Publication or Submission of Quotations Without Specified Information

Federal RegisterOct 27, 2020

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 240

[Release Nos. 33-10842; 34-89891; File No. S7-14-19]

RIN 3235-AM54

Publication or Submission of Quotations Without Specified Information

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (the “SEC” or the “Commission”) is adopting amendments to Rule 15c2-11 (the “Rule”) under the Securities Exchange Act of 1934 (the “Exchange Act”), which 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 amendments are designed to modernize the Rule, promote investor protection, and curb incidents of fraud and manipulation by, among other things: Requiring information about issuers to be current and publicly available for broker-dealers to quote their securities in the OTC market; narrowing reliance on certain exceptions from the Rule's requirements, including the piggyback exception; adding new exceptions for the quotations of securities that may be less susceptible to fraud and manipulation; removing obsolete provisions; adding new definitions; and making technical amendments.

DATES:

Effective date:

December 28, 2020.

Compliance date:

The compliance dates are discussed in Part II.P of this release.

FOR FURTHER INFORMATION CONTACT:

Laura Gold, Special Counsel, John Guidroz, Branch Chief, James Curley, Theresa Hajost, Samuel Litz, Patrice Pitts, Special Counsels, Elizabeth Sandoe, Senior Special Counsel, Josephine Tao, Assistant Director, Office of Trading Practices, and Mark Wolfe, Associate Director, Office of Derivatives Policy and Trading Practices, and John Fahey, Senior Special Counsel, Office of Chief Counsel, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549, at (202) 551-5777.

SUPPLEMENTARY INFORMATION:

The Commission is adopting amendments to Rule 15c2-11 under the Exchange Act [15 U.S.C. 78a

et seq.

] and a conforming amendment to 17 CFR 230.144(c)(2) under the Securities Act of 1933 (the “Securities Act”) [15 U.S.C. 77a

et seq.

Table of Contents

I. Overview

II. Discussion of the Final Amendments

A. Unlawful Activity

1. Current and Publicly Available Issuer Information—Rule 15c2-11(a)(1)(i)(B), (a)(2)(ii)

2. Qualified IDQS That Complies With the Information Review Requirement—Rule 15c2-11(a)(2)(i) Through (iv)

3. Broker-Dealer That Relies on a Qualified IDQS's Publicly Available Determination That It Complied With the Information Review Requirement—Rule 15c2-11(a)(1)(ii)

4. Policies and Procedures for Making Certain Publicly Available Determinations—Rule 15c2-11(a)(3)

B. Specified Information

1. Current Reports—Rule 15c2-11(b)(3)(i) Through (iv)

2. Reporting Issuer Provision—Rule 15c2-11(b)(3)

3. Catch-All Issuer Information—Rule 15c2-11(b)(5)(i)

4. Requirement To Make Catch-All Issuer Information Available Upon Request—Rule 15c2-11(b)(5)(ii)

5. Application of the Catch-All Issuer Provision—Rule 15c2-11(b)(5)(ii)

6. Specified Information Provision for Crowdfunding Issuers—Rule 15c2-11(b)(3)(iii)

C. Supplemental Information Requirement—Rule 15c2-11(c)

D. Piggyback Exception

1. Increased Transparency of Issuer Information—Rule 15c2-11(f)(3)(i)(C)(1) through (3)

2. One-Way Priced Quotations—Rule 15c2-11(f)(3)(i)(A)

3. Following a Trading Suspension—Rule 15c2-11(f)(3)(i)(B)

4. Shell Company Exclusion—Rule 15c2-11(f)(3)(i)(B)

5. Frequency of Quotation Requirement—Rule 15c2-11(f)(3)(i)(A)

6. Grace Period—Rule 15c2-11(f)(3)(ii)

7. Removal of Certain Piggyback Exception Provisions Under the Former Rule

E. Unsolicited Quotation Exception—Rule 15c2-11(f)(2)

F. ADTV and Asset Test Exception—Rule 15c2-11(f)(5)

G. Underwritten Offering Exception—Rule 15c2-11(f)(6)

H. Publicly Available Determination That an Exception Applies—Rule 15c2-11(f)(7)

I. Recordkeeping Requirement—Rule 15c2-11(d)

J. Definitions

1. Current—Rule 15c2-11(e)(2)

2. Shell Company—Rule 15c2-11(e)(9)

3. Publicly Available—Rule 15c2-11(e)(5)

4. Qualified Interdealer Quotation System—Rule 15c2-11(e)(6)

5. Company Insider—Rule 15c2-11(e)(1)

K. Removal of Outdated Provisions

L. Exemptive Authority—Rule 15c2-11(g)

M. Technical Amendments

N. Conforming Rule Change—Rule 144(c)(2)

O. Guidance

1. Introduction

2. Source Reliability

3. Information Review Requirement

4. Examples of Red Flags

P. Compliance Date

III. Comments on the Concept Release

A. Information Repositories

B. Other Issues

IV. Other Matters

V. 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

2. Other Burden Hours

3. Collection of Information Is Mandatory

4. Confidentiality

5. Retention Period of Recordkeeping Requirement

VI. Economic Analysis

A. Background

B. Baseline and Affected Parties

1. Affected Parties

2. Baseline

C. Discussion of Economic Effects

1. Effects of Rule 15c2-11 Amendments

2. Efficiency, Competition, and Capital Formation

D. Reasonable Alternatives

1. Eliminating the Piggyback Exception

2. Maintaining the Piggyback Exception for the Securities of Non-Transparent Issuers

3. Eliminating or Maintaining the Piggyback Exception for Shell Companies

4. Alternative Thresholds for Exceptions

5. Quotations With Both Bid and Offer Prices for the Piggyback Exception

6. Alternative Required Frequency of Current and Publicly Available Information

VII. Regulatory Flexibility Act Certification

VIII. Statutory Authority

I. Overview

The Commission is adopting amendments to Rule 15c2-11, which sets out certain requirements for a broker-dealer seeking to initiate (or resume) quotations for securities in the OTC market.

The amendments are

designed to modernize the Rule and to enhance investor protection by requiring that current and publicly available issuer information be accessible to investors. Specifically, the amendments provide greater transparency to the investing public by requiring information about the issuer and its security

to be current and publicly available before a broker-dealer can begin quoting that security.

For purposes of this release, Rule 15c2-11, as amended, is referred to as the “amended Rule.” 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-dealer in receiving bids or offers from others for a security, or any indication by a broker-dealer that wishes to advertise its general interest in buying or selling a particular security. Amended Rule 15c2-11(e)(7). A “quotation medium” is defined as any “interdealer quotation system” or 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. Amended Rule 15c2-11(e)(8). An “interdealer quotation system” is defined as any system of general circulation to brokers or dealers that regularly disseminates quotations of identified broker-dealers. Amended Rule 15c2-11(e)(3). A “national securities exchange” is an exchange, as defined under Section 3(a)(1) of the Exchange Act

and Rule 3b-16 thereunder, that is registered with the Commission under Sections 5 and 6 of the Exchange Act. The amendments adopted do not change the definitions of the terms “quotation,” “quotation medium,” and “interdealer quotation system” under the Rule.

This information is listed in paragraph (a) of the former Rule and in paragraph (b) of the proposed Rule and amended Rule. For purposes of this release, the documents and information specified in paragraph (b) of the proposed Rule and amended Rule are referred to as “paragraph (b) information.”

Securities that trade in 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 investment decisions. A lack of current and public information about these companies disadvantages retail investors because it may prevent them from estimating return probabilities and generating positive returns in OTC stocks.

It can contribute to incidents of fraud and manipulation by preventing retail investors from being able to counteract misinformation.

A majority of the Commission enforcement cases involving allegations of fraudulent behavior in the OTC securities market has involved delinquent filings, which result in a lack of current, accurate, or adequate information about an issuer.

As broker-dealers play an integral role in facilitating investor access to OTC securities and serve an important gatekeeper function, Rule 15c2-11 is designed to prevent fraud and manipulation by requiring that broker-dealers review key, basic information about an issuer before initiating a quoted market in an OTC security. In practice, however, certain of the Rule's outdated exceptions often have resulted in a quoted market for the securities of issuers for which there is no current and publicly available information for analysis by market participants, including broker-dealers and retail investors. In some cases, a quoted market may continue for the securities of issuers that no longer exist or have ceased operations.

Providing greater transparency of OTC issuers to retail investors so that they can make better-informed investment decisions and counteract misinformation promotes the Commission's important mission of protecting investors.

See

Andrew Ang

et al., Asset Pricing in the Dark: The Cross-Section of OTC Stocks,

26 Rev. Fin. Studs. 2985-3028 (2013).

See infra

Part VI.B.2.b, Table 3 (describing how, of the 9,895 companies that issue securities that are quoted in the OTC market, 6,886 of those issuers have public information available).

See, e.g.,

Joshua T. White, Outcomes of Investing in OTC Stocks (Dec. 16, 2016),

https://www.sec.gov/files/White_OutcomesOTCinvesting.pdf

See

Rajesh Aggarwal & Guojun Wu,

Stock Market Manipulations,

79 J. Bus. 1915 (2006); Thomas Renault,

Market Manipulation and Suspicious Stock Recommendations on Social Media,

Universite Paris I Pantheon-Sorbonne—Centre d'Economie de la Sorbonne (Dec 20, 2017),

https://ssrn.com/abstract=3010850

;

infra

Part VI.C.1.a.

For instance, one study looked at a broad sample of litigated securities cases between January 2005 and June 2011 and identified 1,880 cases involving OTC securities and 1,157 cases involving securities listed on national securities 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) (“We stress the fact that litigated cases of fraud are not necessarily representative of actual cases of fraud. The difference between actual cases and litigated cases depend on rule setting (listing standards and exchange trading rules), surveillance (the people and technology available to detect fraud), and the quality of enforcement (the process and expenditures to enable cases to go forward and the effectiveness of courts).”);

see also infra

Part VI.B.2.c.

See Publication or Submission of Quotations Without Specified Information,

Exchange Act Release No. 87115, at 7-8 (Sept. 25, 2019), 84 FR 58206, 58207 (Oct. 30, 2019) (“Proposing Release” or the “proposal”).

See

Proposing Release at 58210-11 (discussing key regulatory approaches that the Commission has implemented to combat retail investor fraud).

Further, the OTC market has changed significantly since the Rule was initially adopted in 1971

(approximately 49 years ago) and last substantively amended in 1991 (over 29 years ago).

For example, use of the internet is much more widespread today than it was when the Rule was last substantively amended. In 1991, it was significantly more difficult to obtain information about issuers of OTC securities and to continuously update and widely disseminate quotations for OTC securities. The internet and other forms of electronic communication and innovation have made it far less costly and burdensome to access, update, and disseminate information on a global scale.

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).

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”).

Responding to these developments, and as part of the Commission's overall efforts to protect retail investors from fraud and manipulation,

the Commission is adopting amendments that are designed to modernize the Rule to: (1) Promote investor protection by providing greater transparency to the investing public regarding issuers of OTC securities, (2) facilitate capital formation for issuers for which information is current and publicly available, and (3) reduce unnecessary burdens on broker-dealers and enhance the efficiency of the OTC market.

See supra

note 9.

The amended Rule continues to require a broker-dealer to obtain and review basic information about an issuer of an OTC security before initiating or resuming a quoted market in the issuer's security.

The amended Rule also continues to require the broker-dealer to have a reasonable basis for believing that the information about the issuer, when considered along with any supplemental information, is accurate and from a reliable source. In addition to broker-dealers, under the amended Rule, qualified interdealer quotation systems (each, a “qualified IDQS”)

are permitted to comply with the information review requirement, and broker-dealers may rely upon a qualified IDQS's publicly available determination that it has complied with the information review requirement to publish or submit a quotation to initiate or resume a quoted market in an issuer's security.

For purposes of this release, the term “information review requirement” refers to the requirement for broker-dealers and qualified interdealer quotation systems to obtain and review certain issuer information before a broker-dealer publishes a quotation for a security in the absence of an exception.

See

infra

Part II.J.4 for a discussion of the proposed definition of the term “qualified interdealer quotation system” and how that term is defined in the amended Rule.

The information review requirement in the amended Rule includes additional provisions that are designed to enhance transparency of issuer information and help to foster the integrity of the OTC market. Importantly, the amended Rule requires that the documents and information that a broker-dealer or qualified IDQS reviews generally must be current and publicly available. The amended Rule specifies under paragraph (b) the documents and information that must

be reviewed with respect to issuers, including a new provision to recognize companies that issue securities in reliance on Regulation Crowdfunding (“crowdfunding issuers”), and expands the list of documents and information that must be reviewed for certain other types of issuers. In addition, the amended Rule requires that a broker-dealer or qualified IDQS identify whether the quotation is published on behalf of the issuer or a company insider and also expands the list of market participants that must review supplemental information to comply with the information review requirement to include qualified IDQSs.

The amended Rule contains several exceptions to the information review requirement. The amended Rule continues to provide an exception that permits broker-dealers to publish a quotation for unsolicited customer orders without complying with the information review requirement.

However, the amendments to the Rule prohibit broker-dealers from relying on this exception for an affiliate of the issuer or a company insider, unless information about the issuer is current and publicly available. This exception, as amended, permits a broker-dealer to rely on a representation from the customer's broker that such customer is not an affiliate of the issuer or a company insider.

See

Amended Rule 15c2-11(f)(2).

The amended Rule also adds three new exceptions. First, the amended Rule adds an exception for highly liquid securities of well-capitalized issuers if the security meets a multi-prong test involving the security's worldwide average daily trading volume value and its issuer's total assets and shareholders' equity.

Second, the amended Rule adds an underwritten offerings exception for quotations for a security by a broker-dealer that is named as an underwriter in the registration statement or offering statement for such security.

Finally, the amended Rule adds an exception to permit broker-dealers to rely on publicly available determinations by a qualified IDQS or a registered national securities association that the requirements of certain other exceptions are met.

The qualified IDQS or registered national securities association must establish, maintain, and enforce reasonably designed written policies and procedures with respect to making the determinations.

See

Amended Rule 15c2-11(f)(5).

See

Amended Rule 15c2-11(f)(6).

These exceptions are the exchange-traded security exception, the municipal security exception, the “piggyback” exception, and the exception for the highly liquid securities of well-capitalized issuers.

See

Amended Rule 15c2-11(f)(7).

In addition, the amended Rule modifies the “piggyback” exception, which allows a broker-dealer to rely on the quotations of another broker-dealer that initially complied with the information review requirement.

The amended Rule permits broker-dealers to rely on the piggyback exception based on at least a one-way priced quotation, so long as there are no more than four business days in succession without a quotation,

and prohibits reliance on the exception if the issuer of the security is a shell company after a certain prescribed period or was the subject of a trading suspension order issued by the Commission until 60 calendar days after the expiration of such order.

The exception also now requires issuer information to be, depending on the regulatory status of the issuer, one of the following: (1) Current and publicly available, as defined by the amended Rule; (2) timely filed (

i.e.,

filed by the prescribed due date for a report or statement as required by an Exchange Act or Securities Act reporting obligation); or (3) filed within 180 calendar days from a specified period. The exception also now includes a grace period that permits broker-dealers to continue quoting the securities for a limited period of up to 15 calendar days once a qualified IDQS or register national securities association makes a publicly available determination that issuer information is no longer current and publicly available, timely filed, or filed within 180 calendar days from the applicable specified time frame. The piggyback exception no longer requires that there be quotations on each of at least 12 days within the previous 30 calendar days to establish piggyback eligibility.

See

Amended Rule 15c2-11(f)(3). Once the requirements of this exception are met, a broker-dealer can “piggyback” on either its own or other broker-dealers' previously published quotations.

See

Amended Rule 15c2-11(f)(3)(i)(A). The piggyback exception under the amended Rule no longer includes provisions contained in the piggyback exception under the former Rule for: (1) A broker-dealer quotation in an IDQS that does not identify the quotation as an unsolicited quotation, which provision permitted broker-dealers to publish or submit quotations in reliance on the piggyback exception in an IDQS that did not make known to others unsolicited quotations; and (2) self-piggybacking by market makers, which provision permitted broker-dealers to publish or submit quotations in reliance on their own quotations if all of the other requirements of the piggyback exception were met.

See

Amended Rule 15c2-11(f)(3)(i)(B).

Generally, under the amended Rule, broker-dealers, qualified IDQSs, and a national securities association must preserve the applicable documents and information they reviewed, including to demonstrate reliance on an exception and in relation to publicly available determinations, for at least three years, the first two years in an easily accessible place.

These entities are not required to preserve documents and information available on the Commission's Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”).

A broker-dealer that publishes a quotation in reliance on a publicly available determination of a qualified IDQS or a registered national securities association need only preserve a record of the name of such qualified IDQS or registered national securities association.

The requirement for broker-dealers and other entities to keep certain records that support their compliance with the information review requirement or reliance on an exception, as applicable, is referred to throughout this release as the “recordkeeping requirement.”

See

Amended Rule 15c2-11(d)(1), (2).

See

Amended Rule 15c2-11(d)(2)(ii).

The amended Rule also adds definitions for the terms “company insider,” “current,” “publicly available,” “qualified interdealer quotation system,” and “shell company.”

Finally, the Commission is providing guidance regarding source reliability and the information review requirement, with modifications to incorporate and update the red flags guidance provided in 1999.

See

Amended Rule 15c2-11(e).

See 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”).

II. Discussion of the Final Amendments

In general, the final amendments: (1) Provide greater transparency to retail investors and other market participants regarding issuers of quoted OTC securities, (2) limit the use of certain exceptions under the Rule to better protect retail investors from fraud and manipulation, and (3) add new exceptions to reduce unnecessary burdens on broker-dealers and to enhance the efficiency of the OTC market. As discussed in greater detail below, commenters supported many aspects of the proposal. For example, commenters stated that the proposal would help to modernize the Rule, better protect investors by facilitating increased availability of issuer information for OTC securities and their issuers,

and make the OTC market

more efficient.

Some commenters supported the amendments as proposed.

Many commenters generally supported amending the Rule to better protect investors but suggested certain changes to the proposal,

including, for example, to permit broker-dealers to publish quotations for securities of issuers whose paragraph (b) information is current and publicly available on an annual basis, as opposed to on a six-month basis, to maintain a quoted market in such issuers' securities.

Letter from Marcia E. Asquith, Executive Vice President, Board and External Relations, Financial Industry Regulatory Authority, Inc., to Vanessa Countryman, Sec'y, SEC (Feb. 11, 2020) (“FINRA Letter”); Letter from Ted Haberfield, Chairman & President, MZHCI, LLC, to SEC (Sept. 2, 2020) (“MZ Letter”); Letter from John B. Lowy, P.C., to SEC (July 26, 2020) (“Lowy Letter”);

see

Letter from

Gerald Adler, Adler Silverberg PLLC, to SEC (Mar. 3, 2020) (“Adler Silverberg Letter”); Sherwood E. Neiss, Co-founder, GUARDD and Principal, Crowdfund Capital Advisors, Douglass S. Ellenoff, Esq., Co-founder, GUARDD and Founding Partner, Ellenoff Grossman & Schole LLP, James P. Dowd, CPA, CFA, Co-founder GUARDD and CEO North Capital Private Securities Corporation, GUARDD, Inc., to Div. Trading & Mkts., SEC (Jan. 13, 2020) (“GUARDD Letter”); Letter from Aseel M. Rabie, Managing Director and Associate General Counsel, and Bernard V. Canepa, Vice President and Assistant General Counsel, Securities Industry and Financial Markets Association, to Vanessa Countryman, Sec'y, SEC (Dec. 23, 2019) (“SIFMA Letter”); Letter from James Toes, President and CEO, and Chris Halverson, Chairman of the Board, Security Traders Association, to Vanessa Countryman, Sec'y, SEC (Jan. 23, 2020) (“STA Letter”); Letter from Robert Verderese, Head of Cash Trading, Virtu Financial, to Vanessa Countryman, Sec'y, SEC (Feb. 7, 2020) (“Virtu Letter”) (stating that stocks that meet the definition of a penny stock and are not providing current information would not be eligible for quoting under the Rule); Letter from Andrew F. Viles, U.S. General Counsel, Canaccord Genuity LLC, to Vanessa Countryman, Sec'y, SEC (Mar. 20, 2020) (“Canaccord Letter”).

Letter from William F. Galvin, Sec'y of the Commonwealth, Commonwealth of Massachusetts, to Vanessa Countryman, Sec'y, SEC (Dec. 30, 2019) (“Massachusetts Letter”); Letter from Sherry J. Sandler, Global OTC, to Vanessa Countryman, Sec'y, SEC (Mar. 3, 2020) (“Global OTC Letter”);

see

MZ Letter.

Steven Barber (Dec. 30, 2019); Barry Gleicher (Nov. 7, 2019); Massachusetts Letter.

See, e.g.,

R. Cromwell Coulson, CEO, OTC Mkts. Grp. Inc. (May 6, 2020) (citing R. Cromwell Coulson,

Exploring the Investor Impact of an SEC Rule Proposal,

Traders Magazine (May 1, 2020),

available at https://www.tradersmagazine.com/departments/regulation/exploring-the-investor-impact-of-an-sec-rule-proposal/

) (“Coulson Comment”); FINRA Letter; Global OTC Letter; Letter from Peter Goldstein, Managing Member, Exchange Listing LLC, to Vanessa Countryman, Sec'y, SEC (May 8, 2020) (“Exchange Listing Letter”); Letter from Sara Hanks, CEO, CrowdCheck, Inc., to Vanessa Countryman, Sec'y, SEC (May 22, 2020) (“CrowdCheck Letter”); Letter from Joseph M. Lucosky, Managing Partner, Lawrence Metelitsa, Partner, and Scot E. Linsky, Counsel, Lucosky Brookman LLP, to SEC (May 29, 2020) (“Lucosky Brookman Letter”); Letter from David Menn, CEO, MCAP LLC, to Vanessa Countryman, Sec'y, SEC (May 15, 2020) (“MCAP Letter”); Richard Revelins, Executive Director, Peregrine Corporate Limited (July 10, 2020) (“Peregrine Comment”); Letter from Robin Sosnow, Managing Partner, & Manuel Pesendorfer, Attorney, Sosnow & Associates PLLC, to Vanessa Countryman, Sec'y, SEC (May 14, 2020) (“Sosnow & Associates Letter”); SIFMA Letter; STA Letter; Letter from Louis Taubman, Partner, Hunter Taubman Fischer & Li LLC, to Vanessa Countryman, Sec'y, SEC (May 28, 2020) (“HTFL Letter”); Virtu Letter.

See, e.g.,

Letter from Stephen M. Brophy, President, Aztec Land and Cattle Company, Limited, to SEC (Dec. 27, 2019) (“Aztec Letter”); Brett Dorendorf (Nov. 23, 2019); Al Gonzalez, President, Beacon Redevelopment Industrial Corp. (Dec. 8, 2019) (“Beacon Redevelopment Letter”); Michael Hess (Sept. 27, 2019); Doug Mohn (Nov. 8, 2019); Ariel Ozick (Dec. 30, 2019); Robert E. Schermer, Jr. (Dec. 20, 2019); Tom H. Sleeter, Chief Investment Officer, Total Clarity Wealth Management, Inc. (“Total Clarity Comment”); Letter from David Waters, President, Alluvial Capital Management, LLC (Oct. 9, 2019) (“Alluvial Letter”).

Other commenters, however, believed that the proposal would not be effective in deterring fraud and manipulation, including pump-and-dump schemes,

and stated that the proposal was too broad and overly expansive.

For example, one commenter stated its belief that the proposal would not effectively deter fraud but would negatively affect liquidity in the OTC market, which, according to this commenter, ultimately would impair capital formation.

Laura Coffman (Nov. 7, 2019); Alexandra Elliott (Oct. 10, 2019); Christian Gabis (Nov. 26, 2019); Letter from Ari Rubenstein, Co-Founder and Chief Executive Officer, Global Trading Systems, LLC, to Vanessa Countryman, Sec'y, SEC (Feb. 26, 2020) (“GTS Letter”); Reid McKenzie (Oct. 31, 2019); Joshua Marino (Oct. 4, 2019); Letter from James E. Mitchell, General Partner, Mitchell Partners, L.P., to Vanessa Countryman, Sec'y, SEC (Oct. 9, 2019) (“Mitchell Partners Letter 1”); Letter from Erik S. Nelson, President, Coral Capital Partners, Inc., to Vanessa Countryman, Sec'y, SEC (Dec. 30, 2019) (“Coral Capital Letter”); Virtu Letter;

see

Christopher J. DiIorio (Feb. 4, 2020).

Coral Capital Letter; Ron Lefton (Nov. 11, 2019); Letter from Jon Norberg, to Chairman Clayton (Nov. 19, 2019) (“Norberg Letter”); Debby Valentijn (Dec. 21, 2020). Another commenter highlighted that, because there are many different types of companies in the OTC market, the proposed regulatory solutions are not always effective. Mitchell Partners Letter 1;

see

John Gardiner, President and CEO, Taranis Resources, Inc. (Mar. 4, 2020) (“Taranis Comment”); GTS Letter.

Coral Capital Letter.

As discussed further below, the Commission agrees that there may be a negative impact on liquidity for dark issuers (

i.e.,

issuers that do not make their information publicly available) as a result of broker-dealers not being able to continuously quote their securities and understands that existing shareholders of non-reporting issuers may be negatively impacted from the loss of a quoted market for such securities, even if the securities migrate to the grey market.

The Commission, however, believes that the amendments should incentivize issuers to make their information current and publicly available to allow broker-dealers to continuously quote their securities.

As discussed further below, the Commission believes the amendments will enhance transparency overall, which will facilitate price discovery, provide investors with information that will allow them to make better-informed investment decisions and help counteract misinformation about the issuers of such securities that can contribute to incidents of fraud and manipulation.

The Commission further believes that this requirement, in combination with the addition of new, targeted exceptions, will enhance the efficiency of the OTC market.

The Commission, however, believes that the potential for such harm would be limited by the ability of broker-dealers to rely on exceptions to publish quotations, including the unsolicited quotation exception, and the ability of existing shareholders to continue to trade their securities.

See infra

note 216 and accompanying text.

The Commission does not expect the amended Rule to affect the liquidity and pricing of securities in the entire OTC market, as this commenter stated. A delinquent reporting issuer's security could experience a discount in price resulting from the risk that the issuer may not file its required report within 180 days from the end of a specified period. In such case, as discussed below in Part II.D.1, broker-dealers would not be able to rely on the piggyback exception to publish or submit quotations for such issuer's security if its paragraph (b) information were not “current” and “publicly available.” This scenario involving a particular subset of OTC securities is not expected to affect the liquidity and pricing of all quoted securities in the OTC market because individual securities in the OTC market generally are not included in a market index or benchmark that would be affected by any one security's liquidity or pricing. Further, to the extent an OTC security is included in an index or benchmark, such an index or benchmark would require that issuer information be current and publicly available.

See, e.g., OTC Markets Indices,

OTC Mkts. Grp. Inc.,

https://www.otcmarkets.com/market-activity/indices

(last visited Aug. 31, 2020).

See infra

Part VI.C.1.a.

Several academic studies have found that higher levels of disclosure are associated with higher levels of liquidity in the OTC markets.

See infra

Part VI.C.1.

See infra

Part VI.C.1.a, c.

Other commenters stated that additional regulation would make it more expensive to trade OTC securities.

The Commission believes, as discussed below, that the amended Rule contains provisions that help mitigate costs associated with quoting OTC securities (

e.g.,

the ability for a broker-dealer to rely on publicly available determinations of a qualified IDQS or a registered national securities association, new exceptions to broker-dealers' compliance with the information review requirement, and flexibility to make current information about an issuer publicly available on any of several different websites).

Frank Danna, III (Nov. 10, 2019); James Duade (Dec. 26, 2019); Christian Gabis.

Some commenters stated that the Rule should be left as is.

Specifically, some commenters stated that the amendments are unnecessary because, according to

these commenters, investors are aware of the risks when they buy OTC securities,

other Commission rules and regulations have superseded the original purpose of Rule 15c2-11,

and state law already provides investor protections that the proposal seeks to provide.

While investor protections can be provided through a variety of means (

e.g.,

from sales practice rules to registration requirements), the specific manner in which Rule 15c2-11 governs the publication or submission of broker-dealers' quotations in a quotation medium serves to cement the broker-dealer's role as a gatekeeper for many investors, including retail investors, to the OTC market. Further, as discussed above, in light of technological developments that have transformed the OTC market since the Rule was adopted and last substantively amended, the Commission believes that it is appropriate to update and modernize the Rule with the goals of providing greater transparency and better combatting fraud.

Letter from Steven Erickson, CFA, Anbec Partners, LP, to Hon. Jay Clayton, Chairman, SEC (Oct. 23, 2019) (“Anbec Partners Letter”); Ariel Ozick; Michael E. Reiss (Oct. 25, 2019).

David Aldridge (Oct. 1, 2019); R. Berkvens (Oct. 3, 2019); Dana Blanc (Oct. 10, 2019); Joe Helmer, CFA, Caldwell Sutter Capital (Dec. 24, 2019) (“Caldwell Sutter Capital Comment”); Frank Danna, III; Ralf Erz (Oct. 8, 2019); Philippe Goodwill (Oct. 1, 2019); Letter from Matthew Kerchner, CFA, Terravoir Venture, to Hon. Jay Clayton, Chairman, SEC (Nov. 25, 2019) (“Terravoir Venture Letter”); Richard Kogut (Oct. 8, 2019); Aharon Levy (Oct. 12, 2019); Tracy Michaels (Sept. 30, 2019); Michael E. Reiss; Robert Ringelberg (Oct. 13, 2019); Jim Rivest (Sept. 29, 2019); Letter from David Sanders, to SEC (Oct. 10, 2019) (“Sanders Letter”); Thomas Schiessling (Oct. 30, 2019); Lucas H. Selvidge (Oct. 23, 2019); Kevin Ward (Oct. 8, 2019);

see

Philippe Goodwill. Another commenter specified that broker-dealers require purchasers of OTC stocks to sign multiple agreements and disclaimers before they are eligible to purchase OTC stocks and that broker-dealers require annual income qualifications and tax bracket verification when opening accounts. Letter from Darian Andersen, General Counsel, P.C., to Vanessa Countryman, Sec'y, SEC (Dec. 23, 2019) (“Andersen Letter”).

See

Letter from James J. Angel, Ph.D., CFA, Associate Professor of Finance, Georgetown University, McDonough School of Business, to SEC (Jan. 24, 2020) (“Professor Angel Letter”).

Letter from Douglas Raymond, Drinker Biddle & Reath (Nov. 21, 2019) (“Drinker Letter”).

Another commenter stated that, instead of amending the Rule, the Commission should focus on enforcing rules governing market makers.

Some commenters stated that the Commission should instead focus its enforcement efforts on bad actors.

For example, one commenter stated that the most effective way to protect retail investors is by suspending trading in securities that are implicated in conduct that appears suspicious or “illegitimate.”

For the reasons discussed throughout this release, the Commission believes that the amended Rule is an important tool to combat fraud and manipulation and enhance investor protection, in addition to trading suspensions and other enforcement actions.

Hans Brost (Nov. 15, 2019).

See, e.g.,

Caldwell Sutter Capital Comment; Exchange Listing Letter; Braxton Gann (Oct. 11, 2019); Joshua Marino; Daniel Raider (Oct. 2, 2019);

see

Canaccord Letter.

While certain of the Commission's initiatives to protect investors involve addressing 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.

The Commission believes that the amendments facilitate such efforts by, for example, addressing the lack of current and publicly available information about companies to the disadvantage of retail investors in comparison to other market participants.

The amendments are narrowly tailored to further the Commission's ongoing effort to protect retail investors from fraud and manipulation in the OTC market, maintain the integrity of the OTC market, promote a more efficient and effective OTC market, and facilitate capital formation for issuers that make their information current and publicly available.

See

Proposing Release at 58210.

Id.

For example, the Commission stated in the Proposing Release its concern that market participants can take advantage of exceptions from the Rule's information review requirement to the detriment of retail 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.

See id.

at 58208.

See infra

Part VI.C.2.

The Commission is adopting substantially as proposed several amendments to the Rule, as discussed above. However, the Commission has modified the proposed Rule in a number of respects. Summarized below are key modifications from the proposal:

•

Piggyback Exception.

The Commission is adopting the proposed amendments to the piggyback exception with several targeted modifications: Requiring at least a one-way priced quotation (as opposed to two-way priced quotations);

removing from the exception the 30-calendar-day window but still requiring that no more than four days in succession elapse without a quotation;

permitting broker-dealers to rely on the piggyback exception to publish quotations for the security of a shell company for the 18 months following the initial priced quotation for an issuer's security that is published or submitted in an IDQS;

and providing a limited, conditional grace period to permit broker-dealers to continue to rely on the piggyback exception to publish quotations for an issuer in certain instances when the issuer's paragraph (b) information ceases to be, depending on the regulatory status of the issuer, current and publicly available, timely filed, or filed within 180 calendar days from a specified time frame.

Amended Rule 15c2-11(f)(3)(i)(A).

Amended Rule 15c2-11(f)(3)(i)(A). As discussed above, the former Rule required that 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. Former Rule 15c2-11(f)(3)(i), (ii).

See

Amended Rule 15c2-11(f)(3)(i)(B)(2).

See

Amended Rule 15c2-11(f)(3)(ii).

•

Specified Information.

The Commission is adopting a provision to clarify that issuers that make filings pursuant to Regulation Crowdfunding are reporting issuers for purposes of the Rule.

For catch-all issuers, the Commission is also: (1) Expanding the list of information specified in paragraph (b) to include the address of the issuer's principal place of business, the state of incorporation of each of the issuer's predecessors (if any), the ticker symbol of the issuer's security (if assigned), and the title of each company insider;

and (2) requiring the issuer's most recent balance sheet to be as of a date less than 16 months before the publication or submission of a broker-dealer's quotation and the issuer's profit and loss and retained earnings statements to be for the 12 months preceding the date of the most recent balance sheet.

Amended Rule 15c2-11(b)(3)(iii).

See paragraphs (b)(5)(i)(B), (C), (D), and (K) of the amended Rule, respectively, for such requirements.

See

Amended Rule 15c2-11(b)(5)(i)(L). As discussed below in Part II.B.3, the Commission has determined not to adopt the proposed requirement for a catch-all issuer's balance sheet that is not as of a date less than six months before the publication or submission of the broker-dealer's quotation to be accompanied with profit and loss and retained earnings statements for the period from the date of such balance sheet to a date that is less than six months before the publication or submission of the quotation.

•

Unsolicited Quotation Exception.

The Commission is limiting reliance on the exception for a quotation on behalf of either a company insider, as proposed, or an affiliate of the issuer if the issuer's paragraph (b) information is not current and publicly available; modifying the exception to permit broker-dealers to rely on a written representation from a customer's broker that such customer is not a company insider or an affiliate;

and clarifying

that broker-dealers may rely on a publicly available determination by a qualified IDQS or a registered national securities association that an issuer's information is current and publicly available.

See

Amended Rule 15c2-11(f)(2)(iii)(A). While the Commission proposed this limitation with respect to quotations that are published or

submitted on behalf of company insiders, the amended Rule also applies this limitation with respect to affiliates of the issuer.

See

Amended Rule 15c2-11(f)(2)(iii)(B).

•

ADTV and Asset Test Exception.

The Commission is clarifying in the rule text that the worldwide ADTV value must be “reported” and eliminating the term “unaffiliated” from the shareholders' equity prong of the three-part test.

See infra

Part II.F.

•

Publicly Available Determination That an Exception Applies.

The Commission is adopting the proposed exception for a broker-dealer to rely on a qualified IDQS's or registered national securities association's publicly available determination that an exception applies; however, the Commission is not adopting the provision in the exception that would have required a qualified IDQS or registered national securities association to make a publicly available determination that an issuer's information is current and publicly available in addition to its determination that an exception applies.

The Commission is adding a new provision that a qualified IDQS or a registered national securities association that makes certain publicly available determinations must establish, maintain, and enforce certain reasonably designed written policies and procedures.

The Commission is making conforming changes in the rule text to clarify that a broker-dealer may rely on publicly available determinations regarding the exception for exchange-traded securities, the piggyback exception, the exception for municipal securities, and the ADTV and asset test exception.

See

Proposed Rule 15c2-11(f)(8)(i).

Amended Rule 15c2-11(a)(3). The Commission, therefore, is not adopting in each of the exceptions that reference a publicly available determination the proposed requirement for a qualified IDQS or a national securities association to make a publicly available determination that it “has” certain reasonably designed written policies and procedures, as proposed paragraph (f)(8)(iii) would have required.

See

Amended Rule 15c2-11(f)(7).

•

Location of Publicly Available Specified Information.

The Commission is expanding the list of locations where issuer information may be made publicly available to include (in addition to EDGAR and the website of a qualified IDQS, a registered national securities association, an issuer, and a broker-dealer) the website of: (1) A state or federal agency, and (2) an electronic delivery system that is generally available to the public in the primary trading market of a foreign private issuer.

Amended Rule 15c2-11(e)(5).

A. Unlawful Activity

1. Current and Publicly Available Issuer Information—Rule 15c2-11(a)(1)(i)(B), (a)(2)(ii)

The Commission is adopting, largely as proposed, the amendment that requires an issuer's paragraph (b) information to be current and publicly available

for a broker-dealer to publish or submit an initial quotation for that issuer's security. Consistent with the proposed Rule, the amended Rule provides that the particular information that a broker-dealer must obtain and review is determined by an issuer's regulatory status: Whether the issuer (1) filed a registration statement under the Securities of Act of 1933 (a “prospectus issuer”), (2) filed an offering statement under Regulation A

(a “Reg. A issuer”), (3) is subject to the periodic reporting requirements of the Exchange Act, Regulation A or Regulation Crowdfunding, or is the issuer of a security covered by Section 12(g)(2)(G) of the Exchange Act (a “reporting issuer”), or (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”). Such issuers are subject to statute- or rule-based disclosure and reporting requirements under the federal securities laws. An issuer that does not fall within any of these categories and is generally not subject to similar statute- or rule-based disclosure and reporting requirements under the federal securities laws is referred to as a “catch-all issuer.”

Consistent with the proposed Rule, the amended Rule requires that an issuer's paragraph (b) information be current and publicly available for all issuers, including catch-all issuers, for a broker-dealer to initiate or resume a quoted market in an issuer's security.

For purposes of this release, the terms “current” and “publicly available” have the same meaning as their definitions in paragraphs (e)(2) and (e)(5) of the amended Rule, respectively.

See infra

Part II.J.1. The definition of the term “current” as used in this release may differ from its meaning in other Commission rules (

e.g.,

Securities Act Rule 144).

See

Rules 251 and 252 of Regulation A. The proposal used the term “notification” instead of “offering statement” to refer to the specified information for a Reg. A issuer, and the Commission is making a technical edit in the amended Rule to use the term “offering statement” to be consistent with Regulation A.

See

Amended Rule 15c2-11(b)(2).

For purposes of this release, the term “catch-all issuer” refers to issuers for which documents and information are specified in paragraph (b)(5) of the proposed Rule and amended Rule. As discussed in more detail below, this term refers to an issuer for which the documents and information specified in paragraphs (b)(1) through (b)(4) of the proposed Rule or amended Rule do not apply. As discussed below in Part II.B.5, the amended Rule treats reporting issuers that are delinquent in their filing obligations (

i.e.,

their paragraph (b) information is not “current”) as catch-all issuers only for purposes of initiating or resuming a quoted market in these issuers' securities. However, other catch-all issuers may have no Exchange Act or Securities Act reporting or disclosure obligation whatsoever.

Specifically, the amended Rule requires an issuer's paragraph (b) information (excluding, in the case of a catch-all issuer, the documents and information specified in paragraphs (b)(5)(i)(N) through (P)) to be current and publicly available.

See

Amended Rule 15c2-11(a)(1)(i)(B), (a)(2)(ii). Paragraph (b) information must be current and publicly available, consistent with (1) a broker-dealer's determination, as part of its compliance with the information review requirement, that an issuer's paragraph (b) information is current and publicly available or a qualified IDQS's publicly available determination that it has complied with the information review requirement, including the requirement in paragraph (a)(2)(ii) that the issuer's paragraph (b) information is current and publicly available; and (2) the broker-dealer publishing or submitting a quotation within three business days after it complies with the information review requirement or the qualified IDQS makes such publicly available determination. As discussed below in Part II.A.3, this three-business-day requirement is designed to promote the commencement of a quoted market in a security concomitant with current information about the issuer of that security.

The Commission sought comment about the proposal's requirement that an issuer's paragraph (b) information be current and publicly available for a broker-dealer to publish or submit, after complying with the information review requirement or after relying on the review performed by a qualified IDQS,

an initial quotation for that issuer's security in a quotation medium.

Certain commenters supported the principle of increased access to issuer information to support informed investment decisions,

observing that the internet has created new ways of accessing and storing information, as well as the rise of online brokerages, which has made trading securities easier and less expensive than it was when the Rule was last substantively amended.

The Commission also received comments that did not support increased transparency; in particular, the Commission received numerous comments on the proposed requirement for an issuer's paragraph (b) information to be current and publicly available to remain eligible for the piggyback exception, as discussed below in Part II.D.1. However, the Commission did not receive any comments specifically relating to the proposed requirement for current and publicly available information in the context of publishing or submitting an initial quotation for an issuer's security. The Commission is adopting this provision related to broker-dealers' initial quotations largely as proposed.

For purposes of this release, the “proposed qualified IDQS review exception” refers to the proposed exception provided in paragraph (f)(7) of the proposed Rule. The ability of a broker-dealer to initiate or resume a quoted market in a security in response to a qualified IDQS's publicly available determination that it complied with the information review requirement is substantively adopted; however, this provision no longer appears as an exception under paragraph (f) of the amended Rule and, instead, appears in the amended Rule's unlawful activity provision under paragraph (a)(1)(ii). For a discussion of this amendment, see

infra

Part II.A.3.

Proposed Rule 15c2-11(a)(1)(ii), (a)(2)(ii). While the Commission proposed to require that an issuer's paragraph (b) information be current and publicly available for a broker-dealer to rely on certain exceptions to publish or submit quotations for that issuer's security (

e.g.,

the proposed amendments to the piggyback exception), paragraph (a) of the proposed Rule and the amended Rule address broker-dealers' initial quotations that are published or submitted to commence a quoted market once they have either complied with the information review requirement or relied on a

qualified IDQS's publicly available determination that it complied with the information review requirement.

See, e.g.,

Letter from Christopher Gerold, President, North American Securities Administrators Association, Inc., to Vanessa Countryman, SEC (Dec. 27, 2019) (“NASAA Letter”); Letter from Brenda Hamilton, Hamilton & Associates Law Group, P.A., to Vanessa Countryman, Sec'y, SEC (Oct. 15, 2019) (“Hamilton & Associates Letter”); Josh Lawler, Partner, Zuber Lawler & Del Duca LLP (Feb. 24, 2020) (“Zuber Lawler Letter”); Michael E. Reiss; Jim Rivest; Robert E. Schermer, Jr.; Michael Tofias (Oct. 21, 2019);

see

Peter Kniffin (Oct. 12, 2019); Sosnow & Associates Letter.

See

Hamilton & Associates Letter (“The result has been the entry of large numbers of new investors into the once-obscure OTC market. Revisions to the Rule are long overdue.”);

see

Dana Blanc; Doug Mohn.

As discussed below in relation to the piggyback exception, the Commission believes that the public availability of an issuer's paragraph (b) information helps to alleviate concerns that limited or no information for certain OTC issuers, such as catch-all issuers, exists or that such information is difficult for retail investors to find.

However, the Commission also believes that the amended Rule's requirement that an issuer's paragraph (b) information be current and publicly available for a broker-dealer to quote the issuer's security should not result in an obligation for the public availability of current information for catch-all issuers that is more onerous than the disclosure obligations for reporting issuers under the federal securities laws. The Commission believes that this is important because not all catch-all issuers have a reporting or disclosure obligation under the federal securities laws, and catch-all issuers' paragraph (b) information might not be updated more frequently than annually if the issuer's state or local disclosure regulations do not impose such a requirement. Accordingly, the Commission has made a modification to the proposed information review requirement for broker-dealers to publish or submit initial quotations. For broker-dealers to publish or submit initial quotations (and also for broker-dealers to rely on the piggyback exception, as discussed below), the Commission is not requiring certain financial information for catch-all issuers to be as of a date less than six months of the publication or submission of a broker-dealer's quotation for a catch-all issuer's security.

Instead, the Commission is requiring that the issuer's: (1) Most recent balance sheet must be as of a date less than 16 months before the publication or submission of the broker-dealer's quotation, and (2) profit and loss and retained earnings statements must be as of a date for the 12 months preceding the date of such balance sheet.

Consistent with the proposed Rule, the amended Rule provides that, for a broker-dealer to initiate or resume a quoted market in a catch-all issuer's security, the catch-all issuer information specified in paragraph (b)(5)(i), excluding the issuer's financial information described above, must be as of a date within 12 months before the publication or submission of the quotation.

See, e.g.,

Ulf Brüggemann

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

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). In addition, increasing the public availability of current information about OTC issuers has the potential to counteract misinformation, which can proliferate through promotions and other channels.

See infra

Part VI.B.2.c.

See infra

Part II.B.3.

See

Amended Rule 15c2-11(b)(5)(i)(L);

see also infra

Part II.J.1.

See

Amended Rule 15c2-11(b)(5)(i).

2. Qualified IDQS That Complies With the Information Review Requirement—Rule 15c2-11(a)(2)(i) Through (iv)

The Commission is expanding the scope of market participants that may comply with the information review requirement.

Paragraph (a)(2) of the amended Rule permits a qualified IDQS to make known to others the publication or submission of a quotation by a broker-dealer that relies on a qualified IDQS's compliance with the information review requirement, so long as certain criteria are met (a “qualified IDQS review quotation”).

The qualified IDQS that makes known to others the quotation of a broker-dealer that is published or submitted pursuant to paragraph (a)(1)(ii) of the amended Rule must first have complied with paragraphs (a), (b), and (c) of the amended Rule, which require the qualified IDQS to review the issuer's paragraph (b) information and any of its supplemental information in compliance with the information review requirement. In addition, a qualified IDQS that complies with the information review requirement must also comply with the recordkeeping requirement in paragraph (d)(1)(i)(B) of the amended Rule.

See

Proposing Release at 58212. Consistent with the proposal, paragraph (a)(2) of the amended Rule does not impose an affirmative obligation on a qualified IDQS to comply with the information review requirement; rather, paragraph (a)(2) makes it an unlawful activity for a qualified IDQS to make known to others the publication or submission of a quotation by a broker-dealer that relies on the qualified IDQS's compliance with the information review requirement, unless the qualified IDQS has obtained and reviewed the applicable specified issuer documents and information in compliance with the information review requirement and made a publicly available determination of such compliance.

Amended Rule 15c2-11(a)(2). The definition of the term “qualified interdealer quotation system” under the amended Rule is discussed below in Part II.J.4.

The Commission proposed to permit a qualified IDQS to make known to others the publication or submission of a qualified IDQS review quotation.

The Commission also proposed to define the term “qualified interdealer quotation system” to mean any IDQS that meets the definition of an “alternative trading system” (an “ATS”) 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.”

Under the proposed Rule, broker-dealers would have been able to publish or submit quotations based on their reliance on a qualified IDQS's publicly available determination that it complied with the information review requirement.

In addition, under the proposed Rule, the activities that satisfy the information review requirement that

would apply to a qualified IDQS (

i.e.,

obtaining and reviewing the applicable paragraph (b) information and supplemental information) would be the same as those that would apply to a broker-dealer.

See

Proposing Release at 58213.

Proposed Rule 15c2-11(e)(5).

See

Proposing Release at 58213;

see also

Proposed Rule 15c2-11(f)(7).

See

Proposing Release at 58213.

The Commission sought comment about the proposed amendment to permit qualified IDQSs to comply with the information review requirement.

This aspect of the proposal received no comment in opposition, and commenters who supported the proposal stated that it expands the types of entities that may comply with the information review requirement, modernizes the information review process, and makes the process more efficient.

The Commission has determined to adopt this provision substantially as proposed, with technical edits.

Proposed Rule 15c2-11(a)(2).

See, e.g.,

Letter from James Berns, Berns & Berns, to Vanessa Countryman, Sec'y, SEC (Aug. 31, 2020); Coral Capital Letter; CrowdCheck Letter;

see also

HTFL Letter; Lowy Letter.

The amended Rule replaces the phrase “required by” with “specified in” and adds the word “the” to the requirement that “[s]uch qualified interdealer quotation system ha[ve] in its records

the

documents and information

specified in

paragraph (b) of this section . . . .” Amended Rule 15c2-11(a)(2)(i) (emphasis added). Paragraph (a)(2) of the amended Rule also includes the phrase “for publication” to mirror the text of paragraph (a)(1), updates the cross-reference to paragraph (a)(1)(ii) of the amended Rule, and removes in three instances the word “and.”

A qualified IDQS's requirements under paragraph (a)(2) of the amended Rule mirror the requirements for broker-dealers under paragraph (a)(1) of the amended Rule.

The amended Rule's recordkeeping requirements for broker-dealers and qualified IDQSs should aid in Commission oversight of compliance with the Rule's provisions. Finally, the notice and reporting requirements for an IDQS that operates as an ATS under the Exchange Act contribute to the Commission's effective oversight of ATSs.

The shell company limitation in paragraph (f)(7)(i) of the proposed qualified IDQS review exception is not incorporated into the information review requirement for qualified IDQSs under the amended Rule. The Commission believes that the investor protections provided from a qualified IDQS's compliance with the information review requirement for a shell company helps to ensure that a quoted market for its security is less susceptible to fraudulent or manipulative schemes because the qualified IDQS must have a reasonable basis for believing that the shell company's information is accurate in all material respects and from a reliable source before a broker-dealer can initiate or resume a quoted market in the shell company's security.

3. Broker-Dealer That Relies on a Qualified IDQS's Publicly Available Determination That It Complied With the Information Review Requirement—Rule 15c2-11(a)(1)(ii)

The Commission is adopting a new provision in the amended Rule to allow broker-dealers to rely on a qualified IDQS's publicly available determination that it complied with the information review requirement.

The amended Rule, consistent with the proposed Rule, sets forth certain criteria for a broker-dealer to publish or submit a quotation in reliance on a qualified IDQS's compliance with the information review requirement.

See

Amended Rule 15c2-11(a)(1)(ii).

The Commission sought comment about the proposal for an exception to permit a broker-dealer to publish or submit a qualified IDQS review quotation.

The Commission received comment supporting this provision.

Commenters who supported the proposed exception stated that it would: (1) Reduce burdens for broker-dealers by expanding the scope of entities that may comply with the information review requirement, (2) modernize and make the Rule more efficient, and (3) promote more competition to improve the overall process.

One commenter also stated that the qualified IDQS review exception should be collapsed into the Rule's unlawful activity provision to simplify the Rule.

Proposed Rule 15c2-11(f)(7). The Commission stated that the proposed exception would have reduced the burden on broker-dealers in connection with initiating or resuming a quoted market in an OTC security. Under the proposed exception: (1) A broker-dealer would need to have published or submitted a quotation within three business days after the qualified IDQS made its determination publicly available, and (2) broker-dealers could rely on the exception only during the 30 calendar days after the first quotation was published or submitted in reliance on the proposed exception. These timing requirements were intended, among other things, to ensure that the broker-dealer would commence a quoted market shortly after the qualified IDQS makes the applicable publicly available determination and to provide an opportunity for the broker-dealer to establish the frequency of quotations that the proposed amendments to the piggyback exception would require.

See

Proposing Release at 58231. Further, the proposed exception would not have applied if the issuer of a security were a shell company.

See

Proposed Rule 15c2-11(f)(7)(i).

Coral Capital Letter (stating that the exception should apply to the securities of shell companies and penny stocks); Canaccord Letter; Letter from Daniel Zinn, General Counsel, and Cass Sanford, Associate General Counsel, OTC Mkts. Grp. Inc., to SEC (Nov. 25, 2019) (“OTC Markets Group Letter 1”); Letter from Daniel Zinn, General Counsel, and Cass Sanford, Associate General Counsel, OTC Mkts. Grp. Inc., to SEC (Dec. 30, 2019) (“OTC Markets Group Letter 2”); Letter from F. Mark Reuter, Partner, Keating, Muething & Klekamp (Dec. 13, 2019) (“Keating Letter”); SIFMA Letter. Commenters also supported the proposal with respect to publicly available determinations that issuer information is current and publicly available. Zuber Lawler Letter.

Coral Capital Letter;

see

Keating Letter.

See

Letter from Daniel Zinn, General Counsel, and Cass Sanford, Associate General Counsel, OTC Mkts. Grp. Inc., to SEC (Apr. 8, 2020) (“OTC Markets Group Letter 3”). This commenter also suggested a reordering of the Rule such that there would no longer exist a need to distinguish between initial versus ongoing quoting requirements, according to the commenter.

Id.

The Commission is adopting new paragraph (a)(1)(ii) of the amended Rule,

which substantively is the same as the proposed exception to permit broker-dealers to rely on a qualified IDQS's publicly available determination that it complied with the information review requirement.

Specifically, this provision requires a broker-dealer's quotation to be published or submitted within three business days after the qualified IDQS makes a publicly available determination.

Unlike the proposed Rule, the amended Rule does not include a 30-calendar-day limitation for broker-dealers to rely on a qualified IDQS's publicly available determination.

To ensure that there is current issuer information at the initiation of a quoted market in such issuer's security, the Commission has determined to adopt the proposed requirement that a broker-dealer's quotation must be published within three business days of the qualified IDQS making publicly available its determination. This three-business-day window is designed to help ensure that there is a very limited time period between the information review conducted by the qualified IDQS and the first quotation published or submitted by a broker-dealer in reliance on the qualified IDQS's publicly available determination that it complied with the information review requirement.

As discussed below,

broker-dealers that publish quotations pursuant to paragraph (a)(1)(ii) need only to preserve the name of the qualified IDQS that made the publicly available determination that it has complied with the information review requirement.

This provision is substantively the same as that in the proposed exception but is achieved through different means; the amended Rule provides this ability in a single place, under the unlawful activity provision, while the proposed Rule largely provided this through an exception. The amendments as modified are designed to streamline the amended Rule and facilitate compliance.

See

Proposed Rule 15c2-11(f)(7).

See infra

note 95 (stating that this three-business-day window is consistent with the time frame specified for the required manner in which current reports must be obtained under paragraph (b)(3) of the amended Rule).

As discussed below in Part II.D.5, the piggyback exception under the amended Rule no longer has a timing requirement of 30 calendar days following the initiation (or resumption) of a quoted market for securities to establish piggyback eligibility.

The requirement for a broker-dealer's quotation to be published within three business days of the qualified IDQS making publicly available its determination is consistent with the time frame specified for the required manner in which current

reports must be obtained under amended Rule 15c2-11(b)(3), as discussed below in Part II.B.1. Further, this three-business-day window is designed to take account of the fact that certain issuer information (

e.g.,

a current report) is not filed at regular intervals. Accordingly, the three-business-day window provides a limited time frame during which a quoted market for an issuer's security can be initiated following the potential disclosure of new information about the issuer. This requirement that a broker-dealer's quotation be published within three business days of the qualified IDQS making its publicly available determination applies equally for publicly available determinations across all issuers, including those that do not have a reporting or disclosure obligation under the federal securities laws, to promote the investor protections that result from the commencement of a quoted market in a security concomitant with current information about the issuer of that security.

See infra

Part II.I (discussing the recordkeeping requirement).

In response to a comment stating that entities other than a broker-dealer or a qualified IDQS should be able to comply with the information review requirement,

the Commission does not believe that it would be appropriate to further expand the scope of entities that may comply with the Rule's information review requirement. The Commission's oversight of, and regulatory requirements for, broker-dealers and qualified IDQSs under the Exchange Act would help to promote compliance with the information review requirement and enhance investor protection.

Other commenters stated that the Rule should permit broker-dealers to rely on the determination of a qualified IDQS: (1) To initiate quotes in these securities without requiring a broker-dealer or qualified IDQS to file a separate Form 211 with the Financial Industry Regulatory Authority (“FINRA”),

and (2) to publish subsequent quotations without the 30-calendar-day “piggyback eligibility” period following the initial quotation.

100

One commenter requested clarification on whether a qualified IDQS would need to submit a Form 211 to FINRA for a broker-dealer to rely on a qualified IDQS's publicly available determination that it complied with the information review requirement before it could publish a quotation for some or all categories of securities.

101

The requirement to file a Form 211 falls under FINRA Rule 6432. The amended Rule does not impose obligations with respect to FINRA Rule 6432 and does not require qualified IDQSs, or broker-dealers relying on a qualified IDQS's publicly available determination that an exception applies, to file Forms 211 with FINRA. During and after the transition period, the Commission will continue to monitor the operation of this market and expects FINRA to do the same, including through examinations of qualified IDQSs. The Commission's staff expects to work with FINRA on an ongoing basis regarding the implementation of the amended Rule.

102

Coral Capital Letter.

See

Proposing Release at 58236.

Canaccord Letter; STA Letter; Virtu Letter.

100

Letter from Laura Anthony, Anthony L.G., PLLC, to SEC (Feb. 26, 2020) (“Anthony Letter”); Letter from Leonard Burningham to SEC (Dec. 30, 2019), and Letter from Leonard Burningham to SEC (Dec. 30, 2019) (collectively, the “Leonard Burningham Letters”); OTC Markets Group Letter 2; OTC Markets Group Letter 3 (advocating for an elimination of the three-business-day requirement for reliance on the exception); SIFMA Letter.

101

FINRA Letter (stating that its current rules do not contemplate that a qualified IDQS would be required to submit a Form 211 to FINRA and that the Form 211 includes a certification attesting that the submitting broker-dealer has not accepted and will not accept payments from the issuer of the security to be quoted for market making, which applies to the filing of a Form 211).

102

As discussed below in Part II.P, the Commission staff intends to offer assistance and support to covered entities during the transition period and thereafter, with the aim of helping to ensure that the investor protections and other benefits of the amended Rule are implemented in an efficient and effective manner.

4. Policies and Procedures for Making Certain Publicly Available Determinations—Rule 15c2-11(a)(3)

The Commission has determined to require a qualified IDQS or registered national securities association that makes certain publicly available determinations in accordance with the amended Rule to establish, maintain, and enforce reasonably designed written policies and procedures associated with making such a determination. Such publicly available determinations may pertain to whether: (1) An issuer's paragraph (b) information is current and publicly available for purposes of the unsolicited quotation exception,

103

(2) the piggyback exception's grace period applies,

104

or (3) the requirements of a certain exception (

i.e.,

the exchange-traded security exception, the piggyback exception, the municipal security exception, or the ADTV and asset test exception) are met.

105

Under the proposed Rule, the qualified IDQS or registered national securities association would have had to make a publicly available determination that it has reasonably designed policies and procedures in place and being maintained and enforced to determine whether the applicable paragraph (b) information is current and publicly available, and that the requirements of an exception are met.

106

103

See

Amended Rule 15c2-11(f)(2)(iii)(B).

104

See

Amended Rule 15c2-11(f)(3)(ii)(A).

105

See

Amended Rule 15c2-11(f)(7).

106

Proposing Release at 58232;

see

Proposed Rule 15c2-11(f)(8)(iii).

Commenters expressed general concern that the proposal would weaken Commission oversight of compliance with the Rule.

107

The Commission is strengthening the proposed Rule's policies and procedures requirements for making such publicly available determinations. Instead of requiring a qualified IDQS or registered national securities association to make a publicly available determination that it “has” reasonably designed policies and procedures, the amended Rule requires such entities to establish, maintain, and enforce reasonably designed written policies and procedures to make the particular publicly available determination.

107

See, e.g.,

Steven Gereau, Mayfair Plastics Inc. (Sept. 30, 2019); Tom Prenger (Sept. 30, 2019).

Specifically, paragraph (a)(3) under the amended Rule requires a qualified IDQS or registered national securities association that makes a publicly available determination regarding whether issuer information is current and publicly available, and, in some instances, whether the requirements of an exception are met, to establish, maintain, and enforce reasonably designed written policies and procedures to determine whether: (1) Paragraph (b) information is current and publicly available, and (2) the requirements of the paragraph (f)(7) exception are met.

108

The obligation to establish, maintain, and enforce written policies and procedures specified in paragraph (a)(3) of the amended Rule is designed to help promote the integrity of such publicly available determinations and to facilitate Commission oversight of the qualified IDQS or registered national securities association that makes them.

108

Amended Rule 15c2-11(a)(3). Paragraph (a)(3) of the amended Rule applies to registered national securities associations (and qualified IDQSs) that make publicly available determinations, but a registered national securities association is not eligible to comply with the information review requirement, as provided in paragraphs (a)(1)(i)(A) through (C) and (a)(2)(i) through (iii) of the amended Rule.

B. Specified Information

1. Current Reports—Rule 15c2-11(b)(3)(i) Through (iv)

The Commission is adopting as proposed

109

the requirement that a

broker-dealer or a qualified IDQS obtain current reports as of a date up to three business days before the publication or submission of the quotation in connection with the information review requirement.

110

The Commission proposed to update and streamline the timing requirement for obtaining certain reports about material events affecting the issuer of a quoted security, such as a Form 8-K or Form 6-K, in connection with the information review requirement.

111

Prior to the amendment, the Rule required that a broker-dealer obtain such reports on the earlier of five business days before: (1) The initial publication or submission of a quotation; or (2) the date of submission of certain information pursuant to applicable rules of FINRA or its successor.

112

109

See

Proposing Release at 58214. The proposed Rule would revise the timing requirement from five business days to three business days and would streamline the timing standard associated with obtaining current reports by removing the

requirement regarding a broker-dealer's demonstration of its compliance with the Rule by filing a form (

i.e.,

a Form 211) with FINRA, which must be received at least three business days before the broker-dealer's quotation is published or displayed in a quotation medium. Thus, 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 before the initial publication or submission of a quotation. The proposed timing requirement was intended to reflect that, in today's market, reports, such as a Form 8-K, are easily accessible and can be obtained in a timely manner. In addition, the proposed requirement to obtain all current reports as of a certain date is related to the initiation or resumption of a quoted market for a security, not to the requirements of applicable FINRA rules for a broker-dealer to submit certain information to FINRA.

See id.

These changes were intended to require broker-dealers and qualified IDQSs to obtain current reports closer in time to the initial publication or submission of a quotation.

110

Amended Rule 15c2-11(b)(3)(i) through (iii).

111

Proposed Rule 15c2-11(b)(3)(i) through (iii). Current reports filed with the Commission include, but are not limited to, current reports on Form 8-K pursuant to Section 13 or 15(d) of the Exchange Act and current reports on Form 1-U pursuant to Rule 257(b)(4) of Regulation A.

See

Proposing Release at 58214 n.58.

112

Former Rule 15c2-11(d)(2)(i). The timing standard for obtaining current reports in paragraph (d)(2)(i) of the former Rule was incorporated, with a modification, into paragraphs (b)(3)(i) through (iii) of the proposed Rule.

In response to the proposal, one commenter expressed concern that the proposal imposed a requirement to wait three business days before publishing quotations,

113

while another suggested that the Commission remove the three-day-window.

114

After consideration of these comments, the Commission has determined to adopt the provision as proposed. As discussed in the Proposing Release, events that require the filing of current reports, such as a Form 8-K or Form 6-K, generally involve material events affecting an issuer.

115

The three-business-day period recognizes that current reports are not filed at regular intervals, and thus removing the entire period would be impractical. For example, a reporting issuer might file a current report, such as a Form 8-K, minutes before a broker-dealer publishes a quotation for such security. Therefore, the amended Rule, like the proposed Rule, provides a period during which such recently filed current reports will not be required paragraph (b) information for issuers that have a reporting obligation under Section 13 or 15(d) of the Exchange Act or Regulation A, although the amended Rule shortens the former Rule's five-day period to a three-day period.

113

See

Coral Capital Letter.

114

OTC Markets Group Letter 3.

115

See

Proposing Release at 58214.

This amendment is not designed to serve as a waiting period, as one commenter suggested,

116

but rather as a cutoff date at which a broker-dealer is not required to consider a more recently filed current report to comply with the information review requirement prior to publishing or submitting a quote. For example, a broker-dealer could publish a quotation on the same day that it complies with the information review requirement or on the same day that a qualified IDQS makes a publicly available determination that it has complied with the information review requirement. The Commission believes that removing the three-business-day period would create an impractical result and require broker-dealers and qualified IDQSs to continuously monitor for the filing of current reports with the Commission in the three business days leading up to the publication or submission of a broker-dealer's quotation. The three-business-day period provides a degree of certainty in regard to compliance burdens for the uncertain timing surrounding current reports, while at the same time shortening the previously existing period to better achieve the Commission's goals.

116

See

Coral Capital Letter.

2. Reporting Issuer Provision—Rule 15c2-11(b)(3)

To simplify the amended Rule and improve its readability, the Commission is breaking out the provisions governing paragraph (b) information for reporting issuers by addressing each type of issuer in a separate paragraph. This amendment would not have changed any substantive obligations for a broker-dealer under the Rule and would remove from the list of issuers those that are covered by Section 12(g)(2)(B) under the Exchange Act because such issuers have a reporting obligation under Section 13 or 15(d) under the Exchange Act and would, therefore, already be covered by paragraph (b)(3)(i) under the proposed Rule.

117

The Commission sought comment about this aspect of the proposal but did not receive any comment. The Commission is adopting the reorganized structure, as proposed.

118

117

See

Proposing Release at 58214.

118

See

Amended Rule 15c2-11(b)(3)(i) through (v). To make the amended Rule easier to read, the Commission is making a streamlining edit from the proposal by not adopting the proposed requirement in paragraphs (b)(3)(i)(B), (b)(3)(ii)(B), and (b)(3)(iii)(B) for a broker-dealer or qualified IDQS to have a reasonable basis for believing that the issuer is current in filing the applicable specified information. This requirement was redundant with the proposed Rule's information review requirement—and would have been redundant with the amended Rule's information review requirement—that a broker-dealer or a qualified IDQS must have a reasonable basis for believing that the specified information is “current and publicly available.”

See

Amended Rule 15c2-11(a)(1)(i)(B) and (C), (a)(2)(ii) and (iii); Proposed Rule 15c2-11(a)(1)(ii) and (iii), (a)(2)(iii);

see also infra

Parts II.J.1 and 3 (discussing how paragraph (b) information that is filed by the applicable time frames specified in paragraph (b) for the issuer is current and publicly available for purposes of the amended Rule). Instead, paragraph (b)(3) of the amended Rule provides that the specified information for reporting issuers is a current copy of the documents and information that are listed under the applicable subparagraph under paragraph (b). This technical edit is appropriate because the definition of current for purposes of the amended Rule pertains to an issuer's paragraph (b) information and not to the issuer itself.

See

Amended Rule 15c2-11(e)(2);

infra

Part II.J.1. For a description of non-structural changes to the specified information provision for reporting issuers, see

infra

Part II.B.6, which discusses the addition of a specified information provision for crowdfunding issuers under the amended Rule.

3. Catch-All Issuer Information—Rule 15c2-11(b)(5)(i)

The Commission is also expanding the list of specified paragraph (b) information for catch-all issuers to include the identity of company officers and large shareholders, along with additional information that commenters suggested, and is lengthening the amount of time for all catch-all issuer information to be updated for such information to meet the definition of “current.”

119

The Commission proposed to expand the list of specified paragraph (b) information associated with catch-all issuers to include the identity of company officers and large shareholders of the company.

120

The proposed requirement to make such information publicly available was designed to make it easier for investors and other market participants to identify a more complete list of persons who are associated with the issuer and to research their backgrounds.

121

119

See

Amended Rule 15c2-11(b)(5)(i).

120

Proposed Rule 15c2-11(b)(5)(i)(K).

121

See

Proposing Release at 58214-15.

The Commission sought comment about the proposal to expand the list of

paragraph (b) information for catch-all issuers to include the identity of company insiders and larger shareholders of the company; the ticker symbol of the security being quoted; the address of the issuer's principal place of business if that address differs from the address of the issuer's principal executive offices; and any additional information to help accurately identify company insiders (

e.g.,

job title). One commenter stated that a variety of securities trade in the OTC market and advocated for greater flexibility in the specified information that is required to be current and publicly available.

122

The Commission believes that, by requiring different types of paragraph (b) information to address the wide variety of OTC issuers

123

and by providing flexible requirements for such information to be current and publicly available,

124

the amended Rule is appropriately tailored to each type of covered issuer. Further, the Commission believes that the list of catch-all issuer information that is required to be current and publicly available appropriately balances the fact that some catch-all issuers do not have a reporting obligation while protecting investors through the disclosure of a relatively limited amount of information that could help investors access information about the catch-all issuer before making an investment decision.

122

Mitchell Partners Letter 1;

see

Letter from Philip Milner, Jr., to Hon. Jay Clayton (Nov. 26, 2019) (“Milner Letter”); Norberg Letter; Kyle M. Peeples (Dec. 1, 2019); Debby Valentijn.

123

This specified information ranges from a registration statement for prospectus issuers to a list of specified information for a catch-all issuer.

See

Amended Rule 15c2-11(b)(1) through (5). Further, the paragraph (b) information for catch-all issuers that must be obtained and reviewed for a broker-dealer to initiate a quoted market does not approach the level of comprehensiveness that is required with respect to a company with reporting obligations under the federal securities laws. As discussed above, except for certain financial information, most paragraph (b) information for catch-all issuers is current if it is publicly available on an annual basis. In contrast, certain reporting issuers may have an obligation to file a report on a quarterly basis.

124

For example, certain information for a catch-all issuer is not required to be current and publicly available for a broker-dealer to rely on the piggyback exception.

See

Amended Rule 15c2-11(f)(3)(i)(C)(3).

Another commenter stated that the Rule's requirements for paragraph (b) information for catch-all issuers to be current and publicly available should not be as onerous as the disclosure obligations imposed on reporting companies and that information that is required to be current and publicly available should not be too complicated for an investor to read.

125

The Commission believes that the information that is required to be current and publicly available for catch-all issuers includes basic information about the issuer and does not include the type of detail or complexity as is required for reporting issuers under the federal securities laws. For example, the amended Rule's specified information for catch-all issuers does not require that the issuer's balance sheet be audited. Other commenters requested that paragraph (b) information for catch-all issuers also include: Any trade sanctions to which the issuer is subject;

126

the security's ticker symbol and CUSIP number;

127

the address of the issuer's principal place of business if that address differs from the address of the issuer's principal executive office;

128

the job titles of company insiders;

129

the number of freely tradeable securities;

130

and additional information with regard to an issuer's recent predecessors (over the prior five years), along with their state of incorporation and the CUSIP numbers of any equity securities issued by those predecessors.

131

The Commission agrees that it is appropriate that some of this information be required to be disclosed to the investing public regarding catch-all issuers before a broker-dealer can publish or submit a quotation for securities of such issuers and, therefore, has determined to expand the former Rule's list of paragraph (b) information for catch-all issuers to include, in paragraph (b)(5)(i) of the amended Rule, the identity of company officers and large shareholders, as proposed, along with certain additional information that commenters suggested: (1) Job titles for company insiders, (2) the names of all of an issuer's predecessors during the past five years, (3) the issuer's principal place of business, (4) the state of incorporation or registration of each of the issuer's predecessors (if any) during the past five years, and (5) the ticker symbol (if assigned) during the past five years.

132

The Commission has determined not to require all of the information suggested by commenters because the Commission believes that the catch-all issuer information required in paragraph (b) of the amended Rule strikes an appropriate balance between (1) ensuring that important basic information about an issuer is current and publicly available to commence a quoted market or rely on many of the amended Rule's exceptions (

e.g.,

the piggyback exception), and (2) allowing broker-dealers to facilitate demand in a quoted market for OTC securities without an overly burdensome list of information to prepare, obtain, and review.

133

The public availability of this additional information about catch-all issuers will provide a more comprehensive look at the company and its operations for those making investment decisions before a broker-dealer can publish quotations for such issuers' securities.

125

Beacon Redevelopment Letter.

126

Jean-Paul Tres (Dec. 29, 2019).

127

Coral Capital Letter.

128

Id.

129

Id.

130

FINRA Letter.

131

Id.

132

See

Amended Rule 15c2-11(b)(5)(i).

133

See infra

Part VI.C.1.a.

One commenter suggested that the list of persons described in paragraph (b)(5)(i)(K) of the proposed Rule include the word “executive” in front of the word “officer” because, according to the commenter, an issuer may employ many persons with the title of “officer” who do not direct company-wide policies and do not manage the company.

134

As stated in the proposal, the Commission believes that investors could benefit from knowing the identity of officers who manage a company.

135

Further, the term “officer” refers to a person's management functions as opposed to his or her title. For example, under the amended Rule, while the term “officer” could be used to refer to a president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer of a company, it can also refer to any person routinely performing corresponding functions with respect to the company.

136

In complying with the information review requirement, a broker-dealer or qualified IDQS may rely on information regarding officers provided by a person whom the broker-dealer has a reasonable basis for believing is a reliable source, such as the issuer.

137

Paragraph (b)(5)(i)(K) of the amended Rule uses the newly defined term “company insider” to replace the list of persons delineated in paragraph (b)(5)(i)(K) of the proposed Rule.

138

As discussed below in Part II.L.5, this term is designed to capture persons who manage a company or have a greater degree of access to issuer information and who may have a heightened incentive to engage in fraudulent or manipulative conduct.

139

134

Brian Brown, Chief Financial Officer and Treasurer, Computer Services, Inc. (Mar. 10, 2020) (“Computer Services Letter”).

135

See

Proposing Release at 58214.

136

See

Exchange Act Rule 3b-2.

137

See infra

Part II.O.

138

Amended Rule 15c2-11(e)(1).

139

For example, company insiders may stand to profit by selling the company shares they own during a pump-and-dump scheme. Proposing Release at 58225.

Finally, the Commission has determined not to adopt the proposed requirement that would have required certain catch-all issuer financial information—the issuer's profit and loss and retained earnings statements—to be as of a date less than six months before the publication or submission of a broker-dealer's quotation for a catch-all issuer's security if the issuer's balance sheet were not as of a date within six months before such publication or submission of a quotation.

140

As discussed below in Part II.D.1, the Commission also has lengthened the time period for financial information of catch-all issuers to be current and publicly available under the piggyback exception. Among other reasons, including those discussed below, the Commission believes that requiring such financial information for catch-all issuers to be compiled and published more frequently than annually would require an allocation of resources to the preparation of financial statements that is not justified in light of the facts that a catch-all issuer generally does not have any reporting or disclosure obligation under the federal securities laws and that an issuer's reporting obligations under state law generally are annual. In addition, the Commission believes that this time frame, in addition to the expansion of the list of specified information for catch-all issuers, as discussed above, will help provide investors with the appropriate tools to make better-informed investment decisions. Accordingly, the amended Rule specifies that, for a broker-dealer to initiate, resume, or maintain a quoted market in a catch-all issuer's security:

141

(1) Such issuer's balance sheet is current if its most recent balance sheet is as of a date less than 16 months before the publication or submission of the broker-dealer's quotation,

142

and (2) the issuer's profit and loss and retained earnings statements are current if they are for the 12 months preceding the date of such balance sheet.

143

Consistent with the proposed Rule, the amended Rule also provides that catch-all issuer information specified in paragraph (b)(5)(i), excluding the issuer's financial information, is current if it is as of a date within 12 months before the publication or submission of the quotation.

144

140

Amended Rule 15c2-11(b)(5)(i)(L).

141

The timing requirements for a catch-all issuer's paragraph (b) information to be current (and publicly available) are the same notwithstanding whether a broker-dealer is initiating or resuming a quoted market in a catch-all issuer's security pursuant to paragraph (a) of the amended Rule or whether it is relying on the piggyback exception to maintain a quoted market in a catch-all issuer's security. For a discussion of the requirement for catch-all issuer information to be current and publicly available for a broker-dealer to initiate or resume a quoted market in a catch-all issuer's security, see

supra

Part II.A.1. For a discussion of the requirement for catch-all issuer information to be current and publicly available for a broker-dealer to maintain a quoted market in a catch-all issuer's security by relying on the piggyback exception, see

infra

Part II.D.1.

142

As discussed above, the Commission is not requiring such financial information for catch-all issuers to be current and publicly available on a six-month basis, as proposed, because such a requirement would result in a catch-all issuer's financial information being compiled and published on a more frequent basis than the information of certain issuers that have a reporting or disclosure obligation under the federal securities laws, such as crowdfunding issuers. A period of 16 months allows time to finalize and make publicly available an annual balance sheet.

143

See

Amended Rule 15c2-11(b)(5)(i)(L).

144

Amended Rule 15c2-11(b)(5)(i);

see

Amended Rule 15c2-11(e)(2). The Commission is also making technical edits to the proposed Rule so that the amended Rule is easier to read. First, while the proposed Rule would have used the phrase “the documents and information required by paragraph (b),” the amended Rule uses the term “the documents and information specified in paragraph (b).” This technical edit is intended to reflect that paragraph (b) specifies the documents and information regarding an issuer that a broker-dealer or qualified IDQS must obtain and review to comply with the information review requirement or determine that the requirements of an exception are met. Second, the Commission is not adopting the requirement in proposed paragraph (b)(5)(i) that catch-all issuer information must be “current and made publicly available.” The Commission believes that this change from the proposal is appropriate, given the requirement that such information be current and publicly available for a broker-dealer or qualified IDQS to comply with the information review requirement, or for a broker-dealer to rely on certain of the amended Rule's exceptions. This streamlining amendment does not change any of the timing components for such information to be considered current and publicly available.

4. Requirement To Make Catch-All Issuer Information Available Upon Request—Rule 15c2-11(b)(5)(ii)

To facilitate investor access to information, the amended Rule requires broker-dealers that comply with the information review requirement to make catch-all issuer information available upon the request of a person expressing an interest in a proposed transaction in the issuer's security, such as by providing the requesting person with appropriate instructions regarding how to obtain publicly available information electronically.

145

The Commission proposed to permit broker-dealers to provide persons who express an interest in a proposed transaction involving a catch-all issuer with instructions regarding how to obtain publicly available information electronically.

146

This proposed amendment was intended to make it easier for retail investors to locate and easily access catch-all issuer information.

147

This proposed amendment would not limit other ways in which a broker-dealer could make information available to persons expressing an interest in a proposed transaction in a security of a catch-all issuer; it simply recognized that the internet provides a cost-effective means to distribute catch-all issuer information to such persons.

148

145

Amended Rule 15c2-11(b)(5)(ii).

146

Proposed Rule 15c2-11(b)(5)(ii). Proposed Rule 15c2-11(b)(4) included a similar requirement to permit a broker-dealer to provide to persons who express an interest in a proposed transaction in a security of an exempt foreign private issuer appropriate instructions regarding how to obtain the information electronically.

147

See

Proposing Release at 58215.

148

See id.

Additionally, as the Commission explained in the Proposing Release, “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).”

Id.

The Commission sought comment on this aspect of the proposal and received support.

149

The Commission has determined to adopt the proposed amendment regarding the manner in which a broker-dealer may provide this information. To alleviate the concern that issuer information may be difficult for investors to locate on their own, this amendment is designed to make such information easier to find while providing a cost-effective means for broker-dealers to distribute catch-all issuer information to all investors, not just those that request such information.

150

In this regard, if such information is located on different websites, broker-dealers may provide the website addresses at which investors can find the information that is required to be publicly available. The Commission is also adopting a technical edit.

151

Consistent with the proposal, the amended Rule requires that, to the extent the broker-dealer also has catch-all issuer information, the broker-dealer must make such information available to persons who request such information.

152

A broker-dealer that publishes a quotation in reliance on a publicly available determination of a qualified IDQS that the qualified IDQS complied with the information review requirement, therefore, is not required to make catch-all issuer information available upon request because such broker-dealer is not itself complying

with the information review requirement.

149

Coral Capital Letter.

150

See

Proposing Release at 58215.

151

Paragraph (b)(5)(ii) of the amended Rule replaces the words “required by” with the words “specified in” and includes the word “the” so that the broker-dealer “must make

the

information

specified in

paragraph (b)(5)(i) of this section” available upon request.

See

Amended Rule 15c2-11(b)(5)(ii) (emphasis added).

152

See

Amended Rule 15c2-11(b)(5)(ii).

5. Application of the Catch-All Issuer Provision—Rule 15c2-11(b)(5)(ii)

Consistent with the Commission's efforts to increase transparency about OTC securities for all investors, the Commission is adopting, as proposed, the provision that specifies that an issuer would be a “catch-all issuer” if the documents and information specified in paragraphs (b)(1) through (b)(4) of the amended Rule do not apply to the issuer.

153

As discussed below, however, the amended Rule treats reporting issuers that are delinquent in their filing obligations (

i.e.,

their paragraph (b) information is not “current,” as that term is defined in paragraph (e)(2) of the amended Rule) as catch-all issuers only for purposes of initiating or resuming a quoted market in these issuers' securities.

153

See

Amended Rule 15c2-11(b)(5)(ii). While proposed Rule 15c2-11(b)(5)(ii) would have applied “

to any security

of an issuer that is not included in paragraphs (b)(1) through (b)(4) of [the Rule],” amended Rule 15c2-11(b)(5)(ii) requires that “[t]he documents and information specified in paragraph (b)(5) of [the amended Rule] must be reviewed where paragraphs (b)(1) through (b)(4) of [the amended Rule] do not apply to such issuer.” This technical change from the proposal addresses the fact that paragraph (b) specifies an issuer's documents and information.

One commenter stated that the term “catch-all issuer” is a term that many market participants will not understand. Hamilton & Associates Letter. This term, however, is used only for purposes of this release to refer to issuers for which documents and information are specified in paragraph (b)(5) of the amended Rule.

The Commission sought comment about the provision in paragraph (b)(5)(ii) of the proposed Rule that specified the two circumstances in which an issuer would be a catch-all issuer: (1) If an issuer is not a type of reporting issuer enumerated in (b)(1) through (b)(4) of the proposed Rule, and (2) if the information required to be reported by the particular type of reporting issuer is not current because, for example, it is not timely filed. One commenter stated that a company with a reporting obligation that files a Form NT and provides notice that it will not file a periodic report on a timely basis may become a catch-all issuer and thus be ineligible for quoting pursuant to the piggyback exception because, under paragraph (b)(5)(i)(L) of the proposed Rule, its financial information would be older than six months.

154

OTC Markets Group Letter 2 (recommending that the Commission align references in paragraph (b) to the timing of disclosure with relevant Commission rules that apply to smaller reporting companies). The amended Rule's timing requirements for piggyback eligibility provide a longer window than reporting issuers have to comply with their Exchange Act reporting obligations, and are aligned with the requirements of Commission rules that apply to smaller reporting companies, by requiring that the documents and information specified in paragraph (b) be either filed within 180 calendar days from a specified period, for issuers with an Exchange Act reporting obligation, or timely filed for issuers with a reporting obligation under Regulation A or Regulation Crowdfunding.

See infra

Part II.D.1. In addition, the piggyback exception under the amended Rule includes a grace period that permits broker-dealers to continue to rely on the piggyback exception for a time-limited period if a report that must be filed pursuant to an Exchange Act or Securities Act reporting obligation has not been timely filed or filed within 180 days from the end of the specified period.

See infra

Part II.D.6.

The Commission has determined to modify the proposed provision that specified that a reporting issuer would be a catch-all issuer if its information is no longer “current,”

155

by limiting its application to compliance with the information review requirement for a broker-dealer to initiate a quoted market for an issuer's security. Accordingly, the amended Rule treats reporting issuers that are delinquent in their filing obligations as catch-all issuers only for purposes of initiating or resuming a quoted market in these issuers' securities, and thus a broker-dealer or a qualified IDQS would be required to comply with the information review requirement using the catch-all issuer's information required under the amended Rule only if a broker-dealer were initiating or resuming a quoted market in the issuer's security.

156

Notably, the amended Rule does not treat delinquent reporting issuers as catch-all issuers for purposes of the piggyback exception, as discussed below in Part II.D.1.

155

See

Amended Rule 15c2-11(e)(2);

infra

Part II.J.1.

156

Specifically, paragraph (b)(5)(ii) of the amended Rule provides that, for purposes of compliance with paragraph (a)(1)(i)(C) (broker-dealer complies with the information review requirement) or (a)(2)(ii) (qualified IDQS complies with the information review requirement) of the amended Rule, the documents and information specified in paragraph (b)(5) must be reviewed for an issuer for which the documents and information specified in paragraph (b)(1), (b)(2), (b)(3), or (b)(4) of the amended Rule regarding such issuer are not current.

See

Amended Rule 15c2-11(b)(5)(ii).

While proposed Rule 15c2-11(b)(5)(ii) would have required that “[p]aragraph (b)(5) of this section [ ] apply to

any security of an issuer

if information described in paragraphs (b)(1) through (b)(4) of [the proposed Rule] is not current,” amended Rule 15c2-11(b)(5)(ii) requires that “the documents and information specified in paragraph (b)(5) of [the amended Rule] must be reviewed for an issuer for which the documents and information specified in paragraph (b)(1), (b)(2), (b)(3), or (b)(4) of [the amended Rule] regarding such issuer are not current.” This technical change from the proposal addresses the fact that paragraph (b) specifies an issuer's documents and information.

In the context of maintaining a quoted market for an issuer's security, this change from the proposal (

i.e.,

limiting the treatment of delinquent reporting issuers as catch-all issuers to the initiation or resumption of a quoted market for an issuer's security) enhances the Rule's investor protections by reducing the potential for broker-dealers to sustain the false appearance of an active market in the securities of issuers that remain delinquent in their reporting obligations or no longer exist.

157

Consistent with the proposed amendment, the amended Rule does not change an issuer's statute- or rule-based reporting or disclosure obligation.

158

In response to a comment regarding an issuer that is granted an extension to file its annual report, and as discussed below, such an issuer will remain a reporting issuer

159

for purposes of the amended Rule's piggyback exception, and thus the broker-dealer would need to comply with the provisions of the piggyback exception that apply to reporting issuers (

i.e.,

paragraph (f)(3)(i)(C)(1) or (2)), depending on the category of reporting issuer, and not the provision that applies to catch-all issuers (

i.e.,

paragraph (f)(3)(i)(C)(3)).

160

157

See infra

Part II.D.1.a (discussing the time frame requirements associated with the transparency of reporting issuer information under the amended Rule's piggyback exception).

158

See

Amended Rule 15c2-11(b)(5)(ii) (using the phrase “specified in” instead of “required by” to clarify that the Rule does not impose any obligation on issuers).

159

See

Exchange Act Rule 12b-25(b) (providing that a registrant's report shall be deemed to be filed on the prescribed due date for such report if, among other things, the issuer represents in the Form 12b-25 that the subject annual report will be filed no later than the fifteenth calendar day following the prescribed due date).

160

See infra

Part II.D.1.

6. Specified Information Provision for Crowdfunding Issuers—Rule 15c2-11(b)(3)(iii)

The Commission has determined to add paragraph (b)(3)(iii) to the amended Rule as a technical amendment to align the amended Rule with Regulation Crowdfunding

161

and to tailor the provision to the specific regulatory status and existing disclosure and reporting obligations of a crowdfunding issuer, similar to how the amended Rule is tailored to recognize issuers that have an ongoing reporting obligation under the Exchange Act and Regulation A. Before the amendments, the Rule did not contain a provision tailored to the specific regulatory status and existing disclosure and reporting obligations of a crowdfunding issuer. A broker-dealer, therefore, would have been able to review the documents and information for a catch-all issuer to comply with the information review requirement before a broker-dealer could publish a quotation

for the crowdfunding issuer's security. However, under the amended Rule, a crowdfunding issuer would not be treated as a catch-all issuer, and thus a broker-dealer or qualified IDQS would need to obtain and review the documents and information specified in the specific provision for crowdfunding issuer information to comply with the information review requirement (assuming the issuer is not delinquent in its reporting obligations, as discussed above).

162

In light of the addition of a specified information provision for crowdfunding issuers, a broker-dealer or qualified IDQS would need to obtain and review the documents and information in paragraph (b)(3)(iii) of the amended Rule (rather than paragraph (b)(5) for catch-all issuers, as proposed) to determine if the requirements of certain exceptions are met.

161

E.g.,

Rules 201 through 203 of Regulation Crowdfunding.

162

This new provision regarding the documents and information of crowdfunding issuers is provided in paragraph (b)(3)(iii) of the amended Rule. Paragraphs (b)(3)(iii) and (iv) of the proposed Rule pertained to the documents and information regarding (1) issuers that file annual statements referred to in Section 12(g)(2)(G)(i) of the Exchange Act and any periodic and current reports pursuant to Section 13 or 15(d) of the Exchange Act and (2) issuers of securities that fall within the provisions of Section 12(g)(2)(G) of the Exchange Act and that file annual statements referred to in Section 12(g)(2)(G)(i) of the Exchange Act, respectively. Such paragraphs are now contained in paragraphs (b)(3)(iv) and (b)(3)(v) of the amended Rule, respectively, in light of the addition of the specified information provision for crowdfunding issuers in paragraph (b)(3)(iii) of the amended Rule.

Paragraph (b)(3)(iii) of the amended Rule specifies that the applicable information for a crowdfunding issuer is the issuer's most recent annual report

163

because such report is the only periodic report required by Regulation Crowdfunding to be filed with the Commission.

164

The amended Rule also provides that, until a crowdfunding issuer files an annual report, the applicable paragraph (b) information is the Form C (the offering statement for securities offered under Regulation Crowdfunding)

165

filed by the issuer within the prior 16 months, together with any Form C/A (amendments to the offering statement)

166

and Form CU (updates on meeting targeted offering amounts)

167

filed thereafter.

168

The amended Rule allows broker-dealers and qualified IDQSs to review the issuer's Form C, together with any Form C/A and Form CU filed thereafter as an alternative to obtaining and reviewing the issuer's annual report when the issuer's first annual report may not have been filed due to a gap between: (1) The end of the issuer's fiscal year after initially offering securities pursuant to Regulation Crowdfunding, and (2) the prescribed due date for the issuer to file its first annual report. Form C, together with Form C/A and Form C/U, includes substantially the same information that is required by an annual report.

169

In addition, paragraph (b)(3)(iii) of the amended Rule requires that a broker-dealer or qualified IDQS have a reasonable basis under the circumstances for believing that the issuer is current in filing such reports described in this paragraph (b)(3)(iii).

170

Paragraph (b)(3)(iii) of the amended Rule closely tracks the document and information provisions regarding issuers with an Exchange Act or Securities Act reporting or disclosure obligation, and includes provisions specific to crowdfunding issuers in accordance with the thrust of the amended Rule to separate information requirements by the type of issuer.

163

See

Amended Rule 15c2-11(b)(3)(iii).

164

See

Rule 202 of Regulation Crowdfunding.

165

See

Rule 203(a)(1) of Regulation Crowdfunding.

166

See

Rule 203(a)(2) of Regulation Crowdfunding.

167

See

Rule 203(a)(3) of Regulation Crowdfunding.

168

Amended Rule 15c2-11(b)(3)(iii). Under the amended Rule, a recently filed Form C offering statement is not specified as paragraph (b) information because securities sold under Regulation Crowdfunding are generally not transferable for one year from issuance.

169

See

Rule 202 of Regulation Crowdfunding.

170

Amended Rule 15c2-11(b)(3)(iii)(B).

C. Supplemental Information Requirement—Rule 15c2-11(c)

To help support the integrity of the OTC market and to promote investor protection by helping to ensure that market participants consider material information prior to the initiation of a quoted market for an issuer's security, the Commission is extending the application of the Rule's obligations regarding supplemental information

171

to cover all market participants that comply with the Rule's information review requirement, including broker-dealers and qualified IDQSs alike.

172

Under the amended Rule, a broker-dealer and a qualified IDQS, in complying with the information review requirement, must consider supplemental information about the issuer of an OTC security as part of its evaluation of whether the amended Rule's specified information is materially accurate. The type of information that is considered to be supplemental information (

e.g.,

a copy of a trading suspension order issued by the Commission pursuant to Exchange Act Section 12(k)) includes information about the issuer of the security that comes to the knowledge or possession of the broker-dealer before the broker-dealer publishes or submits a quotation for the issuer's security,

173

including records of transactions involving the issuer and company insiders.

174

The Commission has determined to adopt paragraph (c) as proposed, with one technical modification.

175

171

For purposes of this release, this requirement is referred to as the “supplemental information requirement.”

172

See

Proposing Release at 58217. As stated in the Proposing Release, this modification was 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.

See

Proposing Release at 58218. Proposed paragraph (c) would not require that a qualified IDQS (or a broker-dealer) affirmatively seek additional information about the issuer. Rather, proposed paragraph (c) would require that a qualified IDQS (or broker-dealer) that complies with the information review requirement keep records of the documents and information specified in proposed paragraphs (c)(1) through (c)(3) (excluding documents and information available on EDGAR), including any information regarding the transactions actually provided to the qualified IDQS (or broker-dealer).

173

See

Proposed Rule 15c2-11(c); 1999 Reproposing Release at 11146-47 (explaining that, while a broker-dealer is not required to affirmatively seek out information about the issuer beyond that specifically required by the Rule, material information about the issuer that comes to the broker-dealer's knowledge or possession—orally or in writing—must be taken into account by the broker-dealer in assessing whether the issuer information is accurate and from a reliable source).

174

As stated in the Proposing Release, such information is important to consider, in conjunction with the issuer's paragraph (b) information and any other supplemental information, because persons such as company insiders might be able to exert control over the issuer of an OTC security and have a heightened incentive to manipulate the price of the security.

See

Proposing Release at 58218. The proposed Rule would not have required that company insider status automatically lead a broker-dealer or qualified IDQS to conclude that the issuer's information is not accurate in all material respects or from a reliable source. Instead, such information would need to have been evaluated in conjunction with the issuer's paragraph (b) information, along with any other supplemental information that has come to the knowledge or possession of the broker-dealer or qualified IDQS, in forming a reasonable basis to believe that the issuer's information is accurate and from a reliable source. The Commission stated that the knowledge that a quotation is by or on behalf of a company insider could aid investors by alerting the broker-dealer or qualified IDQS 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 an issuer's security.

See id.

175

Specifically, paragraph (c)(3) of the amended Rule uses the newly defined term “company insider” to capture persons who are associated with an issuer, manage the company, or have heightened access to issuer information and who may have a heightened incentive to engage in fraudulent or manipulative conduct.

See infra

Part II.J.5.

The Commission sought comment on its proposed changes to the supplemental information requirement, including extending the requirement to qualified IDQSs and requiring records of transactions involving issuers and

company insiders.

176

One commenter stated that broker-dealers and qualified IDQSs that comply with the information review requirement should not be required to affirmatively seek additional information about the issuer because such a requirement would effectively turn broker-dealers into a combination of due diligence firms and private investigative agencies.

177

While the supplemental information requirement places an affirmative obligation on broker-dealers and qualified IDQSs that comply with the information review requirement to consider and record information beyond the paragraph (b) information, the Commission believes that this provision will help to support the integrity of the OTC market and promote investor protection by requiring that broker-dealers and qualified IDQSs consider material information before commencing a quoted market.

178

The Commission also believes that the provision, as amended, is appropriately tailored to minimize burdens on broker-dealers and qualified IDQSs. Broker-dealers and qualified IDQSs are required to seek out only certain supplemental information (

e.g.,

the identity of the person on whose behalf the quotation is made, company insider status, and recent trading suspensions). The requirement to obtain information regarding for whom a quotation is being published and whether the security has been subject to a trading suspension is not a new requirement. Obtaining such information does not require any particular due diligence or private investigation skills. For example, the broker-dealer can ascertain the identity of a person who is requesting that an initial quotation for a security be published or submitted by asking the person when the person contacts the broker-dealer. Additionally, whether a security has been the subject of a trading suspension is available on the Commission's website and is easily accessible.

179

176

See

Proposing Release at 58216-17.

177

See

Coral Capital Letter.

178

As discussed below in Part II.O, the supplemental information requirement places an affirmative requirement on such broker-dealers and qualified IDQSs to consider and have in their records the following documents and information: (1) Records related to the identity of the person or persons for whom the quotation is being published or submitted, whether such person or persons is the issuer or a company insider, and any information regarding the transactions that such person or person has provided to the broker-dealer or qualified IDQS; and (2) a copy of any trading suspension order issued by the Commission pursuant to Section 12(k) of the Exchange Act regarding any securities of the issuer or its predecessor (if any) during the 12 months preceding the date of the publication or submission of the quotation or a copy of the public release issued by the Commission announcing such trading suspension order. However, such broker-dealers or qualified IDQSs must consider and record a copy or a written record of any other material information (including adverse information) regarding the issuer only if it comes to the knowledge or possession of the broker-dealer or qualified IDQS before the quotation is published or submitted.

179

Trading Suspensions,

https://www.sec.gov/litigation/suspensions.shtml

(last visited Aug. 27, 2020).

A broker-dealer or qualified IDQS is required to consider and record other supplemental information only if such information: (1) Is provided to the broker-dealer or qualified IDQS by the person on whose behalf the quotation is published (

e.g.,

information regarding transactions),

180

or (2) comes to the knowledge or possession of the broker-dealer or qualified IDQS (

e.g.,

other material information regarding the issuer).

181

Considering and recording such information does not require a broker-dealer or qualified IDQS to conduct a due diligence review or a private investigation into facts that have not otherwise been provided to the broker-dealer or qualified IDQS, or that have not come to the knowledge or possession of the broker-dealer or qualified IDQS. The Commission believes structuring the supplemental information provision in this way strikes an appropriate balance of achieving the objectives of the Rule without placing unduly burdensome obligations on broker-dealers and qualified IDQSs.

180

Amended Rule 15c2-11(c)(1).

181

Amended Rule 15c2-11(c)(3).

Another commenter stated that information regarding the identity of the retail end-customer is not required to be publicly disclosed, so it is difficult for a broker-dealer that receives orders from correspondent brokers to have this information in its records on a transaction-by-transaction basis.

182

The Commission appreciates that a broker-dealer that publishes a quotation may not have a direct relationship with the retail customer on whose behalf the quotation is published and that such customer's broker is not required to publicly disclose the customer's identity.

183

Prior to the amendment, the Rule already required that a broker-dealer that complies with the information review requirement retain a record of the identity of the person or persons for whom the quotation is submitted or published. The Commission believes that it is operationally feasible for a broker-dealer to obtain this information (

e.g.,

the customer's retail broker might provide information to the broker-dealer about the identity of its customer) when such broker-dealer is reviewing the issuer's information and commencing a quoted market at the behest of a customer. While the amended Rule requires that broker-dealers and qualified IDQSs record the identity of the person on whose behalf the initial quotation is made, the Commission believes that requiring a record of the identity of the person on whose behalf the quotation is made when commencing a quoted market furthers the objectives of the Rule without imposing undue burdens associated with individual quotations and may aid Commission oversight of broker-dealers' and qualified IDQSs' compliance with the amended Rule. Further, the Commission understands that the majority of quotations are currently, and expects that they will continue to be, published in reliance on exceptions to the amended Rule and not in reliance on the performance of the information review requirement.

182

OTC Markets Group Letter 3.

183

See infra

Part II.E (discussing the final amendments to the unsolicited quotation exception).

This commenter also requested that the supplemental information regarding company insiders be limited to information that has come to the knowledge or possession of the broker-dealer or qualified IDQS.

184

The Commission has determined not to limit the amended Rule's specified supplemental information regarding status as an issuer and company insider to information that has come to the knowledge or possession of the broker-dealer or qualified IDQS. Because the amended Rule requires a broker-dealer or qualified IDQS to consider supplemental information only for initial quotations when initiating or resuming a quoted market, the Commission does not believe that it is unreasonable to require a broker-dealer or qualified IDQS to know the identity of the person making the request to commence a quoted market in this limited circumstance. Issuers and company insiders can have a heightened incentive to engage in misconduct to artificially affect the price and trading volume of the issuer's security. The Commission believes that application of the supplemental information requirement only to information that has come to the knowledge or possession of the broker-dealer or qualified IDQS would be inconsistent with the Commission's goal of enhancing the Rule to better protect retail investors from fraud and

manipulation orchestrated by company insiders.

184

OTC Markets Group Letter 3.

The Commission continues to believe that certain supplemental information is relevant for a broker-dealer or qualified IDQS to evaluate in establishing a reasonable basis under the circumstances for believing that an issuer's paragraph (b) information is accurate in all material respects and from a reliable source.

185

Consequently, paragraph (c) of the amended Rule adds qualified IDQSs to the Rule's list of market participants that must have in their records supplemental information to help ensure that all market participants that comply with the information review requirement are subject to the same requirements.

186

Under the amended Rule, broker-dealers and qualified IDQSs that comply with the information review requirement must retain a copy or a written record of three categories of supplemental information: (1) Records related to the publication or submission of the quotation, including the identity of the person on whose behalf the quotation is made, whether such person is an issuer or a company insider, and any information regarding the transaction provided to the broker-dealer or qualified IDQS; (2) a copy of any trading suspension order issued by the Commission during the 12 months preceding the date of publication or submission of the quotation or a copy of the press release announcing such suspension; and (3) any other material information regarding the issuer that comes onto the knowledge or possession of broker-dealer or qualified IDQS.

187

185

Amended Rule 15c2-11(c).

186

Paragraph (c) of the amended Rule also adds to the former Rule's list of records related to the submission or publication of a quotation for a security a record of whether such submission or publication is on behalf of an issuer or company insider because such individuals might be able to influence or control the issuer of an OTC security.

See

Amended Rule 15c2-11(c), (c)(1); Proposing Release at 58218.

187

Amended Rule 15c2-11(c)(1) through (3).

The Commission is amending the Rule as proposed to require that the entity that complies with the information review requirement must have in its records the documents and information related to the identity of the person or persons for whom the quotation is being submitted or published, including whether such person is the issuer or a company insider

188

because the knowledge that a quotation is by or on behalf of the issuer or a company insider could promote investor protection by alerting the broker-dealer or qualified IDQS 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.

189

Whether the quotation is being made on behalf of such person is information that must be considered, together with any other supplemental information or paragraph (b) information, by the broker-dealer or qualified IDQS in forming a reasonable basis under the circumstances for believing that the issuer's paragraph (b) information is accurate in all material respects and from a reliable source.

190

188

Amended Rule 15c2-11(c)(1).

189

See

Proposing Release at 58218.

190

See

Amended Rule 15c2-11(a)(1)(i)(C), (a)(2)(iii) (requiring a broker-dealer or qualified IDQS that complies with the information review requirement to have a reasonable basis under the circumstances for believing that the issuer's paragraph (b) information is accurate in all material respects and that the sources of such paragraph (b) information are reliable based upon a review of the issuer's paragraph (b) information, together with any other supplemental information, as applicable);

see also infra

Part VI.B.2.c (discussing how OTC market may attract those seeking to engage in fraudulent practices, such as pump-and-dump schemes, due to a lack of publicly available current information about certain issuers of quoted OTC securities).

199

See

Proposing Release at 58207;

see also

Ang

et al.,

supra note 3.

200

Douglas Cumming

et al., Financial Market Misconduct and Agency Conflicts: A Synthesis and Future Directions,

34 J. Corp. Fin 150-68 (2015).

201

See infra

Part VI.A. In this regard, increasing the public availability of current information about OTC issuers has the potential to counteract misinformation, which can proliferate through promotions and other channels.

See infra

Part VI.B.2.c.

One commenter suggested that the Commission should repeal the piggyback exception because, as the commenter stated, it is “a loophole that has permitted broker-dealers to solicit interest from and sell OTC securities to retail investors without verifying any of the details of the security, including, whether the issuer actually exists.”

202

Another commenter stated that repealing the piggyback exception entirely would harm existing shareholders in OTC securities because it would cause many broker-dealers to cease market making or quoting prices in many OTC securities, draining or even eliminating liquidity in the OTC market.

203

The Commission believes that the piggyback exception serves an important purpose in helping to facilitate liquidity but remains concerned that the OTC market may attract those seeking to engage in fraudulent practices, such as pump-and-dump schemes, due to a lack of publicly available current information about certain issuers of quoted OTC securities.

204

This concern is amplified by the fact that the primary investors in the OTC market are retail investors. The amendments to the piggyback exception under the amended Rule are designed to facilitate liquidity in the OTC market while making narrowly tailored updates that promote investor protection and market efficiency, including the prevention of fraud and manipulation.

205

202

Letter from Dennis M. Kelleher, President and CEO, and Lev Bagramian, Senior Securities Policy Advisor, Better Markets, Inc., to Vanessa Countryman, Sec'y, SEC (Dec. 30, 2020) (“Better Markets Letter”).

203

NASAA Letter.

204

Proposing Release at 58282.

205

See infra

Part VI.C.1.b.

Some commenters stated their concern that prohibiting quotations for securities of companies that do not provide current and publicly available information would not prevent fraud and manipulation

206

but would destroy liquidity,

207

be inconsistent with the proposal's goal of promoting a fair and orderly market for OTC securities,

208

and make dark companies' shares “worthless.”

209

Commenters stated that some of these companies have longstanding histories of operation and profit, and suggested that issuers of securities with certain characteristics should be exempt from the requirement that their information be current and publicly available.

210

206

See

Anbec Partners Letter; Franklin Antonio; Caldwell Sutter Capital Comment; Alexandra Elliott; Braxton Gann; Han Han (Oct. 15, 2019); Peter Hayman; Norberg Letter; Daniel Raider; Jim Rivest; Mark Schepers (Oct. 15, 2019); STA Letter; Terravoir Venture Letter; Tiercel Capital Comment; Michael Tofias; Alex Toppan (Oct. 14, 2019); Debby Valentijn; Virtu Letter; Don C. Whitaker;

see also

Coral Capital Letter (stating that the loss of a quoted market would harm the ability of an issuer to become current in its reporting obligations by reducing access to capital that is necessary to pay expenses associated with regaining its current status). One commenter argued that closed-end funds that hold securities of issuers that are not current in their reporting requirements would need to fair value those securities rather than calculate net asset value using recent trades. Sanders Letter (arguing that such a result could provide investors with less reliable information to make informed investment decisions). The Investment Company Act of 1940 prescribes the method for closed-end funds to value their portfolio securities, whether or not market quotations are readily available.

See, e.g.,

Investment Company Act Section 2(a)(41);

see also Good Faith Determinations of Fair Value,

Investment Company Release No. 33845 (Apr. 21, 2020), 85 FR 28734 (May 13, 2020).

207

See, e.g.,

Alluvial Letter; Andersen Letter; Franklin Antonio (Dec. 27, 2019); Hank Armested (Oct. 24, 2019); Thomas M. Amenda (Oct. 23, 2019); R. Berkvens; Tyler Black (Nov. 25, 2019); J.H. Broekhoven (Nov. 16, 2019); Brad Christensen (Oct. 3, 2019); Caldwell Sutter Capital Comment; Laura Coffman; Connor Davis, Founder and Principal, Lake Highlands Capital Management (“Lake Highlands Comment”); Douglas DiSanti (Nov. 18, 2019); Brett Dorendorf; Drinker Letter; Alexandra Elliott; David J. Flood (Oct. 8, 2019); Braxton Gann; Letter from Matt Geiger, Managing Partner, MJG Capital Fund, LP, to Chairman Clayton (Oct. 28, 2019) (“MJG Capital Fund Letter”); Carlton Getz, Winter Harbor Advisors, LLC (“Winter Harbor Advisors Comment”); Chris Girand (Oct. 25, 2019); Bradley Grasl, Chief Investment Officer, Tiercel Capital Texas (“Tiercel Capital Comment”); Peter Hayman (Dec. 31, 2019); Gary Huscher (Nov. 1, 2019); Matt Jester (Oct. 8, 2019); Richard Krejcarek (Jan. 2, 2020); Ron Lefton (Nov. 11, 2020); Aharon Levy; Guarang Merani (Oct. 15, 2019); Michael Milchen (Oct. 10, 2019); Milner Letter; Mitchell Partners Letter 1; William E. Mitchell (Oct. 24, 2019); Norberg Letter; Peter Quagliano (Nov. 1, 2019); Daniel Raider; Charles M. Rardon (Oct. 1, 2019); Michael E. Reiss; Ronald Ringelberg; Jim Rivest; GTS Letter; David Schiff (Oct. 22, 2019); Eric Schleien, Investment Manager, Granite State Capital Management (“Granite State Capital Comment”); Dan Schum (Oct. 7, 2019); Lucas H. Selvidge (Oct. 23, 2019); Chris Soule (Oct. 10, 2019); Andrew Summers, CFA, Managing Partner, Summers Value Partners LLC (“Summers Value Partners Comment”); Total Clarity Comment; Franklin Urdaneta (Dec. 3, 2019); Debby Valentijn (Dec. 21, 2019); S. Van den Hoogenhoff (Dec. 9, 2019); Virtu Letter; Don C. Whitaker (Sept. 29, 2019); Samuel J. Yake (Oct. 5, 2019);

see generally

Logan Kemper (Nov. 6, 2019) Professor Angel Letter; Winter Harbor Advisors Comment.

208

Brett Dorendorf; Peter Hayman; Kyle M. Peeples; Norberg Letter; S. Van den Hoogenhoff; Debby Valentijn.

209

Andersen Letter. Other commenters were primarily concerned with the proposed amendments' effect on liquidity of securities of dark companies and what they perceived as potential harm to shareholders of those companies.

E.g.,

Exchange Listing Letter; GTS Letter; Virtu Letter;

see

OTC Markets Group Letter 3. Comments regarding a general opposition to the proposed amendments with respect to this perceived impact are discussed above, in Part II.

210

See

Aztec Letter; Caldwell Sutter Capital Comment; Lawrence Goldstein, President, SMP Asset Management LLC (“SMP Asset Management Comment”); Ron Lefton; William E. Mitchell; Mitchell Partners Letter 1; Doug Mohn; Norberg Letter; Peter Quagliano; Michael E. Reiss; Jim Rivest; Mark Schepers; Total Clarity Comment; Debby Valentijn; Don C. Whitaker; David Wright (Dec. 16, 2019); Michael A. Zgayb (Oct. 23, 2019);

see also

James Duade; Eric Speron (Nov. 27, 2019); Michael Tofias; Virtu Letter.

The Commission understands commenters' concern regarding the proposed Rule's impact on certain OTC companies that do not make their information publicly available. Under the amended Rule, the potential reduction in public price discovery in an OTC security due to the loss of a quoted market can reduce an issuer's ability to raise capital through stock issuances or through other channels,

such as debt,

211

and existing shareholders of non-reporting issuers can be negatively impacted from the loss of a quoted market for such securities, even if the securities migrate to the grey market.

212

The Commission believes, however, that undertaking to try to determine what constitutes a “legitimate” issuer, as suggested by commenters,

213

may require the Commission to make a merit-based determination that weighs certain characteristics of OTC issuers in relation to, or to the exclusion of, other characteristics of other OTC issuers. In addition, the limited available data regarding dark issuers would hamper analysis.

211

See infra

Part VI.C.2 (discussing how issuers may nevertheless be able to access capital through transactions in the grey market).

212

See infra

Part VI.C.1.a.

213

See, e.g.,

Doug Mohn; Taranis Comment.

Further, the Commission does not believe the fact that such companies have longstanding histories of operation and profit obviates the need for their information to be current and publicly available for a broker-dealer to publish quotations for such securities. The Commission does not believe that these issuers with operations and profitability will become “worthless”

214

as a result of the amendments. The amendments can adversely affect these issuers and their shareholders; however, these issuers, even without a quotation for their securities by a broker-dealer, presumably would continue to operate and generate profits for their shareholders. These OTC securities would continue to represent an ownership interest on these profits and the issuer's assets. For newer issuers with prospective future profits, OTC shares would similarly represent a claim on these prospective profits. The Commission also believes that the potential harm to existing shareholders is (1) limited by the ability of broker-dealers to rely on exceptions to publish quotations, including the unsolicited quotation exception,

215

and the ability of existing shareholders to continue to trade their securities; and (2) mitigated by the decrease in exposure to fraudulent activity involving the securities of non-transparent companies (due to broker-dealers' inability to rely on the piggyback exception) to engage in manipulative schemes, such as pump-and-dump schemes.

216

214

Andersen Letter.

215

See infra

Part VI.C.1.a.

216

See infra

Part VI.C.2;

see also

Proposing Release at 58258, 58259 (stating that requirements for the transparency of issuer information could have a deterrent effect in inhibiting fraudulent activity related to quoted OTC securities). In addition, as discussed below in this Part II.D.1, the formation of an “expert market,”

see infra

note 269 and accompanying text, may alleviate these concerns, as well.

However, the Commission understands that market participants may have unique facts and circumstances as to how the amended Rule affects their activities, and the Commission will consider requests from market participants, including issuers, investors, or broker-dealers, for exemptive relief from the amended Rule for OTC securities that are currently eligible for the piggyback exception yet may lose piggyback eligibility due to the amendments to the Rule.

217

In considering whether an exemption from the Rule (pursuant to Section 36 of the Exchange Act and paragraph (g) of the amended Rule)

218

under these circumstances is necessary or appropriate and in the public interest, and is consistent with the protection of investors, the Commission may consider a number of factors, such as whether, based on data or other facts and circumstances provided by requestors, the issuers and/or securities are less susceptible to fraud or manipulation. In this regard, the Commission may consider, among other things, securities that have an established prior history of regular quoting and trading activity; issuers that do not have an adverse regulatory history; issuers that have complied with any applicable state or local disclosure regulations that require that the issuer provide its financial information to its shareholders on a regular basis, such as annually; issuers that have complied with any tax obligations as of the most recent tax year; issuers that have recently made material disclosures as part of a reverse merger; or facts and circumstances that present other features that are consistent with the goals of the amended Rule of enhancing protections for investors, particularly retail investors. The Commission encourages requests to be submitted expeditiously during the nine-month transition period of the amended Rule to avert potential interruptions in quotations in such securities that may occur on or after implementation.

219

217

Issuers and investors that may be interested in requesting any such exemptive relief may coordinate with broker-dealers to submit requests. Because the amended Rule governs publications or submissions by broker-dealers, the requirements of the amended Rule and any conditions of any such exemptive relief would likely be undertaken to be complied with by a broker-dealer rather than an investor or issuer.

218

See infra

Part II.L. Paragraph (g) of the amended Rule states that “[u]pon written application or upon its own motion, the Commission may, conditionally or unconditionally, exempt by order any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of this section, to the extent that that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.”

219

The amended Rule has a compliance date that is nine months after the effective date of the amended Rule, and the compliance date for paragraph (b)(5)(i)(M) of the amended Rule is two years after the effective date of the amended Rule.

See infra

Part II.P. Prior to the compliance date, broker-dealers may continue to publish quotations in reliance on the piggyback exception even if an issuer's paragraph (b) information is not current and publicly available.

In addition, the Commission believes that the amendments are appropriate to help protect investors against potential exposure to fraud and manipulation that can occur when current information about an issuer is not publicly available. The Commission recognizes that shareholders of OTC securities may incur costs related to a loss of liquidity when broker-dealers cannot rely on the piggyback exception because there is no current and publicly available paragraph (b) information. However, on balance, the Commission believes that any such costs would be warranted by the attendant benefits. The Commission continues to believe that requiring issuer information to be current and publicly available will facilitate investor protection and transparency that will assist retail investors in making better-informed investment decisions and will counteract misinformation that can proliferate through promotions and other channels, thereby helping to prevent fraud and manipulation. More specifically, the amended Rule's requirements could have a deterrent effect in inhibiting fraudulent activity related to quoted OTC securities. Investors could benefit from decreased exposure to investment losses as a result of diminished fraudulent activity in the OTC market.

220

Further, academic studies have highlighted the relationship between the breadth and quality of firm disclosures and liquidity in the OTC market.

221

The Commission also believes that, because prices may become less susceptible to manipulation as a result of the trading activity of informed investors who have access to paragraph (b) information, the efficiency of prices (

i.e.,

the degree to which prices reflect the fundamental value of the security) could improve in the OTC market. These investors could buy underpriced securities and sell overpriced securities, pushing

mispriced securities toward fundamental values.

222

220

See infra

Part VI.C.1.a;

see also

Proposing Release at 58255.

221

See supra

note 6 and accompanying text.

222

See infra

Part VI.C.2.

Another commenter suggested that the Rule should explicitly except market makers who do not solicit retail customers and that other broker-dealers should not be permitted to piggyback on market makers relying on the piggyback exception.

223

Although such market makers may not directly solicit retail customers, retail investors may access these market makers' quotations that are published or submitted in an IDQS. Such quotations may thereby serve as an advertisement (for interest in a particular security) to these retail investors to purchase shares in the quoted company, which could be a dark issuer. Accordingly, this suggested exception would undermine the amended Rule's goal of providing transparency of the OTC market because it would allow broker-dealers that provide liquidity as market makers to publish or submit quotations for any security, including the security of an issuer for which information is not current and publicly available. Because the investor protection goals of this requirement are achieved, in part, by greater transparency and the public availability of current issuer information, and not by the mere fact that a broker-dealer provides liquidity a

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