Publication or Submission of Quotations Without Specified Information

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

Release No. 34-41110; File No. S7-5-99

RIN 3235-AH40

Publication or Submission of Quotations Without Specified

Information

AGENCY: Securities and Exchange Commission.

ACTION: Reproposed rule.

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SUMMARY: The Securities and Exchange Commission is reproposing for

comment amendments to Rule 15c2-11 under the Securities Exchange Act of

1934 (Exchange Act). Rule 15c2-11 governs the publication of quotations

for securities in a quotation medium other than a national securities

exchange or Nasdaq. Also, we are reproposing a companion amendment to

relocate in Rule 17a-4 under the Exchange Act the record retention

requirement currently contained in Rule 15c2-11. The original proposal

was issued in February 1998 in response to concerns about increased

incidents of fraud and manipulation in over-the-counter (OTC)

securities, which typically involve thinly-traded securities of thinly-

capitalized issuers (i.e., microcap securities).

The reproposed amendments are more limited than the initial

proposal and focus the Rule on those securities the Commission believes

are more likely to be prone to fraud and manipulation. The reproposal

is part of the Commission's continuing efforts in regulatory,

inspections, enforcement, and investor education areas that are key to

deterring microcap fraud.

In addition, the reproposal will increase the information that

broker-dealers must review before publishing quotations for non-

reporting issuers' securities, and will ease the Rule's recordkeeping

requirements when broker-dealers have electronic access to information

about reporting issuers. Finally, we are giving guidance to broker-

dealers on the scope of the review required by the Rule and providing

examples of ``red flags'' that they should look for when reviewing

issuer information.

DATES: Comments must be received on or before April 7, 1999.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,

NW, Mail Stop 6-9, Washington, DC 20549. Comments may also be submitted

[[Page 11125]]

electronically at the following E-mail address: [email protected].

All comment letters should refer to File No. S7-5-99. All comments

received will be available for public inspection and copying in the

Commission's Public Reference Room, 450 Fifth Street, NW, Washington,

DC 20549. Electronically submitted comment letters will be posted on

the Commission's Internet website (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Any of the following attorneys in the

Division of Market Regulation, Securities and Exchange Commission, 450

Fifth Street, NW, Mail Stop 10-1, Washington, DC 20549, at (202) 942-

0772: Nancy J. Sanow, Irene A. Halpin, Florence E. Harmon, Chester A.

McPherson, or Jerome J. Roche.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Executive Summary

A. Overview of the microcap fraud problem and efforts to prevent

further abuses

B. Background of Rule 15c2-11 and recent proposed amendments

II. Overview of Reproposed Amendments

III. Discussion of Amendments

A. Securities excluded from the Rule

1. Securities satisfying a trading value test

2. Securities satisfying a bid price test

3. Securities of issuers satisfying a net tangible assets test

4. Non-convertible debt, non-participatory preferred stock, and

asset-backed securities

5. Other Exceptions

B. Quotations subject to the Rule

1. The initial quotation for a covered OTC security

2. Priced quotations

3. Annual review

C. Information required under the Rule

1. Reporting issuers delinquent in their filings

2. Issuers in bankruptcy

a. Reporting issuers

b. Non-reporting issuers emerging from bankruptcy

3. Non-reporting foreign private issuers

4. Other non-reporting issuers

D. Information available upon request

E. Information repository

F. Definitions

G. Preservation of documents and information

H. Transition and exemptive authority provisions

I. Information submitted to the NASD

IV. General Request For Comments

V. Effects on Efficiency, Competition, and Capital Formation

VI. Costs and Benefits of the Amendments

A. Benefits

B. Costs

VII. Initial Regulatory Flexibility Act

VIII. Paperwork Reduction Act

A. Collection of information under the amendments

B. Proposed use of information

C. Respondents

D. Total annual reporting and recordkeeping burden

1. Burden-hours for broker-dealers

2. Burden-hours for issuers

3. Total burden-hour costs to broker-dealers and issuers

4. Capital cost to broker-dealers and issuers

E. General information about the collection of information

F. Request for comments

IX. Statutory Basis and Text of Proposed Amendments and Rule

Appendix

I. Introduction

II. Quotation Events Triggering the Review Requirement

III. The Review Process

A. Introduction

B. Source reliability

1. Determining whether a source is reliable

2. Examples of unreliable sources

C. Document review obligations

D. Scope of review following a trading suspension

IV. Examples of Red Flags

I. Executive Summary

A. Overview of the Microcap Fraud Problem and Efforts to Prevent

Further Abuses

Because incidents of fraud and manipulation involving microcap

securities are a serious concern, the Commission, along with other

regulators, has made combating microcap fraud one of its top

priorities. Microcap securities generally are characterized by low

share prices and little or no analyst coverage.\1\ The issuers of

microcap securities typically are thinly-capitalized and information

about them often is limited, particularly when they are not subject to

the Commission's periodic disclosure requirements. Securities of

microcap companies usually are quoted on the OTC Bulletin Board

operated by the National Association of Securities Dealers, Inc.

(NASD), or in the Pink Sheets published by the National Quotation

Bureau, Inc. (NQB), but they are not exclusive to these quotation

mediums.\2\

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\1\ The term microcap securities is not defined under the

federal securities laws or regulations. The use of the term

``microcap securities'' in this release, however, should be

distinguished from its use in the mutual fund context. For example,

Lipper Analytical Services, a mutual fund rating organization,

generally categorizes microcap companies as companies with market

capitalization of less than $300 million. Lipper-Directors'

Analytical Data, Investment Objective Key, 2d ed. 1997.

\2\ Microcap securities can also be listed on securities

exchanges or Nasdaq or quoted in alternative trading systems.

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Microcap fraud often involves schemes such as ``pump and dump''

operations, in which unscrupulous brokers sell the securities of less-

seasoned issuers to retail customers by using high pressure sales

tactics and a supply of securities under the firm's control. The

fraudsters create interest in the security by disseminating false or

misleading information about the issuer through, for example, oral

statements, press releases, or the Internet. To further the

manipulative scheme, the retail broker frequently acts as a market

maker in the security or, either on its own or through the issuer's

promoter, induces other firms to act as market makers.

By publishing quotations, the market maker raises the profile of

the security, even though the market maker is not an active participant

in the fraud and publishes quotations solely in response to increased

demand for the security. The broker, promoter, or others orchestrating

the fraud can point to quotations for the security to ``validate'' its

worth. The perpetrators of the fraud then dispose of their stake at an

inflated price. Once they no longer need to stimulate interest in the

security, the market for it collapses and innocent investors are left

holding stock with little or no value.

The defrauded victims of microcap fraud activities are not the only

ones harmed. When other investors become reluctant or unwilling to

invest in the kinds of securities they perceive as prone to fraud,

liquidity for those securities can be impaired. As a result, existing

shareholders can face difficulty in disposing of their holdings and

legitimate issuers of lower-priced stocks can find it hard to raise

capital to start up or expand operations or services. In short,

continuing incidents of microcap fraud are detrimental to the integrity

of our nation's capital markets.

To combat microcap abuses, we have initiated several enforcement,

examination, education, and regulatory measures. These actions include

the following:

In September 1998, we filed 13 enforcement actions against

41 defendants for their involvement in fraudulent microcap schemes that

bilked investors of more than $25 million.\3\

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\3\ For a summary of these cases, see Fight Against Microcap

Fraud ``Paying Dividends'', Press Release No. 98-92 (September 24,

1998), available through our Internet website at http://

www.sec.gov/news/micronew.htm>.

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We conducted a nationwide sweep to combat fraud through

the Internet, which resulted in 23 enforcement actions against 44 stock

promoters of microcap stocks in October 1998.\4\

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\4\ For a summary of these cases, see Purveyors of Fraudulent

Spam, Online Newsletters, Message Board Postings, and Websites

Caught, Press Release No. 98-117 (October 28, 1998), available

through our Internet website at http://www.sec.gov/news/

netfraud.htm>.

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[[Page 11126]]

We initiated examination sweeps of several firms that are

active in the microcap market. Our examination staff conducted complex

and resource-intensive reviews of these firms' records for evidence of

the hallmarks of microcap fraud, such as patterns of ``bait and

switch'' sales techniques, misrepresentations and exaggerated claims,

unauthorized trading and refusals to sell securities, market

manipulation, and lax or nonexistent supervision.

We have held numerous investors' town meetings across the

country to educate people about investing wisely, and we have put

together several brochures to assist investors.\5\

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\5\ See, e.g., ``Microcap Stock: A Guide for Investors''

(providing a variety of tips on how to detect and avoid microcap

fraud); ``Cold Calling Alert'' (describing the cold calling rules

and instructing investors how to avoid telephone scams); ``Internet

Fraud'' (describing common frauds including on-line newsletter and

bulletin board posting scams); and ``Ask Questions'' (listing

questions that investors should ask about their investments and

their investment professionals). All of these publications are

available for free from our toll-free publications line at (800)

732-0330 and can be downloaded through our Internet website at

http://www.sec.gov>.

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We are cooperating with self-regulatory organizations

(SROs) to improve supervision and regulation of the OTC securities

market. For example, we recently approved NASD rule changes that limit

quotations on the OTC Bulletin Board to the securities of issuers that

are current in their reports filed with the Commission or other

regulatory authority.\6\

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\6\ Securities Exchange Act Release No. 40878 (January 4, 1999),

64 FR 1255 (OTC Bulletin Board Release).

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We have taken steps to strengthen our regulations and

close loopholes to help reduce incidents of microcap fraud.

Today, we are taking action on several additional regulatory

measures aimed at preventing further incidents of microcap fraud. In

addition to adopting amendments to Form S-8 \7\ under the Securities

Act of 1933 (Securities Act) \8\ and adopting amendments to Regulation

D,\9\ we are reproposing amendments to Rule 15c2-11 \10\ under the

Securities Exchange Act of 1934 (Exchange Act),\11\ our rule that

governs the quotations by broker-dealers for OTC securities.\12\ Rule

15c2-11 is intended to prevent broker-dealers from becoming involved in

the fraudulent manipulation of OTC securities. However, even if a

broker-dealer technically complies with the Rule's requirements, it

would be subject to liability under other antifraud provisions of the

securities laws, such as Rule 10b-5, if it publishes quotations as part

of a fraudulent or manipulative scheme.\13\

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\7\ Securities Act Release No. 33-7646 (February 19, 1999). The

amendments to Form S-8 restrict the use of Form S-8 for the sale of

securities to consultants and advisors, among other things.

\8\ 15 U.S.C. 77a et seq.

\9\ Securities Act Release No. 33-7644 (February 19, 1999). The

amendments limit the circumstances where freely tradable securities

may be issued in reliance on, and general solicitation is permitted

under, Rule 504 of Regulation D.

\10\ 17 CFR 240.15c2-11.

\11\ 15 U.S.C. 78a et seq.

\12\ In this release, ``OTC stocks'' or OTC securities refers to

securities that are not listed on a national securities exchange or

Nasdaq. ``Covered OTC securities'' refers to those OTC securities

that are subject to Rule 15c2-11. The Rule applies to securities

quoted on the OTC Bulletin Board operated by the NASD, the Pink

Sheets operated by the NQB, and similar quotation mediums. For

further discussion of quotation mediums, see Part III.F. below

\13\ 17 CFR 240.10b-5.

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B. Background of Rule 15c2-11 and Recent Proposed Amendments

Rule 15c2-11 contains requirements that are intended to deter

broker-dealers from initiating or resuming quotations for covered OTC

securities that may facilitate a fraudulent or manipulative scheme. The

Rule currently prohibits a broker-dealer from publishing (or submitting

for publication) a quotation for a covered OTC security in a quotation

medium unless it has obtained and reviewed current information about

the issuer.\14\ The broker-dealer must also have a reasonable basis for

believing that the issuer information, when considered along with any

supplemental information, is accurate and is from a reliable

source.\15\

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\14\ Rule 15c2-11 defines quotation as any bid or offer at a

specified price with respect to a security, or any indication of

interest by a broker or dealer in receiving bids or offers from

others for a security, or any indication by a broker or dealer that

advertises its general interest in buying or selling a particular

security. For the purposes of this release, a ``priced quotation''

is a bid or offer at a specified price.

\15\ See Part III.C. below for a description of the required

issuer and supplemental information.

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The Rule currently contains several exceptions to its prohibitions.

Under the ``piggyback'' exception, the Rule's information requirements

do not apply when a broker-dealer publishes, in an interdealer

quotation system, a quotation for a covered OTC security that was

already the subject of regular and frequent quotations in the same

interdealer quotation system.\16\ A broker-dealer is able to

``piggyback'' on either its own or other broker-dealers' previously

published quotations. This exception assumes that regular and frequent

quotations for a security generally reflect market supply and demand

and are based on independent, informed pricing decisions. However, as a

result of the piggyback provision, the Rule's application is

essentially limited to just the first broker-dealer publishing quotes.

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\16\ An interdealer quotation system is a quotation medium of

general circulation to brokers or dealers which regularly

disseminates quotations of identified brokers or dealers. 17 CFR

240.15c2-11(e)(2). Under the proposed amendments, the definition of

``interdealer quotation system'' would be incorporated into the

definition of ``quotation medium.'' See Part III.F. below for a

discussion of the term ``quotation medium.''

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In February 1998, the Commission published for comment amendments

to the Rule that were designed to curb fraud in microcap

securities.\17\ This proposal would have eliminated the piggyback

provision by requiring all broker-dealers to review current issuer

information before publishing their first quotation for a covered OTC

security, without regard to whether the quotation was priced or

unpriced, and to thereafter review current issuer information annually

if they published priced quotations. With limited exceptions, the

proposal would have applied to any security quoted in a quotation

medium other than a national securities exchange or Nasdaq. The

proposal would also have expanded the information required for issuers

that do not file periodic reports with the Commission (e.g., non-

reporting issuers). In addition, broker-dealers would have been

required to make the issuer information available to anyone who

requested it.

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\17\ Securities Exchange Act Release No. 39670 (February 17,

1998), 63 FR 9661 (Proposing Release).

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In response to the Proposing Release, we received 199 comment

letters from 193 commenters.\18\ The majority of commenters, which

included broker-dealers, issuers, attorneys, and individuals, opposed

many of the proposed changes. Broker-dealers were especially concerned

that they would be exposed to potential liability in civil actions as a

result of their increased review obligations under the proposal.

Commenters also expressed views about the possibility of: reduced

liquidity in covered OTC securities if broker-dealers stopped making

markets; less transparent markets if broker-dealers did not publish

priced quotes to avoid the annual review requirement; less competitive

pricing for covered OTC securities; impaired access to capital by

[[Page 11127]]

issuers; and increased compliance costs for broker-dealers. In

addition, some commenters pointed out that the proposal would not cover

Nasdaq SmallCap securities, which, they noted, have also been the

subject of abusive activities. Some commenters also remarked that the

proposal would not stop microcap fraud, which, in their view, is really

a sales abuse problem.

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\18\ This total includes virtually identical comment letters

from 68 issuers. All comment letters are available in File No. S7-3-

98 at our Public Reference Room, 450 Fifth Street, NW, Washington,

DC 20549. Comment letters that were submitted electronically are

available through our Internet website at http://www.sec.gov/rules/

s7398.htm>.

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Several commenters, principally state securities regulators and

their national association, supported the proposal. They believed that

microcap fraud would be deterred if broker-dealers are required to

review issuer information and make their own independent and

substantiated determinations before publishing quotations. Further,

commenters favoring the proposal stated that the availability of

information via EDGAR and the speed of communication via the Internet

would ease any increased burden on broker-dealers created by the Rule

amendments. Finally, a number of commenters were more neutral in their

approach and offered views or suggestions on specific provisions.

II. Overview of Reproposed Amendments

The Commission is issuing a revised proposal to amend Rule 15c2-11

to help curtail abuses in the offer, sale and trading of microcap

securities. Because these amendments will significantly change the

Rule's scope, we are publishing them to give interested persons an

opportunity to provide us with their comments and views.

The amendments are intended to have broker-dealers ``stop, look and

listen'' before they begin to quote a covered OTC security in a

quotation medium other than a national securities exchange or Nasdaq.

However, the amendments reflect commenters' concerns about the earlier

proposal by limiting the scope of the Rule principally to priced

quotations and to those securities that the Commission believes are

more likely to be the subject of improper activities. Under these

amendments, the Rule will no longer apply to securities of larger

issuers, or to securities that have a substantial trading price or that

meet a minimum dollar value of average daily trading volume. In

addition, the Rule will only cover priced quotations, except in the

case of the first quotation for a covered OTC security. The provisions

relating to the broker-dealer's obligations under the Rule and the

issuer information that the broker-dealer must review are little

changed from the initial proposal.

We also are providing guidance regarding the steps broker-dealers

should take and ``red flags'' they should consider when reviewing the

Rule's required information. In response to commenters' concerns about

broker-dealer liability, we stress that broker-dealers will have no

obligation to continuously update their Rule 15c2-11 materials. The

broker-dealer's review obligations under the Rule occur only at the

specific times identified in the Rule.

In general, the amendments would:

Limit the Rule primarily to priced quotations; \19\

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\19\ The amendments, however, will prohibit the first broker-

dealer from publishing a priced or unpriced quotation for a covered

OTC security unless it complies with the Rule. For a discussion of

the requirements concerning the initial quotation for a covered OTC

security, see Part III.B.1. below.

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Eliminate the Rule's piggyback provision and require all

broker-dealers to review current issuer information before publishing

priced quotations for a security;

Require broker-dealers publishing priced quotations for a

security to review current information about the issuer annually and

upon the occurrence of specified events;

Expand the information required for certain non-reporting

issuers;

Require documentation of the broker-dealer's compliance

with the Rule; and

Require broker-dealers publishing quotes in compliance

with the Rule to provide the issuer information upon request to

customers, prospective customers, information repositories, and other

broker-dealers.

In addition, the amendments would exclude from the Rule's coverage:

Securities with a worldwide average daily trading volume

value of at least $100,000 during each month of the six full calendar

months immediately preceding the date of publication of a quotation,

and convertible securities where the underlying security satisfies this

threshold;

Securities with a bid price of at least $50 per share;

Securities of issuers with net tangible assets in excess

of $10,000,000, as demonstrated by audited financial statements;

Non-convertible debt and non-participatory preferred

stock; and

Asset-backed securities that are rated as investment grade

by at least one nationally recognized statistical rating organization.

These amendments are intended to enhance the integrity of

quotations for securities in this market sector, to improve the quality

of information about smaller, lesser-known issuers, and to foster

greater access to this information by investors. The amendments also

reorganize and simplify the Rule's provisions consistent with the

Commission's Plain English program.

III. Discussion of Amendments

The amendments restructure Rule 15c2-11 by setting forth more

clearly the quotation events that trigger the Rule, the requirements

that the broker-dealer must satisfy, and the nature of the information

that the broker-dealer must review. The amendments state that no

broker-dealer, directly or indirectly, may publish the described kinds

of quotations for a security in any quotation medium, without first

complying with the Rule's provisions. The Rule will only apply at

specified points in time, namely, when a broker-dealer publishes:

The first quotation for a security;

Its first quotation at a specified price for a security

after another broker or dealer published the first quotation for the

same security;

The first quotation following the termination of a

Commission trading suspension ordered pursuant to section 12(k) of the

Exchange Act \20\ in any security of the issuer of the suspended

security;

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\20\ 15 U.S.C. 781(k).

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A quotation at a specified price for a security after a

period of five or more consecutive business days when it did not

publish any quotations at a specified price for that security;

Its first quotation at a specified price for a security

after the date that is four months after the end of the issuer's fiscal

year, unless the issuer is a foreign private issuer; or

Its first quotation at a specified price for a security of

a foreign private issuer after the date that is seven months after the

end of the issuer's fiscal year.

The broker-dealer's information gathering and review requirements

are substantially the same as the initial proposal.\21\ If the Rule

applies, the broker-dealer must:

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\21\ However, we are narrowing the scope of the requirement

contained in the Proposing Release that broker-dealers provide the

Rule 15c2-11 information to others upon their request. See Part

II.D. below.

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Review the Rule's specified information;

Determine that it has a reasonable basis for believing

that the information is accurate in all material respects and was

obtained from reliable sources;

Record the date it reviewed the specified information, the

sources of the information, and the person at the firm responsible for

the broker-dealer's compliance with the Rule; and

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Preserve the specified information in accordance with Rule

17a-4.\22\

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\22\ 17 CFR 240.17a-4.

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Commenters on the Proposing Release did not object to the standards

set forth in these review and documentation requirements. Rather, they

expressed concerns about the scope of a broker-dealer's review

obligations under the earlier proposal, particularly as some of them

misconstrued the proposal to require continuous updating of

information. To assist broker-dealers publishing quotations for covered

OTC securities, we are giving guidance in an appendix to this release

about the nature of the review we expect broker-dealers to conduct

under both the current Rule and the proposed amendments.

A. Securities Excluded From the Rule

Several commenters suggested that the Rule should cover only those

securities that have the characteristics that have led to abuses in the

microcap market.\23\ These commenters noted that, while the earlier

proposal was intended to focus on microcap abuses, it covered

quotations for a number of non-reporting foreign and domestic issuers'

securities that are unlikely to be the targets of microcap schemes.

They suggested that the amendments be crafted to cover only those

equity securities most likely to be prone to abusive activities.

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\23\ See, e.g., Letter from Securities Industry Association

(April 28, 1998) (SIA Comment Letter).

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We agree that applying the Rule to the securities of larger

issuers, more liquid securities, and certain fixed-income debt

securities is not directly related to microcap fraud concerns.\24\ We

therefore are proposing to exclude from Rule 15c2-11 those securities

satisfying any one of three alternative tests based on: the value of

the security's average daily trading volume (ADTV); the security's bid

price; or the issuer's net tangible assets.\25\ We are also proposing

to exclude debt securities, non-participatory preferred stock, and

investment grade asset-backed securities.

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\24\ Of course the general antifraud provisions of the federal

securities laws, including Rule 10b-5 (17 CFR 240.10b-5), apply to

transactions in all securities, whether or not excluded from Rule

15c2-11.

\25\ We estimate that at least 10% of covered OTC securities

will be excluded from the Rule under these tests. We estimate that

approximately 5% of the OTC securities of U.S. companies, 10% of the

OTC securities of foreign issuers (excluding ADRs), and 66% of OTC

American Depositary Receipts (ADRs) will satisfy any one of these

three alternative tests.

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1. Securities Satisfying a Trading Value Test

To tailor the Rule to transactions that we believe are most likely

to involve microcap fraud, the amendments exclude securities with a

value of worldwide ADTV of at least $100,000 during each month of the

six full calendar months immediately preceding the date of publication

of a quotation.\26\ Convertible securities will also be excluded when

the underlying security satisfies this threshold.

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\26\ We have used an ADTV value of $100,000 in another, but

related, context. Rules 101 and 102 of Regulation M, 17 CFR 242.101

and 102, provide for a one business day restricted period for

securities with an ADTV value of at least $100,000 (as measured over

a 60 day period), if the issuer has a public float value of at least

$25 million. These rules are intended to prevent manipulative

activities during a distribution.

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The majority of OTC stocks of U.S. companies that are not listed on

an exchange or Nasdaq trade infrequently and will not satisfy for a

test based on a value of ADTV of $100,000 or more during each month

over a six month measuring period. However, there are a number of non-

reporting issuers having securities with significant trading levels,

particularly larger foreign issuers with actively traded securities in

their home markets. We think that it is appropriate to take this

trading activity into account in applying the value of ADTV test.

The price of a microcap security that is the subject of a fraud

often is manipulated upward rapidly so that those involved in the

manipulation can quickly sell stock at a significant profit, to the

detriment of innocent investors. Microcap securities involved in such

manipulations often are thinly traded, and the daily trading volume for

such securities rarely reaches a value of $100,000 over an extended

period of time. We believe that measuring the value of the security's

ADTV over a six month period is a way to ensure that the securities

qualifying for this exclusion are not involved in the type of short-

term price manipulations frequently seen in microcap schemes.

A broker-dealer should determine the value of a security's ADTV

from information that is publicly available and that the broker-dealer

has a reasonable basis for believing that the information is

reliable.\27\ In calculating the value of ADTV in U.S. dollars, any

reasonable and verifiable method may be used.\28\ For example, it may

be derived from multiplying the number of shares by the price in each

trade. The NASD may also be able to assist broker-dealers in

determining whether a particular security is eligible for the

exclusion.

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\27\ A broker-dealer will be able to rely on trading volume as

reported by SROs or comparable entities, or any other source

believed to be reliable. Electronic information systems that provide

information regarding securities in markets around the world could

provide an easy means to determine worldwide trading volume in a

particular security. Worldwide trading volume includes all markets,

domestic or foreign, where an OTC security is traded.

\28\ This is comparable to the calculation of value of ADTV

under Regulation M. See Securities Exchange Act Release No. 38067

(December 20, 1996), 62 FR 520, 537.

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Q1. Should the dollar value of ADTV for this exclusion be higher

than $100,000, e.g., $500,000 or $1 million, or should it be a lower

amount, e.g., $50,000? Commenters should provide data and analysis to

support suggested revisions to this proposed threshold.

Q2. Should the dollar value of ADTV measuring period be longer than

six months, e.g., twelve months, or be shorter, e.g., three months?

Should the length of the measuring period depend on the amount of the

value of ADTV threshold, i.e., should a lower value of ADTV threshold

be allowed but require a longer measuring period?

Q3. Should the exclusion based on ADTV value also incorporate a

value of public float test, like Regulation M does? If so, should the

public float value be $25 million or some higher or lower amount? Would

public float information be easy or difficult to obtain for non-

reporting issuers? \29\

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\29\ See id.

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Q4. Rule 101 under the Commission's Regulation M excludes from that

rule's trading prohibitions securities with a value of ADTV of $1

million or more, using a two month measuring period, if the issuer has

a public float value of at least $150 million. Should Rule 15c2-11's

exclusion parallel the terms of this exclusion?

2. Securities Satisfying a Bid Price Test

To limit the Rule to transactions that the Commission believes are

most likely to involve microcap fraud, we are proposing an amendment to

exclude securities with a bid price of at least $50 per share at the

time the quotation is published in the quotation medium.\30\ While the

vast majority of OTC stocks are quoted at lower prices and will not

typically satisfy for a test based on a bid price of at least $50 per

share, there are

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securities of closely-held issuers that are quoted at significant share

prices. The broker-dealer publishing the quotation can use its own bona

fide quotation to satisfy the test. The broker-dealer cannot use its

own or another broker-dealer's unpriced quotation to rely on this test,

even if the broker-dealer publishing a name-only quotation provides a

bid price of at least $50 per share upon inquiry. If a security is a

unit composed of one or more securities, the bid price of the unit,

when divided by the number of shares of the unit that are not warrants,

options, rights, or similar securities, must be at least $50 to be

excepted from the Rule.\31\

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\30\ Most of the Commission's recent trading suspension orders

issued under Section 12(k) of the Exchange Act, 15 U.S.C. 781(k),

have involved securities quoted on the OTC Bulletin Board or the

Pink Sheets. Our staff's analysis of these trading suspension

orders, issued between April 1, 1994 and January 1, 1998, showed

that the suspended OTC securities had an average bid price of

approximately $5, with a median bid price of approximately $3. These

securities had bid prices that ranged from a low of approximately

$0.50 to a high of approximately $18.

\31\ This is comparable to the provisions excluding equity

securities priced at $5 or more from the definition of ``penny

stock'' contained in 17 CFR 240.3a51-1(d)(2).

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Q5. Should this exclusion be based on a bid price higher than $50

per share, e.g., $100 per share or lower, e.g., $20 per share?

Commenters should provide data and analysis to support suggested

alternatives to the proposed threshold.

Q6. Should this exclusion be available only if the security has a

bid price of $50 over a specified period of time?

Q7. Should this test be based instead on the security's last sale

price? If so, should there be a time limit added to such a test so that

a stale last sale price cannot be used?

3. Securities of Issuers Satisfying a Net Tangible Assets Test

Microcap fraud schemes generally involve issuers with limited

assets.\32\ We are therefore proposing to exclude securities of issuers

having net tangible assets in excess of $10,000,000, as determined by

audited financial statements.

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\32\ Analysis of OTC securities that were the subject of recent

Commission-ordered trading suspensions showed the issuers on average

had approximately $3,500,000 in net tangible assets, with a median

of approximately $225,000 is such assets.

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If the issuer is not a foreign private issuer, a broker-dealer

should make this determination using the most recent financial

statements for the issuer that have been audited and reported on by an

independent public accountant in accordance with the provisions of Rule

2-02 of Regulation S-X.\33\ If the issuer is a foreign private issuer,

a broker-dealer should make this determination using the most recent

financial statements for the issuer (dated less than 18 months prior to

the date of the publication of the quotation) that are prepared in

accordance with a comprehensive body of accounting principles, audited

in compliance with requirements of the country of incorporation, and

reported on by an accountant duly registered and in good standing under

the regulations of that jurisdiction.\34\ If audited financial

statements are unavailable, the broker-dealer may not rely on this

exception.

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\33\ 17 CFR 210.2-02.

\34\ These financial statements may be found in filings with the

Commission on Forms 20-F or 6-K, or in submissions under Rule 12g3-

2(b) under the Exchange Act (17 CFR 240.12g3-2(b)), or elsewhere.

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Some commenters suggested that we look to the current definition of

``penny stock'' in assessing the scope of Rule 15c2-11. Exchange Act

Rule 3a51-1 excludes from the definition of penny stock a security of

an issuer having net tangible assets in excess of $2 million, if the

issuer has been in continuous operation for at least 3 years, or $5

million, if the issuer has been in continuous operation for less than

three years.\35\ We preliminarily believe that, for purposes of an

exclusion from the Rule, the net tangible assets amount should be

higher, and, unlike the definition of penny stock, the threshold need

not distinguish between newer and more seasoned issuers.

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\35\ 17 CFR 240.3a51-1.

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Q8. Should the threshold amount for this net tangible assets test

be higher than $10 million, e.g., $20 million? Under what circumstances

would it be appropriate to permit a lower threshold amount? Commenters

should provide data and analysis to support their views on whether the

threshold amount should be raised or lowered.

Q9. For ease of compliance with both Commission and NASD rules,

should this exclusion parallel the exclusion contained in the NASD's

proposed rule that would require broker-dealers to review current

information about the issuer of an OTC security before recommending a

transaction in the security?\36\ The NASD proposal would exclude the

securities of issuers having total assets of at least $100 million and

shareholders' equity of at least $10 million, based on audited

financial statements.

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\36\ See proposed NASD Rule 2315, which the Commission recently

issued for public comment. Securities Exchange Act Release No. 41075

(February 19, 1999). The proposed rule will be available through the

NASD Regulation Internet website at http://www.nasdr.com> and our

Internet website at http://www.sec.gov>.

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Q10. Will there be sufficient information in financial statements,

particularly those of non-reporting issuers, to permit broker-dealers

to make the net tangible assets calculation?

Q11. Should the use of financial statements of a foreign private

issuer be limited to financial statements prepared in accordance with

U.S. generally accepted accounting principles (GAAP)?

Q12. Should the use of financial statements of a foreign private

that are not prepared in accordance with U.S. GAAP be limited to

financial statements prepared in accordance with the accounting

standards promulgated by the International Accounting Standards

Committee (IASC)?\37\

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\37\ IASC's accounting standards are summarized on, and may be

ordered through, the IASC's Internet website at http://

www.iasc.org.uk>.

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Commenters are invited to provide us with their views on the

alternative tests for an exclusion from Rule 15c2-11, as described

above.

Q13. Should all three of the tests based on value of ADTV, bid

price, and net tangible assets be incorporated into Rule 15c2-11?

Q14. Should the proposed exclusions from the Rule be limited to

those securities that satisfy at least two of the three tests?

Q15. Are there other tests that are more appropriate to exclude the

securities of larger, more seasoned issuers from Rule 15c2-11? For

example, should a security that has no or very minimal trading volume

be excluded from the Rule's requirements? What would be an appropriate

low volume threshold? If trading volume suddenly exceeded the low

volume threshold, would broker-dealers publishing quotes find it easy

or difficult to have to obtain and review information before continuing

to publish priced quotations?

4. Non-Convertible Debt, Non-Participatory Preferred Stock, and Asset-

Backed Securities

We are proposing to exclude non-convertible debt securities, non-

participatory preferred stock,\38\ and asset-backed securities that are

rated by at least one nationally recognized statistical rating

organization, as that term is used in Rule 15c3-1 under the Exchange

Act,\39\ in one of its generic rating categories that signifies

investment grade.\40\ Commenters on this

[[Page 11130]]

issue generally supported excluding fixed-income securities from the

Rule.

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\38\ Non-participatory preferred stock means non-convertible

capital stock, the holders of which are entitled to a preference in

payment of dividends and in distribution of assets on liquidation,

dissolution, or winding up of the issuer, but are not entitled to

participate in residual earnings or assets of the issuer. See

paragraph (j)(8) of the Rule proposal, which is based upon a

definition contained in Rule 902(a)(1) of Regulations S (17 CFR

230.902(a)(1)).

\39\ 17 CFR 240.15c3-1 (net capital requirements for broker-

dealers).

\40\ The Commission's staff is engaged in a project to consider

the development of disclosure and registration requirements

specifically related to asset-backed securities. As part of that

project, the staff intends to examine further the role of ratings

with respect to asset-backed securities. Therefore, we consider it

appropriate to limit the proposed exclusion to investment grade

asset-backed securities at this time.

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The fraud and manipulation that we have observed in the microcap

securities have not been evident in the fixed-income market. In

addition, non-convertible debt securities, non-participatory preferred

stock, and investment grade asset-backed securities generally trade at

prices and in denominations that make them less likely targets for

manipulation. Further, the type of issuer information required by the

Rule is much less relevant to the pricing and trading of these types of

securities.

Q16. Should this exclusion apply to all asset-backed securities or

should the exclusion apply only to asset-backed securities that are

rated investment grade on the basis that those securities are even less

likely to be subject to fraudulent activities?

Q17. Should the Rule exclude all non-convertible debt and non-

participatory preferred stock or should the exclusion apply only to

non-convertible debt and non-participatory preferred stock that are

rated investment grade?

5. Other Exceptions

The exceptions relating to quotations for exchange-listed and

Nasdaq securities, quotations representing a customer's unsolicited

order, and quotations for exempted securities remain substantively the

same as currently in the Rule. As we indicated in the Proposing

Release, the unsolicited status of the customer orders would be called

into question if a broker-dealer repeatedly publishes quotations on the

basis of the unsolicited customer order exception.\41\

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\41\ Proposing Release, 63 FR at 9669. Also, we are combining

into a single provision the current exceptions for exchange-listed

and Nasdaq securities.

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Q18. Should unsolicited customer orders be required to be

identified as such in the quotation medium? Is it feasible for

quotation mediums to show that the quote represents an unsolicited

customer order?

B. Quotations Subject to the Rule

1. The Initial Quotation for a Covered OTC Security

As indicated above, the Rule's requirements will apply at the time

of discrete quotation events. Subject to the Rule's exceptions, the

amendments will prohibit the first broker-dealer from publishing a

priced or unpriced quotation for a covered OTC security in a quotation

medium unless it has obtained and reviewed specified information about

the issuer and the security. Further, this information will need to be

submitted to the NASD, in accordance with the NASD's rules, at least

three business days before the quotation is published.\42\ There is one

situation that ``restarts'' the Rule's requirements: following the

termination of a Commission trading suspension ordered pursuant to

Exchange Act Section 12(k),\43\ the broker-dealer publishing the first

quote, whether it is priced or unpriced, must comply with Rule 15c2-11.

In essence, this is the way the Rule currently works.

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\42\ For a discussion of the requirements under the reproposed

amendments concerning the submission of information to the NASD, see

Part III.I. below.

\43\ 15 U.S.C. 781(k).

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We believe that the Rule should cover the first quotation as a

means to assure that there is basic information about the issuer

available to the marketplace before trading in the security begins and

to alert regulators that trading in the security will be starting. The

NASD uses Rule 15c2-11 submissions for surveillance and enforcement

purposes and routinely provides copies of this information to the

Commission.

2. Priced Quotations

While the first broker-dealer must obtain the required information

for the initial quotation (priced or unpriced) for a covered OTC

security as discussed above, thereafter the Rule will only apply to

broker-dealers submitting their first priced quotations. The Rule's

review requirements are also triggered when a broker-dealer first

publishes a priced quotation following the lapse of five or more

business days of its priced quotations for the security. In addition,

as discussed below, a broker-dealer must satisfy the Rule's

requirements if it publishes a priced quotation as of a specific date

following the end of the issuer's fiscal year.

We propose to focus the Rule's requirements after publication of

the first quote on priced quotations, because recent microcap

manipulation schemes have primarily involved priced quotations. In

addition, priced quotes are used as indicia of value for a variety of

purposes (e.g., bank loans or pledges of securities). This revision

also responds to the concerns of several commenters that the earlier

proposal could have resulted in some broker-dealers being precluded

from publishing any quotations if they could not obtain the Rule's

required information. We solicit commenters' views, however, on whether

unpriced indications of interest will be used more often in unlawful

microcap activities, and, if so, whether the Rule should cover all

initial quotations.

3. Annual Review

The amendments require a broker-dealer to review the specified

information annually if the broker-dealer publishes priced quotations

for the security. The date by which the annual review must be performed

depends on whether the issuer is a domestic or a foreign company:

Domestic Issuers: The annual review must occur prior to

the first priced quotation that is more than four months after the end

of the issuer's fiscal year.

Foreign Private Issuers: The annual review must occur

prior to the first priced quotation that is more than seven months

following the end of the issuer's fiscal year.

The purpose of this requirement is to make sure that the broker-

dealer periodically reviews fundamental information about the issuer if

the broker-dealer continues to publish priced quotations. The broker-

dealer should know if no current information about the issuer exists or

if current information reflects a significant change in the issuer's

ownership, operations, or financial condition.

While we originally proposed two alternative dates for conducting

the annual review, to simplify the Rule we are reproposing only one

date for each type of security.\44\ Four months after the end of the

issuer's fiscal year, a broker-dealer publishing priced quotes for a

covered OTC security of a domestic issuer must have conducted the

annual review. In the case of a foreign private issuer's security, the

annual review must occur before the broker-dealer publishes a priced

quote following the date that is seven months after the issuer's fiscal

year end. We believe that these time periods give a broker-dealer

sufficient time to obtain and review updated issuer information for

both reporting and non-reporting issuers.

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\44\ The initial proposal would have permitted a broker-dealer

to conduct the annual review as of the anniversary date of the

initial quotation.

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Some commenters opposed the annual review requirement because of

potential recordkeeping burdens, the perceived difficulty of obtaining

the required information, and the loss of liquidity that could

potentially occur if broker-dealers could not publish priced quotes

because current issuer information was unavailable.\45\

[[Page 11131]]

Commenters stated that the Rule's review requirements represented a

shift from the Commission and the SROs to broker-dealers of the burdens

of overseeing issuer compliance with regulatory requirements.\46\ Some

commenters wrote that the annual review is only appropriate for certain

non-reporting companies or issuers for which only limited information

is available. Other commenters stated that the annual review should not

apply to issuers that are current in their reporting requirements

because this information is available on EDGAR.\47\ A number of

commenters, however, generally supported some sort of required annual

review for broker-dealers publishing priced quotations, although they

differed as to the securities that should be subject to this

provision.\48\

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\45\ See Letter from A.G. Edwards & Sons, Inc., (April 27, 1998)

(A.G. Edwards Comment Letter); and Letter from National Quotation

Bureau, LLC, (April 27, 1998) (NQB Comment Letter).

\46\ See, e.g., A.G. Edwards Comment Letter.

\47\ See, e.g., NQB Comment Letter.

\48\ See Letter from NASD Regulation, Inc., (July 17, 1998)

(NASD Comment Letter); Letter from North American Securities

Administrators Association, Inc., (April 27, 1998) (NASAA Comment

Letter); and SIA Comment Letter.

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The amendments will apply the annual review requirement to priced

quotations for both reporting and non-reporting issuers' securities. We

believe that an annual review requirement for both reporting and non-

reporting issuers' securities fulfills the objectives of the Rule

without imposing significant burdens on broker-dealers. This is

especially so because we are revising the Rule to cover only those

securities that, in our view, are most likely to be the subject of

microcap fraud schemes and are also limiting the scope of the annual

review to priced quotations. We also note that because information

about reporting issuers is available on the Commission's website, the

review of information about these issuers can be accomplished quite

easily.

Commenters are requested to provide us with their views on the

reproposal's focus on priced quotations.

Q19. Should the Rule cover all broker-dealers' initial quotations,

whether priced or unpriced, as the earlier proposal would have? Will

the reproposal cause broker-dealers to publish unpriced quotes to avoid

complying with the Rule?

Q20. Should the Rule apply exclusively to priced quotes, i.e., the

Rule would not cover any unpriced quotes?

Q21. Are there other approaches that would be more appropriate,

e.g., to cover any initial quote for a covered OTC security by a

broker-dealer, whether priced or unpriced, but not to apply the Rule or

at least the annual review requirement to reporting issuers'

securities? How would such a proposal help reduce instances of microcap

fraud?

Q22. Is the Rule text sufficiently clear in identifying the

quotation events that are subject to the Rule's provisions? Are there

other quotation events that should be covered by the Rule?

Q23. Should the provision pertaining to a lapse in quotations of

five consecutive business days or more provide for a longer time

period, e.g., ten consecutive business days without a priced quotation,

or a shorter time period, e.g., three consecutive business days without

a priced quotation?

Q24. Should the Rule give broker-dealers the option to conduct the

annual review as of the anniversary date of the initial quotation by

the broker-dealer?

C. Information Required Under the Rule

The amendments are substantially identical to the earlier proposal

with respect to the issuer information that a broker-dealer must review

before publishing a quotation for a covered OTC security. Under the

reproposal, a broker-dealer subject to the Rule must gather, review,

and maintain in its records the following issuer information:

For an issuer that has conducted a recent public offering

either registered under the Securities Act of 1933 (Securities Act) or

effected pursuant to Regulation A under the Securities Act, a copy of

the prospectus or offering circular;

For an issuer that files reports with the Commission

pursuant to Sections 13 or 15(d) of the Exchange Act\49\ (reporting

issuer), the issuer's most recent annual or semi-annual report and any

subsequent quarterly and current reports;

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\49\ 15 U.S.C. 78m and 78o(d).

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For an issuer that is an insurance company of the kind

specified in Section 12(g)(2)(G) of the Exchange Act,\50\ the issuer's

most recent annual statement referred to in Section 12(g)(2)(G)(i);

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\50\ 15 U.S.C. 78l(g)(2)(G).

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For an issuer that is not required to file reports

pursuant to Sections 13 or 15(d) of the Exchange Act and that is a bank

or savings association, the issuer's most recent annual report and any

subsequent reports filed with its appropriate federal or state banking

authority; and

For any other issuer, the information, including certain

financial information, specified in proposed paragraph (c)(6) of the

Rule, which must be reasonably current in relation to the day a

quotation is submitted.

The broker-dealer also must obtain and review the supplemental

information contained in paragraph (d) of the reproposed Rule. A

broker-dealer must review a copy of any trading suspension order issued

under Section 12(k) for any of the issuer's securities during the 12

months preceding the publication of the quotation, as well as any other

material information, including adverse information, that comes to the

broker-dealer's knowledge or possession before publication of the

quotation. A broker-dealer must consider this supplemental information,

along with the issuer information, when it determines whether it has a

reasonable basis for believing that the issuer information is accurate

and from reliable sources. While we are not including a requirement

that the broker-dealer obtain and review any trading suspension for a

foreign security that was issued by a foreign financial regulatory

authority, this information must be taken into account by the broker-

dealer if it comes to the broker-dealer's knowledge or possession at

the time that a review is required.

In addition, the broker-dealer must make a record of the

significant relationship information contained in paragraph (e) of the

reproposed Rule, which is unchanged from the Proposing Release. Under

this provision, a broker-dealer would have to document specified

information such as whether the broker-dealer has any affiliation with

the issuer or arrangements to receive any consideration to publish the

quote, and whether the quote is being published on behalf of another

broker-dealer or the issuer, any of its insiders, or any large

shareholder.

Commenters generally did not object to the issuer, significant

relationship, and supplemental information requirements; in fact, some

commenters favored the enhanced information requirements for non-

reporting issuers.\51\ Therefore, we are reproposing these requirements

without any substantive changes, other than revisions relating to

financial statements for non-reporting issuers, as discussed

[[Page 11132]]

below in Part III.C.4. We are addressing below specific points that a

few commenters raised about the information requirements and other

provisions. Commenters are welcome to provide their views on the

information requirements for the various categories of issuers and

should consult the Proposing Release for a more detailed description of

these provisions.\52\

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\51\ In response to the 78 comment letters that we received from

issuers of securities quoted on the OTC Bulletin Board who were

concerned about continued liquidity for their securities, we note

that 33 of these issuers are reporting companies. Also, under

recently approved amendments to NASD Rules 6530 and 6540, all of

these issuers ultimately will need to be reporting companies current

in their reporting obligations in order for their securities to

remain on the OTC Bulletin Board. See note 6 above and accompanying

text. There should be no burdens on reporting issuers to provide

information to broker-dealers wishing to publish quotations because

the issuer information should be available on EDGAR, as long as the

issuers are current in their reporting obligations.

\52\ See Part II.A.4. of the Proposing Release at 63 FR 9661,

9664-9669.

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1. Reporting Issuers Delinquent in Their Filings

In the case of an issuer delinquent in its reporting obligations, a

broker-dealer will not be able to publish an initial priced quotation,

or continue to publish priced quotations after the annual review date,

because it will not be able to obtain the specified reports. A few

commenters indicated concern about the possible adverse implications

for the market for delinquent issuers' securities if broker-dealers

could not publish quotes when current issuer information was

unavailable.\53\ As noted above, we are revising the Rule to permit

broker-dealers to publish unpriced quotations, even in the absence of

current issuer information (except in the case of the first quotation

for the security).

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\53\ See, e.g., NASAA Comment Letter.

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2. Issuers in Bankruptcy

a. Reporting Issuers

A few commenters urged us to permit broker-dealers to continue to

quote the securities of reporting issuers that had filed for

reorganization under federal bankruptcy law because it would provide

liquidity for these securities.\54\ They noted that it was often

burdensome for small companies that had filed for reorganization under

Chapter 11 of the Bankruptcy Code \55\ to produce audited financial

statements to comply with Exchange Act reporting requirements.

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\54\ See, e.g., Letter from Daniel J. Demers (March 27, 1998)

(Demers Comment Letter); Letter from Robotti & Company, Inc., (April

27, 1998) (Robotti Comment Letter); and NQB Comment Letter. In 1989,

we sought comment on whether there were situations, such as

bankruptcy, that should be addressed if the piggyback provision were

revised. See Securities Exchange Act Release No. 27247 (September

14, 1989), 54 FR 39194 (1989 Release). Commenters on the 1989

Release argued that it was appropriate to permit broker-dealers to

continue quoting the securities of issuers that had filed for

bankruptcy because it provided liquidity for these securities and

suggested that issuers in bankruptcy be identified in the quotation

system by using a special indicator.

\55\ 11 U.S.C. 1101 et seq.

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Commenters suggested that broker-dealers could satisfy the Rule's

requirements by reviewing bankruptcy court filings made by an issuer in

Chapter 11 reorganization when current Exchange Act reports were

unavailable. One commenter also suggested that the Commission permit

delinquent reporting companies that experience a 51% ownership change

as a result of a confirmed plan of reorganization to begin reporting

from the effective date of the reorganization plan with a filing with

the Commission, attaching the court-approved disclosure statement

together with a certified audited balance sheet as of the effective

date.\56\

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\56\ Demers Comment Letter; see also 11 U.S.C. 1125. The

disclosure statement includes, among other things, a description of

the issuer's business plan, a description of any securities to be

issued, and financial information.

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The reproposal will require a broker-dealer publishing quotations

for a reporting issuer's securities to obtain the issuer's Exchange Act

reports, even if the reporting issuer has filed for Chapter 11

reorganization. Thus, if a reporting issuer that has filed for Chapter

11 reorganization becomes delinquent in its reporting obligations, a

broker-dealer will not be able to publish priced quotations covered by

the Rule. For example, a broker-dealer could not continue to publish

priced quotations as of the annual review date for a covered security

of a reporting debtor that has become delinquent in its reporting

obligations.\57\

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\57\ Broker-dealers would be able to continue to publish

unpriced quotations.

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The bankruptcy court filings for an issuer undergoing

reorganization under Chapter 11 are not adequate to satisfy the Rule's

requirements. These Rule 2015 bankruptcy reports ordinarily contain

only data about issuer receipts and disbursements and not the type of

issuer financial information contemplated by Rule 15c2-11.\58\ In some

cases, our Division of Corporation Finance may grant issuers in

bankruptcy no-action relief with respect to Exchange Act filing

requirements.\59\ These no-action positions, however, are predicated on

little or no trading occurring in the debtor's securities. The Rule

2015 bankruptcy reports that the Division of Corporation Finance

accepts under its no-action position do not satisfy Rule 15c2-11

because this financial report usually contains only information about

issuer receipts and disbursements. Where a reporting issuer receives

this type of no-action position, a broker-dealer would not be able to

obtain the issuer information required by the Rule until the debtor's

reorganization plan becomes effective, and the debtor files a Form 8-K,

which instead of attaching the Rule 2015 bankruptcy reports, now

includes the issuer's audited balance sheet. Under Rule 15c2-11,

broker-dealers could review this 8-K, which contains an issuer's

audited balance sheet, and then publish priced quotations. From then

on, the issuer must file its Exchange Act periodic reports for all

periods that begin after the plan becomes effective.\60\ The

publication of quotations by a broker-dealer indicates that a market

exists for the issuer's securities. It would be inconsistent with the

premise of the no-action position (i.e., that there is no trading in

the issuer's securities) if a broker-dealer were able to stimulate

trading by publishing quotations without having the issuer's Exchange

Act reports.

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\58\ See Federal Rule of Bankruptcy Procedure 2015 (Rule 2015

bankruptcy reports).

\59\ See Staff Legal Bulletin No. 2 (April 15, 1997) (CF) (Staff

Legal Bulletin No. 2), which is available through our Internet

website at http://www.sec.gov/rules/othern/slbcf2.txt>. Under Staff

Legal Bulletin No. 2, our Division of Corporation Finance has

granted no-action relief permitting an issuer in Chapter 11

reorganization to satisfy its Exchange Act reporting obligations by

filing the Rule 2015 bankruptcy reports on Exchange Act Form 8-K.

See 17 CFR 249.308. Under Staff Legal Bulletin No. 2, the staff has

allowed a company to substitute its Rule 2015 bankruptcy reports for

its Exchange Act periodic reports when there is little or no trading

in the debtor's securities.

\60\ See Staff Legal Bulletin No. 2.

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Q25. Are there circumstances in which a broker-dealer should be

permitted to publish priced quotations for the securities of delinquent

reporting issuers in bankruptcy? Please describe these circumstances.

Should the Rule prohibit broker-dealers from publishing unpriced quotes

for the securities of these issuers?

b. Non-Reporting Issuers Emerging From Bankruptcy

The Proposing Release contained amendments to permit broker-dealers

that quote the securities of non-reporting companies emerging from

bankruptcy to review the bankruptcy court-approved disclosure statement

and issuer financial information required by the Rule from the date

that the bankruptcy court confirms the reorganization plan.\61\ The

commenters who addressed this issue supported the proposal to limit a

broker-dealer's review to the post-reorganization information.\62\ The

amendments are unchanged from the original proposal.

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\61\ See 11 U.S.C. 1125. The disclosure statement includes,

among other things, a description of the issuer's business plan, a

description of any securities to be issued, and financial

information.

\62\ See Letter from Florida Division of Securities (April 27,

1998) (Florida Comment Letter); NQB Comment Letter; Demers Comment

Letter; and Robotti Comment Letter. Mr. Demers suggested that the

required financial information for non-reporting issuers emerging

from bankruptcy be from the ``effective date'' of the plan, instead

of the ``confirmation date'' of the plan. We are retaining this

amendment from the confirmation date because adequate information is

available about the non-reporting issuer at this point for Rule

15c2-11 purposes.

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[[Page 11133]]

3. Non-Reporting Foreign Private Issuers

In the case of a foreign private issuer that relies on an exemption

from registration under Section 12(g) \63\ of the Exchange Act by

complying with Exchange Act Rule 12g3-2(b), Rule 15c2-11 specifies that

a broker-dealer must review the information submitted to the Commission

under Rule 12g3-2(b).\64\ To qualify for the registration exemption,

the issuer must furnish to the Commission information that the issuer

has made or is required to make public under the law of the country in

which the foreign private issuer is domiciled or incorporated; has

filed or is required to file with a stock exchange on which the

securities are traded and which the exchange has made public; or has

distributed or is required to distribute to its securityholders. For

foreign private issuers that do not furnish the Commission with

information under Rule 12g3-2(b), the Rule currently requires broker-

dealers to obtain and review the same kind of information, including

financial information, as required for non-reporting domestic issuers.

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\63\ 15 U.S.C. 78l(g).

\64\ 17 CFR Sec. 240.12g3-2(b).

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We note that Rule 12g3-2(b) contains no specific requirements

governing the categories of information the issuer must furnish to the

Commission under the exemption. As a result, there is no assurance that

broker-dealers publishing quotes will obtain the same type of

information for each foreign private issuer that claims the Rule 12g3-

2(b) exemption as they must for other non-reporting foreign private

issuers. This can be problematic since a number of issuers claiming the

Rule 12g3-2(b) exemption are foreign microcap companies that can

potentially be subject to the same kinds of abusive practices as their

U.S. counterparts.

Therefore, we are proposing to change Rule 15c2-11 requirements

with respect to quotations for the securities of foreign issuers

complying with Rule 12g3-2(b). Broker-dealers publishing quotations for

the securities of Rule 12g3-2(b) issuers will have to obtain and review

the information specified in paragraph (c)(6) of the reproposed

Rule.\65\ However, as described in more detail below, we propose to

revise the financial statements that must be reviewed for non-reporting

foreign private issuers to recognize the foreign status of these

issuers.\66\ By eliminating the provision for Rule 12g3-2(b) issuers,

all non-reporting foreign private issuers will be treated similarly

under Rule 15c2-11.

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\65\ Some of the paragraph (c)(6) information that broker-

dealers will have to obtain and review may be present in the foreign

issuer's Rule 12g3-2(b) materials.

\66\ See Part III.C.4. below.

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Commenters were divided on whether we should amend the provisions

of the Rule governing the review of information for non-reporting

foreign private issuers.\67\ Because the reproposal excludes the

securities of many larger foreign issuers from Rule 15c2-11 and also

distinguishes between U.S. and foreign accounting standards for those

foreign issuers that continue to be covered, many of the reasons for

permitting broker-dealers to rely on Rule 12g3-2(b) information have

been addressed.

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\67\ For example, some commenters stated that we should delete

the reference to Rule 12g3-2(b) and require broker-dealers to review

the same information as required for all other foreign non-reporting

issuers whose securities are subject to Rule 15c2-11. See, e.g.,

Florida Comment Letter. Other commenters, however, indicated that we

should continue to require broker-dealers to review only the home

country information that certain foreign issuers submit to the

Commission under Rule 12g3-2(b). See, e.g., SIA Comment Letter.

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Q26. Should broker-dealers be required to obtain and review the

same type of issuer information with respect to non-reporting foreign

private issuers providing information under Rule 12g3-2(b) as they must

for other non-reporting foreign issuers? Are there reasons to retain a

special provision in Rule 15c2-11 for foreign issuers furnishing

information under Rule 12g3-2(b)?

Q27. What is the experience of broker-dealers under the Rule when

the foreign issuer has not furnished information to the Commission

under Rule 12g3-2(b)? How difficult or easy will it be for broker-

dealers to obtain the paragraph (c)(6) information for a non-reporting

foreign private issuer?

4. Other Non-Reporting Issuers

The amendments parallel the Proposing Release in their treatment of

non-reporting issuers (i.e., those non-reporting issuers that are not

financial institutions covered by paragraph (c)(4)), except for the new

exclusions discussed in Part III.A. above and the revisions to the

required financial information for non-reporting issuers. As in the

Proposing Release, the Rule will require broker-dealers to review more

information than currently required about the issuer's outstanding

securities; the issuer's insiders, including their disciplinary

history; and certain significant events involving the issuer, among

other items. This information will provide a broker-dealer that is

considering whether to publish quotations for such an issuer greater

understanding of the issuer's operations and a better indication of

whether potential or actual fraud or manipulation may be present.

Several commenters supported the requirement for a broker-dealer to

review the disciplinary information about the insiders of non-reporting

issuers. One commenter believed that if broker-dealers are allowed to

publish quotations without obtaining this disciplinary information, it

would create a loophole for issuers to avoid disclosing information

that would be of utmost importance and would thereby defeat the goal of

the Commission.\68\ While no commenters directly opposed the

requirement to obtain disciplinary information, several commenters

objected to the enhanced information requirements in general as too

difficult and burdensome, especially when issuers are unwilling to

volunteer information.\69\

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\68\ See NASAA Comment Letter.

\69\ See, e.g., Letter from David B. Schneider (April 21, 1998).

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Q28. Should the Rule require the disciplinary history information

for the insiders of all issuers of covered OTC securities, and not just

insiders of non-reporting issuers, on the basis that microcap fraud can

involve issuers whose insiders have histories of prior misconduct?

We are proposing to amend the financial information that a broker-

dealer must review when publishing quotations of both domestic and

foreign non-reporting issuers. The reproposal lists the financial

statements required for a domestic issuer, which must be prepared in

accordance with U.S. GAAP, and sets forth when these financial

statements will be presumed ``current'' under the Rule. Absent contrary

information, a domestic issuer's balance sheet will be considered

current if it is as of a date that is less than 15 months before the

quotation is published, rather than less than16 months as now specified

in the Rule.\70\ This revision comports with existing Exchange Act

requirements regarding when a domestic reporting issuer's financial

statements are considered

[[Page 11134]]

current. The reproposal also will require broker-dealers to review the

specified financial information for such part of the two preceding

fiscal years (in the case of the balance sheet, the preceding fiscal

year) that the issuer (or any predecessor) has been in existence.

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\70\ This provision is a presumption that financial information

that is less than 15 months old is current. However, if the broker-

dealer has other information that indicates that the issuer's

financial condition has materially changed from that shown in the

financial statements, this presumption may not apply, and the

broker-dealer should determine whether more recent financial

information is available. Financial information older than 15 months

is not current and does not satisfy the Rule's requirements. The

presumption for non-financial information is that this information

is considered current if it is as of a date within 12 months of

publication of the quotation.

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The reproposal also will revise the requirements with respect to

the financial statements that broker-dealers must review when

publishing a quotation for a non-reporting foreign private issuer's

security. The reproposal lists the financial statements that the

broker-dealer must review, which must be prepared in accordance with a

comprehensive body of accounting principles, and sets forth when these

financial statements will be considered current under the Rule. For a

non-reporting foreign private issuer, its balance sheet will be

presumed current if it is as of a date less than 18 months before the

quotation is published.\71\ Also, if the balance sheet is as of a date

more than 9 months before the quotation is published, the broker-dealer

must obtain more current financial information only to the extent that

the issuer has prepared it. The broker-dealer must obtain the specified

financial information for the two preceding fiscal years (one year with

respect to the balance sheet) that the issuer has been in existence.

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\71\ This presumption will operate in the same manner as for

domestic issuers. See footnote 70 above.

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Q29. Are the financial statement requirements, including the

presumption regarding when the information is considered current, clear

and capable of being complied with by broker-dealers publishing

quotations? Should there be longer time periods for the presumption

regarding when the financial statements for a non-reporting foreign

private issuer are considered current? If so, what time periods would

be appropriate?

Q30. Are there any information requirements for non-reporting

issuers that should be added or removed from reproposed paragraph

(c)(6)?

D. Information Available Upon Request

We believe that some microcap frauds could be prevented if there

were greater investor access to information about those securities and

their issuers. Accordingly, we are reproposing, with some revisions,

the requirement that a broker-dealer publishing quotations for any

covered OTC security make the information promptly available upon

request. In response to the Proposing Release, several commenters

suggested that we restrict the types of persons and entities to which a

broker-dealer must provide the information.\72\ The amendments require

a broker-dealer to provide information upon request to any current

customer, prospective customer, information repository, or other

broker-dealer.

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\72\ See, e.g., Letter from Security Traders Association (April

28, 1998) (STA Comment Letter). We originally proposed that the

information be made available to anyone upon request.

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A few commenters asserted that broker-dealers should not be

required to provide information that already is generally available to

the public from other sources (e.g., information for reporting

companies that is available on EDGAR).\73\ We are addressing these

concerns in the amendments by requiring broker-dealers to provide the

required information that is not accessible through EDGAR, any other

federal or state electronic information system, or an information

repository. Further, most commenters responding to this issue were

concerned about the cost of providing information to others upon

request.\74\ We believe that the cost of requiring broker-dealers to

make the information available (including to other broker-dealers) upon

request is minimal.\75\

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\73\ See e.g., Letter from Richard P. Ryder, Esq. (May 12,

1998).

\74\ See e.g., Letter from The Bond Market Association Comment

Letter (April 27, 1998); NQB Comment Letter; and Florida Comment

Letter.

\75\ A broker-dealer may charge for the reasonable expenses it

incurs in producing and forwarding copies of the Rule 15c2-11

information.

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The amendments retain in substantial form the clause that providing

information to others does not constitute a representation by the

broker-dealer that the information is accurate. Rather, providing the

information to others constitutes a representation that the information

is current in relation to the date the information was reviewed, and

that the broker-dealer has a reasonable basis for believing that the

information was accurate as of the date recorded and was obtained from

reliable sources.

Q31. Should we require broker-dealers to make the information

available to anyone who requests it, particularly if broker-dealers are

permitted to charge reasonable fees? Should broker-dealers be required

to provide information to fewer classes of persons?

E. Information Repository

The amendments, as in the Proposing Release, eliminate the

piggyback provision of the Rule. The elimination of the piggyback

provision and the potential for increased costs of compliance suggest

the desirability of having a data base of information about the non-

reporting issuers of covered OTC securities.\76\ Such a data base also

would enhance the availability of information about little-known

issuers to investors, other professionals, and regulators. The

consensus among the commenters who specifically addressed this issue

was that the creation of a repository would foster access to

information about issuers that do not participate in the public

disclosure system.\77\ For these reasons, we encourage the development

of one or more repositories of Rule 15c2-11 information, but we note

that the existence of a repository will not be necessary for broker-

dealers to comply with the Rule.

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\76\ We note that, for reporting issuers, information

repositories already exist. Broker-dealers are able to access and

review the required information on our EDGAR system, available

through our Internet website at http://www.sec.gov>. In addition,

broker-dealers may consult federal or state electronic information

systems for information about issuers of covered OTC securities.

\77\ See e.g., Letter from Singer Frumento Sichenzia, LLP,

(April 13, 1998).

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The amendments establish that the Commission may, upon written

application, designate an entity as an information repository.\78\ In

determining whether to grant or deny such a designation, the Commission

will consider whether an entity:

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\78\ This authority will be delegated to the Director of the

Commission's Division of Market Regulation. We propose to amend Rule

200.30-3, which provides for delegation of authority to the

Director, to include the designation of information repositories.

See 17 CFR 200.30-3.

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Collects information about a substantial segment of

issuers of securities subject to the Rule;

Maintains current and accurate information about such

issuers;

Has effective acquisition, retrieval, and dissemination

systems;

Places no inappropriate limits on the issuers from or

about which it will accept or request information;

Provides access to the documents deposited with it to

anyone willing and able to pay the applicable fees; and

Charges reasonable fees.

In general, the Commission will consider whether an entity wishing

to act as an information repository is so organized and has the

capacity to be able reasonably to obtain and provide to others current

information required by the Rule. An information repository will be

required to notify the Commission of any material changes in the facts

and circumstances of their application for designation as an

information repository. In the event that an information repository no

longer satisfies these attributes, we may withdraw such designation.

[[Page 11135]]

Some commenters suggested that the Commission assume the task of

serving as the Rule 15c2-11 information repository.\79\ Because the

issuers that would be the focus of any information repository generally

would not be required to file periodic reports with the Commission,

this is not a function that we can assume at this time. The NASD has

also advised us preliminarily that it is unable to undertake the

responsibility of serving as an information repository at the present

time. Therefore, we encourage private sector initiatives for the

creation of one or more Rule 15c2-11 information repositories.

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\79\ See, e.g., STA Comment Letter.

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Q32. Are there other criteria that should be used to determine the

information repository designation?

F. Definitions

Reproposed paragraph (j) of the Rule sets forth the definitions

applicable to all provisions of the Rule. Most of the definitions are

unchanged from the Proposing Release, but a few definitions are revised

to respond to commenters' suggestions or to add clarity to the

amendments.

Quotation Medium. The current definition of ``interdealer quotation

system'' will be incorporated into the definition of ``quotation

medium'' in paragraph (j)(12).\80\ This definition of quotation medium

is quite inclusive: it covers any publication, alternative trading

system (ATS), or other device that is used by brokers or dealers to

make known to others their interest in transactions in any security,

including offers to buy or sell at a stated price or otherwise, or

invitations of offers to buy or sell.\81\ A few ATSs expressed concern

about whether they would have to comply with the Rule's information

review requirements with regard to any covered OTC security that is

traded on their systems by broker-dealer subscribers to such ATSs.\82\

ATSs are included in the definition of ``quotation medium'' if they

display subscriber orders to any person other than ATS employees. The

Rule's information review requirements, however, apply only to the

broker-dealers that submit quotations for publication by the ATS, and

not to the ATS functioning as the quotation medium for them. The Rule

will apply to an ATS only if, as a registered broker-dealer, it

displays its own orders in the ATS.

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\80\ Under the current Rule, interdealer quotation system is

defined as any system of general circulation to brokers or dealers

which regularly disseminates quotations of identified brokers or

dealers. A separate definition of ``interdealer quotation system''

is no longer necessary because of the proposed elimination of the

piggyback provision and the revision that the information be

furnished to the NASD in accordance with NASD rules, rather than to

interdealer quotation systems.

\81\ We are using the term ``alternative trading system,'' which

encompasses the term ``electronic communications network.'' See

Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR

70844.

\82\ See e.g., Letter from Instinet (April 22, 1998).

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An issue has also been raised about whether Rule 15c2-11 applies to

broker-dealers submitting orders through an ATS. We understand that

some broker-dealers have taken the position that compliance with Rule

15c2-11 is not necessary when they submit an order through an ATS.\83\

They have viewed such an order for the security as not constituting a

quotation within the meaning of Rule 15c2-11. These orders may

represent transactions for the broker-dealer's own account. The Rule's

definition of quotation makes clear that the Rule covers any indication

of interest by a broker or dealer in receiving bids or offers from

others for a security, or any indication by a broker or dealer that it

wishes to advertise its general interest in buying or selling a

particular security. Thus, broker-dealers are subject to the Rule when

they place any indication of interest in any quotation medium,

including an ATS, that they wish to receive bids or offers in a covered

OTC security, unless they can rely on one of the Rule's exceptions.\84\

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\83\ For example, some broker-dealers have claimed to submit

customer ``orders'' in quotations mediums following the termination

of a Commission trading suspension issued under Exchange Act Section

12(k).

\84\ To rely on the exception for an unsolicited customer order,

the order must represent an unsolicited indication of interest of a

customer (other than a person acting as or for a dealer) of the

broker-dealer submitting the order to the ATS.

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Also, we are clarifying the Rule's application to broker-dealers

that publish quotations in multiple quotation mediums or move their

quotations from one quotation medium to another. If the broker-dealer

complies with the Rule's provisions, based upon a review of

information, it may publish quotations in one or more quotation

mediums.\85\

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\85\ We have previously interpreted the Rule to require a

broker-dealer that was publishing quotations in a particular

interdealer quotation system to review issuer information before

publishing quotations in another interdealer quotation system unless

it relied upon an exemption. See Letter re: OTC Bulletin Board

Display Service (December 20, 1993) (conditional exemption

permitting broker-dealers that are currently publishing quotations

in an interdealer quotation system to publish quotations in the OTC

Bulletin Board without reviewing issuer information under the Rule);

and Letter re: OTC Bulletin Board; Modification of Exemption

(December 1, 1998) (modifying the exemption granted in 1993). Upon

adoption of the reproposed amendments, we will rescind this

interpretation and related exemptions.

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Net tangible assets. We are proposing to add a definition to the

Rule to assist broker-dealers in assessing whether or not a security

can meet the proposed exception to the Rule for securities of issuers

with net tangible assets exceeding $10 million. Net tangible assets

means total assets less intangible assets and liabilities and this

determination must be based on the issuer's current financial

statements, which must be audited.

G. Preservation of Documents and Information

To facilitate compliance with the Rule's recordkeeping

requirements, we believe that it is appropriate to codify the Rule's

record preservation requirements in Rule 17a-4,\86\ rather than in Rule

15c2-11. Rule 17a-4 obligates broker-dealers to preserve documents and

information that they must compile pursuant to Commission rules for the

time period and in the manner specified in the various provisions of

Rule 17a-4. As in the Proposing Release, Rule 17a-4 would be amended to

add the information specified in reproposed paragraphs (c), (d), and

(e) of Rule 15c2-11 to the other information that broker-dealers are

already required to preserve under Rule 17a-4.\87\

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\86\ 17 CFR 240.17a-4. We will add new paragraph (b)(11).

\87\ This proposed recordkeeping requirement was discussed by

few commenters and generally was viewed favorably. See e.g., NASAA

Comment Letter.

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With regard to issuer information that is accessible to broker-

dealers through our EDGAR system, any other federal or state electronic

information system,\88\ or an information repository, the amendments

provide different requirements. If broker-dealers obtain and review the

information contained on such systems, they will not need to preserve

such information separately, as long as they document the review and

the information is accessible on such system for the same period of

time that

[[Page 11136]]

the broker-dealers are obligated to preserve such information pursuant

to Rule 17a-4.

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\88\ Broker-dealers publishing quotes for securities of exempt

financial institutions may obtain the regulatory reports from the

financial institution by contacting their primary bank regulatory

agency. Broker-dealers can access the Federal Reserve System's

National Information Center of Banking Information Internet website

at http://www.ffiec.gov/NIC>, the Office of the Comptroller of the

Currency's Internet website at http://www.occ.treas.gov>, which has

information about individual nationally chartered banks, or the

Federal Deposit Insurance Corporation's (FDIC) Internet website at

http://www.fdic.gov>, which provides the most recent Call Reports

for all FDIC insured banks. Broker-dealers that access exempt

financial institution information through these websites would be

able to satisfy the Rule's requirements by recording their review

and preserving the information in the same manner as for EDGAR

information discussed above.

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H. Transition and Exemptive Authority Provisions

We are reproposing the transition provision covering quotations by

broker-dealers that were initiated prior to the effective date of the

proposed amendments and, with a slight modification, the provision

giving the Commission the authority to grant exemptions from the

Rule.\89\ These proposed provisions were viewed as adequate by the few

commenters who discussed them.\90\

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\89\ The reproposal would provide the Commission with the

authority to grant an exemption from the Rule for any quotation for

a security or any class of security.

\90\ See, e.g., Florida Comment Letter.

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I. Information submitted to the NASD

Rule 15c2-11 currently requires any broker-dealer covered by the

Rule to submit the information required under paragraph (a)(5) (i.e.,

for non-reporting issuers) to the interdealer quotation system, in the

form prescribed by the system, at least three business days before

submitting a quotation for publication. We intend to amend this

obligation by requiring broker-dealers to submit the information that

they must review only to the NASD, in accordance with the NASD's rules.

The amendments are substantially the same as originally proposed,

except for one change. Under the Proposing Release, a broker-dealer

would be in compliance with the requirement to obtain current reports

filed by a reporting issuer, if the broker-dealer obtained all current

reports filed with the Commission by an issuer as of a date up to three

business days before the earlier of the date the broker-dealer

submitted the quotations to the quotation medium and the date the

broker-dealer submitted information to the NASD. To reduce the chance

that a broker-dealer would overlook a recently filed report containing

material issuer information, we are proposing to eliminate the

reference to the date the information was submitted to the NASD. This

means that a broker-dealer would be required to obtain current reports

filed by a reporting issuer after the broker-dealer had submitted

information to the NASD, if such reports were filed more than three

business days in advance of the publication of the quotation.

IV. General Request for Comments

We solicit comment on all aspects of the amendments to Rule 15c2-

11, as well as on any other matter that might have an impact on the

reproposal discussed above. In particular, we seek comment on the

whether the reproposal will help focus the Rule on those securities and

quotations most likely to be involved in microcap fraud. Commenters are

requested to address whether there are other ways to amend the Rule

that would help reduce fraud and manipulation in the OTC market.

Commenters also are invited to address whether the Rule's text is

sufficiently clear and understandable, or whether it can be simplified

without sacrificing its purposes. We also request commenters to provide

us with their views regarding whether the original proposal, or aspects

of it, are preferable to the reproposal.

We encourage commenters to focus on the various provisions of the

reproposal and bring to our attention any compliance or other specific

issues that they may encounter if the reproposal is adopted. Commenters

are urged to provide us with their views as expeditiously as possible

so that we can complete our review of Rule 15c2-11.

V. Effects on Efficiency, Competition, and Capital Formation

Section 23(a)(2) of the Exchange Act requires the Commission, in

adopting rules under the Exchange Act, to consider the anti-competitive

effects of any rules it adopts thereunder, and to not adopt any rule

that would impose a burden on competition not necessary or appropriate

in the public interest.\91\ Furthermore, Section 3(f) of the Exchange

Act \92\ requires the Commission, when engaged in rulemaking, to

consider or determine whether an action is necessary or appropriate in

the public interest, and whether the action will promote efficiency,

competition, and capital formation.

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\91\ 15 U.S.C. 78w(a)(2).

\92\ 15 U.S.C. 78c.

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We preliminarily believe that the reproposal would not have any

anti-competitive effects that are not necessary or appropriate in the

public interest. By applying the Rule to the first broker-dealer

publishing any quotations for a security in a quotation medium and to

other broker-dealers publishing priced quotations thereafter, the

availability of information about issuers of covered OTC securities

should be increased. This should help improve the level of competition

among broker-dealers publishing priced quotations and enhance the

extent of information about OTC issuers that is available to the

investing public. Moreover, by excluding unpriced quotations from the

Rule, anti-competitive burdens will be reduced because broker-dealers

that cannot, or do not want to, obtain the specified information can

still advertise their interest in buying or selling a particular OTC

security in a quotation medium. Finally, the reproposal should have a

beneficial impact on capital formation because microcap fraud

ultimately increases the costs of raising capital for legitimate

smaller issuers. Investors may be less willing to commit their

resources if they are concerned about fraudulent activities in OTC

securities.

We request comments on the benefits, as well as the adverse

consequences, that may result with respect to efficiency, competition

and capital formation, if the reproposal is adopted.

VI. Costs and Benefits of the Amendments

We request commenters to evaluate the costs and benefits associated

with the amendments to Rule 15c2-11. We have identified certain costs

and benefits relating to the reproposal, which are discussed below, and

encourage commenters to discuss any additional costs or benefits. In

particular, we request comments on the potential costs for any

necessary modifications to information gathering, management, and

reporting systems or procedures that would be necessary to implement

the amendments, as well as any potential benefits resulting from the

reproposal for issuers, investors, broker-dealers, securities industry

professionals, regulators or others. Commenters should provide analysis

and data to support their views on the costs and benefits associated

with the amendments.

A. Benefits

Incidents of microcap fraud frequently involve issuers for which

public information is limited.\93\ Without information, it is difficult

for investors, securities professionals, and others to evaluate the

risks presented by these securities. Consequently, many investors fall

prey to persons who make false representations and unrealistic

predictions about these securities. The publication of quotations by

broker-dealers can facilitate the fraudulent promotion of microcap

securities.

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\93\ See, e.g., SEC v. Global Financial Traders, Ltd.,

Litigation Release Nos. 15291 (March 14, 1997), and 15338 (April 17,

1997).

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In our view, the reproposal generally would improve the quality of

the markets for securities subject to Rule 15c2-11 and would help

protect

[[Page 11137]]

investors from fraudulent schemes involving these securities. The

reproposal is focused on the OTC-quoted securities of smaller issuers.

Absent the amendments, we believe that some broker-dealers would submit

quotations without regard to basic information about relatively unknown

issuers. In our view, when broker-dealers must review specified issuer

information before publishing priced quotations, they are less likely

to become unwitting participants in unlawful schemes of unscrupulous

broker-dealers or promoters. Market makers in the securities of

legitimate microcap issuers, as well as the issuers themselves, also

would benefit from improving the integrity of this market sector. One

benefit of the reproposal is that the scope of the Rule will be revised

so that broker-dealers will not have to obtain information about those

securities that satisfy any one the proposed alternative tests.

We also believe that the amendments will serve an important

surveillance function. Currently, only the first broker-dealer quoting

a security in a quotation medium must gather, review, and preserve the

information. The amendments will require the first broker-dealer

initiating any quotation and all broker-dealers initiating priced

quotations thereafter to satisfy the Rule's information review

requirements. Moreover, under NASD Rule 6740,\94\ broker-dealers

demonstrate their compliance with that rule by filing the Rule 15c2-11

information with the NASD. Recently, the review of Forms 211 filed with

the NASD has resulted in a number of Commission trading suspensions and

other enforcement actions.

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\94\ NASD Manual, Marketplace Rules, Rule 6740.

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The amendments require broker-dealers publishing quotes in

compliance with the Rule to provide the information upon request to any

customer, prospective customer, other broker-dealers, or information

repository unless the information is available through a government

sponsored database. This amendment will help make information about

non-reporting issuers more widely available to the public.

We also believe that the amendments will ease significantly the

Rule's recordkeeping requirement because broker-dealers will not have

to retain information that is available on the Commission's EDGAR

system or on the information systems of other federal or state

authorities. Access to EDGAR and similar government-sponsored

information systems is free on the Internet. Given that approximately

60% of securities on the OTC Bulletin Board and Pink Sheets are issued

by reporting companies, whose reports are included on EDGAR, a

significant recordkeeping cost savings to broker-dealers should result.

We do not have the data to quantify the value of the benefits

described above. We seek comments on the value of these benefits and on

any benefits, not already identified, that may result from the adoption

of the amendments.

B. Costs

We anticipate that the elimination of the piggyback provision will

create the most significant costs that the industry will incur.

Currently, only those broker-dealers that publish quotations during the

first 30 days of the security's trading are required to obtain and

review the specified information before they initiate quotations. As

reproposed, the Rule will continue to require the first broker-dealer,

before initiating a priced or unpriced quotation for a covered OTC

security in a quotation medium, to review the specified information.

Thereafter, the reproposed Rule will impose the review requirement only

on broker-dealers publishing priced quotations, including in connection

with the annual review requirement. Of course, if the Commission

suspends trading under Exchange Act Section 12(k) for any of the

issuer's securities, the Rule's requirements are triggered.

The first broker-dealer, before initiating any quotation for a

covered OTC security, is currently required to incur the cost of having

to gather and review the issuer information. As a result of the

amendments, that broker-dealer will incur the cost to update that

information annually if it continues to publish priced quotations.

Thereafter, any broker-dealer publishing priced quotations for a

covered OTC security will incur costs when it first publishes a priced

quotation and when it conducts the required annual review. To the

extent a broker-dealer does not already have the required information,

it will incur costs for the collection and review of this information.

Moreover, a broker-dealer also will incur costs associated with

creating the records required by the Rule and retaining the Rule's

required information for the specified period of time under the

amendment to Rule 17a-4.

We estimate that approximately 60% of the issuers of OTC stocks are

reporting issuers, while the remaining 40% are non-reporting issuers.

Based on this assumption, broker-dealers publishing priced quotations

for the OTC securities of reporting issuers should be able to obtain

the prescribed information required by the reproposed Rule from the

Commission's EDGAR system and therefore should incur minimal costs to

comply with the Rule. We believe that it will take a broker-dealer a

maximum of 4 hours to collect, review, record, retain, and supply to

the NASD the information pertaining to a reporting issuer, and a

maximum of 8 hours to collect, review, record, retain, and supply to

the NASD the information pertaining to a non-reporting issuer.\95\ We

estimate that it will cost a broker-dealer an average cost of $40 per

hour (based on a blended compensation rate for clerical and supervisory

compliance staff) to obtain and review the necessary information

required by the Rule.\96\

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\95\ We computed these cost estimates after reviewing, among

other sources, responses to a survey of broker-dealers conducted by

the NQB about issues raised in the Proposing Release. The results of

the NQB's survey are available in File No. S7-3-98 at the

Commission's Public Reference Room, 450 Fifth Street N.W.,

Washington, D.C. 20549.

\96\ The cost estimate assumes that clerical staff are paid at

an average rate of $15 per hour and supervisory compliance staff are

paid at an average rate of $100 per hour. The blended compensation

rate assumes that 70% of the time is clerical and 30% is supervisory

compliance [(0.7 x $15) + (0.3 x $100) = $40].

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We recently approved changes to NASD Rules 6539 and 6540 to limit

the quotations on the OTC Bulletin Board to securities of issuers that

are current in their reports filed with us or other regulatory

authority, and to prohibit NASD members from quoting a security on the

OTC Bulletin Board unless the issuer has made current filings with

us.\97\ While these NASD Rule changes may result in more issuers

choosing to become reporting issuers in order to continue to qualify

for quotation on the OTC Bulletin Board, we are at this time unable to

adequately quantify the cost impact or burden that the reproposal

imposes in relation to these rule changes. However, we believe that,

generally, any increase in the number of reporting issuers subject to

the Rule will cause a reduction in the number of the burden hours and

associated costs. We are of the view that because reporting issuer

information is readily available from the Commission's EDGAR system

and, because we estimate that broker-dealers only have to spend 4 hours

reviewing reporting issuer information, instead of the estimated 8

hours to review non-reporting issuer information, the reduced time

spent reviewing issuer information will result in lower costs to

broker-dealers.

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\97\ See OTC Bulletin Board Release.

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However, broker-dealers publishing priced quotations for the OTC

securities of non-reporting issuers are likely to incur greater costs

in complying with

[[Page 11138]]

the Rule. For purposes of the Paperwork Reduction Act, we estimate the

total burden hours for all broker-dealers to be 143,278 hours and the

total cost to be $5,731,120. Some broker-dealers may not want to expend

the time or the cost to obtain the non-reporting issuer information and

may therefore choose not to publish priced quotes. On the other hand,

the costs broker-dealers incur in obtaining and reviewing information

about non-reporting issuers may be reduced if one or more on-line

information repositories of this information are established. We seek

comments on the reasonableness of these estimates for annual hourly and

dollar costs to broker-dealers. We also seek comments on the extent to

which these cost estimates will be affected by the new NASD rule to

limit the OTC Bulletin Board to the securities of issuers current in

their periodic filings.

Although Rule 15c2-11 does not regulate issuers, there may be some

indirect costs imposed on issuers, particularly non-reporting issuers,

because they may be contacted by broker-dealers to provide the

information specified in the Rule. Non-reporting issuers would incur

the cost of having to collect and provide the requested information to

each requesting broker-dealer. However, we are assuming that non-

reporting issuers maintain their financial information in compliance

with prevailing accounting standards and, in most instances, would have

available updated financial information prepared in accordance with

generally accepted accounting principles (GAAP). The NASD has informed

us that financial statements submitted with the Form 211 generally are

prepared in accordance with GAAP, and many are audited.

Regarding start-up, operating, and maintenance costs, we believe

that broker-dealers that collect, review, and retain the information

currently required by the Rule, would incur only marginal start-up,

operating, and maintenance costs (i.e., to expand systems already in

place) to comply with the Rule as reproposed. Further, some broker-

dealers already may be collecting the required information for other

purposes. However, we believe that some broker-dealers may not have

adequate systems in place to retain issuer information and would,

therefore, incur start-up, operating, and maintenance costs in order to

comply with the requirements of the amendments.

We estimate that about 100 broker-dealers in the aggregate will

incur start-up, operating, and maintenance costs of $100,000

($1,000 x 100) associated with reporting issuer information, and

$400,000 ($4,000 x 100) associated with non-reporting issuer

information. Total start-up, operating and maintenance cost burden for

broker-dealers is estimated to be $500,000 ($100,000+$400,000) or an

average of $5,000 for each broker-dealer.

We assume that non-reporting issuers, because they generally

maintain their financial information in compliance with prevailing

accounting standards, will not incur any start-up costs to prepare the

required information in response to broker-dealers' requests. We also

believe that reporting issuers of covered OTC securities will not incur

start-up costs as a result of the amendments since such issuers already

provide the required information to the Commission under the federal

securities laws. Therefore, we believe issuers will not incur start-up

costs as a consequence of the adoption of the Rule amendments, as

reproposed.

Finally, the Rule, as modified by the amendments, could affect the

liquidity of some securities. If broker-dealers are unable to obtain

the required issuer information, they would have to refrain from

publishing priced quotations in that security. This could make it

somewhat more difficult for investors to determine what prices other

market participants are willing to bid or offer for the security,

although they could call a broker-dealer publishing a name-only

quotation to obtain a priced quotation. Thus, while investors are still

able to obtain price information, the cost of obtaining this

information may increase. However, under the reproposal, after the

first quotation for a security is published, broker-dealers could

publish unpriced quotes without complying with the Rule's provisions.

In addition, broker-dealers could rely on the exception that permits

them to publish quotes representing unsolicited customer orders.

Any effect on liquidity must be weighed against the benefit of

reducing instances of fraud or manipulation. Greater investor access to

information should result in more informed investor decisions and

potentially could result in additional trading, and thus liquidity, for

covered OTC securities. We have modified the proposals to permit

broker-dealers to publish unpriced quotations for OTC securities

without reviewing the specified information (other than the first

broker-dealer to quote the security). This revision responds to the

views of those commenters that expressed concerns about the Rule's

impact on liquidity.

VII. Initial Regulatory Flexibility Act

We have prepared an Initial Regulatory Flexibility Analysis (IRFA)

\98\ regarding the amendments to Rule 15c2-11 and the reproposed

companion amendment to Rule 17a-4 under the Exchange Act. The following

summarizes the IRFA.

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\98\ See 5 U.S.C. 603.

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As discussed in the IRFA, the amendments specify the information

that a broker-dealer must gather and review before publishing

quotations for covered OTC securities. The reproposed Rule is intended

to prevent broker-dealers from publishing quotations for covered OTC

securities in a quotation medium without obtaining, reviewing, and

retaining current information about the issuer. The reproposed Rule

applies primarily to priced quotations.

The amendments to the Rule would affect all broker-dealers,

including a number of small broker-dealers, seeking to publish

quotations for covered OTC securities.\99\ The number of small broker-

dealers that publish quotations for covered OTC securities in quotation

mediums is not known at this time. However, we recently estimated that

about 13% of all registered broker-dealers would be characterized as

small.\100\ We estimate that, at any given time, there are

approximately 400 broker-dealers, including small broker-dealers, that

submit quotations for covered OTC securities. Therefore, based on this

estimate, we believe that approximately 52 small broker-dealers

(400 x 13%) would be affected by the amendments. In fact, it is

possible that few, if any, broker-dealers publishing quotations for

covered OTC securities would be classified as a small business, because

as market makers they typically require more than $500,000 in capital

to support their market making activities. In the Proposing Release, we

solicited but did not receive any comments on the number of small

broker-dealers that would be affected by the amendments. We are again

soliciting comments on the number of small broker-dealers that would be

affected by the amendments.

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\99\ For purposes of the regulatory flexibility analysis, a

broker-dealer is considered ``small'' if its total capital is less

than $500,000, and is not affiliated with a broker-dealer that has

$500,000 or more in total capital.

\100\ See Securities Exchange Act Release No. 40122 (June 24,

1998), 63 FR 35508 (adopting amendments to the definitions of

``small business'' or ``small organization'' under the Investment

Company Act of 1940, the Investment Advisers Act of 1940, the

Securities Exchange Act of 1934, and the Securities Act of 1933).

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The amendments would indirectly have an impact on those small

issuers that may be requested to provide the information required by

the Rule to

[[Page 11139]]

broker-dealers publishing quotations in those issuers' securities.

Based on Exchange Act Rule 0-10(a), a small issuer is one that on the

last day of its most recent fiscal year had total assets of $5,000,000

or less. In the Proposing Release, we solicited but did not receive any

comments on the total number of issuers of covered OTC securities; the

number (or percentages) of these issuers that are small issuers; and

the total number (or percentage) of small issuers of covered OTC

securities that are reporting and non-reporting issuers, respectively.

We are again seeking comments on these issues.

The IRFA notes that the availability of the Commission's EDGAR

system and similar systems sponsored by federal or state authorities

should assist broker-dealers in collecting and reviewing the reports

required by the Rule. In addition, the prevalent use of computers and

the Internet, on which access to EDGAR is free, should also reduce the

recordkeeping and compliance costs for all broker-dealers by automating

the information collection and retention process.

The IRFA recognizes that the amendments indirectly affect certain

issuers, particularly non-reporting issuers. The amendments would

require the first broker-dealer to publish any quotation for a covered

security to review the Rule's information. Thereafter, other broker-

dealers must review information about the issuer when they first

publish or resume publishing a priced quotation for a covered security,

and all broker-dealers publishing priced quotations must conduct an

annual review. We are not aware of any information repository,

electronically accessible or otherwise, now in existence that covers

all of the information about non-reporting issuers that broker-dealers

must gather to comply with the Rule. Consequently, non-reporting

issuers must collect and provide the required information to each

requesting broker-dealer. We assume that non-reporting issuers maintain

their financial information in compliance with generally accepted

accounting standards and that the costs incurred by non-reporting

issuers to prepare the necessary information in response to broker-

dealers' requests would be minimal.

The IRFA discusses the kinds of possible alternative proposals that

we have considered. These include, among others, creating differing

compliance or reporting requirements or timetables that take into

account the resources available to small entities, and whether such

entities could be exempted from the reproposed rule, or any part

thereof. Therefore, having considered the foregoing alternatives in the

context of the amendments, we do not believe they would accomplish the

stated objectives of the proposal.

We encourage the submission of written comments regarding any

aspect of the IRFA. In particular, we seek comments on: (i) the number

of small entities that would be affected by the amendments, including

the number of small broker-dealers and issuers; (ii) the number of

small entities that are issuers of covered OTC securities; and (iii)

the number of small entities that are reporting and non-reporting

issuers of covered securities, respectively. Comments should also

specify the costs of compliance with the amendments, and suggest

alternatives that would meet the objectives of the amendments in a more

effective manner, while imposing costs equal to or less than the

amendments. In describing the nature of any impact that the amendments

would have, empirical data supporting these views should be provided.

For purposes of the Small Business Regulatory Enforcement Fairness

Act of 1996, we are also requesting information regarding the potential

impact of the proposed amendments on the economy on an annual basis. In

particular, comments should address whether the proposed changes, if

adopted, would have a $100,000,000 annual effect on the economy, cause

a major increase in costs or prices, or have a significant adverse

effect on competition, investment, or innovations. Commenters should

provide empirical data to support their views.

Comments should be submitted in triplicate to Jonathan G. Katz,

Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,

Washington, DC 20549. Comments may also be submitted electronically at

the following E-mail address: [email protected]. All comment

letters should refer to File No. S7-5-99; this file number should be

included on the subject line if E-mail is used. Comment letters will be

available for public inspection and copying in the Commission's Public

Reference Room, 450 Fifth Street, NW, Washington, DC 20549.

Electronically submitted comment letters will also be posted on the

Commission's Internet website (http://www.sec.gov).

A copy of the Initial Regulatory Flexibility Analysis may be

obtained by contacting Chester A. McPherson, Office of Risk Management

and Control, Division of Market Regulation, Securities and Exchange

Commission, 450 Fifth Street, NW, Washington, DC 20549, at (202) 942-

0772.

VIII. Paperwork Reduction Act

Certain provisions of the amendments contain ``collection of

information'' requirements within the meaning of the Paperwork

Reduction Act of 1995 (PRA).\101\ The title for the collection of

information is: ``Publication or submission of quotations without

specified information.'' Accordingly, the collection of information

requirements contained in the Rule and the initial proposal were

submitted to the Office of Management and Budget (OMB) for review, in

accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11, and were approved

by OMB. The Rule has been assigned OMB Control No. 3235-0202.\102\

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\101\ 44 U.S.C. 3501 et seq.

\102\ The Commission notes that a separate PRA filing was not

prepared to reflect the proposed companion changes to Rule 17a-4.

The burden hours and costs described for the Rule include and

account for the anticipated burdens that may arise as a result of

the proposed change to Rule 17a-4.

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A. Collection of Information Under the Amendments

As reproposed, the Rule would require the first broker-dealer,

before initiating a priced or unpriced quotation for a covered OTC

security in a quotation medium, to gather and review the issuer

information, and to review updated information annually if it continues

to publish priced quotations. This review requirement would also be

imposed on any other broker-dealer publishing a priced quotation for a

covered OTC security. Broker-dealers submitting priced quotations for

the security would be required to collect, review, and retain the

Rule's specified information annually. Broker-dealers would also have

to record the sources of their information, the date their review

occurred, and the person responsible for the review. Also, the

proposals would require broker-dealers publishing quotations for a

covered OTC security to collect, review, and retain more information

than is required currently.

Under Rule 15c2-11, the information that is collected pursuant to

the Rule must be submitted to the NASD at least three business days

before any quotation is published.\103\ Finally, the amendments would

require broker-dealers to provide the information specified to any

customer, prospective customer, other broker-dealer or information

repository that requests it.

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\103\ The NASD has a rule requiring broker-dealers that initiate

or resume quotations for covered equity securities to submit

verification that they have collected the information necessary to

comply with NASD requirements, as well as Rule 15c2-11. See NASD

Manual, Marketplace Rules, Rule 6740.

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[[Page 11140]]

B. Proposed Use of Information

Broker-dealers must collect and review the information required

under the amendments if they publish the first quotation for a covered

OTC security or if they publish priced quotations. Moreover, the Rule

requires that broker-dealers have a reasonable basis for believing that

the information about the issuer and related persons is accurate and

from reliable sources. This information collection protects investors

by deterring fraudulent or manipulative quotations for thinly-traded

securities whose issuers are relatively unknown. Because information

about these issuers is not widely disseminated and often is not

current, fraudulent and manipulative schemes are easier to perpetrate.

Moreover, this collection of information helps broker-dealers guard

against becoming unwitting participants in fraudulent or manipulative

schemes. The Rule 15c2-11 information gathering requirements also serve

an important surveillance function for both the Commission and the

NASD. Recently, the Commission has used the Rule 15c2-11 information to

suspend trading in the issuers' securities pursuant to Section 12(k) of

the Exchange Act where publicly available information about the issuer

raised questions about the accuracy and adequacy of the issuers'

disclosures.

C. Respondents

The amendments would apply to those broker-dealers that publish

quotations for a covered OTC security in a quotation medium as of

specified quotation events. The amendments also indirectly affect

issuers that are asked by broker-dealers to provide this information.

Most of the Rule 15c2-11 information that would be required for issuers

that publicly file periodic reports with the Commission (reporting

issuers) is available electronically on EDGAR or through the Internet.

Thus, the reproposal is likely to have a greater paperwork burden when

broker-dealers publish quotations for the securities of issuers that do

not participate in the Commission's public reporting program, (i.e.,

non-reporting issuers) or do not file reports with other federal or

state regulatory authorities.

D. Total Annual Reporting and Recordkeeping Burden

The amendments would require broker-dealers to collect, review,

retain, and record certain issuer and supplemental information when

they are the first broker-dealer to quote the security; when they first

publish priced quotations for a covered OTC security; and if they are

publishing priced quotations as of the annual review requirement. The

discussion below estimates the collection of information burden one

year after the anticipated date of effectiveness of the amendments when

broker-dealers that publish quotes for covered OTC securities

qualifying for the reproposed transition provision must fully comply

with the Rule's information requirements. The discussion below also

provides estimates for the same period for issuers that may be

contacted to provide the information. In particular, the following

analysis measures the cost to broker-dealers of: (1) collecting,

reviewing, recording, and retaining the required issuer information and

supplying it to the NASD; (2) responding to requests for issuer

information from customers, prospective customers, other broker-dealers

and information repositories; and (3) starting up or maintaining

systems for the collection and retention of issuer information. The

analysis below also addresses the indirect cost to issuers who must

furnish information to requesting broker-dealers.

1. Burden-Hours for Broker-Dealers

Based on information provided by the NASD and NQB, we estimate that

as of December 31, 1998, there were approximately 6,625 covered OTC

securities quoted in the OTC Bulletin Board and 3,225 quoted in the

Pink Sheets for a total of 9,850 covered OTC securities.\104\ We also

believe that approximately 10% (985) of these securities would not be

subject to the Rule, based on the exceptions that are included in this

reproposing Release and that approximately 8,865 securities would be

subject to the Rule. According to NASD estimates, we also believe that

approximately 1,400 new applications from broker-dealers to initiate or

resume publication of covered equity securities in the OTC Bulletin

Board and/or the Pink Sheets or other quotation mediums were approved

by the NASD for the 1998 calendar year. We have estimated that 60% of

the covered OTC securities were issued by reporting issuers, while the

other 40% were issued by non-reporting issuers. We also estimate that

broker-dealers publish priced quotations for approximately 90% of the

covered OTC securities quoted in the OTC Bulletin Board and publish

priced quotes for about 10% of the covered OTC securities quoted in the

Pink Sheets. According to NASD and NQB estimates, we believe that, on

average, there are approximately 4.3 broker-dealers publishing priced

quotations for each covered OTC security, and that at any given time

there are no more than 400 broker-dealers that submit priced quotations

for covered OTC securities. Finally, the reproposed Rule's transition

provision would not subject the broker-dealers quoting the securities

of the estimated 8,865 potentially covered securities currently quoted

in the OTC Bulletin Board and/or the Pink Sheets until the annual

review requirement is triggered. Therefore, only those new applications

that are submitted after the reproposal becomes effective would be

subject to the initial review requirement.

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\104\ We recognize that there may be covered OTC securities

quoted in other quotation mediums, but at this time we do not have

the empirical data to include them in our estimations.

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Because the amendments would require the first broker-dealer

publishing a quotation, priced or unpriced, for a particular security

to collect issuer information, we believe that during the first year

after the amendments are effective, broker-dealers that are publishing

the first quotations (whether priced or unpriced) for covered OTC

securities in the aggregate would have to conduct approximately 1,260

initial reviews of issuer information.\105\ We believe that it will

take a broker-dealer about 4 hours to collect, review, record, retain,

and supply to the NASD the information pertaining to a reporting

issuer, and about 8 hours to collect, review, record, retain, and

supply to the NASD the information pertaining to a non-reporting

issuer.

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\105\ This estimate is based on the assumption that the NASD

will, in the first year after the reproposal becomes effective,

approve 10% fewer Form 211 filings than the 1,400 applications

approved in 1998.

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We therefore estimate that after the reproposal has become

effective, the broker-dealers who are the first to publish the first

quote for a covered OTC security of a reporting issuer (priced or

unpriced) will require 3,024 hours (1,260 x 60% x 4) to collect,

review, record, retain, and supply to the NASD the information required

by the Rule as reproposed. We estimate that after the reproposal has

become effective the broker-dealers who are the first to publish the

first quote for a covered OTC security of a non-reporting issuer

(priced or unpriced) will require 4,032 hours (1,260 x 40% x 8) to

collect, review, record, retain, and supply to the NASD the information

required by the Rule as reproposed. We therefore estimate the total

annual burden hours for the first broker-dealers to be 7,056 hours

(3,024+4,032).

The Rule also would require an annual review for broker-dealers

[[Page 11141]]

publishing priced quotations for covered OTC securities. We have

estimated that each issuer is quoted by about 4.3 broker-dealers. We

are assuming that of the universe of approximately 8,865 potentially

affected covered OTC securities, broker-dealers would publish priced

quotations for approximately 90% of the OTC Bulletin Board securities

or 5,366 securities ((6,625 x 90%) x 90%) and for 10% of the Pink Sheet

securities or 290 securities (3,225 x 90%) x 10%).\106\ Therefore, we

estimate that priced quotations will be published for approximately

5,656 (5,366+290) covered OTC securities. Given that about 60% of OTC

stocks are issued by reporting issuers and the other 40% by non-

reporting issuers, and that it would take a broker-dealer 4 and 8

hours, respectively, to meet the requirements of the reproposed Rule

for these issuers, we estimate the burden hours as follows: for

reporting issuers we estimate approximately 58,375 hours

(3,394 x 4.3 x 4), and for non-reporting issuers we estimate

approximately 77,847 hours (2,263 x 4.3 x 8). Therefore, we estimate

the total annual paperwork burden hours for all broker-dealers to be

143,278 hours (7,056+58,375+77,847).

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\106\ Some securities have priced quotations published in both

of these quotation systems. To avoid double counting, such

securities are counted as OTC Bulletin Board securities.

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2. Burden-Hours for Issuers

Regarding the burden on issuers to provide broker-dealers with the

required information, we believe that the 5,319 issuers of covered OTC

securities (based on our estimate that 60% of the 8,865 potentially

covered OTC securities are reporting issuers) will not bear any

additional hourly burdens under the amendments because these issuers

already report the required information to the Commission through

mandated periodic filings. Further, reporting issuer information is

widely available to broker-dealers through a variety of media. However,

non-reporting issuer information is not widely available. Consequently,

these issuers must provide the information required by the amendments

to requesting broker-dealers before quotations in their securities can

be published. We believe that the 3,546 issuers of non-reporting

covered OTC securities (based on an estimate that 40% of the 8,865

potentially covered OTC securities are non-reporting ) will spend an

average of 9 hours each to collect, prepare, and supply the information

required by the proposals to the first broker-dealer that requests this

information. Thereafter, we estimate that it will take an average of 1

hour for an issuer to provide the same information to the remaining 3.3

broker-dealers that request the information. Accordingly, we estimate

the 3,546 non-reporting issuers annually will incur 31,914 hours

(3,546 x 9 x 1) to comply with the first broker-dealer's request for

information, and 11,702 hours (3,546 x 1 x 3.3) to comply with the

subsequent 3.3 broker-dealer requests for an annual total of 43,616

burden hours (31,914+11,702). On average, therefore, each non-reporting

issuer would spend approximately 12.3 burden hours (43,616/3,546) per

year to comply with these requests.

3. Total Burden-Hour Costs to Broker-Dealers and Issuers

We estimate the collection of information will require

approximately 186,894 burden hours annually (143,278 + 43,616) from

approximately 3,946 respondents (400 broker-dealers and 3,546 issuers).

4. Capital Cost to Broker-Dealers and Issuers

We believe that broker-dealers that now collect, review, and retain

the information required by the current Rule will not incur any

significant start-up costs to expand systems already in place. Further,

broker-dealers that are collecting the information required by the

proposals for other purposes also will not incur significant start-up

costs. However, we believe some broker-dealers may not have adequate

systems in place to retain issuer information and will incur start-up

costs in order to comply with the requirements of the amendments. We

assume that of the 400 broker-dealers that provide quotations for

covered OTC securities, about 100 broker-dealers will incur additional

start-up costs, while the remaining 300 broker-dealers will only incur

incremental costs. Because the information for reporting issuers will

be generally available on EDGAR and such availability satisfies the

recordkeeping requirements of the proposals, we are assuming that the

start-up costs associated with retaining information on reporting

issuers will average $1,000 per broker-dealer, whereas the same costs

will be $4,000 per broker-dealer for non-reporting issuer information.

We estimate that broker-dealers in the aggregate will incur start-up,

operating, and maintenance costs of $100,000 ($1,000 x 100)

associated with reporting issuer information, and $400,000 ($4,000 x

100) associated with non-reporting issuer information. Total start-up,

operating and maintenance cost burden for broker-dealers is estimated

to be $500,000 ($100,000 + $400,000) or an average of $5,000 for each

broker-dealer.

We assume that non-reporting issuers, because they maintain their

financial information in compliance with prevailing accounting

standards, will not incur any start-up costs to prepare the required

information in response to broker-dealers' requests. We also believe

that reporting issuers of covered OTC securities will not incur start-

up costs as a result of the amendments since such issuers already

provide the required information to the Commission under the federal

securities laws. Therefore, we believe issuers will not incur start-up

costs as a consequence of the adoption of the Rule amendments, as

reproposed.

E. General Information About the Collection of Information

The collection of information under the amendments is mandatory and

would be required at periodic intervals: by the first broker-dealer to

publish any quote for a covered OTC security, by broker-dealers

publishing priced quotes thereafter, and by broker-dealers publishing

priced quotes at the time of the annual review requirement. Broker-

dealers would be required to retain the information they collect for a

period of not less than three years. Information collected under the

Rule would not be kept confidential. Any agency may not conduct or

sponsor, and a person is not required to respond to, a collection of

information unless it displays a currently valid control number.

F. Request for comments

Pursuant to 44 U.S.C. 3506(c)(2)(B), we are soliciting comments to:

(i) evaluate whether the reproposed collection of information is

necessary for the proposed performance of the functions of the agency,

including whether the information will have practical utility;

(ii) evaluate the accuracy of our estimates of the burden of the

reproposed collection of information;

(iii) enhance the quality, utility, and clarity of the information

to be collected; and

(iv) minimize the burden of collection of information on those who

are to respond, including through the use of automated collection

techniques or other forms of information technology. We seek data about

quotations for covered OTC securities in OTC quotation mediums other

than the OTC Bulletin Board and the Pink Sheets. We seek comments on

our estimate of the number of issuers affected by the reproposed Rule

and on the time estimates made for broker-dealers and

[[Page 11142]]

issuers to comply with the information collection requirements.

Persons desiring to submit comments on the collection of

information requirements should direct them to the Office of Management

and Budget, Attention: Desk Officer for the Securities and Exchange

Commission, Office of Information and Regulatory Affairs, Room 10102,

New Executive Office Building, Washington, DC 20503, and should also

send a copy of their comments to Jonathan G. Katz, Secretary,

Securities and Exchange Commission, 450 Fifth Street, NW, Washington,

DC 20549, and refer to File No. S7-5-99. OMB is required to make a

decision concerning the collections of information between 30 and 60

days after publication of this release in the Federal Register, so a

comment to OMB is best assured of having its full effect if OMB

receives it within 30 days of this publication.

IX. Statutory Basis and Text of Proposed Amendments and Rule

The rule amendments are being proposed pursuant to Sections 3,

10(b), 15(c), 15(g), 17(a), and 23(a) of the Securities Exchange Act of

1934, 15 U.S.C. Secs. 78c, 78j(b), 78o(c), 78o(g), 78q(a), and 78w(a).

List of Subjects in 17 CFR Part 240

Broker-dealers, Fraud, Reporting and recordkeeping requirements,

Securities.

Text of Reproposed Rule

In accordance with the foregoing, Title 17, chapter II, part 240 of

the Code of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF

1934

1. The authority citation for part 240 continues to read, in part,

as follows:

Authority: 15 U.S.C. Secs. 77c, 77d, 77g, 77j, 77s, 77z-2,

77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1,

78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x,

78ll(d), 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-

4 and 80b-11, unless otherwise noted.

* * * * *

2. Section 240.15c2-11 and the section heading are revised to read

as follows:

Sec. 240.15c2-11 Publication or submission of quotations without

current information.

Preliminary Note: As a means reasonably designed to prevent

fraudulent, deceptive, or manipulative acts or practices, this

section prevents a broker or dealer from publishing a quotation for

a security or, directly or indirectly, submitting a quotation for a

security for publication in a quotation medium, unless the broker or

dealer complies with the provisions of this section or relies on an

exception contained in paragraph (h) of this section. As used in

this section, the term ``you'' refers to a broker or dealer.

(a) When a broker or dealer must comply with this section. You must

comply with paragraph (b) of this section when you publish:

(1) The first quotation for a security;

(2) The first quotation following the termination of a Commission

trading suspension ordered pursuant to section 12(k) of the Act (15

U.S.C. 78l(k)) in any security of the issuer of the suspended security;

(3) Your first quotation at a specified price for the same security

after another broker or dealer publishes the first quotation for a

security as described in paragraph (a)(1) or (a)(2) of this section;

(4) A quotation at a specified price for a security after a period

of five or more consecutive business days when you did not publish any

quotations at a specified price for that security;

(5) Your first quotation at a specified price for a security after

the date that is four months after the end of the issuer's fiscal year,

unless the issuer is a foreign private issuer; or

(6) Your first quotation at a specified price for a security of a

foreign private issuer after the date that is seven months after the

end of the issuer's fiscal year.

(b) The steps a broker or dealer must take to comply with this

section. For each security in which you publish any of the quotations

listed in paragraph (a) of this section, you must:

(1) Review the issuer information described in paragraph (c) of

this section and the supplemental information described in paragraph

(d) of this section;

(2) Determine that you have a reasonable basis under the

circumstances for believing that the issuer information described in

paragraph (c) of this section, when considered in conjunction with the

supplemental information described in paragraph (d) of this section, is

accurate in all material respects and was obtained from reliable

sources;

(3) Make a record of:

(i) The issuer information described in paragraph (c) of this

section, the supplemental information described in paragraph (d) of

this section, and the sources from which you obtained the information.

You will be considered to have obtained the issuer information

described in paragraphs (c) or (d)(1) of this section if you obtained

it through the EDGAR system, any other federal or state electronic

information system, or an electronic information system operated by an

information repository, and you have the means to access the

information for the period required under Sec. 240.17a-4(b)(11);

(ii) Any significant relationship information described in

paragraph (e) of this section;

(iii) The date that you reviewed the information described in

paragraphs (c), (d), and (e) of this section; and

(iv) The person responsible for your compliance with the

requirements of this section; and

(4) Preserve the records required to be made under paragraph (b)(3)

of this section in accordance with Sec. 240.17a-4(b)(11).

(c) The issuer information that a broker or dealer must review. The

type of information that is considered ``issuer information'' and that

must be reviewed under paragraph (b) of this section depends on the

status of the issuer.

(1) Issuers with a recent public offering. If the issuer filed a

registration statement under the Securities Act (other than a

registration statement on Form F-6 (17 CFR 239.36)) that became

effective less than 90 calendar days before you publish the quotation,

and that is not the subject of a stop order, the issuer information is

the prospectus specified by section 10(a) of the Securities Act (15

U.S.C. 77j(a)).

(2) Issuers with a recent Regulation A offering. If the issuer

filed a notification under Regulation A under the Securities Act (17

CFR 230.251 through 230.263) and was authorized to commence the

offering less than 40 calendar days before you publish a quotation, and

the offering circular provided for under Regulation A is not the

subject of a suspension order, the issuer information is the offering

circular.

(3) Certain reporting issuers. If the issuer is current in filing

annual or semi-annual reports required under section 13 or 15(d) of the

Act (15 U.S.C. 78m or 78o(d)) or section 30(a) of the Investment

Company Act of 1940 (15 U.S.C. 80a-29(a)), the issuer information is

the issuer's most recent annual or semi-annual report and any quarterly

and current reports filed by the issuer after such annual or semi-

annual report. You will be considered in compliance with the

requirement to obtain current reports filed by the issuer if you obtain

all current reports filed by that issuer as of the date that is three

business days before you publish the quotation. However, until the

issuer has filed its first annual or semi-annual report, the issuer

information is:

(i) The prospectus specified by section 10(a) of the Securities Act

(15

[[Page 11143]]

U.S.C. 77j(a)) that was included in a registration statement filed by

the issuer under the Securities Act and that became effective within

the prior 15 months; or

(ii) The registration statement filed by the issuer under section

12 of the Act (15 U.S.C. 78l) that became effective within the prior 15

months (other than a registration statement on Form F-6 (17 CFR

239.36)), and any quarterly and current reports filed by the issuer

after the registration statement became effective.

(4) Certain financial institutions. If the issuer is not required

to file reports under sections 13 or 15(d) of the Act and is a bank or

savings association, as those terms are defined in 12 U.S.C. 1813, the

issuer information is the issuer's most recent annual report and any

subsequent reports filed with the issuer's appropriate Federal banking

agency or State bank supervisor, as those terms are defined in 12

U.S.C. 1813.

(5) Certain exempted insurance companies. If the issuer is exempt

from section 12(g) of the Act (15 U.S.C. 78l(g)) by complying with

section 12(g)(2)(G) of the Act (15 U.S.C. 78l(g)(2)(G)), the issuer

information is the issuer's most recent annual statement referred to in

section 12(g)(2)(G)(i) of the Act (15 U.S.C. 78l(g)(2)(G)(i)).

(6) Other issuers. If the issuer is not covered by paragraphs

(c)(1) through (c)(5) of this section, the issuer information is the

information listed below in paragraphs (c)(6)(i) through (c)(6)(xiii)

of this section. Except as specified in paragraph (c)(6)(xiii) of this

section, this information is presumed to be current if it is as of a

date within 12 months before you publish the quotation and must be the

most current information that you know or have reason to know is

available:

(i) The exact name of the issuer and any predecessor;

(ii) The address and telephone number of the issuer's principal

executive offices;

(iii) The state of incorporation of the issuer, if it is a

corporation;

(iv) The date on which the issuer's fiscal year ends;

(v) For each class of the issuer's securities outstanding:

(A) The exact title of the security;

(B) The par or stated value of the security;

(C) The number of securities or total principal amount outstanding

of the security;

(D) The class and number of securities issuable upon the security's

exercise, exchange or conversion, if applicable; and

(E) The total number of securityholders of record for the security

as of the end of the issuer's most recent fiscal year or a more recent

date;

(vi) The exact title and class of the security to be quoted;

(vii) The name, address and telephone number of the transfer agent;

(viii) A description of the issuer's business and facilities;

(ix) A description of the issuer's products or services;

(x) The full names and business addresses of the executive

officers, directors, general partners, promoters, and control persons

of the issuer, and the number of securities of each class of the

issuer's securities that are beneficially owned by each such person as

of the end of the issuer's last fiscal year or a more recent date;

(xi) The following information:

(A) A description of any of the following actions to which any

executive officer, director, general partner, promoter, or control

person of the issuer has been the subject during the prior five years:

(1) A conviction in a criminal proceeding or named as a defendant

in a pending criminal proceeding (excluding traffic violations and

other minor offenses);

(2) The entry of an order, judgment, or decree, not subsequently

reversed, suspended or vacated, by a court of competent jurisdiction

that permanently or temporarily enjoins, bars, suspends or otherwise

limits involvement in any type of business, securities, commodities, or

banking activities;

(3) A finding or judgment by a court of competent jurisdiction (in

a civil action), the Commission, the Commodity Futures Trading

Commission, or a state securities regulator of a violation of federal

or state securities or commodities law, which has not been reversed,

suspended, or vacated; and

(4) The entry of an order by a self-regulatory organization that

permanently or temporarily bars, suspends or otherwise limits

involvement in any type of business or securities activities; or

(B) A statement from the issuer that no executive officer,

director, general partner, promoter, or control person of the issuer is

the subject of any of the actions listed in paragraphs (c)(6)(xi)(A)(1)

through (4) of this section; or

(C) A description of the steps you have taken to obtain from the

issuer the information needed to comply with paragraphs (c)(6)(xi)(A)

or (c)(6)(xi)(B) of this section and a statement that the issuer failed

or refused to provide this information;

(xii) The following information:

(A) A description of any of the following events involving the

issuer, its predecessor, or any of its majority-owned subsidiaries that

occurred in the prior two years:

(1) A change in control;

(2) An increase of 10% or more of the same class of outstanding

equity securities;

(3) A merger, acquisition, or business combination;

(4) An acquisition or disposition of significant assets;

(5) A bankruptcy proceeding; and

(6) The delisting of securities by any securities exchange or

Nasdaq; or

(B) A statement from the issuer that the issuer, its predecessor,

and its majority-owned subsidiaries have not been the subject of any of

the actions or events listed in paragraphs (c)(6)(xii)(A)(1) through

(6) of this section; or

(C) A description of the steps you have taken to obtain from the

issuer the information needed to comply with paragraphs (c)(6)(xii)(A)

or (c)(6)(xii)(B) of this section and that the issuer failed or refused

to provide this information; and

(xiii) The financial information listed below in paragraphs

(c)(6)(xiii)(A) or (c)(6)(xiii)(B) and (c)(6)(xiii)(C) of this section:

(A) If the issuer is not a foreign private issuer, the issuer's

most recent balance sheet, statement of cash flows, statement of

comprehensive income, and statement of operations (income), prepared in

accordance with U.S. generally accepted accounting principles. Unless

you know or have reason to know that more current information is

available, this information will be presumed to be current if:

(1) The balance sheet is as of a date that is less than 15 months

before you publish the quotation;

(2) The statement of cash flows, statement of comprehensive income,

and statement of operations (income) are for the 12 months preceding

the date of such balance sheet; and

(3) If the balance sheet is as of a date that is more than 6 months

before you publish the quotation, it must be accompanied by an

additional statement of cash flows, statement of comprehensive income,

and statement of operations (income) for the period from the date of

such balance sheet to a date that is less than 6 months before you

publish the quotation.

(B) If the issuer is a foreign private issuer, the issuer's most

recent balance

[[Page 11144]]

sheet and statement of operations (income), and to the extent prepared

by the issuer, statement of cash flows, statement of comprehensive

income, and statement of changes in shareholders' equity, prepared in

accordance with a comprehensive body of accounting principles. Unless

you know or have reason to know that more cur

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