# Publication or Submission of Quotations Without Specified Information > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2019-21260 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** October 30, 2019 - **Citation:** 84 FR 58206 ## Text 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. 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 rule-comments@sec.gov. 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 (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 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. 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. 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). 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 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 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. 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. 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. 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 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 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.” • Amend the “piggyback exception,” which is conditioned on continuous and frequent quotations, to: ○ Require issuer information to be current and publicly available; ○ 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; ○ 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; ○ Eliminate the ability of broker-dealers to rely on the exception for securities of “shell companies;” 11 and 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). ○ 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 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. • 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. 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.”). 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 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 . 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 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. 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 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 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, Université Paris I Panthéon-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 . 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. 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 . 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 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. 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 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. 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. 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”). 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 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. 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 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 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. 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. 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). 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 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.”). 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. 42 See infra Part V. 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 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. 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. 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 46 See Proposed Rule 15c2-11(a)(1)(ii). 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. 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. (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 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). 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 50 See Proposed Rule 15c2-11(b)(5)(i)(N) through (P). 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 51 See Proposed Rule 15c2-11(e)(4). 52 See Proposed Rule 15c2-11(e)(1). 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 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. 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 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 55 1991 Adopting Release at 19154. 56 See Exchange Act Rule 15c2-11(d)(2)(i). 57 1991 Adopting Release at 19154. 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. 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. (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 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 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). 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. 61 See Exchange Act Rule 15c2-11(g). 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. 62 See Exchange Act Rule 15c2-11(g)(2). (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. 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. 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 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. 64 Exchange Act Rule 15c2-11(a)(5). 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 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. 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). 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 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 66 Proposed Rule 15c2-11(c)(3); see 1991 Adopting Release at 19151 n.28. 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 these requirements are met, a broker-dealer can “piggyback” on either its own or other broker-dealers' previously published quotations. 68 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. 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). 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 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 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 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. 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. (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 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-de [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2019-21260. Public record. Not legal advice.