securities Act for any prospectus or oral
communication that includes an untrue statement of material fact or
omits to state a material fact that makes the statements made, based on
the circumstances under which they were made, not misleading.
Because of the liability attached to underwriting activity, an
underwriter typically conducts a due diligence review to mitigate
potential liability associated with underwriting an offering of
securities. Depending on its breadth and quality, this review may
permit an underwriter to assert a defense to liability under Section 11
or Section 12(a)(2).\125\ As a result, underwriters of registered and
Regulation A offerings are incentivized to confirm that the information
provided to investors in the prospectus for a registered offering and
offering circular for a Regulation A offering is materially accurate
and obtained from reliable sources.
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\125\ Securities Act Section 11(b) provides a defense from
liability to an underwriter, with respect to non-expertized portions
of the registration statement, only if the underwriter ``had, after
reasonable investigation, reasonable ground to believe and did
believe . . . that the statements therein were true and that there
was no omission to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading.'' Securities Act Section 11(b). Under Section 12(a)(2),
an underwriter may claim a defense if the underwriter ``sustain[s]
the burden of proof that he did not know, and in the exercise of
reasonable care could not have known, of such untruth or omission.''
Securities Act Section 12(a)(2).
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Proposed Rule 15c2-11(a)(1) would prohibit the publication or
submission for publication of a quotation unless (1) the broker-dealer
has in its records the
[[Page 58230]]
required proposed paragraph (b) information; (2) the proposed paragraph
(b) information is current and publicly available; and (3) based on a
review of the proposed paragraph (b) information and any other
documents and information required by proposed paragraph (c), the
broker-dealer has a reasonable basis under the circumstances for
believing that the proposed paragraph (b) information is accurate in
all material respects and that the sources of the proposed paragraph
(b) information are reliable.
With respect to quotations published or submitted less than 90
calendar days following effectiveness of a registration statement for a
registered offering or less than 40 calendar days following
qualification of the offering statement for offerings conducted
pursuant to Regulation A, the required proposed paragraph (b)
information would consist of the final prospectus for the registered
offering or the offering circular for the Regulation A offering.
Underwriters of such offerings would typically have in their records
the final prospectus or offering circular, which would also be publicly
available on the Commission's EDGAR system. In addition, given the
liability underwriters assume under Section 12(a)(2) and, for
registered offerings, Section 11, the Commission believes they would
likely have a reasonable basis for believing, particularly for a
limited period of time following effectiveness of the registration
statement or qualification of the related Form 1-A, that the prospectus
or offering circular is accurate in all material respects and that the
sources of that information are reliable.
Thus, the Commission is proposing to add proposed paragraph (f)(6),
which would except the publication or submission of a quotation
concerning a security by a broker-dealer that is named as an
underwriter in a registration statement for an offering of that class
of security referenced in proposed paragraph (b)(1) of the Rule or in
an offering circular for an offering of that class of security
referenced in proposed paragraph (b)(2) of the Rule.\126\ The proposed
exception would also include a proviso that states that the exception
would apply only to the publication or submission of quotations
concerning a class of security included in the registered or Regulation
A offering within the time frames identified in proposed paragraphs
(b)(1) or (b)(2).\127\
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\126\ See Proposed Rule 15c2-11(f)(6). The Commission is not
proposing that the exception in proposed paragraph (f)(6) alter or
create an exception to Regulation M.
\127\ While the proposed exception in proposed paragraph (f)(6)
would operate to except publications of quotations concerning these
securities from the Rule's application entirely, the proposed
proviso would clarify that reliance on the exception is only
permitted for a limited period of time following effectiveness of
the registration statement or qualification of the Regulation A
offering statement.
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Because of a broker-dealer's involvement in the registered or
Regulation A offering, including their assumption of liability for
misstatements or omissions in the prospectus or offering circular and
public availability of the proposed paragraph (b) information on EDGAR,
the Commission believes that a subsequent information review
requirement would be redundant and, thus, unnecessary. The public
availability of the proposed paragraph (b) information is consistent
with the policy goals of the Rule in addressing the heightened
potential for fraudulent and manipulative conduct involving securities
of little or lesser-known issuers or for which information is not
publicly available.
Accordingly, the Commission believes that the proposed underwriter
exception is appropriate and would provide comparable--if not greater--
protections to investors as the review conducted by broker-dealers
under Rule 15c2-11. While the Commission welcomes any public input on
this topic, the Commission asks commenters to consider the following
questions:
Q83. Are the liability standards and professional obligations of
underwriters in registered and Regulation A offerings a sufficient
basis for providing the proposed exception? Please explain.
Q84. An underwriter in a Regulation A offering is subject to a
different liability standard than an underwriter in an offering
registered under the Securities Act (i.e., Section 12(a)(2) applies for
a Regulation A offering, while Section 11 imposes strict liability in a
registered offering). In view of the different liability standards, the
Commission seeks comment on whether it is appropriate to provide this
exception in connection with securities issued in Regulation A
offerings.
Q85. Should underwritten shelf offerings also be included in the
exception for publications or submissions of quotations for securities
issued in underwritten offerings, even though it is possible that the
shelf takedown could occur up to three years after the effectiveness of
the shelf registration statement? Please explain why underwritten shelf
registration statements should be included in the exception or excluded
from the exception.
Q86. Are there other categories of issuers or potentially other
categories of securities, not otherwise discussed in this release, that
are unlikely to be involved in fraud in the OTC market for which
publications or submissions of quotations of their securities also
should be excepted from the Rule's provisions? Please explain.
Q87. Are there publications or submissions of quotations for other
securities (e.g., debt securities, non-participatory preferred stock,
or investment grade asset-backed securities) that have characteristics
similar to those of the securities set forth above that should also be
excepted from the Rule's provisions? If so, please explain.
3. Qualified IDQS Complies With the Information Review Requirement
The Commission is proposing to add an exception to the Rule that
would except a broker-dealer from conducting the information review if
a regulated third party conducts such review. This should increase the
number of securities that are available to be quoted in the OTC market,
providing retail investors with greater choices of securities in which
to invest. The exception also may facilitate capital formation by
reducing burdens on broker-dealers that are able to begin a quoted
market in reliance on the exception.
In particular, the Commission is proposing to add a new exception
in which a qualified IDQS may undertake to comply with the Rule's
information review requirement and broker-dealers may rely on the
review performed by the qualified IDQS.\128\ The proposed exception is
intended to reduce burdens on broker-dealers while maintaining an
appropriate level of investor protection. Specifically, proposed
paragraph (f)(7) would except from the Rule's information review
requirement a broker-dealer that publishes or submits a quotation in a
qualified IDQS where the qualified IDQS complies with the information
review requirement and also makes a publicly available determination of
such compliance with the information review requirement.\129\
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\128\ See Proposed Rule 15c2-11(f)(7).
\129\ Id.
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To rely on the proposed exception, a broker-dealer would need to
commence a quoted market by publishing or submitting a quotation within
three business days after the qualified IDQS makes its determination
(of compliance)
[[Page 58231]]
publicly available.\130\ The window of three business days is designed
to help ensure that there are a limited number of days between the
information review conducted by the qualified IDQS and the first
quotation by a broker-dealer in reliance on this proposed new
exception.\131\ The three-business-day window also is designed to
provide certainty to a qualified IDQS regarding the timing of its
obligation to review additional current reports, such as Forms 8-K and
Forms 1-U. Under the proposal, a qualified IDQS would not need to
review current reports filed after the qualified IDQS publishes its
determination that it complied with the information review requirement.
The three-business-day window is also designed to encourage the
commencement of a quoted market close in time following a qualified
IDQS's information review and publicly available determination of the
qualified IDQS's compliance with the review requirement.
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\130\ Id.
\131\ See Proposed Rule 15c2-11(b)(3)(i) through (iii). This
three-business-day period establishes a similar limitation to the
requirement that a broker-dealer review current reports of an
issuer, such as a Form 8-K for a reporting issuer or Form 1-U for a
Reg. A issuer, that have been filed with the Commission three
business days before the publication or submission of a quotation
under the proposed amendments to the Rule. See supra Part III.A.2.d.
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The proposed exception, however, would not be available if the
issuer of the security to be quoted is a shell company, or 30 calendar
days after a broker-dealer first publishes or submits such quotation,
in the qualified IDQS, in reliance on this paragraph (f)(7).\132\
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\132\ See Proposed Rule 15c2-11(f)(7)(i) through (ii).
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The Commission does not believe that it would advance the Rule's
purpose to allow broker-dealers to rely on this exception to publish or
submit quotations for securities of shell companies or to rely on the
exception indefinitely. The Commission believes that limiting the
availability of the exception is appropriate where there is an
increased risk for potential fraud and manipulation.\133\
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\133\ See, e.g., Douglas Cumming et al., Financial market
misconduct and agency conflicts: A synthesis and future directions,
34 J. Corp. Fin. 150 (2015).
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As discussed above, proposed paragraph (a)(2) would set forth the
review requirement for a qualified IDQS to be able to make known to
others the quotation of a broker-dealer that publishes or submits a
quotation for a security. Thus, once the qualified IDQS has complied
with the Rule's information review requirement and made a publicly
available determination that the requirements of the proposed paragraph
(f)(7) exception are met, any broker-dealer would be able to publish or
submit quotations for the security without any delay. In other words,
unlike the 30-day timing requirement under the piggyback exception,
there would be no delay for this exception to apply, such that a
broker-dealer would be able to rely on the exception immediately.
Moreover, broker-dealers would only be able to rely on the
exception in proposed paragraph (f)(7) during the 30 calendar days
after the first quotation is submitted or published under proposed
paragraph (f)(7). The Commission believes that 30 calendar days should
provide sufficient time for broker-dealers to publish or submit
quotations in order to establish the frequency of quotations that would
be required for them to be able rely on the piggyback exception (30
calendar days with no more than four business days in succession
without a quotation). As discussed above, the exception in proposed
paragraph (f)(7) is not available for shell companies. Additionally, a
qualified IDQS would not be able to complete the required review if
proposed paragraph (b) information were not current and publicly
available.\134\ Accordingly, when a broker-dealer is no longer able to
rely on the exception in proposed paragraph (f)(7) and may begin to
rely on the piggyback exception, the broker-dealer will not have to
determine if the issuer is a shell company or if there is current and
publicly available proposed paragraph (b) information. If, however, the
security has been the subject of a trading suspension pursuant to
Section 12(k) of the Exchange Act, a broker-dealer might not be able to
rely on the piggyback exception. In such case, 30 calendar days may not
be sufficient to establish broker-dealer reliance on the piggyback
exception.
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\134\ See Proposed Rule 15c2-11(a)(2)(ii).
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If, however, after 30 days, broker-dealers have not begun to
publish or submit quotations on a continuous basis, there could be a
break in quotations that would prevent broker-dealers from then being
able to rely on the piggyback exception.\135\ Should such a break in
quotations occur, the qualified IDQS would be required to comply with
the Rule's information review requirement before broker-dealers would
be able to publish or submit quotations pursuant to this proposed
exception.\136\
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\135\ See Proposed Rule 15c2-11(f)(3)(i)(A) and (B).
\136\ See id.
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Similar to the other two new proposed exceptions (i.e., the ADTV/
asset test and underwriter exceptions), the proposed exception is
intended to provide an initial ``on ramp'' for certain securities to be
quoted in the OTC market that are able to meet the requirements of the
exception. The proposed exception recognizes that, currently, certain
IDQSs meet the definition of an ATS and operate pursuant to the
exemption from the definition of an ``exchange'' under Rule 3a1-1(a)(2)
of the Exchange Act.\137\ The proposed exception would allow these
qualified IDQSs (and any future qualified IDQS) to play a greater role
in the Rule 15c2-11 compliance process by allowing broker-dealers to
rely on a qualified IDQS's review of the required information of
issuers of certain securities that are less likely to be targeted for
fraudulent activity (e.g., securities of large cap foreign issuers).
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\137\ See infra notes 160-162 and accompanying text. As
discussed in greater detail in Part III.H.4 infra, the Commission
believes that limiting the Rule to qualified IDQSs, which are
required to be regulated as ATSs (which are registered broker-
dealers), would allow for greater Commission oversight because non-
ATS IDQSs may not be required to be registered with the Commission.
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The Commission believes that by providing this initial on ramp,
broker-dealers will have the flexibility to rely on a qualified IDQS in
complying with the Rule's provisions. The proposed exception is
designed to reduce burdens on broker-dealers without undermining
investor protections under the Rule.
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q88. How, and to what extent, would the proposed exception
appropriately protect investors? Please explain.
Q89. How, and to what extent, would the limitation of the proposed
exception regarding shell companies appropriately (or unduly) limit the
application of the exception? Should broker-dealers also be permitted
under the exception to rely on qualified IDQSs to comply with the
Rule's requirements when publishing or submitting quotations for
securities of shell companies? Please explain.
Q90. Should broker-dealers also be permitted under the exception to
rely on qualified IDQSs to comply with the Rule's requirements when
publishing or submitting quotations for securities of blank check
companies? If so, what would be an appropriate definition for ``blank
check company'' in this circumstance? Please explain.
Q91. The Commission seeks specific comment on whether the 30-
calendar-day restriction in proposed paragraph
[[Page 58232]]
(f)(7)(ii) is appropriate or, if not, how it should be modified. The
Commission seeks specific comment on whether the three-business-day
window is appropriate or, if not, how should it be modified.
Q92. Should broker-dealers be able to rely upon any entities other
than qualified IDQSs to perform the Rule's information review
requirement? Please explain.
Q93. Should the proposed exception under proposed paragraph (f)(7)
limit broker-dealers to only publishing or submitting quotations in the
qualified IDQS that makes the publicly available determination that the
requirements of an exception are met? Please explain. Would having only
regulated entities that meet the definition of a ``qualified IDQS''
create an unfair competitive disadvantage in the OTC market? Why or why
not?
Q94. Should the Commission place additional limitations on the
proposed exception's availability, such as prohibiting application of
the proposed exception to quotations for a security that is a penny
stock? If so, please explain why such limitation would be appropriate.
Q95. Please discuss potential benefits or disadvantages to
investors or other market participants if a qualified IDQS undertakes
to perform the information review requirement. Please discuss whether
and how any such benefits or disadvantages change if one qualified IDQS
undertakes such action or if multiple qualified IDQSs undertake such
action. Would having a regulated third party conduct the required
review increase the number of OTC securities that could be quoted in
the OTC market? In what way, if any, would this benefit investors,
particularly retail investors? Please explain.
F. Proposed New Exception for Relying on Determinations by a Qualified
IDQS or a Registered National Securities Association
The Commission is proposing to allow broker-dealers to rely on
determinations by regulated third parties that certain exceptions are
available for a security or an issuer. This proposal is designed to
make it easier for broker-dealers to maintain a market in securities,
while at the same time providing the benefits that would result from
such third party determinations, thereby providing retail investors
with greater opportunity to buy and sell securities.
The Commission is proposing to amend the Rule by adding a new
exception in proposed paragraph (f)(8) to allow a broker-dealer to rely
on publicly available determinations by a qualified IDQS or a
registered national securities association that (1) proposed paragraph
(b) information is current and publicly available or (2) that a broker-
dealer may rely on an exception contained in proposed paragraphs
(f)(1), (f)(3)(i)(A), (f)(3)(i)(B), (f)(4), (f)(5), or (f)(7). Thus,
for example, new proposed paragraph (f)(8) would permit broker-dealers
to rely on a publicly available determination by a qualified IDQS or a
registered national securities association that an issuer's proposed
paragraph (b) information is current and publicly available for
purposes of a proposed exception to the Rule, such as the piggyback
exception or the unsolicited quotation exception. In this circumstance,
to facilitate a broker-dealer's reliance, the qualified IDQS or
registered national securities association must represent in a publicly
available determination that it has reasonably designed written
policies and procedures to determine whether proposed paragraph (b)
information is current and publicly available, and that the conditions
of an exception under proposed paragraph (f) are met.
The Commission anticipates that broker-dealers may encounter some
additional costs in determining whether an exception would apply to the
publication or submission of a quotation for an OTC security. For
example, while there are certain situations in which a broker-dealer
can readily know whether an exception applies (e.g., exchange traded
securities under proposed paragraph (f)(1)), there are other
circumstances in which a broker-dealer could be required to use
additional resources to determine whether an exception to the proposed
Rule applies (e.g., whether the issuer meets the $10 million
unaffiliated shareholder equity threshold under proposed paragraph
(f)(5)(i)(B) or whether the broker-dealer can rely on the piggyback
exception under proposed paragraphs (f)(3)(i)(A) and (B)). Proposed
paragraph (f)(8) is intended to mitigate such costs and burdens by
allowing broker-dealers to rely on the determinations of certain
appropriate third parties.
The Commission believes that allowing broker-dealers to rely on a
publicly available determination by a qualified IDQS that a broker-
dealer may rely on an exception to the Rule strikes an appropriate
balance between mitigating costs to broker-dealers in complying with
the proposed Rule's provisions and promoting investor protection. In
particular, a qualified IDQS should have an interest in facilitating a
fair and efficient market to encourage more activity on such IDQS. The
Commission does, however, recognize that profit motives might create an
incentive for a qualified IDQS to make a determination that an
exception applies to a particular publication or submission of a
quotation for a security even when the determination is not
appropriate, assuming that the IDQS would collect fees associated with
quoting activity or transactions that occur after it makes the
exception determination. In complying with the requirements of
Regulation ATS, a qualified IDQS (which would be required to be an ATS)
would have notice and reporting requirements, which would contribute to
the Commission's ability to effectively oversee and effectively examine
qualified IDQSs.\138\
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\138\ See infra Part III.H.4.
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Similarly, the Commission believes that allowing broker-dealers to
rely on a registered national securities association's determination
that a broker-dealer may rely on an exception to the proposed Rule
strikes an appropriate balance between mitigating costs to broker-
dealers in complying with the Rule's provisions and promoting investor
protection. A registered national securities association has
obligations under Section 19 of the Exchange Act ``to comply with
provisions of the [Exchange Act], the rules and regulations thereunder,
and its own rules, and . . . absent reasonable justification or excuse
enforce compliance . . . with such provisions.'' \139\ Additionally, a
registered national securities association is subject to inspections by
the Commission, which contributes to the Commission's ability to
effectively oversee a registered national securities association.
---------------------------------------------------------------------------
\139\ See Exchange Act Section 19(g).
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While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q96. Should a broker-dealer's reliance be limited to a
determination by a registered national securities association and not a
qualified IDQS? Why or why not? Should a broker-dealer's reliance be
limited to a determination by a qualified IDQS and not a registered
national securities association? Why or why not?
Q97. Are there concerns that would discourage a qualified IDQS from
undertaking to comply with the proposed Rule's information review
requirement? Please explain. If so, please describe how such concerns
could be addressed.
[[Page 58233]]
Q98. Should proposed paragraph (f)(8) be expanded to allow broker-
dealers to rely on publicly available determinations by entities other
than qualified IDQSs or registered national securities associations? If
so, what entities should be added to proposed paragraph (f)(8) and why?
Q99. How, and to what extent, do the proposed Rule's requirements
that a qualified IDQS make a publicly available determination that it
has reasonably designed written supervisory procedures, in conjunction
with the Commission's oversight of the qualified IDQS as an ATS,
appropriately mitigate the conflicts of interest that might arise based
on a qualified IDQS's profit motives? If not, how should the Commission
address such conflicts of interests?
Q100. How, and to what extent, would the exception in proposed
paragraph (f)(8) impact liquidity for quoted OTC securities?
Q101. Should certain exceptions enumerated in proposed paragraph
(f)(8) be removed from the paragraph? If so, which ones and why? Should
certain exceptions not enumerated in proposed paragraph (f)(8) be added
to the paragraph? If so, which ones and why?
G. Proposed Amendments to the Recordkeeping Requirement
1. Existing Recordkeeping Requirement
Currently, the Rule requires broker-dealers to preserve the
documents and information required under paragraphs (a) and (b) of the
Rule for a period of not less than three years, the first two years in
an easily accessible place.\140\ Because under the existing Rule a
broker-dealer may not rely on a qualified IDQS's information review, as
would be permitted pursuant to proposed paragraph (a)(2), the existing
Rule does not include a recordkeeping requirement for qualified IDQSs
that make known to others the quotation of a broker-dealer.
Additionally, the existing Rule does not require that broker-dealers,
qualified IDQSs, and registered national securities associations
maintain documents and information that support reliance on an
exception to the Rule.
---------------------------------------------------------------------------
\140\ Exchange Act Rule 15c2-11(c).
---------------------------------------------------------------------------
2. Proposed Amendments to the Recordkeeping Requirement
The Commission is proposing that market participants keep certain
records that support their information review or reliance on an
exception. Providing the Commission with information to oversee this
market would assist in maintaining the integrity of the OTC market.
(a) Recordkeeping Requirement Upon Publication or Submission of
Quotations
Proposed paragraph (d)(1)(i)(A) would require broker-dealers that
comply with the review requirement of proposed paragraph (a)(1) to
preserve for a period of not less than three years, the first two years
in an easily accessible place, the documents and information that are
required under proposed paragraphs (a), (b) and (c) of the Rule.\141\
In addition, proposed paragraph (d)(1)(i)(B) would require any
qualified IDQS that makes known to others the quotation of a broker-
dealer pursuant to proposed paragraph (a)(2) to preserve for a period
of not less than three years, the first two years in an easily
accessible place, the documents and information that are required under
proposed paragraphs (a), (b) and (c) of the Rule.\142\
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\141\ See Proposed Rule 15c2-11(d)(1).
\142\ See id.
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The proposed recordkeeping requirement tracks the text of paragraph
(c) of the existing Rule but adds a recordkeeping requirement for any
qualified IDQSs that make known to others the quotation of a broker-
dealer pursuant to proposed paragraph (a)(2). The Commission is adding
this recordkeeping requirement to make clear that a qualified IDQS that
makes known to others the quotation of a broker-dealer pursuant to
proposed paragraph (a)(2) has the same recordkeeping requirement as a
broker-dealer that complies with the information review requirement in
proposed paragraph (a)(1).
If a broker-dealer or qualified IDQS obtains and reviews proposed
paragraph (b) information that is available on EDGAR, the broker-dealer
or qualified IDQS will not be required to preserve that information.
The broker-dealer or qualified IDQS need only document the proposed
paragraph (b) information that it reviewed. The Commission does not
believe that it is necessary to require broker-dealers or qualified
IDQSs to preserve records that are available on EDGAR because doing so
would create redundant recordkeeping obligations.
(b) Recordkeeping Requirement for Relying on an Exception
Although the existing Rule does not contain a recordkeeping
requirement for a broker-dealer that relies on an exception to the
Rule, the Commission believes that most broker-dealers maintain records
of their reliance on a particular exception to the Rule. There have
been instances during examinations, however, where broker-dealers have
not had records regarding the basis of their reliance on an exception
to the existing Rule. The proposed recordkeeping requirement is
intended to aid the Commission in its oversight of brokers-dealers that
rely on exceptions to the Rule by requiring them to make, retain, and
keep current records that support their reliance on that exception.
Accordingly, any broker-dealer that relies on an exception to publish
or submit a quotation would be required to preserve for a period of not
less than three years, the first two years in an easily accessible
place, the documents and information that demonstrate that the
requirements of the relevant exception are met.
Further, as discussed above, the Commission is proposing to add the
exception contained in proposed paragraph (f)(8), which would allow
broker-dealers to publish or submit quotations for a security in
reliance upon the publicly available determination of a qualified IDQS
or a registered national securities association that the requirements
of certain exceptions are met.\143\ Proposed paragraph (f)(8) also
would permit a broker-dealer to rely on publicly available
determinations by a qualified IDQS or registered national securities
association that proposed paragraph (b) information is current and
publicly available. If a qualified IDQS or a registered national
securities association makes such a determination pursuant to proposed
paragraph (f)(8), it would need to preserve for a period of not less
than three years, the first two years in an easily accessible place,
the documents and information that demonstrate that the requirements of
certain exceptions are met.\144\
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\143\ See supra Part III.F.
\144\ See Proposed Rule 15c2-11(d)(2). The Commission
acknowledges that the proposed recordkeeping requirement is shorter
than the current five year retention period under Exchange Act Rule
17a-1(b) for a registered national securities association. The
Commission, however, believes that it is appropriate for purposes of
Rule 15c2-11 to align the recordkeeping requirement for all
participants in the OTC market to avoid creating different
requirements for market participants engaged in the same activity.
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A broker-dealer that relies on a determination pursuant to proposed
paragraph (f)(7) by a qualified IDQS or proposed paragraph (f)(8) by a
qualified IDQS or a registered national securities association,
however, is required only to document the exception upon which the
broker-dealer is relying and the name of the qualified IDQS or
registered national securities association that determined that the
requirements of that exception
[[Page 58234]]
are met.\145\ In such circumstance, the Commission believes that it is
appropriate to limit the records that a broker-dealer must make and
keep because the qualified IDQS or registered national securities
association would have an independent recordkeeping obligation
regarding its determination that the requirements of an exception are
met. The Commission, therefore, would be able to obtain documents
supporting such determinations directly from the qualified IDQS or
registered national securities association.
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\145\ See id.
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The proposed amendments do not require a broker-dealer to retain
records supporting that every condition of an exception is met each
time the broker-dealer publishes or submits a quotation. The various
requirements of each exception likely would involve different types of
records that would need to be created to establish reliance on an
exception. However, many of these records may not need to be created
every time a broker-dealer publishes or submits a quotation relying on
an exception.\146\
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\146\ See infra Part VII.C.2.
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For example, making and keeping records to support reliance on one
prong of an exception (e.g., whether the asset test prong under the
proposed paragraph (f)(5) exception is met by retaining an electronic
copy of the audited balance sheet) would require the creation and
retention of a record once every year, whereas making and keeping
current records of reliance on another part of the same exception
(e.g., whether the ADTV test prong under proposed paragraph (f)(5) is
met by retaining a screen shot of a website that demonstrates the ADTV
value over the 60-calendar-day period on the day the quotation was
published) would require a record to be created every trading day.
Rather than specifically directing that market participants would need
to document every condition of the basis of their reliance on an
exception for each quotation, the proposed Rule would instead require
broker-dealers, qualified IDQSs, and registered national securities
associations to preserve documents and information ``that demonstrate
that the requirements for an exception under paragraph (f)'' are met.
Broker-dealers should consider facts and circumstances, such as the
nature of their business as it relates to the particular paragraph or
exception to the proposed Rule, in determining when and how they should
create records to support reliance on an exception, and the content of
such records.
Additionally, a broker-dealer, qualified IDQS, or registered
national securities association would not need to preserve records
under proposed paragraph (d)(2) for reliance on exceptions under
proposed paragraphs (f)(1) or (f)(4). These exceptions can be
demonstrated without the need for a broker-dealer, qualified IDQS, or
registered national securities association to preserve a separate
record. With respect to proposed paragraph (f)(1), whether or not a
security is traded on an exchange and thus subject to the proposed
paragraph (f)(1) exception is widely known. Additionally, whether or
not a security is a municipal security for purposes of reliance on the
municipal securities exception in proposed paragraph (f)(4) is also
widely known. Proposed paragraph (d)(2)(ii) would also include a
proviso such that a broker-dealer, qualified IDQS, or registered
national securities association would not be required to preserve
records under proposed paragraph (d)(2) if such records are available
on EDGAR.
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q102. What, if any, impact would the recordkeeping requirement have
on liquidity in the secondary market for quoted OTC securities?
Q103. Is the preservation of records required by proposed paragraph
(d) for a period of three years appropriate? If not, how long should
the period be under proposed paragraph (d) to preserve records under
proposed paragraph (a), (b), and (c) and why? Should proposed paragraph
(d)(1) contain requirements specifying when the record preservation
period begins for the records required to be preserved in proposed
paragraph (d)? What are broker-dealers' current practices for deciding
when to begin preserving the records required to be preserved under the
existing rule? Would these practices need to be modified to comply with
proposed paragraph (d)(1)? Is a recordkeeping requirement necessary, or
will broker-dealers maintain the records of their own accord or
pursuant to other regulatory recordkeeping obligations?
Q104. Are the preservation requirements regarding proposed
paragraph (b) information and proposed paragraph (c) supplemental
information under proposed paragraph (d)(1) unduly burdensome on
broker-dealers or qualified IDQSs or overly costly? If so, in what ways
could the proposed Rule reduce these burdens and costs? What are the
costs to a broker-dealer to preserve proposed paragraph (b)
information?
Q105. In addition to printing or electronically saving proposed
paragraph (b) information and proposed paragraph (c) supplemental
information, are there other ways that a broker-dealer or qualified
IDQS would be able to document its review of proposed paragraph (b)
information and proposed paragraph (c) supplemental information,
including whether such proposed paragraph (b) information is current
and publicly available? If so, what methods or means could a broker-
dealer or qualified IDQS implement to document compliance with the
information review requirement under proposed paragraph (a)? Should a
broker-dealer, qualified IDQS, or registered national securities
association be able to preserve a memorandum or other document
contemporaneous to the review showing that it performed a review,
rather than the documents it reviewed (so long as there is not
otherwise a requirement, such as a Commission or SRO rule, that the
entity make and keep such documents)?
Q106. Should a broker-dealer or qualified IDQS be able to document
its review of proposed paragraph (b) information that is publicly
available on the website of an issuer, broker-dealer, registered
national securities association, or qualified IDQS by recording the
website where the broker-dealer or qualified IDQS obtained such
information? If so, how would a broker-dealer know that such
information would continue to be publicly available for the required
recordkeeping retention period, even after the date at which the
broker-dealer or qualified IDQS complied with the review under proposed
paragraph (a)?
Q107. Should broker-dealers publishing or submitting quotations in
reliance on proposed paragraphs (f)(7) and (f)(8) be required to
document information in addition to the proposed required documentation
(i.e., documenting the exception that the broker-dealer is relying upon
and the name of the qualified IDQS or registered national securities
association that made a determination that the conditions of the
exception have been met)? If so, what additional documentation and
information should a broker-dealer preserve to demonstrate its reliance
on a determination pursuant to proposed paragraphs (f)(7) and (f)(8)?
Q108. Should proposed paragraph (d)(2) contain requirements
enumerating the frequency of recordkeeping or any other specific
measures? Should broker-dealers specifically be required to preserve
documents and information pursuant to proposed paragraph (d)(2) on a
quotation by quotation basis for
[[Page 58235]]
purposes of the unsolicited quotation exception? Why or why not? If
not, is there another alternative approach that could be used? Please
identify any alternative approach and explain why it is preferable. For
example, would the proposed recordkeeping requirement in proposed
paragraph (d)(2) and the requirements of FINRA Rule 6432 be sufficient
to help prevent misuse of the exception? \147\ Please explain.
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\147\ Supplemental Material .01 to FINRA Rule 6432 requires
broker-dealers initiating or resuming quotations in reliance on the
exception provided by Rule 15c2-11(f)(2) (i.e., the unsolicited
quotation exception) to ``be able to demonstrate eligibility for the
exception by making a contemporaneous record of: (a) The
identification of each associated person who receives the
unsolicited customer order or indication of interest directly from
the customer, if applicable; (b) the identity of the customer; (c)
the date and time the unsolicited customer order or indication of
interest was received; and (d) the terms of the unsolicited customer
order or indication of interest that is the subject of the quotation
(e.g., security name and symbol, size, side of the market, duration
(if specified) and, if priced, the price). Any member displaying a
quote representing an unsolicited customer order or indication of
interest that was received from another broker-dealer must
contemporaneously record the identity of the person from whom
information regarding the unsolicited customer order or indication
of interest was received, if applicable; the date and time the
unsolicited customer order or indication of interest was received by
the member displaying the quotation; and the terms of the order that
is the subject of the quotation.''
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Q109. Are there certain exceptions under proposed paragraph (f)
that should be included in the proviso and not be subject to the
recordkeeping requirement in proposed paragraph (d)(2)? If so, which
ones and why? Are there certain requirements concerning exceptions
under proposed paragraph (f) that should be added to the proviso under
proposed paragraph (d)(2)(ii)? If so, what additional requirements
should be considered and what are the characteristics of such
requirements that would warrant its inclusion in the proviso?
Q110. Taken together, would the proposed changes described above
regarding proposed paragraph (f) go far enough to mitigate the
potential for fraud and other abuses, including the potential for
broker-dealers' use of the piggyback exception to facilitate fraud and
other abuses (whether intentional or inadvertent)? Are there other
changes that the Commission should make to address the risk of fraud
and abuse? For instance, should the piggyback exception be eliminated
entirely? Please explain why or why not. How would elimination of the
piggyback exception affect small issuers?
H. Proposed Amendments to the Rule's Definitions
In light of the amendments that the Commission is proposing today,
as discussed above, the Commission is also proposing to add definitions
of certain terms that are referenced throughout these amendments.
1. Current
The Commission proposes to define ``current'' as filed, published,
or disclosed in accordance with the time frames identified in each of
proposed paragraphs (b)(1) through (b)(5) of the Rule.\148\ For
example, with respect to prospectus issuer information, a copy of the
issuer's prospectus that is specified by Section 10(a) of the
Securities Act, other than a registration statement on Form F-6, would
be current for purposes of proposed Rule 15c2-11 if the prospectus
became effective less than 90 calendar days prior to the day on which a
broker-dealer publishes or submits a quotation for a security of the
prospectus issuer. With respect to Reg. A issuer information, the
offering circular required by proposed paragraph (b)(2) would be
current for purposes of proposed Rule 15c2-11 if the Reg. A issuer that
filed a notification under Regulation A became authorized to commence
its offering less than 40 calendar days prior to the day on which a
broker-dealer publishes or submits a quotation for the issuer's
security.
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\148\ See Proposed Rule 15c2-11(e)(1).
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Determining whether reporting issuer information is current for
purposes of proposed Rule 15c2-11 would depend on the issuer's
regulatory status and its obligation to file or publish information
pursuant to a statutory or rule-based requirement under the federal
securities laws (i.e., not pursuant to any of the Rule's provisions).
For example, for a reporting issuer that files annual reports pursuant
to Section 13 or 15(d) of the Exchange Act, the reporting issuer's
information would be current if it were the issuer's most recent annual
report and any periodic or current reports that the issuer has filed
subsequent to that annual report. If that issuer has yet to file its
first annual report, the registration statement that the issuer filed
under the Securities Act or under Section 12 of the Exchange Act would
be current if it became effective within the prior 16 months.
For a reporting issuer that files annual reports pursuant to
Regulation A, the reporting issuer's information would be current if it
were the issuer's most recent annual report and any periodic and
current reports that the issuer has filed under Regulation A subsequent
to that annual report. If the issuer has yet to file its first report,
the offering circular that the issuer filed under Regulation A would be
current if it were qualified within the prior 16 months.
For an insurance company that files an annual statement referred to
in Section 12(g)(2)(G)(i) of the Exchange Act because it is required to
file reports pursuant to Section 13 or 15(d) of the Exchange Act, the
insurance company's information would be current if it were the
issuer's annual statement and any periodic or current reports that the
issuer has filed subsequent to that statement. If the insurance company
has yet to file its first annual statement, the registration statement
that the issuer filed under the Securities Act or Section 12 of the
Exchange Act would be current if it became effective within the prior
16 months. Finally, information for an insurance company that is
exempted from Section 12(g) of the Exchange Act would be current if it
were the issuer's annual statement referred to in Section
12(g)(2)(G)(i) of the Exchange Act.
Exempt foreign private issuer information (i.e., information that
the issuer has published pursuant to Rule 12g3-2(b) under the Exchange
Act) would be current for purposes of the proposed Rule if it were
published since the beginning of the exempt foreign private issuer's
last fiscal year. Catch-all issuer information would be current if it
were dated within 12 months prior to the broker-dealer's publication or
submission of a quotation for the catch-all issuer's security. The
issuer's balance sheet would not be current if it were older than 16
months and did not include a profit and loss statement and retained
earnings statement for 12 months preceding the date of the balance
sheet.\149\ If the balance sheet, however, were not as of a date within
six months before the publication of the quotation, the balance sheet
would need to be accompanied by a profit and loss statement, as well as
a retained earnings statement, that are as of a date within six months
before the publication of a quotation.\150\
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\149\ See Proposed Rule 15c2-11(b)(5)(i)(L).
\150\ See supra Part III.A.2.e.
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This definition would provide clarity to market participants as to
the time frames within which issuer information must be filed,
published, or disclosed for the issuer's information to be current
solely for purposes of broker-dealer and qualified IDQS compliance with
proposed Rule 15c2-11. The proposed definition of ``current'' does not
change the requirements of any issuer to file or
[[Page 58236]]
publish information pursuant to a statutory or rule-based requirement
under the Exchange Act or the Securities Act.
2. Shell Company
The Commission proposes to define ``shell company'' as any issuer,
other than a business combination related shell company as defined in
Rule 405 of Regulation C, or an asset-backed issuer as defined in Item
1101(b) of Regulation AB, that has (1) no or nominal operations and (2)
either (i) no or nominal assets, (ii) assets consisting solely of cash
and cash equivalents, or (iii) assets consisting of any amount of cash
and cash equivalents and nominal other assets.\151\ This definition of
shell company closely tracks the definition of shell company in Rule
405 of Regulation C and in Rule 12b-2,\152\ the provisions of which
apply to registrants.\153\ In addition, the proposed definition of
shell company comports with the provisions of Rule 144(i)(1)(i) \154\
regarding availability of that safe harbor for the resale of securities
initially issued by certain issuers.\155\
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\151\ See Proposed Rule 15c2-11(e)(8).
\152\ Exchange Act Rule 12b-2.
\153\ ``Registrant'' is defined in Rule 405 as the issuer of the
securities for which a registration statement is filed, and in Rule
12b-2 as an issuer of securities with respect to which a
registration statement or report is to be filed.
\154\ Securities Act Rule 144(i)(1)(i).
\155\ Another difference between the definition of shell company
in the proposed amendment to Rule 15c2-11(e)(8) and the definitions
of shell company in Rules 405 and 12b-2 is that the proposed
definition in Rule 15c2-11 does not include a note indicating how
assets are determined for purposes of the definition as do Rules 405
and 12b-2. The proposed definition of a shell company for purposes
of Rule 15c2-11 does not include such a note; Rules 405 and 12b-2
require U.S. GAAP compliance while Rule 15c2-11 does not. While the
amendments to Rule 15c2-11 that the Commission is proposing are
intended to provide, among other things, increased transparency of
issuer information, the Rule does not address how issuers maintain
their financial records. More specifically, the proposed amendments
do not require U.S. GAAP compliance, and the proposed amendments
would permit broker-dealers, qualified IDQSs, and registered
national securities associations to determine whether an issuer is a
shell company based on their review of the issuer's information.
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The proposed definition of a shell company for purposes of Rule
15c2-11, however, is not limited to companies that have filed a
registration statement or have an obligation to file reports under
Section 13 or Section 15(d) of the Exchange Act. Rather, the proposed
definition of a shell company under Rule 15c2-11 would cover all
issuers of securities because the provisions of Rule 15c2-11 apply to
publications and submissions of quotations for securities of reporting
issuers as well as catch-all issuers. Accordingly, the Commission is
proposing a definition of a shell company for purposes of Rule 15c2-11
that applies more broadly, to a greater breadth of issuers, than do the
definitions in Rule 405 of Regulation C and Rule 12b-2.
The Commission believes that the proposed definition of a shell
company is appropriate in the context of Rule 15c2-11 because it would
capture the breadth of issuers of quoted OTC securities. The Commission
has stated that startup companies that have limited operating history
do not meet the condition of having ``no or nominal operations'' for
the purposes of the public resale of restricted and control securities,
and the Commission also believes that this approach is appropriate in
the context of broker-dealers determining whether a company fits within
the meaning of ``shell company'' as defined in proposed paragraph
(e)(8) when deciding whether they may rely on the piggyback
exception.\156\ Further, consistent with the definition of the term
``shell company'' in Rule 405 of Regulation C and Rule 12b-2, the
Commission preliminarily believes that defining the term ``nominal''
with reference to quantitative thresholds would be unworkable in this
context.\157\
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\156\ See supra note 102.
\157\ See Use of Form S-8, Form 8-K, and Form 20-F by Shell
Companies, Exchange Act Release No. 52038 (July 15, 2005), 70 FR
42234 (July 21, 2005); see also supra Part III.C.2.d (discussing how
a determination of whether an issuer is a shell company is based on
facts and circumstances).
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3. Publicly Available
The Commission is proposing a definition of the term ``publicly
available'' that is intended to be broad and to account for the ease
with which investors or other market participants can obtain issuer
information. The Commission proposes to define the term ``publicly
available'' to mean available on EDGAR or on the website of a qualified
IDQS, a registered national securities association, the issuer, or a
registered broker-dealer. Further, publicly available shall not mean
where access to proposed paragraph (b) information is restricted by
user name, password, fees, or other constraints; this language is
included as a proviso to the definition of ``publicly available.''
\158\ The Commission believes that incorporating into the proposed
definition of ``publicly available'' specific locations where regulated
market participants must publish information would help investors and
other market participants to locate the information. Additionally, the
Commission believes that it is appropriate to include the issuer's
website in the definition of publicly available because the issuer
should be a reliable source for proposed paragraph (b) information.
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\158\ See Proposed Rule 15c2-11(e)(4).
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4. Qualified Interdealer Quotation System
The Commission proposes to define the term ``qualified interdealer
quotation system'' to mean any IDQS that meets the definition of an ATS
as defined under Rule 300(a) of Regulation ATS and operates pursuant to
the exemption from the definition of an ``exchange'' under Rule 3a1-
1(a)(2) of the Exchange Act. Accordingly, the proposed definition would
exclude any IDQS that is not an ATS (a ``non-ATS IDQS'').\159\
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\159\ See Proposed Rule 15c2-11(e)(5).
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As proposed, the Rule would permit a qualified IDQS to comply with
the information review requirement to determine if the requirements of
an exception are met, allowing a broker-dealer to publish or submit
quotations in reliance on that qualified IDQS's determination.\160\
Since the Rule was last substantively amended in 1991, IDQSs have
evolved to operate as marketplaces for bringing together the orders of
multiple buyers and sellers of OTC securities in addition to regularly
disseminating quotations of identified broker-dealers. Today, the vast
majority of broker-dealer quotation activity for OTC securities occurs
on certain ATSs,\161\ which, in practice, have become repositories for
information about the issuers of securities that are quoted in their
market. These ATSs generally provide facilities and set criteria for
broker-dealers to display quotations for OTC securities to subscribers
and for the orders of subscribers to interact, match, and execute with
broker-dealers' quotes.
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\160\ See Proposed Rule 15c2-11(a)(2), (f)(7), and (f)(8).
\161\ See, e.g., OTC Markets Stock Screener, supra note 5.
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The Commission believes that the regulatory requirements for an
IDQS that operates as an ATS under the Exchange Act--and the
concomitant Commission oversight--would help to ensure investor
protection and to prevent fraud and manipulation. The notice and
reporting requirements under Regulation ATS contribute to the
Commission's effective oversight of ATSs, which helps to prevent fraud
and manipulation. For example, ATSs, including those that make known to
others broker-dealers' publications of quotations concerning quoted OTC
[[Page 58237]]
securities, are required to file an initial operation report on Form
ATS with the Commission to disclose, among other things, information
about the types of securities traded and procedures for entering and
displaying orders, matching buyers and sellers, and executing,
clearing, and settling trades on the ATS. ATSs are required to disclose
on Form ATS classes of subscribers and differences in access to the
services offered by the ATS to different groups or classes of
subscribers. ATSs are required to disclose on a quarterly basis to the
Commission on Form ATS-R information about subscribers who participated
on the ATS, the securities that the ATS traded, and the transaction
volume for securities traded.\162\ The Commission believes that the
existing Regulation ATS requirements would provide relevant information
to the Commission about the qualified IDQS's operations, including
quoting and trading activity in the ATS, and therefore contribute to
Commission oversight of qualified IDQSs.\163\
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\162\ See Regulation of Exchanges and Alternative Trading
Systems, Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR 70844,
70905 (Dec. 22, 1988).
\163\ See, e.g., Rule 301(b)(9) of Regulation ATS.
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While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q111. Are the proposed definitions accurate? Please explain. What
alternative definitions might be more effective in light of the purpose
of the Rule?
Q112. Company insiders are described in proposed paragraphs
(b)(5)(i)(K), (c)(1), and (f)(2)(ii). Should we add a definition for
``company insiders'' that would include such persons or different
persons? Please explain. Should any other terms be defined? If so, are
there existing definitions in other rules or regulations that could be
used in this context? Why would the use of such other definitions be
appropriate?
Q112. Should non-ATS IDQSs be permitted to conduct the review under
the proposed amendments, or should the review be limited to qualified
IDQSs as proposed? Why or why not? Commenters are requested to please
include any data and analysis that they have to support their response.
Q114. Are there concerns with not proposing a definition of
``nominal'' in the context of the proposed definition of ``shell
company''? Please explain any concerns and provide examples.
I. Proposed Amendment to the Nasdaq Security Exception
Currently, Rule 15c2-11(f)(5) excepts from the provisions of the
Rule the publication or submission of a quotation for a Nasdaq security
where such security's listing is not suspended, terminated, or
prohibited.\164\ This exception, known as the Nasdaq security
exception, was designed to make it clear that then-Nasdaq qualification
standards superseded those of other IDQSs.
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\164\ Exchange Act Rule 15c2-1(f)(5). The Commission adopted
15c2-11(f)(5) in 1984 as an exception to the Rule for securities
that were quoted on ``an inter-dealer quotation system sponsored and
governed by the rules of a registered securities association.'' 1984
Adopting Release at 45123. At the time, this description referred
only to the IDQS operated by the NASD. The Rule was amended in 1991
to specifically refer to quotations concerning a ``Nasdaq security''
because other IDQSs arose since 1985, namely OTC Service and PORTAL
system, that fit the exception as adopted in 1985, and the
Commission wished to limit the exception only to the particular IDQS
operated by NASD in 1985. See 1991 Adopting Release at 19155. Once
Nasdaq became a national securities exchange in 2006, however, the
rationale for the exception became anachronistic.
---------------------------------------------------------------------------
The Nasdaq security exception is obsolete in light of Nasdaq's
registration as a national securities exchange. The publication or
submission of quotations by a broker-dealer for securities listed on a
national securities exchange are covered already by a separate
exception under existing Rule 15c2-11(f)(1). Thus, the Commission
proposes to rescind the Nasdaq security exception.
J. Proposed Amendments to the Furnishing Requirement and Annual,
Quarterly, and Current Reports of Reporting Issuers
1. Proposed Amendment To Remove Furnishing Requirement for Catch-All
Issuer Information
The existing Rule requires that broker-dealers that publish or
submit quotations for securities of catch-all issuers provide the
Rule's required information to the IDQS at least three business days
before the quotation is published or submitted.\165\ The Commission is
proposing to remove the requirement that broker-dealers furnish catch-
all issuer information to an IDQS. The purpose of this requirement is
to afford the IDQS and regulators sufficient time to obtain and review
the information in advance of a broker-dealer's publication of
quotations.\166\ The Commission believes that requiring broker-dealers
to furnish catch-all issuer information to an IDQS is outdated and no
longer necessary because, as a practical matter, IDQSs no longer
independently review a broker-dealer's compliance with the information
review requirement. Today, FINRA, a registered national securities
association, regulates broker-dealer compliance with Rule 15c2-11 by
requiring its members to demonstrate compliance with Rule 15c2-11 by
filing a form (Form 211) with FINRA, which must be received at least
three business days before the member's quotation is published or
displayed in a quotation medium. Accordingly, it is redundant to
require broker-dealers both to submit information to an IDQS and to
comply with the requirements imposed by a registered national
securities association.
---------------------------------------------------------------------------
\165\ Exchange Act Rule 15c2-11(d)(1).
\166\ 1991 Adopting Release at 19155.
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2. Proposed Amendments To Obtain Annual, Quarterly, and Current Reports
Directly From the Issuer
The existing Rule provides that a broker-dealer complies with the
requirement to obtain annual, quarterly, and current reports filed by
the issuer if the broker-dealer has made arrangements to receive such
reports when they are filed by the issuer and it has regularly received
reports from the issuer on a timely basis.\167\ This provision, which
was added to the Rule in 1991, is outdated because it does not take
into account that periodic and current reports can be obtained by
broker-dealers through EDGAR, without obtaining such reports from the
issuer. Accordingly, given technological developments and access to
annual, quarterly, and current reports on EDGAR, the Commission
believes that it is appropriate to remove this provision from the Rule
because access to periodic and current reports precludes the need to
obtain such reports directly from the issuer.
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\167\ Exchange Act Rule 15c2-11(d)(2)(ii).
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While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q115. Rule 15c2-11(d)(1) requires that a broker-dealer publishing
or submitting a quotation for a security of a catch-all issuer furnish
to an IDQS, at least three business days before the quotation is
published or submitted, the required information regarding the security
and the issuer. Should this requirement be retained? Why, or why not?
Q116. Should the Commission retain Rule 15c2-11(d)(2)(ii)? Why, or
why not?
[[Page 58238]]
K. Proposed Amendment to Commission Exemptions From Rule 15c2-11
The Commission is proposing modifications to existing paragraph
(h), which would be re-lettered to proposed paragraph (g), regarding
the Commission's grant of exemptions from the Rule to correspond to
Section 36 of the Exchange Act.\168\ Section 36 was enacted after the
most recent substantive amendments to this Rule were adopted. The
proposed amendment explicitly states that consistent with Exchange Act
Section 36(a), the Commission may grant an exemption from the Rule for
any class of security under specified circumstances.\169\ In
particular, the Commission is removing the requirement that before
granting an exemption, the Commission must find that the exempted
quotation will not ``constitut[e] a fraudulent, manipulative, or
deceptive practice comprehended within the purpose of this section''
\170\ and replacing it with a public interest finding, consistent with
Section 36(a).\171\ The Commission believes that the appropriate
standard for granting an exemption from Rule 15c2-11 should mirror the
standard that is articulated in Section 36 of the Exchange Act.
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\168\ See Exchange Act Section 36.
\169\ See Proposed Rule 15c2-11(g).
\170\ See Exchange Act Rule 15c2-11(h).
\171\ See Proposed Rule 15c2-11(g).
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Q117. Should the existing requirement that, before granting an
exemption, the Commission find that the quotation will not
``constitut[e] a fraudulent, manipulative, or deceptive practice
comprehended within the purpose of this section'' be retained? Why or
why not?
L. Proposed Amendment To Remove Preliminary Note
Currently, the Rule includes a ``Preliminary Note'' that
incorporates guidance issued with the Rule in the 1991 Adopting
Release. Specifically, the Preliminary Note advises that broker-dealers
``may wish to refer to Securities Exchange Act Release No. 29094 (April
17, 1991), for a discussion of procedures for gathering and reviewing
the information required by [Rule 15c2-11] and the requirement that a
broker-dealer have a reasonable basis for believing that the
information is accurate and obtained from reliable sources.'' The
Commission is proposing to remove the Preliminary Note from the Rule
and instead reiterate the guidance, with targeted updates, to accompany
the proposed Rule. The proposed guidance is discussed in Part V below.
Q118. Should the Preliminary Note be retained in its current form,
in the form of guidance as proposed, or in a different form?
M. Technical Amendments to Rule Text
The Commission is proposing technical, non-substantive amendments
to the Rule that do not change the meaning or operation of any of the
Rule's provisions. As discussed above, because the Commission is
proposing to separate the review requirement from the Rule's required
information provisions, the Commission is proposing to re-letter the
Rule's provisions and make conforming edits to all cross-references
within the Rule to reflect the proposed re-lettering. The Commission is
also proposing to alphabetize defined terms under the Rule's
definitional section and to re-letter the Rule's definitional
provisions.
In addition, the Commission is proposing grammatical edits to the
Rule. For example, the Commission is proposing to (1) amend the Rule's
definition of ``quotation'' in proposed paragraph (e)(6) by replacing
the word ``he'' with ``its,'' (2) replace the word ``which'' with the
word ``that'' where appropriate, (3) add and delete commas in proposed
paragraph (b)(5)(i)(P) to provide clarity, and (4) fix typographical
errors. In addition, the Commission is proposing to spell out all
numbers that are less than 10 (e.g., the number 4 in the existing
piggyback exception would be spelled out as the word ``four'').
Further, the Commission is proposing amendments to aid in the
Rule's readability. For example, the Commission is proposing to amend
the Rule by adding headings before certain of the Rule's provisions and
by addressing instances of inconsistent letter capitalization (e.g., by
ensuring that all phrases such as ``Provided, however, That'' are
written consistently throughout the Rule). In addition, the Commission
is proposing to add the term ``that is'' in proposed paragraph (f)(1)
when referring to a security that is admitted to trading on a national
securities exchange. The Commission also is proposing amendments to
replace the word ``shall'' with ``must'' where appropriate (e.g.,
proposed paragraph (b)(5), addressing the public availability of catch-
all issuer information), and is proposing to replace the word
``respecting'' with the word ``concerning'' (e.g., proposed paragraph
(f)(3), in the provisions of the piggyback exception). To be consistent
with other rules under the Exchange Act, the Commission is proposing to
replace any references to the Financial Industry Regulatory Authority,
Inc. with a reference to a registered national securities association.
In addition, the Commission proposes to add the phrase ``of the broker
or dealer'' in proposed paragraph (b)(5)(i)(N) to clarify that the
required information refers to any associated person of the broker-
dealer. In addition, the Commission is proposing conforming changes to
begin each paragraph of proposed paragraph (b) in the same manner to be
consistent in listing the issuer information that the Rule would
require.
The Commission also is proposing amendments to streamline and
clarify the Rule's text. For example, the Commission is proposing to
replace the phrase ``a record of the circumstance involved in'' with
the phrase ``records related to'' in proposed paragraph (c)(1). The
Commission also proposes to replace ``customer's indication of interest
and does not involve the solicitation of the customer's interest'' in
paragraph (f)(2) with ``customer's unsolicited indication of interest''
in proposed paragraph (f)(2). Finally, the Commission proposes to
delete the word ``exact'' from existing paragraphs (a)(5)(i) and (iv)
and replace the phrase ``the nature'' with the phrase ``a description''
in paragraphs (a)(5)(viii), (ix), and (x).
The Commission also is proposing amendments to avoid redundancy in
the Rule's text. For example, the Commission is proposing to remove
from the Rule all instances of the phrase ``as defined in this
section'' because the text of the Rule's definitional section, proposed
paragraph (f), makes it sufficiently clear that all instances where a
particular defined term is mentioned are for the purposes of the Rule,
unless as otherwise specified. In addition, the Commission is proposing
to delete the word ``said'' from existing paragraph (d)(1) because the
words ``of this section'' also would appear in the text of the proposed
Rule.
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following question:
Q119. Are there other technical amendments that would be
appropriate? Please explain. Are there additional technical edits that
the Commission should make to improve the effectiveness and clarity of
the proposed Rule? For example, should the requirement regarding
information about an issuer's address be modified to require the
issuer's ``physical'' address to differentiate it from a post office
box or other possible mailing or alternative addresses that issuers may
have, such as addresses of branch offices, prior or obsolete addresses,
or other non-
[[Page 58239]]
physical addresses such as a service of process address?
Q120. Is there language in the proposed Rule that should be revised
to improve the effectiveness and clarity of the Rule? In particular, we
seek commenters' input regarding whether there is language in proposed
paragraph (b) that should be revised. If so, how? For example, proposed
paragraphs (b)(4) and (b)(5) would keep the existing requirement that
information be made available upon the request of ``a person expressing
an interest about a proposed transaction in the issuer's security.'' Is
there alternative language that would be more clear or effective in
light of the purpose of the Rule? For example, should the language be
replaced with ``a person seeking information about the issuer's
security'' or ``a person inquiring about an issuer's security''? Please
explain. Is it clear what type of information that a broker-dealer must
provide to any person expressing an interest in the security of an
exempt foreign private issuer or catch-all issuer where it is required
to provide ``appropriate'' instructions? If not, what alternative
standard would be clear and effective, if any? Please explain.
IV. Conforming Rule Change and General Request for Comment
A. Proposed Conforming Amendments to Cross-References in Rule 144(c)(2)
Currently, Rule 144(c)(2) \172\ cross-references Rule 15c2-
11(a)(5)(i) to (xiv) and Rule 15c2-11(a)(5)(xvi). Because the
Commission is proposing to re-letter the provision addressing catch-all
information to Rule 15c2-11(b)(5), the Commission is proposing to make
conforming amendments to these cross-references in the provisions of
Rule 144(c)(2) that cite to Rule 15c2-11(a)(5). The Commission is
proposing to amend Rule 144(c)(2) to cross-reference Rule 15c2-
11(b)(5)(i)(A) to (N) and Rule 15c2-11(b)(5)(P), and the Commission is
proposing to remove the cross references to Rule 15c2-11(a)(5)(i) to
(xiv) and Rule 15c2-11(a)(5)(xvi).
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\172\ Securities Act Rule 144(c)(2).
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B. General Request for Comment
The Commission solicits comment on all aspects of the proposed
amendments to Rule 15c2-11 and any other matter that might have an
impact on the proposal discussed above. In particular, the Commission
asks commenters to consider the following questions:
Q121. Are there additional or different ways to amend the Rule that
would help reduce fraud and manipulation in the OTC market? Please
explain.
Q122. Should the Rule be limited to only equity securities? Please
explain.
Q123. How might the proposal positively or negatively impact
investor protection, the maintenance of a fair, orderly, and efficient
OTC market, and capital formation?
Q124. Should each exception to the Rule require that a broker-
dealer establish, maintain, and enforce written policies and procedures
that are reasonably designed to prevent violations of the Rule by the
broker-dealer? Please explain why or why not.
Q125. We seek commenters' views about the potential for changes to
Rule 15c2-11 to help investors track quoted OTC issuers through
corporate events such as reverse mergers and reorganizations. For
example, should Rule 15c2-11's publicly available information
requirement for a quoted OTC security issuer's name and its predecessor
(if any) also require the public availability of such issuer's unique
entity identifiers (if any)? What would the costs and benefits
associated with such a requirement be? Please discuss whether such a
requirement should be limited to certain types of issuers, e.g., catch-
all issuers? Please quantify answers, to the extent possible.
Comments are of greatest assistance to the Commission's rulemaking
initiative if they are accompanied by supporting data and analysis of
the issues addressed in those comments and if they are accompanied by
alternative suggestions to the proposal where appropriate.
V. Proposed Guidance
The Commission is proposing the following guidance to accompany the
proposed Rule and intends to include such guidance in any adopting
release.\173\ If the Commission includes this new guidance in an
adopting release, the guidance provided in the 1991 Adopting Release
and referenced in the Preliminary Note to the Rule would be superseded.
Broker-dealers and qualified IDQSs complying with the information
review requirement under the proposed Rule must have a reasonable basis
under the circumstances for believing, based on a review of proposed
paragraph (b) information, together with any supplemental information
required by proposed paragraph (c), that (1) the proposed paragraph (b)
information is accurate in all material respects and (2) the sources of
the paragraph (b) information are reliable.\174\ Accordingly, the
Commission proposes to provide the following basic principles to guide
broker-dealers or qualified IDQSs in complying with the information
review requirement.
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\173\ The Commission's 1999 Reproposing Release included
proposed guidance in an Appendix that was intended to supplement the
1991 guidance with greater detail concerning, among other things,
red flags. However, the Commission took no further action on the
1999 Reproposing Release, including the Appendix. The 1999 Appendix
is not included in the Commission's proposed new guidance.
\174\ Proposed Rule 15c2-11(a)(1)(iii)(A) and (B). The
Commission would make conforming changes to this guidance as needed
in the adopting release; for example, by removing the word
``proposed'' wherever it appears in this guidance.
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A. Source Reliability
The proposed Rule requires that the broker-dealer or qualified IDQS
must have a reasonable basis for believing that any source of the
proposed paragraph (b) information is reliable. In the absence of any
red flag (e.g., information that, under the circumstances, reasonably
indicates that the source is unreliable), a broker-dealer or qualified
IDQS could satisfy the proposed Rule's requirements regarding the
reliability of the information source if that information were provided
by the issuer of the security or its agents, including its officers and
directors, attorney, or accountant, or was obtained from an independent
information service, a document retrieval service, or standard research
sources such as reputable and commonly used internet websites used to
research information related to securities issuers.
Occasionally, a broker-dealer or qualified IDQS may receive Rule
15c2-11 information about an issuer from another broker-dealer, someone
other than the issuer or its agents, or an independent information
service. In these situations, while the broker-dealer or qualified IDQS
might be aware of the identity of the immediate source of the specified
information, it might not have any knowledge about the person that
compiled the Rule 15c2-11 information. However, to comply with the
proposed Rule's requirements regarding source reliability, the broker-
dealer or qualified IDQS is required to ascertain the reliability of
the sources of the Rule 15c2-11 information.
Where the broker-dealer or qualified IDQS receives the information,
however, from an independent and objective source that represents that
it received the information directly from the issuer, the broker-dealer
or qualified IDQS typically could rely on that representation absent
countervailing information. When a red flag regarding the source's
reliability exists, the broker-dealer or qualified IDQS should conduct
the inquiry called for by the circumstances to reasonably assess
[[Page 58240]]
whether the source of the information is reliable.
B. Information Review Requirement
Once the broker-dealer or qualified IDQS has a reasonable belief as
to the source's reliability, it should examine the materials in its
records to make certain that all of the required information has been
obtained. Next, the broker-dealer or qualified IDQS should review the
proposed paragraph (b) information in the context of all other
information, including supplemental information under proposed
paragraph (c), about the issuer that it has in its knowledge or
possession. Ordinarily, the broker-dealer or qualified IDQS need not
take any further steps (for example, there would be no requirement to
look behind the financial statements or any other information required
to be obtained). However, in its review, the broker-dealer or qualified
IDQS, consistent with proposed paragraphs (a)(1)(iii) and (a)(2)(iii),
respectively, must be alert to any red flags (e.g., information under
the circumstances that reasonably indicates that one or more of the
required items of information may be materially inaccurate or from an
unreliable source). Red flags would be indicated, for example, by
material inconsistencies in the proposed paragraph (b) information or
material inconsistencies between that information and other information
in the broker-dealer's or qualified IDQS's knowledge or possession. In
the absence of red flags, a broker-dealer does not have an obligation
to seek out supplemental information to investigate statements in the
proposed paragraph (b) information. In forming a reasonable basis under
the circumstances for believing that proposed paragraph (b) information
is accurate in all material respects, a broker-dealer would only need
to consider supplemental information that has come to its knowledge or
that is in its possession.
Examples of red flags would include a qualified auditor's opinion
resulting from management's failure to provide all of the information
relevant to prepare the financial statements, or financial statements
of a development stage issuer that lists as the principal component of
its net worth an asset wholly unrelated to the issuer's lines of
business. Warning signs such as these may call into question whether
the accuracy of the information can be relied upon by a broker-dealer
or a qualified IDQS to satisfy the proposed Rule's requirements.
Where no red flags appear during this review process, the broker-
dealer or qualified IDQS could have a reasonable basis for believing
that the information is accurate. If red flags appear, the broker-
dealer or qualified IDQS could attempt to reasonably address any red
flags. The specific efforts by the broker-dealer or qualified IDQS to
satisfy the proposed reasonable basis standard with respect to the
accuracy of the information and the reliability of sources can vary
with the circumstances and may require the broker-dealer or qualified
IDQS to obtain additional information or seek to verify the accuracy of
existing information. For example, the broker-dealer or qualified IDQS
may have a reasonable basis to believe that the information is accurate
in all material respects after questioning the issuer directly. When
information from the issuer is not adequate, or raises reasonable
doubts to the broker-dealer or qualified IDQS, the broker-dealer or
qualified IDQS may wish to consult independent sources, such as an
attorney or accountant.
The proposed Rule would require that a broker-dealer or qualified
IDQS have a reasonable basis under the circumstances for believing that
proposed paragraph (b) information, in light of any other documents and
information required by the proposed Rule, such as proposed paragraph
(c) information, is accurate in all material respects. However, the
requirements of the proposed Rule amendments do not contemplate that,
before submitting or publishing quotations for a security, a broker-
dealer or qualified IDQS must conduct any independent ``due diligence''
investigation concerning the issuer or its business operations and
financial condition such as the investigation expected to be conducted
by an underwriter. A broker-dealer or qualified IDQS publishing
quotations may have no relationship with the issuer of the security.
The proposed Rule would not demand that the broker-dealer or qualified
IDQS develop such a relationship to obtain information about the
issuer. Rather, as described above, the proposed Rule specifies the
information that must be gathered, and the proposed Rule's requirements
would be satisfied if the broker-dealer or qualified IDQS had a
reasonable basis for believing that the information is accurate in all
material respects and obtained from a reliable source, after reviewing
that information. In short, a reasonable basis for belief in the
accuracy of the proposed paragraph (b) information can be founded
solely on a careful review of the proposed paragraph (b) information
together with proposed paragraph (c) information, provided that the
proposed paragraph (b) information was obtained from sources reasonably
believed to be reliable and there are no red flags. When red flags are
initially present, the broker-dealer or qualified IDQS may, upon
inquiry, obtain additional information that provides a reasonable basis
for believing that the information is accurate in all material respects
and that the sources are reliable.
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q126. Are further substantive changes needed to ensure this
guidance reflects the current state of technology and industry
practice? Should the substance of this guidance be incorporated into
the rule text and, if so, are there any changes that should be made?
Q127. Are changes to this guidance needed to address the specific
responsibilities with respect to the information review requirement of
a qualified IDQS that makes known to others the quotation of a broker-
dealer?
Q128. In 1999, the Commission re-proposed amendments to Rule 15c2-
11.\175\ In response to comments that the Commission received regarding
the 1998 Proposing Release expressing concerns about broker-dealers'
review obligations, the Commission also included an Appendix in the
1999 Reproposing Release (``1999 Appendix'') that provided guidance to
broker-dealers on the scope of the review required by the Rule and
provided examples of red flags that broker-dealers should look for when
reviewing issuer information.\176\ The 1999 Appendix, which was not
adopted by the Commission, would have confirmed and supplemented
earlier guidance on Rule 15c2-11 issues.\177\ Should the Commission
incorporate the 1999 Appendix as part of guidance included in any
adopting release? If so, should the guidance from the 1999 Appendix be
modified, updated or expanded? Are there additional examples of red
flags that should be discussed in any such modified, updated or
expanded guidance? Are there red flags that should be removed from the
guidance? What current topics or issues would commenters like to see
addressed in an updated or expanded version of the guidance on Rule
15c2-11? Should the Commission provide guidance on the proposed
amendments to the Rule and
[[Page 58241]]
if so, for which amendments to the Rule would guidance be most helpful?
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\175\ 1999 Reproposing Release at 11124.
\176\ Id., 1999 Reproposing Release at 11145.
\177\ Id., 1999 Reproposing Release at 11146 n.7.
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VI. Concept Release
This section discusses regulatory, policy, and other issues (in
addition to those discussed above), and seeks comment to identify,
where appropriate, possible regulatory actions to address those issues.
A. Information Repositories
The amendments the Commission is proposing today would require that
proposed paragraph (b) information be current and publicly available,
prior to the initial publication or submission of a quotation regarding
a security, in order for a broker-dealer to: Rely on the unsolicited
quotation exception in certain instances, rely on certain new
exceptions under proposed paragraph (f), and continue to rely on the
piggyback exception. In the 1999 Reproposing Release, the Commission
proposed to establish a mechanism to designate as an information
repository an entity that retains and provides access to paragraph (a)
information \178\ while eliminating the piggyback provision.\179\ As
stated in the 1999 Reproposing Release, ``the elimination of the
piggyback provision and the potential for increased costs of compliance
suggest the desirability of having a database of information about the
non-reporting issuers of quoted OTC securities.'' \180\ Although the
Commission is not proposing to eliminate the piggyback exception, it
would eliminate reliance on the exception when proposed paragraph
(b)(5) information is not current and made publicly available within
six months prior to the date the broker-dealer publishes or submits a
quotation for the security in the IDQS.
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\178\ Id., 1999 Reproposing Release at 11134.
\179\ Id., 1999 Reproposing Release at 11127.
\180\ Id., 1999 Reproposing Release at 11134.
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Significant developments in the OTC market have taken place since
the publication of the 1999 Reproposing Release. For example, certain
IDQSs have developed information repositories that provide access to
proposed paragraph (b) information to the investing public.\181\
Additionally, the internet, which provides an easy way for investors to
locate more, relevant information about issuers, has become much more
accessible to the public.\182\ Such developments have allowed issuers
to directly reach the investing public and potential customers for
their products or services. Given market developments and the ability
for issuers to communicate more easily and directly with the investing
public, the Commission questions whether it, at this point, should
impose a regulatory structure around information repositories. In the
1999 Reproposing Release,\183\ the Commission articulated the following
considerations when determining whether an entity should be designated
an information repository:
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\181\ See Company News & Financial Reports, OTC Mkts. Grp. Inc.
(last visited Aug. 13, 2019), https://www.otcmarkets.com/market-activity/news.
\182\ See Camille Ryan & Jamie M. Lewis, Computer and Internet
Use in the United States: 2015, U.S. Census Bureau (Sept. 2017),
available at https://www.census.gov/content/dam/Census/library/publications/2017/acs/acs-37.pdf (``Among all households, 78 percent
had a desktop or laptop, 75 percent had a handheld computer such as
a smartphone or other handheld wireless computer, and 77 percent had
a broadband internet subscription.'').
\183\ 1999 Reproposing Release at 11134.
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Collects information about a substantial segment of
issuers of securities subject to the Rule;
Maintains current and accurate information about such
issuers;
Has effective acquisition, retrieval, and dissemination
systems;
Places no inappropriate limits on the issuers from or
about which it will accept or request information;
Provides access to the documents deposited with it to
anyone willing and able to pay the applicable fees; and
Charges reasonable fees.
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q129. Would access to proposed paragraph (b) information on an
issuer's website provide sufficient access and notice to investors?
What if the issuer does not maintain the information on its website for
the requisite recordkeeping period?
Q130. Would investors and other market participants benefit from
having access to proposed paragraph (b) information solely through a
centralized location, such as an information repository?
Q131. Have any entities that currently publish proposed paragraph
(b) information engaged in any actions that would warrant Commission
intervention? If so, what activities has the entity engaged in and what
would the appropriate regulatory action be?
Q132. The Commission is committed to ensuring that all investors
and market participants can access the information necessary to make
informed financial decisions. One way that the Commission lowers the
burden of accessing and analyzing issuer data is through the use of
structured data. Machine-readable disclosures provide easily accessible
financial statement information that investors and other market
participants can use to compare and analyze issuers, whether they elect
to analyze condensed data sets themselves or analyze data downstream
through a data aggregator service. Regarding actions that the
Commission might propose at a later date, the Commission is interested
in commenters' views on whether or not the financial information
required by proposed paragraph (b)(5)(i)(L) regarding an issuer's
balance sheet, profit and loss statement, and retained earnings
statement should be published in a machine readable format? Is there
other proposed paragraph (b) information that should be machine-
readable, if the Commission were to propose to require that proposed
paragraph (b) information be machine-readable at a later date? How
burdensome and costly would it be for a broker-dealer, qualified IDQS,
or an issuer to provide such information in a machine-readable format?
What are the additional burdens or costs associated with providing such
information in a machine-readable format? For example, would there be
additional costs with respect to complying with documentation and
recordkeeping requirements, specifically those included in the proposed
amendments to the Rule, as a result of information being machine-
readable? How significant are those potential costs relative to the
potential benefits in facilitating an analysis of an issuer's financial
data by investors or other market participants? Please quantify your
answers, to the extent feasible.
The Commission is also interested in the public's views on the
following question regarding short selling in the OTC market:
Q133. At least one commenter to the SEC Investor Advisory Committee
has suggested that amending Regulation SHO to extend the time period
required to close out fails to deliver would enhance liquidity in the
OTC market.\184\ Would extending the Regulation SHO close-out period
for certain market participants enhance price discovery that could
result from short selling without also increasing the potential for
abusive short selling in this market? \185\ Please provide any data to
show that amending Regulation SHO would enhance short selling in the
OTC market
[[Page 58242]]
versus other possible reasons that may affect short selling in quoted
OTC securities, such as margin or capital rules or Regulation T. What
types of market participants should be provided such an extension of
time (e.g., market makers)? Would such an extension increase the
potential for manipulative ``naked'' short selling? Would such an
extension increase the incidence of fails to deliver in quoted OTC
securities? How could the Commission provide such an extension without
increasing the potential for abuses or increased fails to deliver? For
example, should an extension only be provided for certain types of
market makers and not others? What criteria or standards should apply
to eligible market makers to reduce the potential for increased
manipulation from an extension of the Regulation SHO close-out period?
How would amending rules to increase short selling in the OTC market
protect retail investors?
---------------------------------------------------------------------------
\184\ See, e.g., Submission of Cromwell Coulson, OTC Mkts. Grp.
Inc., SEC Investor Advisory Committee: Regulatory Approaches to
Combat Retail Investor Fraud, 1-2 (Mar. 8, 2018), available at
https://www.sec.gov/comments/265-28/26528-3213626-161999.pdf.
\185\ See Rule 204 of Regulation SHO.
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VII. Paperwork Reduction Act Analysis
A. Background
Certain provisions of the Rule and proposed amendments impose
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\186\
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\186\ 44 U.S.C. 3501 et seq.
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The Commission is submitting the proposed amendments to the Office
of Management and Budget (``OMB'') for review in accordance with the
PRA.\187\ The title for the information collection is ``Publication or
submission of quotations without specified information.'' OMB has
assigned control number 3235-0202 to the collection of information. An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a current
valid control number.
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\187\ See 44 U.S.C. 3507; 5 CFR 1320.11.
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The Rule is intended to prevent broker-dealers from publishing or
submitting quotations for quoted OTC securities that may facilitate a
fraudulent or manipulative scheme. Subject to certain exceptions, the
Rule prohibits broker-dealers from publishing or submitting a quotation
for a security, or submitting a quotation for publication, in a
quotation medium unless they have reviewed specified information
concerning the issuer. The Commission is proposing amendments that
would focus the Rule more closely on those quoted OTC securities that
the Commission believes are more likely to be prone to fraud and
manipulation by addressing the lack of transparency of some issuers.
The Commission is also proposing amendments to reduce regulatory
burdens on broker-dealers for quotations concerning OTC securities that
appear to present lower risk.
B. Respondents Subject to the Rule
Generally, the Rule applies to broker-dealers that participate in
the quoted market for OTC securities. The proposed amendments would
modify some of the existing information collection burdens on broker-
dealers and create new record retention obligations on broker-dealers
that rely on exceptions to the Rule. The Commission believes that
approximately 32 broker-dealers would be subject to the burdens
associated with the publishing or submitting a quotation without an
exception,\188\ and approximately 89 broker-dealers would be subject to
the burdens associated with documenting reliance on an exception in
proposed paragraph (f).\189\ Additionally, the Commission estimates
that one qualified IDQS \190\ and one registered national securities
association \191\ would be subject to burdens associated with making
publicly available determinations under proposed paragraph (f)(8).
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\188\ Thirty-two broker-dealers submitted Forms 211 to FINRA in
2018. The Commission uses this number as a proxy for broker-dealers
that comply with the information review requirement under paragraphs
(a), (b), and (c) of the existing Rule.
\189\ As of July 2, 2019, there are 89 broker-dealers that trade
on OTC Markets Group's systems. The Commission believes that this
number reasonably estimates the number of broker-dealers that would
engage in the activity that would subject them to the requirements
discussed in the section ``Other Burden Hours'' below because they
are the only broker-dealers that are publishing or submitting
quotations for OTC securities.
\190\ Based on the current structure of the market for quoted
OTC securities, the Commission preliminarily believes that only one
qualified IDQS would engage in a review pursuant to proposed
paragraph (f)(7) or make publicly available determinations under
proposed paragraph (f)(8).
\191\ As of July 15, 2019, only one registered national
securities association exists.
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Proposed paragraph (f)(7) would permit a qualified IDQS to comply
with the information review requirement in certain circumstances. A
qualified IDQS must meet the definition of an alternative trading
system under Rule 300(a) of Regulation ATS and operate pursuant to the
exemption from the definition of an ``exchange'' under Rule 3a1-1(a)(2)
of the Act. As such, a qualified IDQS must be registered as a broker-
dealer.\192\ This proposed paragraph would modify only the allocation
of burden from existing paragraphs (a), (b), and (c) between qualified
IDQSs and broker-dealers that are not qualified IDQSs, rather than
create new and distinct burdens. Therefore, burdens of the proposed
amendments on qualified IDQSs have not been analyzed in a manner that
is distinct from those of broker-dealers below. The analysis of burdens
for qualified IDQSs and registered national securities associations are
separated from those of broker-dealers in the section discussing
proposed paragraph (f)(8) below.
---------------------------------------------------------------------------
\192\ See Rule 301(a) of Regulation ATS.
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For the purposes of this analysis, as described below, the
Commission has made assumptions regarding how respondents would comply
with the proposed amendments.
C. Summary of Collections of Information
The information collections associated with the initial publication
or submission of a quotation is intended to prevent broker-dealers from
publishing or submitting quotations for OTC securities that may
facilitate a fraudulent or manipulative scheme. Additionally, under the
proposed amendments, the information collections are intended to
alleviate the potential for quoted OTC Securities to be used as
vehicles to defraud investors and to help ensure compliance with the
Rule's exceptions.
1. Burden Associated With the Initial Publication or Submission of a
Quotation in a Quotation Medium
Absent an exception, broker-dealers under the existing Rule must
comply with the information review requirement of the Rule prior to
initiating the publication or submission of a quotation for an OTC
security. The Commission believes that the information collections
associated with the information review requirement and recordkeeping
requirement under the Rule, as well as the proposed Rule, involve
conducting a review of and maintaining the required information.\193\
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\193\ As described above, the Commission is proposing to remove
the disclosure requirement in Exchange Act Rule 15c2-11(d)(1). This
disclosure requirement previously has been discussed as a component
of the estimated burden under Rule 15c2-11 for all issuers, and, as
a result, is included in the existing burden estimates for the Rule.
---------------------------------------------------------------------------
FINRA Rule 6432 requires broker-dealers to file a Form 211 when the
Rule requires them to comply with the information review requirement.
Given the alignment of this FINRA requirement and the Rule, the
Commission believes that the number of Forms 211 filed with FINRA in
2018 provides a reasonable baseline from which to estimate the burdens
associated with the information review
[[Page 58243]]
requirement under the current Rule and as proposed to be amended. Based
on information provided by FINRA, broker-dealers submitted a total of
538 Forms 211 to initiate the publication or submission of quotations
of OTC securities in 2018. FINRA counted that 91 of these Forms 211
concerned securities of prospectus issuers, Reg. A issuers, and
reporting issuers; 391 concerned securities of exempt foreign private
issuers, and 56 concerned securities of catch-all issuers. The
Commission estimates that it takes about three hours to review, record,
and retain the information pertaining to prospectus issuers, Reg. A
issuers, and reporting issuers, and seven hours to review, record, and
retain the information pertaining to exempt foreign private issuers and
catch-all issuers.\194\ As a starting point, therefore, absent the
proposed amendments, the estimated annual burden of the information
collection would be 3,402 hours.\195\
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\194\ The Commission believes that these burden hour estimates
reasonably measure the time required to comply with the information
review requirement and recordkeeping requirement utilizing available
technology and include additional time to review information about
exempt foreign private issuers and catch-all issuers because the
information required to be reviewed concerning these issuers may not
be as readily available as the required information concerning
prospectus, Reg. A, and reporting issuers.
\195\ (91 prospectus, Reg. A, and reporting issuers x 3 hours) +
(391 exempt foreign private issuers x 7 hours) + (56 catch-all
issuers x 7 hours review and recordkeeping) = 3,402 hours.
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The proposed amendments change the information review requirement
only by re-lettering the applicable paragraphs \196\ and by adding the
requirement that proposed paragraph (b) information be current and
publicly available prior to the initial publication or submission of a
quotation.\197\ The Commission believes that these two proposed changes
would not modify the burden hours for completion of the information
review requirement that are estimated above. Additionally, it is not
expected that the proposed changes to the information review
requirement would create any initial one-time burden as it is unlikely
that broker-dealers would need to modify their systems or their
training practices to comply with the information review requirement
under the proposed amendments.\198\
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\196\ Under the proposed amendments, the information review
requirement would be contained in proposed paragraphs (a), (b), and
(c).
\197\ Proposed paragraph (f)(8) would allow a broker-dealer to
rely on publicly available determinations by a qualified interdealer
quotation system or a registered national securities association
that proposed paragraph (b) information is current and publicly
available, as well as whether a broker-dealer may rely on an
exception contained in proposed paragraphs (f)(1), (f)(3)(i)(A),
(f)(3)(i)(B), (f)(4), (f)(5), or (f)(7). This new paragraph is
intended to mitigate costs and burdens of certain of the proposed
exceptions by allowing broker-dealers to rely on determinations of
third parties. While, as discussed below, proposed paragraph (f)(8)
impacts the recordkeeping requirement unrelated to the information
review requirement, the Commission does not believe that this
proposed change would impact the hourly burden attributable to
completion of the information review requirement.
\198\ The Commission does not attribute an initial burden of the
proposed amendments to the information review requirement; an
initial burden has been attributed to determining whether proposed
paragraph (b) information is current and publicly available,
discussed below. See infra Part VII.C.2.
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(a) Proposed Amendments to the Piggyback Exception
As discussed above, the proposed amendments would modify the
piggyback exception in various ways, and these amendments would, in
turn, impact the burdens associated with the information review
requirement.
Proposed paragraph (f)(3)(i)(A) would limit broker-dealers'
reliance on the piggyback exception to both bid and ask quotations at
specified prices in an IDQS, which could reduce the number of
securities that are eligible for the piggyback exception. Broker-
dealers would be required to comply with the information review
requirement prior to the initial publication or submission of
quotations on securities that would lose piggyback eligibility due to
this provision. According to estimates based on data from OTC Markets
Group for 2018, the securities of 879 issuers, out of 9,912 issuers,
would lose piggyback eligibility under this proposed amendment because
they did not have both bid and ask quotations for four business days in
succession on one or more occasions during that year. Based on the lack
of quotes by broker-dealers, it is unclear whether broker-dealers would
conduct the required review for most of these securities that would
lose piggyback eligibility due to the adoption of this proposed
requirement.
It is possible, however, that broker-dealers would begin to publish
both bid and ask quotations for some of these securities to ensure that
they remain piggyback eligible. While, as stated above, it is unclear
whether broker-dealers would comply with the information review
requirement as proposed for these issuers, the Commission is estimating
that broker-dealers would comply with the information review
requirement once annually for each security that would lose piggyback
eligibility to make the most conservative estimate of burden that may
arise under this proposed amendment.\199\ Therefore, it is estimated
that broker-dealers would comply with the information review
requirement 879 additional times annually. The Commission estimates
that the ratio of prospectus, Reg. A, and reporting issuers to exempt
foreign private and catch-all issuers would roughly be consistent with
the 2018 numbers for each type of security based on the proposed
amendments; therefore, 402 of these affected issuers would be
prospectus, Reg. A, or reporting issuers, 187 would be exempt foreign
private issuers, and 290 would be catch-all issuers, leading to an
increase in the total annual burden of 4,545 hours.\200\
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\199\ The Commission believes that this conservative estimate is
reasonable because it accounts for all securities that may lose
piggyback eligibility under this proposed amendment. While broker-
dealers may not comply with the information review requirement for
every security that loses piggyback eligibility, broker-dealers may
comply with it multiple times concerning the same issuer. Therefore,
the Commission believes that this reasonably approximates the impact
of the proposed amendments industry-wide.
\200\ (402 prospectus, Reg. A, or reporting issuers x 3 hours) +
(187 exempt foreign private issuers x 7 hours) + (290 catch-all
issuers x 7 hours review and recordkeeping) = 4,545 hours.
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The Commission is increasing the estimated overall burdens related
to the information review requirement based on the proviso in proposed
paragraph (f)(3)(ii), which would allow broker-dealers to rely on the
piggyback exception for the securities of catch-all issuers if proposed
paragraph (b)(5) information is current and has been made publicly
available within six months prior to the date of publication or
submission of the quotation. Proposed paragraphs (a)(1)(ii) and
(a)(2)(ii) would require that proposed paragraph (b) information be
current and publicly available as a component of the review
requirement, and thus a broker-dealer would not conduct the required
review of the proposed Rule for these securities after they lose
piggyback eligibility based on the lack of proposed paragraph (b)
information that is current and publicly available.
On the one hand, to the extent proposed paragraph (b) information
becomes current and publicly available after the loss of the piggyback
exception, pursuant to proposed paragraph (a), a broker-dealer or
qualified IDQS would need to comply with the information review
requirement for a broker-dealer to be able to publish or submit a
quotation for such OTC security. On the other hand, if there is no
current and publicly available proposed paragraph (b) information for a
security after the loss of the piggyback exception, the broker-dealer
or qualified IDQS would
[[Page 58244]]
not be able to conduct the required review due to the lack of current
and publicly available proposed paragraph (b)(5) information. There
were 3,211 issuers of quoted OTC securities in 2018 without current and
publicly available information subject to the requirements of paragraph
(b)(5). Similar to the proposed change discussed above concerning bid
and ask quotations, it is unclear whether broker-dealers would conduct
the required review for these securities if they lose piggyback
eligibility. This lack of clarity exists because these securities would
be subject to the proviso in proposed paragraph (f)(3)(ii) and the
Commission is estimating that broker-dealers would comply with the
information review requirement once annually for each security that
would lose piggyback eligibility. Accordingly, this proposed amendment
would increase burdens by 22,477 hours.\201\
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\201\ 3,211 catch-all issuers x 7 hours review and recordkeeping
= 22,477 hours.
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The Commission is not revising the estimates of current burdens of
the information review requirement based on the proviso in proposed
paragraphs (f)(3)(ii), which eliminate piggyback eligibility for shell
companies and eliminate piggyback eligibility for 60 calendar-days
following a trading suspension under Section 12(k) of the Act. With
respect to shell companies, as noted in the Economic Analysis, the
Commission believes that there are roughly 421 shell companies that are
quoted in the OTC market. Since broker-dealers would not be able to
rely on the piggyback exception for shell companies, the Commission
believes broker-dealers would not conduct the required review for shell
companies. As such, the Commission does not believe that the proposed
elimination of a broker-dealer's ability to rely on the piggyback
exception for shell companies would change the burdens of the
information review requirement. With respect to securities that have
been subject to a trading suspension under 12(k) of the Act, this
proposed amendment would impact when a broker-dealer may conduct the
required review, but it would not affect the substance of the
information review requirement itself.
In summary, the proposed amendments to the piggyback exception
would impact the burdens associated with the information review
requirement in various ways. The proposed amendment to proposed
paragraph (f)(3)(i)(A) would allow broker-dealers to piggyback only on
bid and ask quotations at specified prices and the Commission estimates
that this amendment would increase the annual burden by 4,545 hours.
The proviso in proposed paragraph (f)(3) would allow broker-dealers
only to piggyback quotations of the securities of catch-all issuers if
proposed paragraph (b)(5) information is current and has been made
publicly available within six months prior to the date of publication
or submission of the quotation and the Commission estimates that this
proposed amendment would increase the annual burden by 22,477 hours.
(b) Other Proposed Amendments
Proposed paragraph (f)(5) would create a new exception to the Rule
that is intended to reduce burdens related to publishing or submitting
quotations for OTC securities the Commission believes are less
susceptible to fraud or manipulation. Specifically, proposed paragraph
(f)(5) would provide an exception for securities with a worldwide ADTV
value of at least $100,000 during the 60 calendar days immediately
before the date of the publication of a quotation for such security and
the issuer of such security has $50 million in total assets and $10
million unaffiliated shareholder's equity as reflected in the issuer's
publicly available audited balance sheet issued within six months after
the end of the most recent fiscal year. Broker-dealers would not be
required to comply with the information review requirement when
publishing or submitting quotations for these securities, so these
amendments would reduce the burden of the information collection. The
Commission believes that excepting certain types of OTC securities from
the Rule's provisions would decrease the burden associated with the
information review requirement in a manner that is consistent with
these securities' percentage of the overall OTC market.
Based on data pulled from Bloomberg's equity screening function on
April 12, 2019, 37 issuers with securities trading on OTC Markets
Group's systems meet the exception in proposed paragraph (f)(5).
Thirty-one of these 37 issuers (roughly 80 percent) are reporting
issuers, and six (roughly 20 percent) are catch-all issuers.\202\
Bloomberg's dataset covers only 6,069 issuers with securities that are
traded on OTC Markets Group's systems, but, from this number and the
number of excepted issuers, it can be estimated that the proposed
amendments would roughly decrease the amount of times broker-dealers
conduct the required review by 0.5 percent annually. Therefore, after
rounding, the Commission estimates that the exceptions would reduce the
number of times broker-dealers conduct the required review by three per
year,\203\ two of which would be reporting issuers and one of which
would be a catch-all issuer,\204\ resulting in a total reduction of 14
burden hours per year.\205\
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\202\ To arrive at this number, a list of excepted issuers that
resulted when using Bloomberg's equity screening function to return
issuers that meet the criteria in proposed paragraph (f)(5) was
cross-referenced against the Reporting Status field in OTC Market's
Company Data File dated March 29, 2019. Issuers that report pursuant
to bank regulatory requirements were considered to be reporting
issuers for the purposes of this number.
\203\ 538 completions of the information review requirement x
.5% = 3.
\204\ 3 x 70% (reporting issuers) and 3 x 20% (catch-all
issuers).
\205\ (2 reporting issuers x 3 hours) + (1 catch-all issuer x 7
hours) = 13 hours.
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The Commission believes that, other than as discussed above, the
proposed amendments to the Rule do not impact the burden of the
information review requirement. For example, proposed paragraph
(f)(2)(ii), which would provide an exception for a broker-dealer to
publish or submit a quotation by or on behalf of certain company
insiders in reliance on the unsolicited quotation exception only if
proposed paragraph (b) information is current and publicly
available,\206\ would limit the availability of the unsolicited
quotation exception in certain circumstances. There is no existing
burden for the information review requirement for these types of
quotations, however, because under paragraph (f)(2) of the existing
Rule, broker-dealers are not required to conduct the review prior to
publishing or submitting a quotation for these orders. Therefore, this
proposed amendment would not decrease the burden of the information
review requirement. If the unsolicited quotation exception becomes
unavailable due to this proposed amendment, broker-dealers would not be
able to complete the required review as an alternative to utilizing
this exception because current and publicly available information is a
condition of the information review requirement in proposed paragraph
(a)(1)(ii) and (a)(2)(ii). As a result, this proposed change would not
increase the burden of the information review requirement if the
unsolicited quotation exception becomes unavailable due to proposed
paragraph (f)(2)(ii).
---------------------------------------------------------------------------
\206\ The burden related to a broker-dealer's determination of
whether paragraph (b) is current and publicly available is discussed
below.
---------------------------------------------------------------------------
Out of an abundance of caution due to a lack of granular data, the
Commission is not reducing the overall burden estimate of the
information review requirement as a result of
[[Page 58245]]
proposed paragraph (f)(6), which would provide an exception from the
information review requirement for certain quotations of broker-dealers
named as underwriters in the registration statement or offering
circular of a security within the time frames contained in proposed
paragraphs (b)(1) or (b)(2), as applicable. The Commission believes
that no broker-dealer would be required to comply with the information
review requirement for quoted OTC securities that meet the requirements
of the underwriter exception. While it is estimated that this proposed
amendment would result in a slight reduction in the number of times
broker-dealers comply with the information review requirement annually,
out of an abundance of caution, the Commission has not decreased the
overall burden estimates of total annual burdens due to this exception
because of a lack of granular data.
---------------------------------------------------------------------------
\207\ As mentioned above, it is not expected that the proposed
changes to the information review requirement would create any
initial one-time burden as it is unlikely that broker-dealers would
need to modify their systems or conduct training to comply with the
information review requirement under the proposed amendments.
\208\ Because the exception for securities that meet the ADTV
and asset tests would decrease the annual burden from the 2018
baseline, the numbers in this section of the chart reflect the
number of times the information review requirement were conducted in
2018 multiplied by the hourly burden estimate for the completion of
the information review requirement.
PRA Table 1--Summary of Estimated Burdens Associated With Initial Publication or Submission of a Quotation in a
Quotation Medium
----------------------------------------------------------------------------------------------------------------
Number of
times the
Initial burden required Annual burden Total industry
Type of issuer Type of burden \207\ information per response burden
reviews are
conducted
----------------------------------------------------------------------------------------------------------------
Information review requirement absent proposed changes \208\
----------------------------------------------------------------------------------------------------------------
Baseline Information Review
Requirement Burdens:
Prospectus, Reg. A, or Recordkeeping 0 91 3 273
reporting issuers. and Review.
Exempt foreign private Recordkeeping 0 391 7 2,737
issuers. and Review.
Catch-all issuers......... Recordkeeping 0 56 7 392
and Review.
----------------------------------------------------------------------------------------------------------------
Limiting piggyback exception to both bid and ask quotations at specified prices
----------------------------------------------------------------------------------------------------------------
Prospectus, Reg. A, or Recordkeeping 0 402 3 1,206
reporting issuers. and Review.
Exempt foreign private Recordkeeping 0 187 7 1,309
issuers. and Review.
Catch-all issuers......... Recordkeeping 0 290 7 2,030
and Review.
----------------------------------------------------------------------------------------------------------------
Requiring current and publicly available proposed paragraph (b) information for catch-all issuers to remain
piggyback eligible
----------------------------------------------------------------------------------------------------------------
Changes to Exceptions:
Prospectus, Reg. A, or Recordkeeping 0 0 0 0
reporting issuers. and Review.
Exempt foreign private Recordkeeping 0 0 0 0
issuers. and Review.
Catch-all issuers......... Recordkeeping 0 3,211 7 22,477
and Review.
----------------------------------------------------------------------------------------------------------------
Exception for securities that meet ADTV and asset test (decreases annual burden)
----------------------------------------------------------------------------------------------------------------
Prospectus, Reg. A, or Recordkeeping 0 2 3 -6
reporting issuers. and Review.
Exempt foreign private Recordkeeping 0 0 0 0
issuers. and Review.
Catch-all issuers......... Recordkeeping 0 1 7 -7
and Review.
----------------------------------------------------------------------------------------------------------------
2. Other Burden Hours
Some provisions of the proposed amendments would create burdens
other than those directly related to the initial publication or
submission of a quotation.
Proposed paragraph (d)(2) would require that certain broker-
dealers, qualified IDQSs, or registered national securities
associations preserve documents and information that demonstrate that
the requirements for an exception under proposed paragraph (f) are met.
As noted above, rather than specifically direct that market
participants would need to document every condition of the basis of
their reliance on an exception for each quotation, the proposed Rule
instead requires broker-dealers, qualified IDQSs, and registered
national securities associations to preserve documents and information
``that demonstrate that the requirements for an exception under
paragraph (f)'' are met. Additionally, proposed paragraph (f)(8) would
allow broker-dealers that publish or submit quotations based on an
exception to rely on publicly available determinations made by a
qualified IDQS or registered national securities association. If a
qualified IDQS or registered national securities association makes a
publicly available determination that the requirements of an exception
are met, or that the proposed paragraph (b) information is current and
publicly available, the broker-dealer would need to document only the
exception upon which the broker-dealer relies and the name of the
qualified IDQS or registered national securities association that made
the determination that the requirements of the exception are met.
[[Page 58246]]
The types of documentation that a broker-dealer, qualified IDQS, or
registered national securities association would need to maintain would
vary based upon the exception. Certain exceptions, however, such as the
unsolicited quotation exception, and the ADTV value and asset test
exception, require that proposed paragraph (b) information be current
and publicly available. Additionally, the piggyback exception requires
that proposed paragraph (b)(5) information be current and publicly
available within six months before the date of publication or
submission of a quotation in an IDQS. The Commission believes that the
requirement in these exceptions to have current and publicly available
proposed paragraph (b) information would create ongoing recordkeeping
burdens for broker-dealers under proposed paragraph (d)(2). A proviso
to proposed paragraph (d)(2)(ii), however, does not require that a
broker-dealer, qualified IDQS, or registered national securities
association preserve proposed paragraph (b) information if such
information is available on EDGAR. As shown in the Table 3 of the
Economic Analysis, there are 9,913 unique issuers of quoted OTC
securities for which broker-dealers would be required to maintain
records to establish that proposed paragraph (b) information is current
and publicly available.\209\ Of these 9,913 issuers, 3,320 are SEC/Reg.
A/Bank Reporting Obligation issuers, 4,192 are exempt foreign private
issuers, and 2,401 are catch-all issuers.\210\ It is estimated that it
would take one minute to create documentation regarding the
determination that the proposed paragraph (b) information is current
and publicly available and that broker-dealers, qualified IDQSs, and
registered national securities associations would do so quarterly for
SEC/Reg. A/bank reporting obligation issuers and foreign private
issuers,\211\ bi-annually for catch-all issuers.\212\ Accordingly, each
broker-dealer would spend roughly 581 hours on this task annually,
leading to a total annual burden of 52,871 hours dispersed between 89
broker-dealers, one qualified IDQS, and one registered national
securities association.\213\ The Commission believes that broker-
dealers, the qualified IDQS, and the registered national securities
association already have systems and personnel in place to create these
records, so the initial burden of putting procedures in place to ensure
compliance with the proposed amendments would be limited to one
annualized hour of internal cost per broker-dealer, qualified IDQS, and
registered national securities association to reprogram systems and
capture records pursuant to the recordkeeping requirement, leading to
an initial burden of 91 hours for the industry. Adding these two
together, it is estimated that the total industry-wide burden for this
documentation requirement would be 52,962 hours for the first year, and
52,871 hours annually going forward.
---------------------------------------------------------------------------
\209\ This number is determined by adding all unique issuers of
quoted OTC securities except for SEC/Reg. A/Bank Reporting
obligation issuers with public information available. Broker-dealers
would not be required to preserve the required information for SEC/
Reg. A/Bank Reporting because the records would be available on
EDGAR.
\210\ See infra Part VIII.B. for Table 3.
\211\ Proposed paragraph (b)(3) provides that the reporting
issuer information be the issuer's most recent annual report and
periodic or current reports filed thereafter to be considered
``current'' and made publicly available. Proposed paragraph (b)(4)
provides a similar standard, for foreign private issuer information,
and requires the information published pursuant to 12g3-2(b) since
the beginning of the issuer's last fiscal year. The Commission
expects that respondents will preserve records to document
compliance with this proposed requirement on a quarterly basis to
capture quarterly reporting for these issuers.
\212\ The proviso in proposed paragraph (f)(3)(ii) would require
that the catch-all issuer information be ``current'' and made
publicly available within six months prior to the broker-dealer's
submission or publication of a quotation in an IDQS, creating a bi-
annual requirement. See supra Part III.A.2.e.
\213\ (3,320 SEC/Reg. A/Bank Reporting Obligation issuers x 1
minute x 4 responses per year) + (4,192 exempt foreign private
issuers x 1 minute x 4 responses per year) + (2,401 catch-all
issuers x 1 minute x 2 responses per year) = 581 hours.
---------------------------------------------------------------------------
Proposed paragraph (f)(2)(ii) eliminates broker-dealers' reliance
on the unsolicited quotation exception for certain company insiders if
proposed paragraph (b) information is not current and publicly
available. Beyond the requirement that proposed paragraph (b)
information be publicly available as discussed above, the Commission
believes that this proposed amendment would create ongoing
recordkeeping burdens for broker-dealers relying on the unsolicited
quotation exception. Based on data from OTC Markets Group, there were
3,043,214 quotations published in reliance on the unsolicited quotation
exception in 2018. Although there is current and publicly available
information for many issuers of securities involving unsolicited
customer order quotations, out of an abundance of caution the
Commission is including all unsolicited customer quotations in its
estimate and estimating that the number would remain consistent on an
annual basis for the purpose of this analysis. Therefore, it is
estimated that there would be 3,043,214 quotations published in
reliance on the unsolicited quotation exception annually that would
require documentation and information to demonstrate that the quotation
is not by or on behalf of an insider.
It is estimated that it would take a broker-dealer approximately
one minute to create a record regarding such unsolicited customer
quotation. Accordingly, it is estimated that, after rounding, broker-
dealers would spend roughly 50,720 hours \214\ in the aggregate
complying with this recordkeeping requirement annually. These 50,720
hours would be dispersed between 89 broker-dealers, leading to an
annual burden of 570 hours per broker-dealer.\215\ The Commission
believes that broker-dealers would already have systems and personnel
in place that they would use to create these records, so the initial
burden of putting procedures in place to ensure compliance would be
limited to three hours of internal cost per broker-dealer to reprogram
systems and capture the record, leading to an initial burden of 267
hours for the industry.\216\ Adding these two together, it is estimated
that the total industry-wide burden for this documentation requirement
would be 50,987 hours for the first year, and 50,720 hours annually
going forward.
---------------------------------------------------------------------------
\214\ (3,043,214 quotations x 1 minute)/60 minutes = 50,720
hours.
\215\ 50,720 hours/89 broker-dealers = 570 hours.
\216\ The Commission notes that Supplemental Material .01 to
FINRA Rule 6432 requires that broker-dealers initiating or resuming
quotations in reliance on the exception provided by Rule 15c2-
11(f)(2) (i.e., the unsolicited quotation exception) must be able to
demonstrate eligibility for the exception by making a
contemporaneous record of (1) the identification of each associated
person who receives the unsolicited customer order or indication of
interest directly from the customer, if applicable; (2) the identity
of the customer; (3) the date and time the unsolicited customer
order or indication of interest was received; and (4) the terms of
the unsolicited customer order or indication of interest that is the
subject of the quotation (e.g., security name and symbol, size, side
of the market, duration (if specified) and, if priced, the price).
Accordingly, based on this FINRA recordkeeping requirement, the
Commission believes that broker-dealers will already have systems in
place to document information related to the unsolicited quotation
exception.
---------------------------------------------------------------------------
The proviso in proposed paragraph (f)(3)(ii) would eliminate
eligibility for the piggyback exception for securities of issuers that
are shell companies. Accordingly, to comply with the recordkeeping
requirement in proposed paragraph (d)(2), each broker-dealer, qualified
IDQS, and registered national securities association that is relying
on, or making publicly available determinations that a broker-dealer
may rely on, the piggyback exception would need to preserve documents
and information regarding its determination that the issuer of a
security is not a shell company. The Commission estimates
[[Page 58247]]
that broker-dealers, qualified IDQSs, and registered national
securities associations would make determinations regarding shell
companies quarterly and rely on the quarterly review for all quotations
submitted concerning a particular issuer.\217\
---------------------------------------------------------------------------
\217\ As discussed above, proposed paragraph (d)(2) would
require broker-dealers, qualified IDQSs, and registered national
securities associations only to preserve documents and information
``that demonstrate that the requirements for an exception under
paragraph (f)'' are met. Accordingly, the Commission believes that
broker-dealers may likely document the availability of this
exception quarterly, but they may do so more or less often in
practice.
---------------------------------------------------------------------------
The Commission estimates that broker-dealers, qualified IDQSs, and
registered national securities associations would each spend one minute
making a determination and preserving documents and information that
demonstrate that an issuer of the OTC security is not a shell company.
As noted in the Economic Analysis, there are 10,167 quoted OTC
securities.\218\ Accordingly, each broker-dealer would spend roughly
678 hours \219\ on this task annually, leading to a total annual burden
of 60,342 hours dispersed between 89 broker-dealers, one qualified
IDQS, and one registered national securities association. The
Commission believes that broker-dealers already have systems and
personnel in place to create these records, so the initial burden of
putting procedures in place to ensure compliance with the proposed
amendments would be limited to three hours of internal cost per broker-
dealer, qualified IDQS, and registered national securities association
leading to an initial burden of 273 hours for the industry to reprogram
systems and capture the record. Adding these two together, it is
estimated that the total industry-wide burden for this documentation
requirement would be 60,615 hours for the first year, and 60,342 hours
annually going forward.
---------------------------------------------------------------------------
\218\ Some broker-dealers may not provide quotations for all OTC
securities; however, as a conservative estimate, the Commission
estimates that each broker-dealer would determine the shell status
of each issuer of a quoted OTC security on a bi-annual basis.
\219\ 10,167 securities x 1 minute x 4 responses per year.
---------------------------------------------------------------------------
As noted above, it is estimated that there would be approximately
37 securities that would meet the proposed paragraph (f)(5) ADTV and
asset tests. Beyond preserving documents and information that
demonstrate proposed paragraph (b) information is current and publicly
available, as discussed above, the broker-dealer, qualified IDQS, or
registered national securities association would need to preserve
documents and information that demonstrate that the various
requirements of the ADTV test and asset test have been met. It is
estimated it would take one minute to create documentation supporting
the broker-dealer's reliance on the asset test prong of the exception
and that broker-dealers would do this once annually per issuer.\220\
Accordingly, broker-dealers, qualified IDQSs, and registered national
securities associations would spend roughly 0.62 hours \221\ on this
information collection annually, leading to an ongoing burden of
roughly 56.5 hours dispersed between 89 broker-dealers, one qualified
IDQS, and one registered national securities association after
rounding. Additionally, the Commission estimates that it would take one
minute for a broker-dealer, qualified IDQS, or registered national
securities association to preserve documents and information that
demonstrate that the requirements of the ADTV test have been met and
that each respondent would do this 252 times a year, each trading day.
Accordingly, each respondent would spend roughly 155.4 hours \222\ on
this information collection annually leading to an ongoing burden of
14,141 hours dispersed between 89 broker-dealers, one qualified IDQS,
and one registered national securities association (after rounding).
The Commission believes that broker-dealers, the qualified IDQS, and
the registered national securities association would already have
systems and personnel in place to create these records, so the initial
burden of putting procedures in place to ensure compliance would be
limited to three hours of internal cost per broker-dealer, qualified
IDQS, and registered national securities association, leading to an
initial burden of 273 hours for the industry to reprogram systems and
capture the record. Adding these values together, it is estimated that,
after rounding, the total industry-wide requirement would be 14,414
hours for the first year, and 14,141 hours annually going forward.
---------------------------------------------------------------------------
\220\ As discussed above, proposed paragraph (d)(2) would
require broker-dealers, qualified IDQSs, and registered national
securities associations only to preserve documents and information
``that demonstrate that the requirements for an exception under
paragraph (f)'' are met. Accordingly, the Commission believes that
broker-dealers would likely document the availability of this
exception annually because the test is based on audited balance
sheets issues within six months of the end of the most recent fiscal
year.
\221\ 37 securities x 1 minute.
\222\ 252 x 37 securities x 1 minute.
---------------------------------------------------------------------------
Proposed paragraph (f)(6) would except from the information review
requirement quotations concerning a security by a broker-dealer that is
named as underwriter in a security's registration statement referenced
in proposed paragraph (b)(1) or in an offering circular referenced in
proposed paragraph (b)(2), subject to the time limitations contained in
those sections. Registration statements and offering circulars are
filed in EDGAR. Since the proviso to proposed paragraph (d)(2)(ii)
would not require broker-dealers to preserve proposed paragraph (b)
information that is available on EDGAR, the Commission is not
estimating any initial or ongoing burden with respect to this
exception.
Proposed paragraph (f)(7) would except from the Rule's issuer
information and review and document collection provisions in proposed
paragraphs (a) through (c), and (d)(1), the publication or submission,
in a qualified IDQS, of a quotation concerning a security where that
qualified IDQS complies with the requirements of proposed paragraphs
(a) through (c) of the proposed Rule. Any broker-dealer would be able
to publish or submit quotations for such security and would be required
to document the reliance on this exception under proposed paragraph
(d)(2). It is unclear how many securities would be eligible for this
exception. As discussed above, this proposed exception is intended to
except certain securities from the information review requirement that
are less likely to be targeted for fraudulent activity (e.g.,
securities of large cap foreign issuers). The Commission conservatively
estimates that qualified IDQSs would conduct the required review for
five percent of the exempt foreign private issuers that are quoted OTC
securities \223\ and that each broker-dealer would document its
reliance on the exception once per year per issuer.\224\ The
information required to document compliance with the exception would be
publicly available, so the Commission estimates that each broker-dealer
would spend approximately one minute creating each
[[Page 58248]]
record. Accordingly, broker-dealers would spend roughly 0.33 hours
\225\ on this information collection annually leading to an ongoing
burden of 30 hours dispersed between 89 broker-dealers (after
rounding). The Commission believes that broker-dealers would already
have systems and personnel in place to create these records, so the
initial burden of putting procedures in place to ensure compliance with
the proposed amendments would be limited to three hours of internal
cost per broker-dealer leading to an initial burden of 267 hours for
the industry to reprogram systems and capture the record. Adding these
two together, it is estimated that the total industry-wide burden for
this documentation requirement would be 297 hours for the first year,
and 30 hours annually going forward.
---------------------------------------------------------------------------
\223\ According to FINRA Form 211 data, broker-dealers complied
with the information review requirement 391 times for exempt foreign
private issuers, five percent of which, after rounding, is 20
issuers. The Commission believes that, given the relatively large
number of foreign issuers of quoted OTC securities, five percent is
a reasonable estimate for the proportion of securities that would be
reviewed by qualified IDQSs.
\224\ Under this proposed exception, the security can become
eligible for the piggyback exception after 30 days and, at this
point, broker-dealers would not be required to document reliance on
proposed paragraph (f)(7). The Commission, therefore, estimates that
the securities that are quoted under this exception would either
become eligible for the piggyback exception or would not be eligible
for quotations for the remainder of the year given the lack of
interest in the market.
\225\ 20 issuers x 1 minute = 20 minutes or 0.33 hours.
---------------------------------------------------------------------------
Under the proposed amendments, proposed paragraph (f)(8) would be
contingent upon the qualified IDQS or registered national securities
association representing that it has reasonably designed written
policies and procedures to determine whether proposed paragraph (b)
information is publicly available and current and the requirements of
an exception under proposed paragraph (f) of this section are met.
Accordingly, these entities would be required to update their written
policies and procedures to make this representation. The Commission
estimates that it would take one qualified IDQS and one registered
national securities association subject to the Rule approximately 18
hours of initial burden each to initially prepare these written
policies and procedures, and an ongoing annual burden of 10 hours each
to review and update policies and procedures. Given the sophistication
of the qualified IDQS and the registered national securities
association, the Commission estimates that this burden would be borne
internally. Accordingly, the total industry-wide burden for this
documentation requirement would be 56 hours for the first year, and 20
hours annually going forward.
Proposed paragraphs (f)(1) and (f)(4) are exceptions for quotations
concerning a security admitted to trading on a national securities
exchange and which is traded on such an exchange on the same day as, or
on the business day immediately preceding, the day of the quote and the
publication or submission of a quotation concerning a municipal
security, respectively. The Commission is not estimating any initial or
ongoing burden with respect to these exceptions because the proviso to
proposed paragraph (d)(2) does not require broker-dealers, qualified
IDQSs, or registered national securities association to preserve
records under paragraph (d)(2) for the proposed paragraphs (f)(1) or
(f)(4) exceptions.
PRA Table 2--Summary of Estimated Other Burdens
----------------------------------------------------------------------------------------------------------------
Number of Total initial Total annual
Requirement Type of burden entities industry industry
impacted burden burden
----------------------------------------------------------------------------------------------------------------
Recordkeeping when relying on Recordkeeping................... 91 273 52,871
an exception under proposed
paragraph (f), that proposed
paragraph (b) information is
current and publicly
available.
Recordkeeping obligations Recordkeeping................... 89 267 50,720
under unsolicited quotation
exception under proposed
paragraph (f)(2).
Recordkeeping obligations Recordkeeping................... 91 273 60,342
concerning determining shell
status under the proviso in
proposed paragraph
(f)(3)(ii)).
Recordkeeping obligations for Recordkeeping................... 91 273 56.5
the exceptions under proposed
paragraph (f)(5)--Asset Test.
Recordkeeping obligations for Recordkeeping................... 91 0 14,141
the exceptions under proposed
paragraph (f)(5)--ADTV Test.
Recordkeeping obligations Recordkeeping................... 89 267 30
concerning reliance on an
IDQS under proposed paragraph
(f)(7).
Recordkeeping obligations Recordkeeping................... 2 36 20
related to the creation of
reasonable Policies under
proposed paragraph (f)(8).
----------------------------------------------------------------------------------------------------------------
3. Collection of Information Is Mandatory
The information collections for the information review requirement
and recordkeeping requirement are mandatory under the proposed
amendments if a broker-dealer wishes to provide the initial publication
or submission of a quotation for an OTC security. Additionally, the
information collections involving documentation and information that
demonstrate that the requirements for an exception have been met are
mandatory under the proposed amendments if a broker-dealer submits or
publishes quotations that rely on an exception in proposed paragraph
(f).
4. Confidentiality
The Commission would not typically receive confidential information
as a result of this collection of information. The collection of
information is expected to be, for the most part, publicly available
information. To the extent that the Commission receives records related
to such disclosures or other records from a qualified IDQS or
registered broker-dealer that are not publicly available concerning the
information review requirement through the Commission's examination and
oversight program, through an investigation, or some other means, such
information would be kept confidential, subject to the provisions of an
applicable law. To the extent that the Commission receives records that
are not publicly available from a qualified IDQS, registered national
securities association, or registered broker-dealer concerning the
records related to a reliance on an exception contained in proposed
paragraph (f) of the proposed Rule through the Commission's examination
and oversight program, or through an investigation, or some other
means, such information would be kept confidential, subject to the
provisions of applicable law.
5. Retention Period of Recordkeeping Requirement
Pursuant to proposed paragraph (d)(1), a broker-dealer publishing
or
[[Page 58249]]
submitting a quotation, or a qualified IDQS that makes known to others
the quotation of a broker-dealer pursuant to proposed paragraph (a)(2),
shall preserve the documents and information for a period of not less
than three years, the first two years in an easily accessible place.
Pursuant to proposed paragraph (d)(2), a broker-dealer publishing or
submitting a quotation, or a qualified IDQS or a registered national
securities association that make a publicly available determination
pursuant to proposed paragraph (f)(8) shall preserve the documents and
information for a period of not less than three years, the first two
years in an easily accessible place.
D. Request for Comment
The Commission requests comment on whether the estimates for burden
hours and costs are reasonable. Pursuant to 44 U.S.C. 3506(c)(2)(B),
the Commission solicits comments to (1) evaluate whether the proposed
collections of information are necessary for the proper performance of
the functions of the Commission, including whether the information
would have practical utility; (2) evaluate the accuracy of the
Commission's estimate of the burden of the proposed collections of
information; (3) determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; and
(4) determine whether there are ways to minimize the burden of the
collections of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
Q134. Is the burden associated with the review required to comply
with the information review requirement generally, and, in particular,
whether three hours for reporting issuers and seven hours for exempt
foreign private and catch-all issuers is reasonably accurate?
Q135. Is the Commission adequately capturing the respondents that
would be subject to the burdens under the proposed Rule? Are there more
than 39, or fewer than 39, broker-dealers that conduct the required
review to provide the initial publication or submission of a quotation?
Are there more than 89, or fewer than 89, broker-dealers that publish
or submit quotations in reliance on exceptions to the Rule?
Q136. What is the impact of the proposed amendments on the number
of times broker-dealers would comply with the information review
requirement?
Q137. What are any other hourly burdens associated with complying
with the proposed amendments?
Q138. Would any of the proposed amendments that are not discussed
in this PRA Analysis impact the burden associated with the collection
of information?
Persons wishing to submit comments on the collection of information
requirements should direct the comments to the Office of Management and
Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and send a copy to Vanessa Countryman, Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090,
with reference to File No. S7-14-19. OMB is required to make a decision
concerning the collection of information between 30 and 60 days after
publication of this release. Consequently, a comment to OMB is best
assured of having its full effect if OMB receives it within 30 days of
publication. Requests for materials submitted to OMB by the Commission
with regard to these collections of information should be in writing,
refer to File No. S7-14-19, and be submitted to the Securities and
Exchange Commission, Office of FOIA Services, 100 F Street NE,
Washington, DC 20549-2736.
VIII. Economic Analysis
A. Background
The proposed amendments are intended to better protect retail
investors from incidents of fraud and manipulation in OTC securities,
particularly securities of issuers for which there is no or limited
publicly available information. These amendments are also intended to
reduce regulatory burdens on broker-dealers for publication of
quotations of certain OTC securities that may be less susceptible to
potential fraud and manipulation, such as securities of certain issuers
with higher capitalization and securities that were issued in offerings
underwritten by the broker-dealer publishing a quote.
The Commission is mindful of the costs imposed by and the benefits
obtained from the Commission's rules. Exchange Act Section 3(f)
requires the Commission, when engaging in rulemaking that requires
consideration or determination of whether an action is necessary or
appropriate in the public interest, also to consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition, and capital formation. Additionally, Exchange
Act Section 23(a)(2) requires the Commission, when adopting rules under
the Exchange Act, to consider the impact that any new rule will have on
competition and not to adopt any rule that will impose a burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Exchange Act.
The discussion below addresses the expected economic effects of the
proposed amendments, including the likely benefits and costs, as well
as the likely effects of the proposed amendments on efficiency,
competition, and capital formation. The Commission has, where possible,
quantified the economic effects that are expected to result from the
proposed amendments in the analysis below. However, the Commission is
unable to quantify some of the potential effects discussed below.
First, it is unclear to what extent publicly available proposed
paragraph (b) information would influence retail investors' investment
decisions and how these decisions might affect the welfare of these
investors.\226\ In addition, the Commission is unable to estimate
certain costs with precision because it lacks data on the costs
associated with making proposed paragraph (b) information publicly
available as well as the degree of activity and concentration in this
market by individual broker-dealers with respect to initiating,
resuming, or piggybacking quotes.\227\ Wherever possible, where more
precise estimates were not feasible, the Commission has estimated a
range or bound associated with the costs of the proposed amendments. In
addition, the Commission lacks information required to predict the
extent to which a qualified IDQS will satisfy the information review
requirement under the proposed amendments to the Rule or the extent to
which a qualified IDQS or a national securities association will make
publicly available a determination about the characteristics of OTC
securities and whether broker-dealers can rely on the proposed
exceptions to
[[Page 58250]]
the Rule. Lastly, the Commission is unable to quantify the extent to
which the proposed amendments to the Rule would impact entry of issuers
into the quoted OTC market or the migration between securities in the
quoted OTC market and the grey market, in which trades in OTC
securities occur without broker-dealers publishing quotations in a
quotation medium. Therefore, much of the discussion below is
qualitative in nature, although the Commission describes, where
possible, the direction of these effects.
---------------------------------------------------------------------------
\226\ For example, the effect of investment decisions on the
welfare of the investor depends on the individual's preference for
risk and return. The Commission lacks data not only on the effect of
disclosure on investment decisions, but also the preferences of OTC
investors.
\227\ For example, the Commission lacks data on the degree to
which OTC issuers are already producing proposed paragraph (b)
information that is current but not disseminating it to the public,
which would reduce the costs associated with the proposed disclosure
requirements. In addition, the Commission lacks data on which
broker-dealers are publishing specific quotes; much of the analysis
in this release is done at the security or issuer-level.
---------------------------------------------------------------------------
B. Baseline and Affected Parties
The proposed amendments would affect broker-dealers that publish or
submit quotations for OTC securities. Besides broker-dealers and
qualified IDQSs, affected parties include issuers of quoted OTC
securities and investors in these securities. The Commission assesses
the economic effects of the proposed amendments relative to the
baseline of existing requirements and practices in the OTC market.
Registered broker-dealers participate in the market for quoted OTC
securities by publishing priced and unpriced quotations representing
customer interest in trading, executing customer orders, and acting as
market makers.\228\ OTC Markets Group identifies 89 broker-dealers that
are active on the OTC Link ATS in OTC securities.\229\ Thirty-two
broker-dealers filed at least one FINRA Form 211 in order to initiate
the publication or submission of quotations for an OTC security during
the calendar year 2018.\230\
---------------------------------------------------------------------------
\228\ In addition to the Rule, the regulatory baseline includes
SRO rules governing the process of broker-dealers' publication of
quotations for OTC securities. In particular, FINRA Rule 6432
requires broker-dealers to file Form 211 when initiating or resuming
quotations in OTC securities to ensure compliance with the
information requirements of the Rule. See supra Part III.J.1.
\229\ See Broker-Dealer Directory, OTC Mkts. Grp. Inc. (last
visited Aug. 13, 2019, 11:06 a.m.), https://www.otcmarkets.com/otc-link/broker-dealer-directory. The Commission expects that some of
the broker-dealers included in the directory are not actively
engaged in quoting OTC securities.
\230\ The average annual level of FINRA Form 211 filing activity
for the 32 broker-dealers was approximately 14 OTC securities during
2018. This activity is associated with initiating or resuming
quotations only. The Commission lacks data that would allow it to
estimate the number of quotes that broker-dealers published pursuant
to paragraph (a) or in reliance on the piggyback exception, national
securities exchange, or municipal security exceptions to the Rule.
Based on data from OTC Markets Group, broker-dealers published
3,043,214 quotations in reliance on the unsolicited order exception
in 2018. See supra note 227 for a discussion of data limitations.
Because broker-dealers could rely on the piggyback exception for the
vast majority (91 percent) of quoted OTC securities on an average
day during 2018, the Commission believes that it is reasonable to
assume that the majority of quotes that broker-dealers published
during 2018 relied on the piggyback exception. See infra Part VIII.B
for Table 2, which describes average daily activity for securities
that are quoted in the OTC market.
---------------------------------------------------------------------------
Securities quoted on the OTC market differ from those listed on
national securities exchanges. In particular, the average OTC security
issuer is smaller, and these securities trade less, on average. Table 1
below compares quoted OTC securities to those listed on the New York
Stock Exchange (NYSE) or Nasdaq.\231\ On average, issuers of quoted OTC
securities have a lower market capitalization than those with
securities that are listed on a national stock exchange.\232\ Panel B
of Table 1 shows that this difference is more pronounced when companies
with securities listed on foreign exchanges, such as the Tokyo Stock
Exchange or the TSX Venture Exchange, are excluded from the sample of
quoted OTC securities. Further, Table 1 demonstrates that quoted OTC
securities are characterized by significantly lower dollar trading
volumes than listed stocks, even when comparing securities of similar
size as measured by market capitalization.\233\
---------------------------------------------------------------------------
\231\ See infra note 234 for a description of OTC securities
data sources. All information for stocks listed on NYSE and Nasdaq
comes from The Center for Research in Security Prices (CRSP).
Statistics are computed by averaging market capitalization and
trading volume for each security across all trading days during the
calendar year 2018. The conclusions drawn from this analysis
regarding how OTC securities compare to exchange-listed securities
with respect to size and volume traded remain qualitatively
unchanged if the Commission extends the analysis to include
securities listed on additional smaller national exchanges.
\232\ The Commission estimates that securities listed on NYSE
and Nasdaq were valued at approximately $34.9 trillion in total
during calendar year 2018, while quoted OTC securities were valued
at approximately $33.6 trillion with 95.3 percent of the total
market capitalization coming from companies that also have
securities listed on public foreign exchanges.
\233\ Total dollar volume is annualized by taking the average
daily trading volume and multiplying it by the number of trading
days in 2018. Panels C and E of Table 1 provide statistics for
comparable samples of quoted OTC and exchange listed securities with
a market capitalization between $50 million and $5 billion. Several
academic studies document the differences in liquidity between OTC
and listed stocks using older data. See Bjorn Eraker & Mark Ready,
Do Investors Overpay for Stocks with Lottery-Like Payoffs? An
Examination of the Returns of OTC Stocks, 115 J. Fin. Econ. 486-504
(2015); Andrew Ang et al., Asset Pricing in the Dark: The Cross-
Section of OTC Stocks, 26 Rev. Fin. Studs. 2985-3028 (2013).
Table 1--Comparison of Quoted OTC Securities and Listed Securities, CY 2018
----------------------------------------------------------------------------------------------------------------
Quoted OTC Exchange listed
--------------------------------------------------------------------------------
$50M-$5B $50M-$5B
All Unlisted market cap All market cap
(A) (B) (C) (D) (E)
----------------------------------------------------------------------------------------------------------------
Market Cap--median ($M)........ 22.12 3.78 444.39 581.20 528.66
Market Cap--mean ($M).......... 3,707.35 328.53 1,130.74 5,818.03 1,031.08
Volume--median ($M)............ 0.34 0.17 0.98 891.16 761.85
Volume--mean ($M).............. 76.18 86.27 39.75 11,422.17 2,737.79
Number of Securities........... 11,534 6,906 2,655 6,125 4,348
----------------------------------------------------------------------------------------------------------------
Table 2 provides more detail on the characteristics of quoted OTC
securities and their issuers for the 2018 calendar year.\234\ The
Commission estimates that, on average, 10,167 quoted OTC securities had
published quotations per
[[Page 58251]]
day during the calendar year 2018.\235\ A majority of these had
published both bid and ask quotations (88 percent).\236\ The Commission
identified that broker-dealers could rely on the piggyback exception to
publish or submit quotations for 91 percent of these quoted OTC
securities.\237\ Many quoted OTC securities are illiquid. For example,
the Commission estimates that, on average, only 43 percent of these
quoted securities reported a positive daily trading volume, with three
percent of quoted securities being ``inactive,'' which the Commission
defines as not having reported any trading volume within the last
year.\238\ Conversely, only nine percent of quoted securities had an
ADTV value greater than $100,000.\239\
---------------------------------------------------------------------------
\234\ The Commission uses three sources of data on OTC
securities. OTC Markets Group's ``End-of-Day Pricing Service'' and
``OTC Security Data File'' provide closing trade and quote data for
the U.S. OTC equity market and include identifying information for
securities and issuers, as well as securities' piggyback
eligibility. The Commission also uses information from the weekly
OTC Markets Group's ``OTC Company Data File.'' Company Data Files
include information about issuer reporting, shell, and bankruptcy
status, as well as the SEC Central Index Key (CIK) identifier and
whether an issuer's financial statements are audited.
All statistics in Table 1 represent characteristics of OTC
securities and OTC issuers on a typical trading day and are computed
by averaging across all trading days for the 2018 calendar year. The
Commission identified 18,964 unique OTC securities for 15,851 unique
companies from aggregated OTC Markets Group data for the calendar
year 2018. Of these, 11,534 unique OTC securities had at least one
published quotation and 9,913 unique companies had a security that
was quoted at least once during the calendar year 2018. The
Commission believes that OTC Markets Group data are reasonably
representative of all OTC quoting and trading activity in the U.S.
\235\ The number of securities quoted includes those with
published priced and unpriced quotations. The Commission estimates
that approximately five percent of quoted OTC securities did not
have priced quotations. The number of OTC securities quoted on an
average day is lower than the total number of OTC securities with
published quotations in 2018 because some securities did not have
published quotations for every trading day in 2018.
\236\ The Commission estimates the number of securities with
quotations with both bid and ask prices from close of trading day
data. This estimate is a lower bound as the Commission is not able
to identify cases in which a security had a published two-sided
quotation during the day but was no longer published at day close.
\237\ See supra Part III.C. A security would qualify for the
piggyback exception if it satisfies the frequency of quotation
requirements pursuant to proposed paragraph (f)(3) of the Rule. For
such securities, a broker-dealer would not need to comply with the
Rule's information review requirement prior to publishing a
quotation on an IDQS.
\238\ Broker-dealers trading in quoted OTC securities are
required to report their trades to FINRA, which then disseminates
this information to the market. OTC Markets Group receives trading
data from FINRA's Trade Data Dissemination Service (TDDS) feed and
incudes aggregated daily trading volume data for OTC securities in
the ``End-of-Day Pricing Data File.''
\239\ The Commission computes the ADTV on a given day by taking
the average of reported dollar trading volume over the previous 60
calendar days. The computed ADTV for each security is a lower bound
estimate of its worldwide ADTV if some of the trading activity was
not reported to FINRA. As such, it is possible that there were more
securities than the Commission identifies that would satisfy the
volume threshold. The Commission estimates that approximately eight
percent of quoted securities had an ADTV value greater than $100,000
and current and publicly available information.
Table 2--Market for Quoted OTC Securities, CY 2018
[Average daily activity]
------------------------------------------------------------------------
------------------------------------------------------------------------
Number of Securities.......................................... 10,167
Quotes with both Bid and Ask.................................. 88%
Piggyback Eligible............................................ 91%
Traded........................................................ 43%
Inactive...................................................... 3%
ADTV value >$100,000.......................................... 9%
------------------------------------------------------------------------
Some OTC securities are traded on the grey market. Broker-dealers
might not publicly quote these securities due to a lack of available
issuer information necessary to satisfy the information review
requirement or due to insufficient investor interest. The Commission
estimates that 5,155 OTC securities were traded at some point during
2018 without having published quotations, with 522 securities of 517
issuers traded on the grey market on average per day during 2018.
Despite not having published quotations, some grey market OTC
securities were actively traded, with two percent having an ADTV value
greater than $100,000.\240\
---------------------------------------------------------------------------
\240\ Conditional on having been traded, the average (median)
dollar trading volume on a given day during 2018 for a security
trading on the grey market was $40,301 ($1,257) as compared to
$336,902 ($4,798) for quoted OTC securities.
---------------------------------------------------------------------------
Table 3 below provides detail on issuers of quoted OTC
securities.\241\ The Commission estimates that, brokers participating
in the OTC market published quotations for the securities of 9,913
issuers during the calendar year 2018.\242\ These issuers differed in
regulatory status, which determines the information issuers need to
provide to comply with securities regulations and the type of proposed
paragraph (b) information that would be required to be publicly
available by the proposed amendments. Thirty-three percent of issuers
followed the Exchange Act, Regulation A, or the U.S. Bank reporting
standards; 42 percent followed the international reporting standard;
and the remaining 24 percent followed an alternative reporting
standard.\243\ Given that issuers of quoted OTC securities follow
different reporting standards, current financials are available for
some issuers but not others. The Commission estimates that current
financials were publicly available for approximately 68 percent of
issuers of quoted OTC securities.\244\ In particular, a total of 3,211
issuers of quoted OTC securities did not disclose information publicly.
Of these, 1,146 issuers had an obligation to disclose information under
the Exchange Act, Regulation A, or the U.S. Bank reporting standards;
111 issuers had an obligation under an international reporting
standard; and the remaining 1,954 issuers did not have a reporting or
disclosure obligation. Although the majority of issuers of quoted OTC
securities provided current financial information publicly, financial
statements of these issuers are not always audited. The Commission
estimates that only 48 percent of issuers with publicly available
financial statements with quoted OTC securities that were quoted in
2018 provided audited financial statements.\245\ Four
[[Page 58252]]
percent of issuers with quoted OTC securities were shell companies, and
broker-dealers were able to rely on the piggyback exception to publish
or submit quotations for nearly all securities of shell companies (99
percent).\246\ Lastly, the Commission estimates that 1,032 (10 percent)
of issuers with quoted OTC securities and current and publicly
available information had total assets greater than $50 million and
shareholder equity greater than $10 million on their most recent
audited balance sheets.\247\
---------------------------------------------------------------------------
\241\ See supra note 234 for information on data sources.
Numbers in parenthesis represent percentages of the row totals.
\242\ During the 2018 calendar year, 14 percent of issuers of
quoted OTC securities had multiple (two or more) quoted OTC
securities with published quotations.
\243\ The Exchange Act reporting standard requires that issuers
are in compliance with their SEC reporting requirements. The
Regulation A reporting standard applies to companies subject to
reporting obligations under Tier 2 of Regulation A under the
Securities Act. These companies must file annual, semi-annual, and
other interim reports on EDGAR. The U.S. Bank reporting standard
applies to companies in the OTCQX U.S. Bank Tier on OTC Markets
Group's system and may be satisfied by following the SEC reporting
standards, Regulation A reporting standards, or reporting standards
outlined in OTCQX Rules for U.S. Banks (https://www.otcmarkets.com/files/OTCQX_Rules_for_US_Banks.pdf). Foreign issuers that are exempt
from registering a class of equity securities under Section 12(g) of
the Exchange Act pursuant to Rule 12g3-2(b) follow international
disclosure requirements. Lastly, the alternative reporting standard,
which could apply to all remaining OTC security issuers and is based
on the information required by Rule 15c2-11(a)(5), has varying
requirements for disclosure depending on the OTC Markets Group Tier
in which quotations for the security are published.
The Commission observed several instances in which issuers of
quoted OTC securities changed their reporting standard during 2018.
In these instances, for the computation of statistics in Table 3,
the Commission attributed a reporting standard that the issuer
followed for the majority of the days that its securities had
published quotations during 2018.
\244\ See supra note 234 for information on data sources. The
Commission uses information on the IDQS and the OTC Markets Group
tier classification to estimate the number of issuers with current
and publicly available disclosures. In particular, the Commission
counts all issuers with securities quoted on OTC Bulletin Board
(``OTCBB'') and specific tiers on OTC Markets Group's system: OTCQX,
OTXQB, and OTC Pink: Current Information and OTC Pink: Limited
Information. This includes all quoted securities other than in the
OTC Market OTC Pink: Limited Information and OTC Pink: No
Information tiers. OTC Bulletin Board requires that quoted
securities are current in their required filings with the SEC or
other federal regulatory authority with proper jurisdiction. All OTC
Markets Group tiers other than OTC Pink: Limited Information and OTC
Pink: No Information require financial information to be at most six
months old and available on www.otcmarkets.com or on the
Commission's EDGAR system. The number the Commission computes here
is a rough estimate as it is possible that some issuers of
securities in the OTC Pink: Limited Information or OTC Pink: No
Information tiers voluntarily release current and public information
somewhere other than on the OTC Markets Group platform. Of all the
quoted securities that qualified for the piggyback exception in
calendar year 2018, the Commission estimates that 68 percent of them
had publicly available current disclosures.
\245\ OTC Markets Group classifies issuers that provide audited
financial statements. In the analysis, the Commission assumes that
all issuers that have been identified as providing audited financial
statements provide audited balance sheets.
Although current FINRA and Commission rules do not require the
financial statements of non-SEC reporting OTC securities issuers to
be audited, OTC Markets Group requires audited financials from OTC
issuers with securities quoted in the OTCQX U.S.[supreg] and
OTCQB[supreg] tiers. Issuers with securities quoted in the OTC Pink:
Current Information tier must provide an Attorney Letter with
Respect to Current Information if they do not file with the SEC and
do not publish audited financial information.
\246\ See supra Part III.C.2.d for a detailed discussion of
shell companies. Even though broker-dealers had the ability to
publish quotes for these securities relying on the piggyback
exception, some quotes broker-dealers published for these securities
may have relied on other exceptions to the Rule.
\247\ The Commission reviews information on assets and
shareholder equity of OTC issuers from a combination of four
sources: (1) Quarterly and annual filings in EDGAR, (2) S&P Global
Market Intelligence Compustat North America and Compustat Global
databases, (3) Bloomberg, and (4) the OTC Markets Group website
(https://www.otcmarkets.com). The Commission uses data on the most
recent financial information available, as the Commission does not
have access to historical financial data for many issuers. In some
cases, the most recent financial data available is outdated.
Specifically, for approximately 28 percent of OTC issuers, for which
the Commission has data, the financial data are from calendar year
2017 or earlier. Of the 15,851 unique OTC issuers that appear in the
data for calendar year 2018, the Commission is able to draw
financial data for 1,806 (11 percent) of them from EDGAR and
Compustat, 10,333 (65 percent) from Bloomberg, and 1,415 (nine
percent) from the OTC Markets Group website. The Commission is
unable to collect financial information for 2,297 (14 percent) of
OTC issuers because financial statement information for these
issuers was absent in the four data sources the Commission checked.
The Commission is only able to observe total shareholder equity
and not affiliated shareholder equity on the balance sheets of
issuers of quoted OTC securities. Since total shareholder equity
serves as an upper bound on affiliated shareholder equity, the
number of issuers with affiliated shareholder equity greater than
$10 million must be no greater than the number of issuers with total
shareholder equity greater than $10 million.
Table 3--Issuers of Quoted OTC Securities, CY 2018 \248\
----------------------------------------------------------------------------------------------------------------
SEC/Reg. A/ bank International No reporting/
reporting reporting disclosure Total
obligation obligation obligation
----------------------------------------------------------------------------------------------------------------
Public Information Available
----------------------------------------------------------------------------------------------------------------
(A) (B) (C)
----------------------------------------------------------------------------------------------------------------
Issuers..................................... 2,174 (32.44) 4,081 (60.89) 447 (6.67) 6,702
Securities.................................. 2,522 (30.71) 5,201 (63.33) 489 (5.95) 8,212
Shell Company............................... 192 (88.48) 1 (0.46) 24 (11.06) 217
Audited Financials.......................... 1,921 (59.58) 1,144 (35.48) 159 (4.93) 3,224
Assets >$50 mil & SE >$10 mil............... 578 (56.01) 438 (42.44) 16 (1.55) 1,032
----------------------------------------------------------------------------------------------------------------
No Public Information Available
----------------------------------------------------------------------------------------------------------------
(D) (E) (F)
----------------------------------------------------------------------------------------------------------------
Issuers..................................... 1,146 (35.69) 111 (3.46) 1,954 (60.85) 3,211
Securities.................................. 1,179 (35.49) 121 (3.64) 2,022 (60.87) 3,322
Shell Company............................... 136 (66.67) 0 (0.00) 68 (33.33) 204
----------------------------------------------------------------------------------------------------------------
Total (by Reporting Status)
----------------------------------------------------------------------------------------------------------------
Issuers..................................... 3,320 (33.49) 4,192 (42.29) 2,401 (24.22) 9,913
Securities.................................. 3,701 (32.09) 5,322 (46.14) 2,511 (21.77) 11,534
----------------------------------------------------------------------------------------------------------------
The OTC market may attract those seeking to engage in fraudulent
practices, such as pump-and-dump schemes, due to a lack of publicly
available current information about certain issuers of quoted OTC
securities. Two academic studies have found that market manipulation
and pump-and-dump cases are concentrated among issuers of OTC
securities relative to exchange-listed securities.\249\ Another study
has highlighted a higher incidence of cases involving delinquent
filings and pump-and-dump schemes brought against issuers of OTC
securities relative to cases brought against issuers of exchange-listed
securities.\250\ A Commission staff analysis of 4,000 SEC litigation
releases between 2003 and 2012 found that the majority of alleged
violations involving issuers of OTC securities were primarily
classified as reverse mergers of shell companies or as market
manipulation.\251\ In addition, the Commission estimates, from a sample
of 226 Commission enforcement actions filed in fiscal years 2017 and
2018 involving 502 OTC securities, that 171 enforcement actions (76
percent) were
[[Page 58253]]
classified as involving delinquent filings and seven enforcement
actions (three percent) were classified as involving market
manipulation. In contrast, the Commission estimates, from a sample of
68 Commission enforcement actions filed in fiscal years 2017 and 2018
involving listed securities, that one enforcement action (two percent)
was classified as involving delinquent filings and three enforcement
actions (five percent) were classified as involving market
manipulation.
---------------------------------------------------------------------------
\248\ See supra note 234 for information on data sources. The
Commission observes that issuers of OTC securities that trade on the
grey market differ from issuers of quoted OTC securities. The
majority of these issuers followed the alternative reporting
standard (69 percent) and a few (one percent) were identified as
shell companies. In addition four percent of these issuers had total
assets greater than $50 million and shareholder equity greater than
$10 million on their most recent audited balance sheets.
\249\ One study analyzed 142 stock manipulation cases, including
pump-and-dump cases, in SEC litigation releases from 1990 to 2001
and found that that 48 percent involved OTC securities, while 17
percent involved securities listed on national exchanges. See
Aggarwal & Wu, supra note 22. A more recent study looked at 150
pump-and-dump manipulation cases between 2002 and 2015 and found
that 86 percent of these cases involved OTC securities. See Renault,
supra note 22.
\250\ This study looked at a broader sample of securities cases
filed between January 2005 and June 2011 and identified 1,880 cases
involving OTC securities and 1,157 cases involving securities listed
on exchanges in the United States. The majority of OTC securities
cases, 1,148 (61 percent), were related to delinquent filings, while
151 (eight percent) were related to a pump-and-dump scheme, 159
(eight percent) were related to financial fraud, 12 (one percent)
were related to insider trading, and 212 (11 percent) were related
to other fraudulent misrepresentation or disclosure. In contrast,
only 26 (two percent) of listed securities cases involved delinquent
filings, 43 (four percent) involved pump-and-dumps, 278 (24 percent)
involved financial fraud, 399 (34 percent) involved insider trading,
and 173 (15 percent) involved other fraudulent misrepresentation or
disclosure. See Cumming & Johan, supra note 23.
\251\ See Spotlight on Microcap Fraud (Feb. 22, 2019), https://www.sec.gov/spotlight/microcap-fraud.shtml.
---------------------------------------------------------------------------
To highlight characteristics of securities and issuers in the OTC
market that tend to involve risk of fraud and manipulation, the
Commission examined quoted OTC securities that had been the subject of
Commission-ordered trading suspensions and those that have been
assigned a ``caveat emptor'' designation by OTC Markets Group during
the 2018 calendar year.\252\ The Commission summarizes the findings
below, in Table 4.\253\
---------------------------------------------------------------------------
\252\ See supra note 25 for information about Commission-ordered
trading suspensions. OTC Markets Group explains that a ``caveat
emptor'' designation may be assigned to a security if OTC Markets
Group becomes aware of a misleading or a manipulative promotion; a
company is under investigation for fraudulent activity; there is a
regulatory suspension on the security; the company fails to disclose
a corporate action, such as a reverse merger; or there is another
public interest concern associated with the security. See Caveat
Emptor Policy, OTC Mkts. Grp. Inc. (last visited July 15, 2019),
https://www.otcmarkets.com/learn/caveat-emptor.
\253\ All statistics in Table 4 were estimated by analyzing
security and issuer characteristics on the trading day before the
start of a Commission-ordered trading suspension or an assignment of
a ``caveat emptor'' designation by OTC Markets Group.
Table 4--Quoted OTC Securities, Suspensions and OTC Markets Group ``Caveat Emptor'' Status, CY 2018
----------------------------------------------------------------------------------------------------------------
OTC Markets
SEC Group ``caveat
suspensions emptor'' status
----------------------------------------------------------------------------------------------------------------
Issue Characteristics:
Number of Securities...................................................... 318 357
Multiple Broker-Dealers Quoting........................................... 296 (93%) 336 (94%)
Quotes with both Bid and Ask.............................................. 270 (85%) 309 (87%)
Piggyback Eligible........................................................ 315 (99%) 354 (99%)
Issuer Characteristics:
Number of Issuers......................................................... 315 349
SEC/Reg. A/Bank Reporting Standard........................................ 225 (71%) 233 (67%)
International Reporting Standard.......................................... 24 (8%) 25 (7%)
Alternative Reporting Standard (ARS)...................................... 65 (21%) 90 (26%)
Public Information Available.............................................. 28 (9%) 56 (16%)
Audited Financials........................................................ 231 (73%) 245 (70%)
Shell Company............................................................. 30 (10%) 34 (10%)
----------------------------------------------------------------------------------------------------------------
Overall, 318 quoted OTC securities were the subject of Commission-
ordered trading suspensions over the calendar year 2018. Relative to
the characteristics of the overall quoted OTC security market, broker-
dealers were more likely to be able to rely on the piggyback exception
to publish or submit quotations for quoted OTC securities subject to
trading suspensions. Although issuers of suspended quoted OTC
securities tended to be mostly reporting companies, they were less
likely to have current public information available relative to the
full sample of quoted OTC securities because many failed to file
required reports.\254\ Several of these companies were identified as
shell companies (10 percent).
---------------------------------------------------------------------------
\254\ Issuers typically become subject to Commission-ordered
trading suspensions under circumstances where there is a lack of
publicly available current, accurate, or adequate information about
the company. This may happen, for example, when a company is not
current in its filings of periodic reports. As a result, it is not
surprising that many of these issuers were not quoted in OTCBB or
OTC market tiers that require current and publicly available
financial information.
---------------------------------------------------------------------------
In addition, the Commission examined 357 instances in which quoted
OTC securities were flagged with the ``caveat emptor'' designation by
OTC Markets Group to inform investors to exercise additional care when
considering whether to transact in these securities. Most of these
companies had Commission-ordered trading suspensions.\255\ Similar to
the sample of OTC issuers with suspended securities, issuers of these
securities were less likely to have publicly available information.
---------------------------------------------------------------------------
\255\ For 297 of the 357 ``caveat emptor'' securities, this
designation was assigned at the start of the suspension. In the
remaining 21 suspension over the calendar year 2018, the security
had already been designated with a ``caveat emptor'' status prior to
2018. The remaining 60 instances of ``caveat emptor'' assignment
were associated with fraud or public interest concerns other than
trading suspension.
---------------------------------------------------------------------------
Increasing the availability of information about OTC issuers has
the potential to counteract misinformation, which can proliferate
through promotions and other channels. Several recent studies have
examined the effects of stock promotions on investor trading in the OTC
market.\256\ For example, one study has found large price and trading
volume movements following spam email campaigns that conveyed optimism
about a particular OTC security's price and were viewed as containing
credible information about the security.\257\ Others have documented
that cases in which issuers have secretly hired stock promoters for
campaigns to increase their stock price and liquidity often are
accompanied by trading by company insiders.\258\ Based on publicly
available website information reviewed by the Commission on OTC
securities that were subjects of promotion campaigns, the Commission
identified 350 OTC securities (three percent of all quoted OTC
securities) that were featured in at least one promotion campaign
during 2018. The vast majority of these OTC securities, 297 (85
percent), were issued by companies that did not otherwise provide
current and publicly available
[[Page 58254]]
financial disclosures. An alternative data source from OTC Markets
Group data identified 241 OTC securities (two percent of all quoted OTC
securities) that were involved in at least one promotion campaign
during 2018 with 58 of these securities (24 percent) issued by
companies that did not have publicly available information.
---------------------------------------------------------------------------
\256\ See White, supra note 41, at 11-12.
\257\ See Karen K. Nelson et al. Are Individual Investors
Influenced by the Optimism and Credibility of Stock Spam
Recommendations?, 40 J. Business Fin. & Acct. 1155-83 (2013)
(``[T]rading volume more than doubles in the days immediately
following the spam campaign, and the mean return is positive and
significant. However, the median return is zero, with nearly as many
firms experiencing negative returns as positive on the spam date . .
. . [C]ombining optimistic target price projections with credible,
but stale, information from old press releases increase the return
and volume reaction to spam. Moreover, the larger the return implied
by the target price, the larger the market reaction.'').
\258\ See Nadia Massoud et al., Does It Help Firms to Secretly
Pay for Stock Promoters?, J. Fin. Stability 26, 45-61 (2016)
(sampling both OTC securities and exchange-listed securities).
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An academic study has found that OTC stocks tend to be owned
primarily by retail investors rather than institutional investors.\259\
Studies have also found that, on average, quoted OTC securities earn
lower returns than exchange-listed stocks. These investment decisions
by individuals may be due to investors misestimating payoff
probabilities for OTC stocks by overweighting extreme positive
outcomes, particularly in cases where there is a lack of available
information about the issuer.\260\ An alternative explanation,
supported by recent research, indicates that some investors in OTC
securities may be driven by a speculative motive.\261\ Demographic
analysis of OTC investors suggests that they tend toward higher wealth
and education.\262\ However, OTC security holding period returns are
worse for investors residing in locations with populations that may be
more vulnerable in that they are older, lower-income, and less
educated.\263\ Overall, findings in these studies suggest that
investors in the OTC market might benefit from additional information
regarding company fundamentals. For example, some retail investors
could more readily find, through online searches, information that
refutes misinformation disseminated through promotions with publicly
available proposed paragraph (b) information. Other retail investors
could benefit from more efficient prices that are less susceptible to
manipulation as a result of the trading activity of better-informed
investors who acquire this information.
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\259\ See Ang et al., supra note 233 (stating that retail
investors are ``the primary owners of most OTC stocks, whereas
institutional investors hold significant stakes in nearly all stocks
on listed exchanges, including small stocks'').
\260\ See White, supra note 41.
\261\ See Christian Leuz et al., Who Falls Prey to the Wolf of
Wall Street? Investor Participation in Market Manipulation (NBER,
Working Paper No. 24083, 2017), available at https://www.nber.org/papers/w24083.pdf (finding an average loss of 30 percent in a sample
of 421 pump-and-dump schemes from 2002 to 2015 involving 6,569
German investors). The study also finds that ``35% of the tout
investors have been day-trading in penny stocks or are frequent
traders with short investment horizons. These investors appear to be
willing to take substantial risks and trade aggressively also in
other stocks. These investor types are more likely to invest in
touts, place larger bets and have better returns. Their
participation in touts looks quite differently from more
conservative traders, who trade infrequently and do not invest in
penny stocks. This group could be the ones that were tricked into
the schemes.'' Id.
\262\ See White, supra note 41; see also John R. Nofsinger &
Abhishek Varma, Pound Wise and Penny Foolish? OTC Stock Investor
Behavior, 6 Rev. Behav. Fin. 2-25 (2014).
\263\ See White, supra note 41 (``[M]edian holding period
returns deteriorate for zip codes with greater percentages of
elderly, less education and residence stability, and lower income
and wealth. All of the return differences are economically and
statistically significant.'').
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C. Discussion of Economic Effects
1. Effects of Rule 15c2-11 Amendments
In this section, the Commission discusses the expected costs and
benefits of the proposed amendments to Rule 15c2-11. These amendments
generally seek to increase the availability of current company
financial information within the quoted OTC market and modify rule
requirements to account for developments in this market.
The amendments would impact OTC investors, issuers, and
intermediaries such as broker-dealers. The Commission anticipates the
principal economic effects of the proposed amendments to be as follows.
First, the transparency requirements could enable investors to learn
more about the fundamental value of certain companies in the OTC
market, which may direct their funds toward higher-return investments.
In addition, other investors could benefit from more efficient prices
that are less susceptible to manipulation as a result of the trading
activity of better-informed investors who acquire this information.
Second, the amendments may reduce the incidence of fraudulent schemes,
such as pump-and-dump activity, as a result of heightened disclosure
requirements and restrictions on the piggyback exception being applied
to non-transparent and illiquid securities. Finally, broker-dealers
could bear additional costs from the information review requirement as
well as filing FINRA Forms 211 more frequently (e.g., if proposed
paragraph (b) information is not publicly available) as a result of,
among other things, proposed limitations on relying on the piggyback
exception.\264\ To the extent that broker-dealers currently incur costs
associated with disseminating proposed paragraph (b)(5) information,
such costs on broker-dealers may be mitigated to some extent. The
requirement for proposed paragraph (b)(5) information to be publicly
available would reduce the broker-dealer's obligation to make proposed
paragraph (b) information available upon request to interested
investors electronically.
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\264\ Several of the proposed amendments would provide
additional exceptions to the Rule (e.g., eliminating the requirement
for 12 business days of quotes within the previous 30 calendar days
to establish piggyback eligibility). However, the Commission does
not expect these amendments to have a significant impact on the
costs and benefits of the Rule, as discussed below.
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In specific circumstances, other provisions of the proposed
amendments seek to relieve broker-dealers of costs related to the
information review requirement and filing FINRA Form 211. For example,
the exception for issuers with ADTV value greater than $100,000, total
assets greater than $50 million, and unaffiliated shareholder equity
greater than $10 million will relieve broker-dealers of the information
review requirement for larger, more liquid issuers which are
potentially less susceptible to fraud.
Broker-dealers could also incur costs and benefits associated with
possible migration in trading activity from certain issuers and markets
to others (e.g., between quoted and grey markets). Some of these costs
and benefits to broker-dealers may be passed on to investors in the
form of higher or lower transaction costs and account fees. The costs
and benefits associated with the specific proposed Rule provisions are
discussed below.
(a) Making Proposed Paragraph (b) Information Current and Publicly
Available
The costs and benefits discussed below pertain to the general
requirements for proposed paragraph (b) information to be publicly
available and current to publish or submit quotations for, or to
maintain a quoted market in, quoted OTC securities. They also pertain
to the new public disclosure requirements for the unsolicited quotation
exception. The Commission expects that investors would benefit from
easier access to proposed paragraph (b) information through public
mediums, such as EDGAR or the website of a qualified IDQS, a registered
national securities association, the issuer, or a registered broker-
dealer that publishes proposed paragraph (b) information related to
quoted OTC securities.
Presently, not all issuers of quoted OTC securities publicly
disclose current financial information.\265\ This information could
allow investors to better assess the quality of the issuer
[[Page 58255]]
and help them to avoid lower-return investments, such as those involved
in a fraudulent scheme. By enabling investors to compare information
contained in promotion campaigns to that in current company
disclosures, the proposed requirement for proposed paragraph (b)
information to be publicly available may help investors avoid trading
on false information. Investors could also use this information to make
better-informed corporate voting decisions to the extent that OTC
issuers put matters to a shareholder vote in annual or special
meetings.\266\ Investors could also benefit from more efficient prices
that are less susceptible to manipulation as a result of the trading
activity of better-informed investors who acquire this information. In
addition, broker-dealers will be restricted from publishing quotations
for securities without publicly available proposed paragraph (b)
information, which would likely push trading activity in these
securities into the grey market.\267\ Therefore, these proposed
requirements could have a deterrent effect in inhibiting fraudulent
activity related to quoted OTC securities. Investors could benefit from
decreased exposure to investment losses as a result of diminished
frequency of fraudulent activity in the OTC market.
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\265\ Notably, there are no requirements to make financial
disclosures publicly available for OTC securities quoted on the OTC
Market OTC Pink: No Information tier. An analysis of quoted OTC
securities during the calendar year 2018 has revealed that
approximately 32 percent of issuers do not publicly disclose current
financial information. See supra Part VIII.B.
\266\ The Commission lacks data on the quantity and nature of
matters put to a vote at annual or special meetings of issuers of
quoted OTC securities not subject to Commission reporting
obligations.
\267\ Using data on daily dollar trading volume for quoted OTC
securities during the 2018 calendar year, the Commission finds that
quoting activity and trading activity are correlated. In particular,
the Commission finds that OTC securities with published quotations
were 1.82 times more likely to have reported a positive dollar
trading volume on a given day in 2018 relative to securities trading
on the grey market. In addition, if they were traded, OTC securities
with published quotations had, on average, 6.68 times greater daily
dollar trading volume than securities trading on the grey market.
See supra note 234 for a description of OTC securities data sources.
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Higher quality issuers (i.e., issuers more likely to have
productive investment opportunities) could benefit from increased
access to capital to the extent that the change leads to a net increase
in demand for higher quality OTC stocks. Previous academic studies have
highlighted the relationship between the breadth and quality of firm
disclosures and liquidity in the OTC market.\268\ Conversely, issuers
may also incur costs associated with making proposed paragraph (b)
information publicly available to enable broker-dealers to publish or
submit quotations for their securities. These costs could include
preparing and producing proposed paragraph (b) information in document
form and ensuring that the proposed paragraph (b) information is
publicly available.\269\ However, this particular cost is mitigated by
the fact that these amendments would offer several possible
alternatives for releasing proposed paragraph (b) materials, including
making disclosures on public information repositories, such as
EDGAR.\270\ Alternatively, OTC issuers may elect not to provide
proposed paragraph (b) information to the public, in which case their
securities may exit from the quoted market, and their shareholders may
incur costs related to loss of liquidity. The Commission estimates that
the cost to an issuer in connection with this proposed amendment to the
Rule will be, at most, equivalent to the cost of completing and filing
a Form C-AR under Regulation Crowdfunding. The staff report on
Regulation Crowdfunding cites survey data and estimates related costs
to issuers to be, at most $12,804.\271\ There were 3,211 issuers of
quoted OTC securities in 2018 without public information subject to the
requirements of proposed paragraph (b)(5).\272\ Therefore, the
Commission estimates that the maximum annual monetized cost of
producing and updating proposed paragraph (b) information and making it
publicly available every six months to be $82,227,288 across OTC
issuers (and this represents a high upper bound, because the survey
includes costs that may be unrelated to the proposed Rule, such as
legal review of promotional materials).\273\ This cost may be mitigated
by a number of factors, including whether some of the cost associated
with ensuring that the proposed paragraph (b) information is publicly
available may be borne by broker-dealers intending to quote the
security of this issuer.\274\
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\268\ See John (Xuefeng) Jiang et al., Private Intermediary
Innovation and Market Liquidity: Evidence from the Pink Sheets
Market, 33 Contemp. Acct. Res. 920-948 (2016) (finding that
following the introduction of Pink tiers in OTC Markets Group, each
associated with different self-established eligibility requirements
pertaining to disclosure, firms with higher levels of disclosure
experienced an increase in liquidity, while firms that did not
disclose information experienced a decrease in liquidity); see also
Bruggemann et al., supra note 49 (finding that market liquidity and
the propensity of a security to experience a crash in returns, both
used as proxies for the quality of a security in the analysis,
decrease monotonically when moving across OTC tiers from those with
high regulatory strictness and disclosure requirements to those with
lower requirements); Ryan Davis et al., Information and Liquidity in
the Modern Marketplace (Working Paper, 2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2873853.
\269\ Issuers that presently make disclosures publicly
available, either voluntarily or because of a reporting obligation,
and have systems in place for the preparation of these disclosures,
would not face additional costs as a result of this proposed
amendment. An analysis of quoted OTC securities during the calendar
year 2018 has revealed that approximately 68 percent of issuers
publicly disclose current financial information. See supra Part
VIII.B.
\270\ Presumably, issuers will choose the most cost-effective
method to disseminate proposed paragraph (b) information.
\271\ See U.S. Securities and Exchange Commission Staff, Report
to the Commission: Regulation Crowdfunding (June 18, 2019),
available at https://www.sec.gov/files/regulation-crowdfunding-2019_0.pdf. This report cites survey data and estimates costs to
issuers undertaking a crowdfunding offering, including accounting
costs of $3289, legal costs of $3297, and certain disclosure costs
of $6218. Some of these costs may include costs unrelated to Form C-
AR (such as legal review of promotional materials). Therefore, the
cost cited above serves as an upper bound for the cost of completing
and filing Form C-AR.
\272\ See supra Part VIII.B for an analysis of quoted OTC
securities issuers for which there was no public information in
2018. Proposed paragraph (b)(5) would include issuers without a
reporting obligation in addition to issuers delinquent in their
reporting obligations.
\273\ $12,804 x 3,211 issuers x two times per year =
$82,227,288. In the Commission's estimate of the maximum total cost
to issuers of providing proposed paragraph (b) information publicly,
the Commission has assumed that all issuers of quoted OTC securities
that do not currently provide information publicly will choose to do
so consistent with the proposed rule provisions. In addition, the
Commission has assumed that these issuers will update this
information every six months in order to maintain quoting activity
in their securities. It may be the case that some of these issuers
will choose not to provide any disclosures and quoting in their
securities will cease. In these cases, costs associated with
providing proposed paragraph (b) information for these issuers will
be null.
\274\ For example, it is unclear the extent to which specific
OTC issuers without public disclosures may already be producing
financial information internally or even have operations producing
income and other accounting items. In these cases, the Commission
expects the cost for these issuers would be less than the
Commission's estimate.
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Broker-dealers may incur costs or accrue benefits from changes in
the liquidity of quoted OTC securities as a result of changes in demand
associated with new disclosures within quoted markets. For example,
there may be changes in trading volume which alter the number of
transactions from which broker-dealers earn fees. As discussed below,
there may be migration from the quoted market to the grey market for
OTC issuers avoiding these requirements. Therefore, the proportion of
rents earned by broker-dealers from the grey market for OTC securities
may increase relative to the quoted market. The net effect of these
changes on the profits of trading intermediaries is unclear. Some of
these costs and benefits to broker-dealers may be passed on to
investors in the form of higher or lower transaction costs and account
fees. The Commission anticipates that costs and benefits would be
passed on more readily as competition increases
[[Page 58256]]
among broker-dealers for OTC transactions.
(b) Proposed Amendments to Rule 15c2-11 Exceptions
The following proposed amendments to the piggyback exception would
serve to limit the circumstances under which the exception would apply
relative to the baseline: The requirement for proposed paragraph (b)(5)
information to be current and publicly available within six months
before the date of publication or submission of quotation in an IDQS in
order for broker-dealers to continue to rely on the piggyback
exception; the requirement that reliance on the piggyback exception be
based upon quotations with both bid and ask prices; and the inability
of broker-dealers to rely on the piggyback exception to publish or
submit quotations for securities of shell companies or for securities
within 60 calendar days of a trading suspension. These amendments
generally would serve to draw quotation and trading activity away from
less liquid and less transparent quoted OTC securities.
Currently, broker-dealers may rely on the piggyback exception to
publish or submit quotations for the vast majority of quoted OTC
securities, but many issuers of these securities do not provide current
publicly available financial disclosures.\275\ This requirement would
encourage OTC issuers that would like to maintain a quoted market for
their securities to provide current information to the public. The
Commission discusses in detail the expected benefits and costs
associated with providing current information publicly for investors,
issuers of quoted OTC securities, and broker-dealers above.
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\275\ See supra note 265. The Commission estimates that during
the calendar year 2018, issuers of 3,250 quoted OTC securities for
which broker-dealers were relying on the piggyback exception when
publishing quotations, did not have publicly available current
information.
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Generally, these amendments could benefit investors by drawing
their trading activity away from less liquid and less transparent
quoted OTC securities that could attract fraudulent activity. Issuers
in the OTC market could benefit from greater access to capital.\276\
These amendments could also benefit investors by potentially deterring
fraudulent activity. For example, the inability of broker-dealers to
rely on the piggyback exception when publishing quotations for
securities of shell companies could draw trading activity away from
these securities. Currently, many publications of quotations for quoted
OTC securities associated with issuers identified as shell companies
are eligible for broker-dealers to rely on the piggyback exception.
Potential fraudsters would incur costs in providing proposed paragraph
(b) information to perpetrate fraud in shell companies.
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\276\ The potential increase in access to capital for issuers is
based on the likelihood that OTC market investors prefer to invest
in unlisted securities, and market changes as a result of the
proposed amendments could result in the divestiture of fraud-related
securities and increased investment in non-fraud-related securities.
However, to the extent that investment decisions are driven by other
factors, such as a personal interest in specific companies, then
there might be no increase in access to capital for issuers.
---------------------------------------------------------------------------
These amendments could also cause broker-dealers to incur
additional costs. In particular, broker-dealers may need to comply with
the information review requirement as well as file FINRA Forms 211 more
often to maintain a quoted market for securities under these
restrictions. The Commission estimates that it will take broker-dealers
four hours to complete the information review and file Form 211 for
prospectus issuers, Reg. A issuers, and reporting issuers and eight
hours to do so for exempt foreign private issuers or catch-all issuers
whenever a broker-dealer initiates the publication or submission of a
quotation for an OTC security.\277\ Therefore, broker-dealers will bear
a monetized cost of $240 for prospectus issuers, Reg. A issuers, and
reporting issuers, $480 for exempt foreign private issuers and catch-
all issuers whenever a broker-dealer initiates the publication or
submission of a quotation in an OTC security.\278\ The Commission
estimates that 3,696 securities would lose piggyback eligibility as a
result of the proposed restrictions on the piggyback exception.\279\
Therefore, the aggregate monetized cost on broker-dealers would be
$1,426,800 assuming that 1,447 securities were from prospectus, Reg. A,
or reporting issuers, 238 were from exempt foreign private issuers, and
2,011 were from catch-all issuers.\280\
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\277\ The Commission estimates that it would take one hour for a
broker-dealer to complete and file FINRA Form 211.
\278\ 94 hours x $60 per hour = $240 for prospectus, Reg. A, and
reporting issuers; 8 hours x $60 per hour = $480 for exempt foreign
private issuers and for catch-all issuers.
\279\ The Commission estimates that during 2018, broker-dealers
could publish quotations relying on the piggyback exception for
10,122 quoted OTC securities. The Commission estimates the total
number of securities that would lose piggyback eligibility under the
proposed amendments by considering the number of securities that
were piggyback eligible, but also would meet at least one of the
following conditions: (1) The issuer of the quoted OTC security did
not provide public information (3,022 securities); (2) the issuer of
the quoted OTC security was a shell company (448 securities); (3)
the security did not have both bid and ask quotations for four or
more consecutive days (879 securities); and (4) the security was
piggyback eligible after having been suspended (316 securities).
Of the 3,696 securities that would lose piggyback eligibility
under the proposed amendments, 1,447 were securities of prospectus
issuers, Reg. A issuers, and reporting issuers, 238 were of exempt
foreign private issuers, and 2,011 were of catch-all issuers.
\280\ 1,447 x $240 + 238 x $480 + 2,011 x $480 = $1,426,800. To
the extent that broker-dealers may maintain the ability to rely on
the piggyback exception by starting to publish both bid and ask
quotations for securities that are presently piggyback eligible with
only bid, ask or unpriced quotations, fewer securities may lose
piggyback eligibility under the proposed amendments than the
estimates the Commission presents. As noted in the PRA section,
broker-dealers may also withdraw from quoting in securities such as
shell companies and suspended securities. Therefore, the Commission
expects the costs for broker-dealers computed here to be an upper
bound.
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Broker-dealers may also incur costs related to determining whether
or not these conditions apply to the issuer (i.e., whether the issuer
is a shell company within the proposed definition). The Commission
believes that broker-dealers could set up information systems to assess
whether these conditions apply to OTC securities such that there would
a one-time cost but negligible ongoing cost. However, these costs on
individual broker-dealers may be mitigated by allowing a qualified IDQS
to satisfy the information review requirement under the Rule, as the
amendments propose. Additionally, these costs may be mitigated by
permitting broker-dealers to rely on determinations by qualified IDQSs
and national securities associations that proposed paragraph (b)
information is publicly available and that an exception to the Rule
applies. The Commission estimates that it would take a broker-dealer,
IDQS, or national securities association fifteen hours to establish a
system to determine whether exceptions apply to an issuer, for a
maximum aggregate cost of $81,900.\281\ Alternatively, broker-dealers
could withdraw from publishing or submitting quotations for certain OTC
securities as a result of the requirements related to proposed
paragraph (b) information, including the requirements to review and
retain this information. This withdrawal may impose costs on investors
by reducing liquidity for OTC securities they might want to purchase or
already own prior to the withdrawal of liquidity. In addition, such
withdrawal might impose costs of raising capital for OTC issuers.
Broker-dealers could, again, incur costs and
[[Page 58257]]
benefits associated with possible migration in trading activity from
certain issuers to others as well as from the quoted to non-quoted
market. Some of these costs and benefits to broker-dealers may, again,
be passed on to investors.
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\281\ (89 broker-dealers + 1 IDQS + 1 National Securities
Association) x 15 hours x $60 = $81,900. These costs are an upper
bound of the total costs on broker-dealers because the actual number
of broker-dealers quoting OTC securities may be a subset of the 89
broker-dealers identified by OTC Markets Group.
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The proposed requirement that reliance on the piggyback exception
be conditioned on quotations with both bid and ask prices could also
impose costs on broker-dealers and issuers of quoted OTC securities by
possibly limiting the formation of an active quoted market for OTC
securities for which broker-dealers initially publish quotes with only
either a bid or ask price or no prices at all. The Commission estimates
that, out of 431 quoted OTC securities for which broker-dealers could
start relying on the piggyback exception to publish or submit
quotations during the calendar year 2018, 45 (10 percent) OTC
securities had quotes with only either a bid or ask price for the
entire first 30-days of being quoted and 14 (three percent) had
unpriced quotes only.\282\ At the same time, however, if the proposed
requirement were to encourage broker-dealers to shift away from
publishing unpriced or quotations with only either a bid or an ask
price to publishing quotations with both bid and ask prices for some
quoted OTC securities, the proposed requirement may expedite the
development of a two-sided market and facilitate price discovery and
liquidity in these securities.
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\282\ Of the 14 quoted OTC securities that became piggyback
eligible based on unpriced quotations, six (42 percent) had a
published priced quote within the first 60 days after becoming
piggyback eligible.
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In contrast, eliminating from the piggyback exception the
requirement for 12 days of quotations within the previous 30 calendar
days has the potential to widen the circumstances under which broker-
dealers may rely on the piggyback exception relative to the baseline.
This proposed amendment could make publishing quotations and trading
easier in less liquid securities. Therefore, this amendment could, in
principle, mitigate both the benefits and costs of the amendments
described above. However, the Commission expects that eliminating the
12-day publication-of-quotations requirement would have an
insignificant effect on the OTC market as it should only impact a small
fraction of quoting activity. In particular, of all quoted OTC
securities in the calendar year 2018, the Commission estimates that
only nine of more than 10,000 securities had fewer than 12 days of
published quotations within the 30 previous calendar days, with no more
than four business days in succession without a quotation.
These proposed amendments also include changes to the exception for
unsolicited customer quotations. In particular, the amendments limit
reliance on the unsolicited quotation exception on behalf of company
insiders when proposed paragraph (b) information is not current and
publicly available. These amendments could increase costs for broker-
dealers because they may need to verify whether proposed paragraph (b)
information is current and publicly available. Broker-dealers could
also be required to document and record the circumstances involved in
an unsolicited customer quotation. The Commission estimates that the
cost of establishing systems to document and record these circumstances
would be included in the $81,900 systems cost discussed previously. In
addition, the Commission estimates that it would take a broker-dealer
one minute to document and record these circumstances for each customer
order arising from a distinct customer and circumstance, resulting in a
monetary cost of $89.\283\ The Commission lacks data to estimate how
many unsolicited customer quotations come from distinct customers under
distinct circumstances, which would trigger the need for broker-dealers
to document a new circumstance. They could also increase costs for
broker-dealers as a result of the information review requirement, as
well as filing FINRA Form 211, when the exception does not apply. The
costs to broker-dealers associated with these requirements for various
types of issuers are the same as discussed previously in this section.
However, the Commission lacks data on which unsolicited customer
quotations come from company insiders.
---------------------------------------------------------------------------
\283\ (89 broker-dealers x 1 hour) x $60 = $5340. (89 broker-
dealers x 1/60 hour) x $60 = $89.
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These costs could be passed on to OTC investors. For example, OTC
investors may be required to provide documentation supporting the fact
that they are not a prohibited person within this exception, and may
experience reduced liquidity in certain securities in which they are
invested. The magnitude of this potential cost to OTC investors could
vary significantly depending on the manner in which it is or is not
acquired by broker-dealers. However, the Commission believes that this
cost could be minimal because there are means to provide documentation
such as through attestations which would require minimal resources on
the part of the investor.
There could also be benefits to OTC investors from the requirement
for broker-dealers to obtain and review proposed paragraph (b)
information when the unsolicited quotation exception does not apply.
For example, the review of proposed paragraph (b) information in order
to provide a quotation for an unsolicited customer quotation of a
company insider could deter fraud by alerting broker-dealers to
potential sales by company insiders related to fraud. In addition, as
discussed above in relation to proposed limitations on the piggyback
exception, the costs and benefits to investors, issuers and broker-
dealers would be qualitatively similar. Issuers in the OTC market could
benefit from greater access to capital if capital flows away from
fraudulent investments. Broker-dealers could also incur costs and
benefits associated with possible migration in trading activity if
unsolicited customer orders move from quoted to non-quoted markets.
These costs and benefits could be passed on to OTC investors. Finally,
there would be benefits and costs associated with the requirements
pertaining to public disclosure of proposed paragraph (b) information,
as the unsolicited quotation exception for a company insider would be
contingent on this information being current and publicly available.
(c) Proposed New Exceptions to Rule 15c2-11 To Reduce Burdens
These amendments propose three new exceptions to except
publications of quotations for certain OTC securities from the
provisions of Rule 15c2-11, primarily the requirement for broker-
dealers to obtain and review proposed paragraph (b) information. The
first of the three new exceptions would apply to securities with (1) a
$100,000 ADTV value and where (2) the issuer of such security has $50
million total assets value and $10 million unaffiliated shareholders'
equity on the issuer's publicly available audited balance sheet issued
within six months after the end of the most recent fiscal year. This
exception would apply only to securities for which proposed paragraph
(b) information is current and publicly available. This exception is
meant to target more visible quoted OTC securities for which current
and reliable information about the issuer is publicly available to
investors, specifically for larger issuers, and for more liquid
securities. This exception is expected to reduce the broker-dealer
burden of complying with the Rule with respect to publishing quotations
for securities for a subset of issuers of OTC securities. The analysis
in the baseline revealed no
[[Page 58258]]
issuers that had financial information publicly available to investors
and that had been the subject of Commission-ordered trading suspensions
or assigned a ``caveat emptor'' designation by OTC Markets Group in
calendar year 2018 would have met both the ADTV and assets tests.\284\
Therefore, the Commission expects that many other quoted OTC securities
that would qualify for these exceptions would be less susceptible to
misinformation campaigns and share price run-ups as a result of buying
pressure.
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\284\ The Commission finds that in 2018, five suspended
securities and 17 ``caveat emptor'' securities had an ADTV value in
excess of $100,000. However, issuers of these securities would not
have satisfied the thresholds for assets and unaffiliated
shareholder equity required to qualify for the exemption under the
proposed amendments. Similarly, 11 issuers of suspended securities
and 10 issuers of securities with the ``caveat emptor'' designation
that met the assets and the shareholder thresholds did not have
sufficient trading volume that would meet the liquidity threshold.
This analysis pertains to total shareholder equity which serves
as an upper bound for unaffiliated shareholder equity. Therefore,
any firms which fall below $10 million in shareholder equity fall
below this threshold for unaffiliated shareholder equity.
Because delinquent filings may be the reason for the trading
suspension, the Commission is aware that the Commission's analysis
using data on total assets and shareholder equity of issuers with
suspended OTC securities may rely on information which is outdated
and no longer representative of issuer fundamentals.
---------------------------------------------------------------------------
The main economic effect of this proposed exception regarding ADTV
and assets tests should be to relieve broker-dealers from the
information review requirement and filing a FINRA Form 211 to publish
quotations in a quotation medium. As before, the Commission estimates
that broker-dealers will incur relief from a monetized cost of $240 for
prospectus issuers, Reg. A issuers, and reporting issuers, $480 for
exempt foreign private and catch-all issuers whenever a broker-dealer
publishes or submits a quotation for issuers satisfying these
requirements. According to the Commission's estimates from the PRA, two
issuers would be reporting issuers while one would be a catch-all
issuer per year so that the total cost savings would be $960.\285\
Broker-dealers would also need to incur costs to verify that OTC
issuers satisfy these ADTV and size thresholds. The Commission believes
that broker-dealers could set up information systems to assess whether
these conditions apply to OTC issuers such that there would a one-time
cost but negligible ongoing cost. This cost would be included in the
$81,900 systems cost across broker-dealers, IDQSs, and national
securities associations discussed previously. Some of these benefits
and costs may be passed on to OTC investors. Certain issuers or
securities that would meet the Rule's proposed ADTV and assets test but
currently trade in the grey market may benefit from a broker-dealer
establishing a quoted market without incurring costs associated with
complying with the Rule's provisions. This migration may result in a
benefit to investors to the extent that it may establish a new quoted
market that facilitates price discovery and liquidity for higher
quality securities previously trading in the grey market.
---------------------------------------------------------------------------
\285\ (2 reporting issuers x $240) + (1 catch-all issuer x $480)
= $960.
There could be additional relief as a result of the ADTV and
assets exceptions for broker-dealers quoting securities that end up
losing piggyback eligibility under the proposed paragraph (g)(3)
exception. The Commission estimates that out of the 3,696 securities
that would lose piggyback eligibility under the proposed amendments,
four securities of prospectus issuers, Reg. A issuers, and reporting
issuers and three securities of exempt foreign private issuers would
have satisfied the ADTV value and assets thresholds. The ability of
broker-dealers to rely on the proposed paragraph (g)(5) exception
for securities for which they could no longer rely on the proposed
paragraph (g)(3) exception could lead to an additional relief of
four x $240 + 3 x $480 = $2,400.
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The second of the three proposed new exceptions would apply to
quotations following a registered or Regulation A offering, where the
broker-dealer was named as an underwriter in the registration statement
or offering circular and publishes or submits quotations for the same
class of security in an IDQS within certain specified time frames. This
exception is targeted towards those OTC securities that were recently
offered in a transaction in which a regulated entity may have conducted
a due diligence review. Because of the liability attached to
underwriting activity, an underwriter typically conducts a due
diligence review to mitigate potential liability associated with
underwriting an offering of securities. Depending on its breadth and
quality, this review may permit an underwriter to assert a defense to
liability under Section 11 or Section 12(a)(2) of the Securities Act.
As a result, underwriters of registered and Regulation A offerings are
incentivized to confirm that the information provided to investors in
the prospectus for a registered offering and offering circular for a
Regulation A offering is materially accurate and obtained from a
reliable source. Thus, excepting these quotations from the Rule's
provisions is expected to reduce the burden of complying with the Rule
for certain broker-dealers without sacrificing investor protection. The
Commission does not currently have data that allow it to estimate the
propensity with which broker-dealers are underwriting offerings for the
same securities for which they are publishing quotations and thus
quantify the effect of this exception on broker-dealers.
In addition, the Commission is also proposing an exception for
publications or submissions of quotations respecting securities where a
qualified IDQS complies with the Rule's provisions, so long as the
issuer of the security is not a shell company. Broker-dealers could
also rely on a publicly available determination by a qualified IDQS
that proposed paragraph (b) information is current and publicly
available for a given security. This exception is expected to reduce
the burden on some broker-dealers with respect to publishing or
submitting quotations for certain OTC securities. However, broker-
dealers may incur additional costs related to determining certain
characteristics about the issuer (e.g., whether the issuer is a shell
company within the proposed definition). The Commission believes that
broker-dealers or qualified IDQSs could set up information systems to
assess whether these conditions apply to OTC issuers such that there
would a one-time cost but negligible ongoing cost. This cost would
again be included in the $81,900 systems cost across broker-dealers,
IDQSs, and registered national securities associations discussed
previously. These costs and benefits may, again, be passed on to OTC
investors. Although the Commission recognizes that, currently, an IDQS
already operates as a public repository for some information about the
securities that trade in their market, the Commission is unable to
predict how common it would become for a qualified IDQS to be willing
to take on the responsibility of satisfying the requirements of the
qualified IDQS review exception to the Rule, allowing certain broker-
dealers to qualify for this exception.
Lastly, the Commission is also proposing an exception for
publications or submissions of quotations by broker-dealers that rely
on publicly available determinations by a qualified IDQS or a
registered national securities association that proposed paragraph (b)
information is current and publicly available, as well as whether a
broker-dealer may rely on certain proposed exceptions to the Rule. The
Commission expects the main economic effect of this proposed exception
to be mitigating costs broker-dealers are expected to incur associated
with determining certain characteristics about an issuer (e.g., whether
the issuer is a shell company within the proposed definition, or
whether the security
[[Page 58259]]
jointly satisfies the ADTV and assets tests.) However, the Commission
is unable to predict how common it would become for a qualified IDQS or
registered National Securities Association to make these
determinations.
2. Efficiency, Competition, and Capital Formation
In this section, the Commission discusses the impact that the
proposed amendments to Rule 15c2-11 may have on efficiency,
competition, and capital formation. As discussed above, these
amendments generally would increase transparency by requiring public
availability of proposed paragraph (b) information that is current to
enable broker-dealers to publish or submit quotations for OTC
securities. As a result, the proposed amendments may cause capital to
migrate from opaque to more transparent companies. A transfer of
capital could occur as a result of non-disclosing OTC issuers either
exiting OTC market altogether or migrating from the quoted OTC market
to the grey market. This transfer of capital would occur where OTC
issuers opt not to make existing paragraph (b) information publicly
available. Less liquid OTC securities could also migrate away from the
quoted OTC market as a result of the proposed restrictions on the
piggyback exception pertaining to (1) shell companies, (2) recently
suspended securities, and (3) securities without a sufficient prior
history of both bid and ask prices. One academic study finds that
valuations decrease when firms migrate from more liquid markets to less
liquid markets, possibly as a result of decreased access to
capital.\286\ Therefore, investors may reallocate capital away from OTC
issuers of these less liquid securities as these issuers exit the
quoted OTC market. These proposed amendments could decrease investors'
exposure to fraudulent activity directed toward non-transparent or
illiquid securities. Capital formation could improve as investors'
funds are diverted away from fraudulent OTC securities, which would
migrate away from the quoted OTC market, and investors move toward the
investments that remain.
---------------------------------------------------------------------------
\286\ See James J. Angel, et al., From Pink Slips to Pink
Sheets: Liquidity and Shareholder Wealth Consequences of NASDAQ
Delistings (Working Paper, Nov. 4, 2004), available at https://www.researchgate.net/profile/Jeffrey_Harris7/publication/4893245_From_Pink_Slips_to_Pink_Sheets_Liquidity_and_Shareholder_Wealth_Consequences_of_Nasdaq_Delistings/links/02e7e527daa56e7612000000.pdf.
---------------------------------------------------------------------------
In addition, the transparency of the market for quoted OTC
securities should generally improve, particularly for non-disclosing
issuers that decide to start publicly disclosing proposed paragraph (b)
information to remain on the quoted OTC market. Capital formation could
improve as investors allocate funds toward more productive investments
based on enhanced availability of proposed paragraph (b) information in
the quoted market for OTC securities. In particular, investors may be
able to better discern the value of an OTC security from the financial
and qualitative data contained in proposed paragraph (b) information.
As a result of these effects, these proposed amendments could generally
enhance the efficiency of capital allocation, i.e., the degree to which
funds are diverted away from low value investments and toward high
value investments. Previous academic studies have documented a
relationship between greater quality of a firm's disclosures and a
decreased cost of capital for the firm.\287\ Other studies find a
relationship between increased quality and frequency of accounting
disclosures and the productivity of corporate investment.\288\ As
discussed previously, certain OTC issuers may withdraw from quoted
markets as a result of the proposed disclosure requirements and lose
access to capital as a result. However, these issuers may be less
likely to have productive investment opportunities than those that opt
to disclose, which may mitigate the impact on capital formation.
---------------------------------------------------------------------------
\287\ See supra note 269; Luzi Hail & Christian Leuz,
International differences in the cost of equity capital: Do legal
institutions and securities regulation matter?, 44 J. Acct. Res.
485-531 (2006) (finding that stock markets with greater disclosure
requirements have lower costs of capital in cross-country
comparisons).
\288\ See e.g., Sugata Roychowdhury et al., The Effects of
Financial Reporting and Disclosure on Corporate Investment: A
Review, J. Acct. & Econ. (forthcoming 2019).
---------------------------------------------------------------------------
The efficiency of prices (i.e., the degree to which prices reflect
the fundamental value of the security) could also improve in the OTC
market as a result of greater transparency. In particular, prices could
become less susceptible to manipulation as a result of the trading
activity of informed investors who would have access to proposed
paragraph (b) information. These investors could buy underpriced
securities and sell overpriced securities, pushing mispriced securities
toward fundamental values.
The heightened transparency that would arise from the proposed
amendments could increase competition among both broker-dealers and
issuers of quoted OTC securities. For example, broker-dealers could
access proposed paragraph (b) information at a low cost and establish
more competitive prices. Prior to these proposed amendments, broker-
dealers could have had differential access to proposed paragraph (b)
information in quoted the OTC market and potentially benefited from
non-competitive pricing as a result. As mentioned previously, some
broker-dealers may withdraw from quoting certain OTC securities (e.g.,
shell companies) as a result of the costs of initiating and resuming
quotations associated with the proposed amendments. As a result, there
may be diminished price competition in these types of securities.
Issuers of quoted OTC securities may also need to price seasoned
equity offerings more competitively because investors would have
improved access to information and might be able to more easily compare
the financials of OTC issuers when allocating their investment dollars.
This information could again enable OTC investors to divert funds more
easily from higher to lower cost issues. As a result, OTC issuers would
have less ability to price their issues high relative to the
fundamental value of the securities being offered.
D. Reasonable Alternatives
In this section, reasonable alternatives to the proposed amendments
to Rule 15c2-11 are discussed.
1. Eliminating the Piggyback Exception
The 1999 Reproposing Release proposed to eliminate the piggyback
exception from Rule 15c2-11. This amendment would have required all
broker-dealers to complete the information review requirement and file
FINRA Form 211 before publishing or submitting a quotation in a
quotation medium. Relative to the baseline (i.e., the existing
provisions of Rule 15c2-11), this alternative would have increased the
costs of broker-dealers that complied with the Rule's review, document
collection, and recordkeeping provisions prior to publishing or
submitting a quotation for an OTC security. These costs could be passed
on to OTC investors. Alternatively, some broker-dealers could withdraw
from publishing quotations in the OTC market as a result of the
information review requirement, which could lead to the disappearance
of a quoted market for some OTC securities and a migration of these
securities to the grey market. Both possible effects would benefit
investors by imposing costs on potential fraudsters in the OTC market.
First, review of proposed paragraph (b) information could help
broker-
[[Page 58260]]
dealers increase price efficiency, while deterring fraudsters. Second,
broker-dealers' withdrawal from publishing quotations for OTC
securities could benefit investors by inhibiting fraudulent and
manipulative schemes. However, broker-dealers might also withdraw from
publishing quotations for securities of high quality issuers at the
same time. Eliminating the piggyback exception would be expected to
increase capital raising costs for OTC issuers. Therefore, the net
effect of this alternative on OTC investors and issuers is unclear.
The Commission preliminarily believes that the proposed Rule more
appropriately meets the Commission's policy goals because the
alternative places the additional burdens upon broker-dealers and OTC
issuers relative to the proposed amendments, while it fails to target
OTC securities most vulnerable to fraud and manipulation. In
particular, broker-dealers would incur additional costs associated with
review of proposed paragraph (b) information and filing FINRA Form 211
for all OTC securities they wish to quote. In addition, this
alternative could raise the cost of capital for OTC issuers relative to
the proposed amendments again without targeting those issuers most
vulnerable to fraud and manipulation.
2. Eliminating the Piggyback Exception for Shell Companies After
Reverse Mergers
These amendments to Rule 15c2-11 propose to eliminate the piggyback
exception for publications or submissions of quotations for shell
companies, which could inhibit pump-and-dump schemes that can be
targeted toward shell companies. One possible alternative would be to
more narrowly target pump-and-dump schemes by eliminating the piggyback
exception for publications or submissions of shell companies only
during a fixed period after a reverse merger between a shell company
and an operating company. Because there is often no public information
about the post-merger company, eliminating the piggyback exception at
that point would require the issuer to make proposed paragraph (b)
information publicly available for a broker-dealer to maintain an
actively quoted market. The economic effect of this alternative would
be directionally similar to that of the proposed restriction on
publications or submissions of quotations for securities of all shell
companies.
In particular, this alternative could improve the welfare of
investors by helping them avoid fraud perpetrated through shell
companies following a reverse merger. Second, issuers in the OTC market
could benefit from greater access to capital.\289\ Although broker-
dealers would bear costs from the information review requirement and
filing FINRA Form 211 for securities of shell companies after a reverse
merger (with some of this cost possibly passed on to OTC investors),
this cost may be lower relative to the proposed amendments because,
under this alternative, broker-dealers would only need to bear this
cost after a reverse merger. However, under this alternative, broker-
dealers may incur additional costs in monitoring the OTC market for
reverse mergers relative to the proposed amendments. The Commission
preliminarily believes that the proposed Rule is more appropriate than
the alternative because of the additional cost on broker-dealers. In
addition, the Commission recognizes that broker-dealers may not be able
to accurately identify reverse mergers when they occur.
---------------------------------------------------------------------------
\289\ The potential increase in capital availability would occur
to the extent that, in response to an exit from quoted markets by
certain issuers, OTC market investors reinvest with other OTC market
companies, reflecting a preference for unlisted investments.
---------------------------------------------------------------------------
3. Alternative Thresholds for Exceptions
The 1999 Reproposing Release proposed to except publications of
quotations from the provision of Rule 15c2-11 for OTC securities with
at least: (1) $100,000 ADTV value, (2) $50 million total assets value
and $10 million shareholders' equity on the issuer's audited balance
sheet or (3) $50 bid price. These exceptions were less restrictive than
the ones in the current proposed amendments as the exception would
apply if an OTC security could conform to only one of these three
conditions. Therefore, one possible alternative would be to establish
thresholds which conform to these conditions from the 1999 Reproposing
Release.
Relative to the baseline, the main economic effect of this
alternative would be to relieve broker-dealers from complying with the
Rule's provisions and filing FINRA Form 211 to publish quotations in a
quotation medium. Some of these benefits may be passed on to OTC
investors. Certain issuers or securities that would qualify for these
exceptions but currently trade in the grey market may benefit from a
broker-dealer establishing a quoted market without incurring costs
associated with complying with the Rule's provisions. This migration
may result in a benefit to investors to the extent that it may
establish a new quoted market that facilitates price discovery and
liquidity for quality securities previously trading in the grey market.
Relative to the proposed amendments, however, this alternative is
more likely to except securities that may be targeted for fraudulent
activity from the Rule's review and document collection provisions. For
example, there were five suspended OTC securities in 2018 with ADTV
value in excess of $100,000 and 11 issuers of suspended OTC securities
that exceeded the thresholds for $50 million in total assets and $10
million in shareholders' equity. Therefore, investors may incur costs
from greater exposure to fraud and manipulation relative to the
proposed amendments. As a result, the Commission preliminarily believes
the proposed Rule is better than the alternative. However, investors in
higher quality OTC issuers could benefit in that a greater number would
qualify for the quoted market relative to the proposed amendments. In
addition, broker-dealers would benefit from even greater relief from
the Rule's provisions and from filing FINRA Form 211.
4. Quotations With Either Bid or Ask Prices for Piggyback Exception
The proposed amendments condition the piggyback exception on
quotations with both bid and ask prices for the prior 30 calendar days
with no gap in quoting of more than four days. One alternative would be
to condition the exception on quotations with either a bid or ask
price. Relative to the proposed amendments, this alternative would
allow more securities to become eligible for the piggyback exception.
As such, broker-dealers would incur less cost associated with the
Rule's review, document collection, and record-keeping provisions (as
well as filing FINRA Form 211) before publishing or submitting a
quotation for an OTC security relative to the proposed amendments. The
Commission has estimated that 879 OTC securities for which broker-
dealers could publish quotations relying on the piggyback exception
during 2018 did not have quotations with both bid and ask prices for
four days one or more times in a year. Of these securities, 402 were of
prospectus, Reg. A, and reporting issuers, 187 were of exempt foreign
private issuers, and 290 were of catch-all issuers. Therefore, the
Commission estimates that the additional dollar benefit to broker-
dealers from this relief would be $325,440.\290\ OTC investors in
[[Page 58261]]
higher quality issuers could benefit from greater liquidity if this
reduced cost results in more securities remaining in the quoted market.
However, this alternative may also allow less liquid securities to
become eligible for piggybacked quotations relative to the proposed
amendments. As a result, OTC investors may suffer costs if these
securities are more prone to fraud than securities with more frequent
quotations with both bid and ask prices. Therefore, the Commission
preliminarily believes the proposed Rule is better than the
alternative.
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\290\ (402 x $240) + (187 x $480) + (290 x $480) = $325,440.
---------------------------------------------------------------------------
5. Alternative Disclosure Frequency
The Commission has sought to align the proposed Rule with existing
regulatory requirements for publicly available information, as well as
with private market solutions that have developed since the Commission
last proposed to amend the Rule. Notwithstanding this, an alternative
to the proposed amendments would be to define proposed paragraph (b)
disclosures as ``current'' for catch-all issuers based on a different
length of time (e.g., four months instead of six months) for the
purposes of the initiation and resumption of quotes or reliance upon
the piggyback exception. For example, increasing the frequency of
disclosures required to qualify as ``current'' could benefit investors
by improving the relevance of information used for investment decisions
relative to the information available under the existing Rule.
Investors could also benefit from decreased exposure to loss from fraud
as heightened disclosure requirements could push trading activity in
less transparent securities out of the OTC market or to the grey
market. Higher quality OTC issuers could benefit from increased access
to capital to the extent that heightened disclosure requirements lead
to a net increase in demand for higher quality OTC stocks.
However, OTC issuers would face increased costs of providing
disclosures more frequently under such an alternative. In particular,
OTC issuers with no reporting obligations or minimal reporting
obligations would effectively be subject to a more frequent reporting
obligation under such an alternative. Some OTC issuers that wish to
have quoted securities may find themselves effectively subject to a
reporting framework that requires more frequent public disclosures than
their current annual or semiannual reporting obligations as an issuer
under the federal securities laws, such as reporting requirements under
the Securities Act or exchange listing requirements under the Exchange
Act. Broker-dealers, IDQSs, and national securities associations may
also be required to review proposed paragraph (b) information more
frequently under this alternative in order to initially publish or
submit, or maintain, quotes in the OTC market. The Commission
preliminarily believes the proposed Rule is better than the alternative
because the additional benefits from more frequently disclosed
information are likely to be minor, while the costs for issuers,
broker-dealers, and other market participants could increase in
proportion to the required frequency of disclosures.
Decreasing the frequency of required disclosures could have effects
opposite to those discussed above. The Commission is not proposing such
an alternative because a significant decrease in the frequency of
required disclosures could make the disclosures less relevant for
decision making purposes, driving down their potential benefit to
investors.
E. Request for Comment
While the Commission welcomes any public input on its economic
analysis, the Commission asks commenters to consider the following
questions:
Q139. The Commission requests information including data that would
help quantify the costs and the value of the benefits of the proposed
amendments described above. The Commission seeks estimates of these
costs and benefits, as well as any costs and benefits not already
defined, that may result from the proposed amendments. The Commission
also requests qualitative feedback on the nature of the benefits and
costs described above and any benefits and costs the Commission may
have overlooked.
Q140. In particular, the Commission requests information including
data on the costs to issuers associated with preparing and providing
publicly proposed paragraph (b) information, especially for issuers
that do not currently have a reporting obligation under the Exchange
Act or other federal securities laws or rules. To what extent are these
costs mitigated by offering alternatives for releasing proposed
paragraph (b) materials?
Q141. What types of investors typically invest in quoted OTC
securities in terms of demographics such as age, income, wealth,
education, gender and other characteristics such as financial literacy
and behavior? What types of investors typically invest in OTC security
promotions or pump-and-dump schemes? What are the typical outcomes from
investment in quoted OTC securities, promotions, and pump-and-dump
schemes for investors with different demographics and characteristics?
Q142. To what extent do investors consider already publicly
available information about quoted OTC securities when making
investment decisions? Would requiring all quoted OTC securities to have
proposed paragraph (b) information publicly available increase investor
reliance on issuer information (perhaps because it would become easier
to compare among issuers)?
Q143. To what extent would the proposed amendments change the
number of quoted securities? In particular, which types of quoted OTC
securities will be likely to move away from the quoted OTC market to
the grey market? Which types of OTC securities previously trading on
the grey market are likely to move to the quoted market? Are there
frictions to moving between the quoted OTC market and the grey market?
Q144. Which types of securities are likely to have significant
discrepancies when comparing worldwide trading volume and trading
volume reported to FINRA? Which data on trading will broker-dealers
likely use when establishing eligibility for relying on the ADTV prong
of the proposed ADTV and asset test exception?
Q145. What impact would the proposed amendments have on
competition? Would the proposed amendments put issuers of quoted OTC
securities, or particular types of issuers of quoted OTC securities, at
a competitive advantage or disadvantage?
Q146. What impact would the proposed amendments have on efficiency?
Has the Commission overlooked any positive or negative effects on
efficiency?
Q147. What impact would the proposed amendments have on capital
formation? Would there be any positive or negative effects on capital
formation that the Commission may have overlooked?
Q148. To what degree would the costs of the proposed Rule's
provisions be borne by a qualified IDQS on behalf of broker-dealers? To
what degree would a qualified IDQS or registered national securities
association make publicly available determinations that the
requirements of an exception are met?
Q149. How common is it for broker-dealers to initiate quotations
for OTC securities that were underwritten by them? To what extent would
broker-dealers rely on the proposed exception for securities issued in
offerings that were underwritten?
[[Page 58262]]
Q150. To what extent do certain broker-dealers have information
systems in place to assess whether certain conditions (i.e., whether
the issuer is a shell company within the proposed definition) apply to
OTC issuers? Which types of broker-dealers, if any, have these
information systems in place? What are the costs of setting up and
maintaining such systems? Is it reasonable to assume that setting up
such systems would involve a one-time fixed cost and negligible ongoing
costs?
Q151. What is the degree of competition among broker-dealers that
publish quotations for OTC securities? Is it the case that there is a
handful of dominant broker-dealers publishing quotations for OTC
securities or is this activity spread across many broker-dealers of
varying size? Do certain broker-dealers publish quotations for a
specific subset of OTC securities and not others (i.e., particular
industries, domiciles, etc.)? How will the degree of competition change
as a result of the proposed amendments? Has there been a change in the
number of broker-dealers publishing quotations for OTS securities over
time? Has there been a change in the number of broker-dealers
conducting the information review under the Rule over time? Commenters
are requested to provide data that would allow the Commission to
identify broker-dealers publishing quotations for OTC securities as
well as the potential costs of the proposed amendments on the broker-
dealer industry.
Q152. For issuers of quoted OTC securities that do not currently
have a reporting or disclosure obligation outside of the existing Rule,
could requiring disclosures to be publicly available lead to changes in
the nature or the quality of disclosures these companies provide? For
these same issuers, which method of distribution would they likely
choose for making proposed paragraph (b) information publicly
available?
Q153. To what extent are quoted OTC securities subjects of
promotion campaigns? How is the propensity of a quoted OTC security to
be the subject of a promotion campaign related to there being a lack of
publicly available information about its issuer?
Q154. Are there alternatives the Commission should consider other
than those discussed in this release? What are the costs and benefits
of those alternatives relative to the regulatory baseline and relative
to the proposed amendments?
IX. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') \291\ requires federal
agencies, in promulgating rules, to consider the impact of those rules
on small businesses. Section 603(a) \292\ of the Administrative
Procedure Act,\293\ as amended by the RFA, generally requires the
Commission to undertake a regulatory flexibility analysis of all
proposed rules, or proposed rule amendments, to determine the impact of
such rulemaking on ``small businesses'' \294\ unless the Commission
certifies that the rule, if adopted, would not have a significant
impact on a substantial number of ``small entities.'' \295\ As
discussed above in PRA section above, the Commission believes that the
Rule and proposed amendments impact the 89 broker-dealers that publish
or submit quotations on OTC Markets Group's systems. A broker-dealer is
a small entity if it has total capital (net worth plus subordinated
liabilities) of less than $500,000 on the date in the prior fiscal year
as of which its audited financial statements were prepared pursuant to
Sec. 240.17a-5(d), and it is not affiliated with any person (other
than a natural person) that is not a small business or small
organization.\296\ As of December 31, 2018, the Commission estimates
that there were approximately 1,000 broker-dealers that would be small
entities as defined above.
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\291\ 5 U.S.C. 601 et seq.
\292\ Id.
\293\ 5 U.S.C. 551 et seq.
\294\ Although Section 601(b) of the RFA defines the term
``small business,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
small business for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10 under the Exchange
Act. Exchange Act Rule 0-10 (``Rule 0-10'').
\295\ 5 U.S.C. 605(b).
\296\ Exchange Act Rule 0-10(c).
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Based on a review of data involving the 89 broker-dealers that
publish quotations for OTC securities, the Commission does not believe
that any of the 89 broker-dealers impacted by the Rule are small
entities under the above definition because they either exceed $500,000
in total capital or are affiliated with a person that is not a small
entity as defined in Rule 0-10.\297\ It is possible that in the future
a small entity may become impacted by the Rule and the proposed
amendments. Based on experience with broker-dealers that participate in
this market, however, the Commission preliminarily believes that this
scenario will be unlikely since firms that enter the market are likely
to exceed $500,000 in total capital or be affiliated with a person that
is not a small entity.
---------------------------------------------------------------------------
\297\ See supra Parts VII.B and VIII.B.
---------------------------------------------------------------------------
For the foregoing reason, the Commission certifies that the
proposed amendments to Exchange Act Rule 15c2-11 would not have a
significant economic impact on a substantial number of small entities
for purposes of the RFA. The Commission encourages written comments
regarding this certification, and requests that commenters describe the
nature of any impact on small entities and provide empirical data to
illustrate the extent of the impact.
X. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, the Commission is also requesting information regarding
the potential impact of the proposed amendments on the economy on an
annual basis. In particular, comments should address whether the
proposed changes, if adopted, would have a $100,000,000 annual effect
on the economy, cause a major increase in costs or prices, or have a
significant adverse effect on competition, investment, or innovations.
Commenters should provide empirical data to support their views.
XI. Statutory Basis and Text of Proposed Rules
The rule amendments are being proposed pursuant to Sections 3,
10(b), 15(c), 15(h), 17(a), and 23(a) of the Securities Exchange Act of
1934, 15 U.S.C. 78c, 78j(b), 78o(c), 78o(g), 78q(a), and 78w(a).
XII. List of Subjects
List of Subjects in 17 CFR Parts 230 and 240
Administrative practice and procedure, Reporting and recordkeeping
requirements, Securities.
For the reasons set out in the preamble, the Commission is
proposing to amend title 17, chapter II of the Code of the Federal
Regulations as follows.
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
0
1. The general authority for part 230 continues to read in part as
follows:
Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h,
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L.
[[Page 58263]]
112-106, sec. 201(a), sec. 401, 126 Stat. 313 (2012), unless
otherwise noted.
* * * * *
Sec. [thinsp]230.144 [Amended]
0
2. Section 230.144, paragraph (c)(2), is amended by removing the text
``(a)(5)(i) to (xiv), inclusive, and paragraph (a)(5)(xvi)'' and adding
in its place ``(b)(5)(i)(A) to (N), inclusive, and paragraph
(b)(5)(i)(P)''.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
3. The authority citation for part 240 continues to read, in part, as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
0
4. Section 240.15c2-11 is revised to read as follows:
Sec. [thinsp]240.15c2-11 Publication or submission of quotations
without specific information.
(a) Review Requirement. As a means reasonably designed to prevent
fraudulent, deceptive, or manipulative acts or practices, it shall be
unlawful for:
(1) A broker or dealer to publish any quotation for a security or,
directly or indirectly, to submit any such quotation for publication,
in any quotation medium, unless:
(i) Such broker or dealer has in its records the documents and
information required by paragraph (b) of this section;
(ii) Such documents and information required by paragraph (b) of
this section (excluding paragraphs (b)(5)(i)(N) through (P) of this
section) are current and publicly available; and
(iii) Based upon a review of the documents and information required
by paragraph (b) of this section, together with any other documents and
information required by paragraph (c) of this section, such broker or
dealer has a reasonable basis under the circumstances for believing
that:
(A) The documents and information required by paragraph (b) of this
section are accurate in all material respects; and
(B) The sources of the documents and information required by
paragraph (b) of this section are reliable; or
(2) A qualified interdealer quotation system to make known to
others the quotation of a broker or dealer that is published or
submitted pursuant to paragraph (f)(7) of this section, unless:
(i) Such qualified interdealer quotation system has in its records
documents and information required by paragraph (b) of this section
(excluding paragraphs (b)(5)(i)(N) through (P) of this section except
where the qualified interdealer quotation system has knowledge or
possession of this information);
(ii) Such documents and information required by paragraph (b) of
this section (excluding paragraphs (b)(5)(i)(N) through (P) of this
section) are current and publicly available; and
(iii) Based upon a review of the documents and information required
by paragraph (b) of this section (excluding paragraphs (b)(5)(i)(N)
through (P) of this section except where the qualified interdealer
quotation system has knowledge or possession of this information),
together with any other documents and information required by paragraph
(c) of this section, such qualified interdealer quotation system has a
reasonable basis under the circumstances for believing that:
(A) The documents and information required by paragraph (b) of this
section are accurate in all material respects; and
(B) The sources of the documents and information required by
paragraph (b) of this section are reliable.
(b) Required Information. (1) A copy of the prospectus specified by
section 10(a) of the Securities Act of 1933 for an issuer that has
filed a registration statement under the Securities Act of 1933, other
than a registration statement on Form F-6, that became effective less
than 90 calendar days prior to the day on which such broker or dealer
publishes or submits the quotation to the quotation medium; Provided,
That such registration statement has not thereafter been the subject of
a stop order that is still in effect when the quotation is published or
submitted; or
(2) A copy of the offering circular provided for under Regulation A
under the Securities Act of 1933 for an issuer that has filed a
notification under Regulation A and was authorized to commence the
offering less than 40 calendar days prior to the day on which such
broker or dealer publishes or submits the quotation to the quotation
medium; Provided, That the offering circular provided for under
Regulation A has not thereafter become the subject of a suspension
order that is still in effect when the quotation is published or
submitted; or
(3) A copy of the:
(i) Issuer's most recent annual report filed pursuant to section 13
or 15(d) of the Act, together with any periodic and current reports
that have been filed thereafter under the Act by the issuer, except for
current reports filed during the three business days prior to the
publication or submission of the quotation; Provided, however, That
(A) Until such issuer has filed its first such annual report, the
broker, dealer, or qualified interdealer quotation system has in its
records a copy of the registration statement filed by the issuer under
the Securities Act of 1933, other than a registration statement on Form
F-6, that became effective within the prior 16 months, or a copy of any
registration statement filed by the issuer under section 12 of the Act
that became effective within the prior 16 months, together with any
periodic and current reports filed thereafter under section 13 or 15(d)
of the Act, and
(B) The broker, dealer, or qualified interdealer quotation system
has a reasonable basis under the circumstances for believing that the
issuer is current in filing such reports described in this paragraph
(b)(3)(i);
(ii) Issuer's most recent annual report filed pursuant to
Regulation A (Sec. Sec. [thinsp]230.251 through 230.263 of this
chapter), together with any periodic and current reports filed
thereafter under Regulation A by the issuer, except for current reports
filed during the three business days prior to the publication or
submission of the quotation; Provided, however, That
(A) Until such issuer has filed its first such annual report, the
broker, dealer, or qualified interdealer quotation system has in its
records a copy of the offering circular filed by the issuer under
Regulation A, that was qualified within the prior 16 months, together
with any periodic and current reports filed thereafter under Regulation
A, and
(B) The broker, dealer, or qualified interdealer quotation system
has a reasonable basis under the circumstances for believing that the
issuer is current in filing such reports described in this paragraph
(b)(3)(ii);
(iii) Annual statement referred to in section 12(g)(2)(G)(i) of the
Act (in the case of an issuer required to file reports pursuant to
section 13 or 15(d) of the Act), together with any periodic and current
reports filed thereafter under the Act by the issuer, except for
current reports filed during the three business days prior to the
publication or submission of the quotation; Provided, however, That
(A) Until such issuer has filed its first such annual statement,
the broker, dealer, or qualified interdealer quotation system has in
its records a copy of the registration statement filed by the issuer
[[Page 58264]]
under the Securities Act of 1933, other than a registration statement
on Form F-6, that became effective within the prior 16 months, or a
copy of any registration statement filed by the issuer under section 12
of the Act, that became effective within the prior 16 months, together
with any periodic and current reports filed thereafter under section 13
or 15(d) of the Act, and
(B) The broker, dealer or qualified interdealer quotation system
has a reasonable basis under the circumstances for believing that the
issuer is current in filing such reports described in this paragraph
(b)(3)(iii); or
(iv) Annual statement referred to in section 12(g)(2)(G)(i) of the
Act (in the case of an issuer of a security that falls within the
provisions of section 12(g)(2)(G) of the Act); Provided, however, That
the broker, dealer, or qualified interdealer quotation system has a
reasonable basis under the circumstances for believing that the issuer
is current in filing (in the case of an insurance company exempted from
section 12(g) of the Act by reason of section 12(g)(2)(G) thereof) the
annual statement referred to in section 12(g)(2)(G)(i) of the Act; or
(4) A copy of the information that, since the beginning of its last
fiscal year, the issuer has published pursuant to Sec.
[thinsp]240.12g3-2(b), which the broker or dealer must make available
upon the request of a person expressing an interest in a proposed
transaction in the issuer's security with the broker or dealer, such as
by providing the requesting person with appropriate instructions
regarding how to obtain the information electronically; or
(5)(i) The following information, which must be made publicly
available (excluding paragraphs (b)(5)(i)(N) through (P) of this
section) and be current as of a date within 12 months prior to the
publication or submission of the quotation, unless otherwise specified:
(A) The name of the issuer and its predecessor (if any);
(B) The address of the issuer's principal executive offices;
(C) The state of incorporation or registration;
(D) The title and class of the security;
(E) The par or stated value of the security;
(F) The number of shares or total amount of the securities
outstanding as of the end of the issuer's most recent fiscal year;
(G) The name and address of the transfer agent;
(H) A description of the issuer's business;
(I) A description of products or services offered by the issuer;
(J) A description and extent of the issuer's facilities;
(K) The name of the chief executive officer, members of the board
of directors, and officers, as well as any person who is, directly or
indirectly, the beneficial owner of more than 10 percent of the
outstanding units or shares of any class of any equity security of the
issuer;
(L) The issuer's most recent balance sheet (as of a date less than
16 months before the publication or submission of the quotation) and
profit and loss and retained earnings statements (for the 12 months
preceding the date of the most recent balance sheet); Provided,
however, That if the balance sheet is not as of a date less than six
months before the publication or submission of the quotation, the
balance sheet must be accompanied with profit and loss and retained
earnings statements for the period from the date of such balance sheet
to a date that is less than six months before the publication or
submission of the quotation;
(M) Similar financial information for such part of the two
preceding fiscal years as the issuer or its predecessor has been in
existence;
(N) Whether the broker or dealer or any associated person of the
broker or dealer is affiliated, directly or indirectly, with the
issuer;
(O) Whether the quotation is being published or submitted on behalf
of any other broker or dealer and, if so, the name of such broker or
dealer; and
(P) Whether the quotation is being submitted or published, directly
or indirectly, by or on behalf of the issuer or persons identified in
paragraph (b)(5)(i)(K) of this section and, if so, the name of such
person and the basis for any exemption under the federal securities
laws for any sales of such securities on behalf of such person.
(ii) The broker or dealer must make information required by
paragraph (b)(5)(i) of this section available upon the request of a
person expressing an interest in a proposed transaction in the issuer's
security with the broker or dealer, such as by providing the requesting
person with appropriate instructions regarding how to obtain publicly
available information electronically. If such information is made
available to others upon request pursuant to this paragraph, such
delivery, unless otherwise represented, shall not constitute a
representation by such broker or dealer that such information is
accurate, but shall constitute a representation by such broker or
dealer that the information is current in relation to the day the
quotation is submitted, that the broker or dealer has a reasonable
basis under the circumstances for believing the information is accurate
in all material respects, and that the information was obtained from
sources that the broker or dealer has a reasonable basis for believing
are reliable. Paragraph (b)(5)of this section shall apply to any
security of an issuer that is not included in paragraphs (b)(1) through
(b)(4) of this section. Paragraph (b)(5) of this section shall apply to
any security of an issuer if information described in paragraphs (b)(1)
through (b)(4) of this section is not current.
(c) Supplemental Information. With respect to any security the
quotation of which is within the provisions of this section, the broker
or dealer submitting or publishing such quotation, or any qualified
interdealer quotation system that makes known to others the quotation
of a broker or dealer pursuant to paragraph (a)(2) of this section,
shall have in its records the following documents and information:
(1) Records related to the submission or publication of such
quotation, including the identity of the person or persons for whom the
quotation is being published or submitted, whether such person or
persons is the issuer, chief executive officer, any members of the
board of directors, officers, or any person, directly or indirectly,
the beneficial owner of more than 10 percent of the outstanding units
or shares of any class of equity security of the issuer, and any
information regarding the transactions provided to the broker, dealer
or qualified interdealer quotation system by such person or persons;
(2) A copy of any trading suspension order issued by the Commission
pursuant to section 12(k) of the Act concerning any securities of the
issuer or its predecessor (if any) during the 12 months preceding the
date of the publication or submission of the quotation or a copy of the
public release issued by the Commission announcing such trading
suspension order; and
(3) A copy or a written record of any other material information
(including adverse information) regarding the issuer that comes to the
knowledge or possession of the broker, dealer, or qualified interdealer
quotation system before the publication or submission of the quotation.
(d) Recordkeeping. (1)(i) The following persons shall preserve for
a period of not less than three years, the first two years in an easily
accessible place, the documents and information
[[Page 58265]]
required under paragraphs (a), (b), and (c) of this section:
(A) Any broker or dealer publishing or submitting a quotation
pursuant to paragraph (a)(1) of this section concerning a security; or
(B) Any qualified interdealer quotation system that makes known to
others the quotation of a broker or dealer pursuant to paragraph (a)(2)
of this section concerning a security;
(ii) Provided, however, That documents and information required by
paragraph (b) of this section are not required to be preserved if it is
available on the Commission's Electronic Data Gathering, Analysis and
Retrieval System (``EDGAR'') and the broker-dealer or qualified
interdealer quotation system documents the documents and information
required by paragraph (b) of this section that it reviewed.
(2)(i) The following persons shall preserve for a period of not
less than three years, the first two years in an easily accessible
place, the documents and information that demonstrate that the
requirements for an exception under paragraphs (f)(2), (f)(3), (f)(5),
(f)(6), (f)(7), and (f)(8) of this section are met:
(A) Any qualified interdealer quotation system or registered
national securities association that makes the publicly available
determinations described in paragraph (f)(8) of this section; and
(B) Any broker or dealer publishing or submitting a quotation
pursuant to paragraph (f) of this section; Provided, however, That any
broker or dealer that relies on a determination described in paragraphs
(f)(7) or (f)(8) of this section is required to preserve only a record
of the exception upon which the broker or dealer is relying and the
name of the qualified interdealer quotation system or registered
national securities association that determined that the requirements
of that exception are met.
(ii) Provided, further, That paragraph (b) information is not
required to be preserved if it is available on the Commission's
Electronic Data Gathering, Analysis and Retrieval System (``EDGAR'').
(e) Definitions. For purposes of this section:
(1) Current shall mean filed, published, or disclosed in accordance
with the time frames identified in each paragraphs (b)(1) through
(b)(5) of this section.
(2) Interdealer quotation system shall mean any system of general
circulation to brokers or dealers that regularly disseminates
quotations of identified brokers or dealers.
(3) Issuer, in the case of quotations for American Depositary
Receipts, shall mean the issuer of the deposited shares represented by
such American Depositary Receipts.
(4) Publicly available shall mean available on the Commission's
Electronic Data Gathering, Analysis and Retrieval System (``EDGAR'') or
on the website of a qualified interdealer quotation system, a
registered national securities association, the issuer, or a registered
broker or dealer; Provided, however, That publicly available shall not
mean where access to documents and information required by paragraph
(b) of this section is restricted by user name, password, fees, or
other restraints.
(5) Qualified interdealer quotation system shall mean any
interdealer quotation system that meets the definition of an
``alternative trading system'' under Rule 300(a) of Regulation ATS and
operates pursuant to the exemption from the definition of an
``exchange'' under Rule 3a1-1(a)(2) of the Act.
(6) Except as otherwise specified in this rule, quotation shall
mean any bid or offer at a specified price with respect to a security,
or any indication of interest by a broker or dealer in receiving bids
or offers from others for a security, or any indication by a broker or
dealer that wishes to advertise its general interest in buying or
selling a particular security.
(7) Quotation medium shall mean any ``interdealer quotation
system'' or any publication or electronic communications network or
other device that is used by brokers or dealers to make known to others
their interest in transactions in any security, including offers to buy
or sell at a stated price or otherwise, or invitations of offers to buy
or sell.
(8) Shell company shall mean any issuer, other than a business
combination related shell company, as defined in Sec. 230.405 of this
chapter, or an asset-backed issuer as defined in Item 1101(b) of
Regulation AB (Sec. 229.1101(b) of this chapter), that has:
(i) No or nominal operations; and
(ii) Either:
(A) No or nominal assets;
(B) Assets consisting solely of cash and cash equivalents; or
(C) Assets consisting of any amount of cash and cash equivalents
and nominal other assets.
(f) Exceptions. Except as provided in paragraph (d)(2) of this
section, the provisions of this section shall not apply to:
(1) The publication or submission of a quotation concerning a
security that is admitted to trading on a national securities exchange
and that is traded on such an exchange on the same day as, or on the
business day next preceding, the day the quotation is published or
submitted.
(2) The publication or submission by a broker or dealer, solely on
behalf of a customer (other than a person acting as or for a dealer),
of a quotation that represents the customer's unsolicited indication of
interest; Provided, however, That this paragraph (f)(2) shall not apply
to a quotation:
(i) Consisting of both a bid and an offer, each of which is at a
specified price, unless the quotation medium specifically identifies
the quotation as representing such an unsolicited customer interest; or
(ii) Published or submitted, directly or indirectly, by or on
behalf of the chief executive officer, members of the board of
directors, officers, or any person who is, directly or indirectly, the
beneficial owner of more than 10 percent of the outstanding units or
shares of any class of any equity security of the issuer, unless
documents and information required by paragraph (b) of this section are
current and publicly available.
(3)(i)(A) The publication or submission, in an interdealer
quotation system that specifically identifies as such unsolicited
customer indications of interest of the kind described in paragraph
(f)(2) of this section, of a quotation concerning a security that has
been the subject of both bid and ask quotations (exclusive of any
identified customer interests) in such a system at specified prices
within the previous 30 calendar days, with no more than four business
days in succession without such a quotation;
(B) The publication or submission, in an interdealer quotation
system that does not so identify any such unsolicited customer
indications of interest, of a quotation concerning a security that has
been the subject of both bid and ask quotations in an interdealer
quotation system at specified prices within the previous 30 calendar
days, with no more than four business days in succession without such a
quotation; or
(C) A dealer acting in the capacity of market maker, as defined in
section 3(a)(38) of the Act, that has published or submitted a
quotation concerning a security in an interdealer quotation system and
such quotation has qualified for an exception provided in this
paragraph (f)(3), may continue to publish or submit quotations for such
security in the interdealer quotation system without compliance with
this section, unless and until such dealer ceases to submit or publish
a quotation
[[Page 58266]]
or ceases to act in the capacity of market maker concerning such
security;
(ii) Provided, however, That this paragraph (f)(3) shall not apply
to the security of an issuer that is a shell company or that was the
subject of a trading suspension order issued by the Commission pursuant
to section 12(k) of the Act until 60 calendar days after the expiration
of such order; and that this paragraph (f)(3) shall apply to a
publication or submission of a quotation concerning a security of an
issuer included in paragraph (b)(5) of this section only where the
information required by paragraph (b)(5)(i) (excluding paragraphs
(b)(5)(i)(N) through (P)) is current and has been made publicly
available within six months before the date of publication or
submission of such quotation.
(4) The publication or submission of a quotation concerning a
municipal security.
(5)(i) The publication or submission of a quotation concerning:
(A) A security with a worldwide average daily trading volume value
of at least $100,000 during the 60 calendar days immediately before the
publication of the quotation of such security; and
(B) The issuer of such security has at least $50 million in total
assets and $10 million in unaffiliated shareholders' equity as
reflected in the issuer's publicly available audited balance sheet
issued within six months after the end of its most recent fiscal year;
(ii) Provided, however, That this paragraph (f)(5) shall apply only
to the publication or submission of a quotation concerning such
security if documents and information required by paragraph (b) of this
section of the issuer of such security are current and publicly
available.
(6) The publication or submission of a quotation concerning a
security by a broker or dealer that is named as an underwriter in a
registration statement for an offering of that class of security
referenced in paragraph (b)(1) of this section or in an offering
circular for an offering of that class of security referenced in
paragraph (b)(2) of this section; Provided, however, That this
paragraph (f)(6) shall apply only to the publication or submission of a
quotation concerning such security within the time frames identified in
paragraphs (b)(1) or (b)(2) of this section.
(7) The publication or submission of a quotation by a broker or
dealer, in a qualified interdealer quotation system, concerning a
security where such qualified interdealer quotation system complies
with the requirements of paragraphs (a) through (c) of this section and
also makes a publicly available determination of such compliance, and a
broker or dealer publishes or submits a quotation in reliance on this
exception within three business days after such publicly available
determination; Provided, however, That this paragraph (f)(7) shall not
apply to a quotation concerning a security:
(i) If the issuer of such security is a shell company; or
(ii) After the first 30 calendar days of publication or submission
of such quotation by a broker or dealer in reliance on this paragraph
(f)(7).
(8) The publication or submission of a quotation by a broker or
dealer that relies on publicly available determinations by a qualified
interdealer quotation system or registered national securities
association that:
(i) Documents and information required by paragraph (b) are current
and publicly available;
(ii) A broker or dealer may rely on an exception contained in
paragraph (f)(1), (f)(3)(i)(A), (f)(3)(i)(B), (f)(4), (f)(5), or (f)(7)
of this section;
(iii) The qualified interdealer quotation system or registered
national securities association has reasonably designed written
policies and procedures to determine whether documents and information
required by paragraph (b) of this section are current and publicly
available and that the requirements of an exception under paragraph (f)
of this section are met.
(g) Exemptive Authority. Upon written application or upon its own
motion, the Commission may, conditionally or unconditionally, exempt by
order any person, security, or transaction, or any class or classes of
persons, securities, or transactions, from any provision or provisions
of this section, to the extent that such exemption is necessary or
appropriate in the public interest, and is consistent with the
protection of investors.
By the Commission.
Dated: September 25, 2019.
Vanessa Countryman,
Secretary.
[FR Doc. 2019-21260 Filed 10-29-19; 8:45 am]
BILLING CODE 8011-01-P