SEC Concerns with the “Piggyback” Exception of Rule 15c2-11 -

Rule 15c2-11 (“Rule 15c2-11”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), sets forth procedures for the submission and publication of quotations by broker-dealers for certain over-the-counter equity (“OTC”) securities. The purpose of Rule 15c2-11 is to prevent fraudulent, deceptive or manipulative acts or practices among broker-dealers in publishing securities quotes for securities that are traded on exchanges other than U.S. national securities exchanges. Rule 15c2-11 requires broker-dealers to review and maintain specified information about the issuer. Speaking in the context of the secondary market for the securities of privately held companies, Luis Aguilar, former Commissioner of the Securities and Exchange Commission (the “SEC”), voiced concern that the “piggyback exception” of Rule 15c2-11 may compromise the integrity of market quotations and hinder the creation of a fair and efficient secondary market by allowing broker-dealers to rely on potentially stale issuer information.1

Pursuant to this exception, if an OTC security has been quoted during the past 30 calendar days, and during those 30 days the OTC security was quoted on at least 12 days without more than four consecutive business days without quotations, then a subsequent broker-dealer may “piggyback” off of this previous quotation and does not need to meet the requirements of Rule 15c2-11 (which we describe below). The exception assumes that regular and frequent quotations for an OTC security generally reflect market supply and demand and are based on independent and informed decisions, an assumption that has since been challenged. Given that in recent years more and more companies are choosing to remain privately held longer and thus deferring their IPOs and relying on exempt offerings, concerns have arisen with respect to the secondary private markets for the securities of these companies as to which there may be limited information. In recent statements, SEC Chair White expressed some concerns regarding the availability of, and the quality of, information regarding companies that are not Exchange Act-reporting. Chair White also noted that the integrity of secondary markets depended on robust and timely disclosures.