The Securities and Exchange Commission (the SEC or Commission) recently adopted amendments (the Amendment) to Rule 15c2-11 (the Rule) of the Securities Exchange Act of 1934 (the Exchange Act). Generally, in an effort to prevent fraudulent, deceptive or manipulative acts or practices related to the quote, the Rule imposes restrictions on a broker-dealer’s ability to publish or submit securities quotations for unlisted companies. Specifically, the Rule governs the requirements that broker-dealers must satisfy before they publish or submit securities quotations for unlisted companies in a quotation medium other than a national securities exchange – in other words, the over-the-counter (OTC) market. The Amendment adds additional investor protections by mandating that investors have access to the current and publicly available information of issuers whose securities trade on the OTC markets, and it further requires broker-dealers to confirm that certain information about the issuer and its security is current and publicly available before quoting that security.

This Client Alert discusses these additional requirements set forth in the Amendment.

Key Takeaways

The Amendment:

• Requires documents and information about an issuer to be current and publicly available for a broker-dealer or a qualified interdealer quotation system (a qualified IDQS) to review prior to quoting such issuer’s securities in the OTC market.
• Narrows reliance on certain exceptions to the Rule, including the piggyback exception.
• Adds new exceptions for the quotation of lower-risk securities.
• Amends the existing recordkeeping requirements.
• Adds new definitions.
• Amends the SEC’s exemptive authority.

Background

The Rule was originally adopted in 1971 and was last substantively amended in 1991. In large part, the amended Rule recognizes the important “gatekeeping” role that broker-dealers play, especially as it relates to securities traded in the OTC markets, which are primarily owned by retail investors. The Commission believes the Amendment will remedy certain imbalances in the OTC market by 1) providing greater transparency into issuers of OTC securities for investors, 2) promoting market efficiency by facilitating capital formation for issuers that maintain current and publicly available information, and 3) reducing unnecessary burdens on broker-dealers and enhancing the efficiency of the OTC market.

The amended Rule continues to require broker-dealers to obtain and review information relating to an issuer of OTC securities prior to initiating or resuming a quoted market in that issuer’s security. It also continues to require broker-dealers to have a reasonable basis under the circumstances for believing that the issuer information obtained is accurate in all material respects and from reliable sources. Additionally, under the amended Rule, a qualified IDQS can comply with the information review requirements and broker-dealers may rely upon the publicly available determination of a qualified IDQS to publish or submit a quotation in an issuer’s security.

Review of Current and Publicly Available Information

Two Ways to Confirm Information. Before quoting an issuer’s security, a broker-dealer must confirm that certain information about an issuer and its securities is current and publicly available. The Amendment provides a broker-dealer with two ways to satisfy this obligation: 1) independently obtaining such information from issuers (or their agents) and reviewing it for material accuracy and reliability or 2) relying on a publicly available determination by a qualified IDQS.

A broker-dealer’s ability to now rely on a qualified IDQS to provide a quote is not absolute. Reliance is subject to the publicly available determination of a qualified IDQS that the issuer’s current and publicly available information meets the Rule’s information review requirement. A broker-dealer’s reliance for this purpose is conditioned on the issuer information being current, publicly available, and maintained in the records of the qualified IDQS and on the qualified IDQS reasonably believing under the circumstances that the records are materially accurate and from reliable sources. Additionally, the broker-dealer must publish or submit the quotation within three business days of the date of the publicly available determination by the qualified IDQS. The qualified IDQS must also have policies and procedures relating to the determination that each of the conditions are met and must further identify whether the quotation is published on behalf of the issuer or a company insider.

Issuers Subject to Disclosure and Reporting Requirements. The information a broker-dealer or qualified IDQS must obtain from an issuer subject to disclosure and reporting requirements under the federal securities laws depends on that issuer’s filing status. If the issuer

1. filed a registration statement (other than Form F-6) under the Securities Act of 1933 that became effective less than 90 days prior to the day on which a broker or dealer publishes or submits a quotation (and remains effective as of such date), then its current and publicly available information consists of a copy of its Section 10(a) prospectus;
2. filed an offering statement under Regulation A that was qualified less than 40 calendar days prior to the day on which a broker or dealer publishes or submits a quotation, then its current and publicly available information consists of a copy of its offering circular (provided there is no intervening suspension order);
3. is subject to the periodic reporting requirements of the Exchange Act, Regulation A, or Regulation Crowdfunding or is the issuer of a security covered by Section 12(g)(2)(G) of the Exchange Act, then its current and publicly available information consists of a current copy of its annual report or statement, together with any periodic or current reports which may be required by the applicable regulation or act, with certain exceptions; or
4. is a foreign private issuer that is exempt from registration under Section 12(g) of the Exchange Act pursuant to Rule 12g3-2(b), then its current and publicly available information consists of a copy of the information the issuer has published on its website or through another electronic delivery system that has been made generally available to the public in its primary trading market and complies with its informational requirements under Rule 12g3-2(b)(iii).

Catch-all and Delinquent Reporting Issuers. An issuer that is not subject to any of the above or similar disclosure and reporting requirements is considered a “catch-all issuer.” The amended Rule also treats reporting issuers that are delinquent in their filing obligations and therefore without current public information as catch-all issuers only for purposes of initiating or resuming a quoted market in such issuers’ securities.

The Amendment expands the information and clarifies the financial information required to be provided by catch-all issuers pursuant to Rule 15c2-11(b). Current information includes the identity of company officers and large shareholders, job titles for company insiders, the names of all of an issuer’s predecessors during the past five years, the issuer’s principal place of business, the state of incorporation or registration of each of the issuer’s predecessors (if any) during the past five years, and the ticker symbol (if assigned) during the past five years. In addition, the Amendment clarifies that a catch-all issuer’s financials will be considered current and therefore able to be quoted by a broker-dealer if 1) the date of its most recent balance sheet is not more than 16 months before the publication or submission of the broker-dealer’s quotation and 2) its profit-and-loss and retained earnings statements are for the 12 months preceding the date of the balance sheet.

The expanded list of information balances the absence of current information associated with catch-all issuers that do not have a reporting or disclosure obligation under securities laws with an investor’s ability to make an informed investment decision based on a relatively limited amount of information. In particular, the Amendment requires broker-dealers to be able to provide such information upon the request of any person who expresses an interest in a proposed transaction in the issuer’s security with such broker-dealer.

Supplemental Information. Further, the Amendment extends the application of the Rule’s obligations regarding supplemental information to cover all market participants complying with the Rule’s information review requirement, including broker-dealers and qualified IDQSs. A broker-dealer or qualified IDQS must consider certain supplemental information in determining the material accuracy of issuer information. Pursuant to the Amendment, broker-dealers and qualified IDQSs must retain a copy or a written record of three categories of information: 1) records relating to the identity of the person on whose behalf a quotation is made, and any information regarding the transaction provided to the broker-dealer or qualified IDQS; 2) a copy of any trading suspension order or press release announcing such suspension within the 12-month period prior to the date of publication or submission of the quotation; and 3) any other material issuer information that comes into the knowledge or possession of the broker-dealer or qualified IDQS.

Exceptions to Information Gathering and Reviewing

The Amendment also modifies and adopts certain exceptions that permit a broker-dealer to quote securities without regard for the informational requirements of the Amendment.

Piggyback Exception

The Amendment modifies the provisions of the piggyback exception, which allows a broker-dealer to rely on the existing quotations of another broker-dealer that initially complied with the information review requirement of the Rule. The SEC amended this provision primarily to prevent broker-dealers from continuing to publish quotations for issuers that do not make current information publicly available.

The Amendment provides that a broker-dealer may rely on the piggyback exception based on at least a one-way priced quotation so long as there has been a quotation for the security in the four preceding business days. It also requires that issuer information be current and publicly available, timely filed, or filed within 180 calendar days from a specified period. However, the Amendment prohibits reliance on the exception by shell companies for a specified period and by issuers that have been subject to a trading suspension order issued by the SEC until 60 days after the expiration of such order.

The piggyback exception provides a limited, conditional grace period to permit broker-dealers to continue to rely on the piggyback exception to publish quotations for an issuer whose Rule 15c2-11(b) information is no longer current and publicly available, timely filed, or filed within 180 calendar days from a specified period. Subject to certain conditions, this limited grace period permits broker-dealers to continue quoting securities for a period of up to 15 calendar days once a qualified IDQS or registered national securities association makes a publicly available determination that issuer information is no longer current and publicly available.

The following table provides a summary of the time frames for which certain Rule 15c2-11(b) information must be current and publicly available, timely filed, or filed within 180 calendar days of a specified period.

The amended piggyback exception is not available for quotations in a qualified IDQS unless the qualified IDQS specifically identifies the quotation as an unsolicited customer indication.

Unsolicited Quotation Exception

The Amendment modifies the unsolicited quotation exception to limit reliance on the exception for a quotation on behalf of either a company insider or an affiliate if the issuer’s information is not current and publicly available. The Amendment allows broker-dealers posting the quote to reasonably rely on a written representation from a customer’s broker that the customer is not an insider or affiliate. It also clarifies that a broker-dealer may rely on a publicly available determination by a qualified IDQS or registered national securities association that an issuer’s information is current and publicly available.

ADTV and Asset Test Exception

The SEC adopted the average daily trading volume (ADTV) and asset test exception to provide retail investors with greater price transparency and to reduce burdens on broker-dealers in publishing quotations for highly liquid securities of well-capitalized issuers. This exception excludes from the information gathering and review requirements the securities of issuers that have 1) reported worldwide ADTV value of at least $100,000 in the 60-day period before the quote is published and 2) at least $50 million in total assets and $10 million in shareholders’ equity, as shown in the issuer’s publicly available audited balance sheet issued not more than six months following its most recent fiscal year-end.

Underwritten Offering Exception

The Amendment also introduces an underwriting exception to help expedite the availability of securities to retail investors in the OTC market following an underwritten offering and to facilitate capital formation. This exception permits a broker-dealer, without complying with the information review requirement, to publish or submit a quotation for a security of the same class issued in an underwritten offering if the broker-dealer served as the underwriter. In the case of a registration statement, the broker-dealer has 90 days from the effective date of the registration statement, and in the case of an offering statement, 40 days from the date the offering statement was qualified.

Recordkeeping

Prior to the adoption of the Amendment, the Rule required broker-dealers to preserve documents and information for a period of not less than three years, the first two years in an easily accessible place. The Amendment subjects a qualified IDQS to the recordkeeping requirements.

Definitions

The SEC adopted definitions to terms used throughout the Amendment. Under the Amendment, “current” is defined as “the paragraph (b) information of a prospectus issuer, a Reg. A issuer, an exempt foreign private issuer, or a catch-all issuer is current if it is filed, is published, or is as of a date in accordance with the time frames specified in the applicable subparagraph for such information (i.e., paragraph (b)(1), (b)(2), (b)(4), or (b)(5), respectively).” “Publicly available” means “available on EDGAR or on the website of a qualified IDQS, a registered national securities association, the issuer, or a registered broker-dealer” and will include “(1) the website of a state or federal agency, and (2) an electronic information delivery system that is generally available to the public in the primary trading.” For the information to be publicly available, access must not be restricted by username, password, fees or other restraints.

Exemptive Authority

The Amendment conforms the standard for the amended Rule’s exemptive authority to the provision included in Section 36 of the Exchange Act. Upon written application or upon its own motion, the Commission may, conditionally or unconditionally, exempt by order any person, security, transaction, or any class or classes of persons, securities, or transactions from any provision or provisions of Rule 15c2-11 to the extent that exemption is necessary or appropriate in the public interest and is consistent with the protection of investors.

Effectiveness

The Amendment becomes effective Dec. 28, 2020, which is 60 days after publication in the Federal Register, and compliance with the Amendment must generally be achieved within nine months of its effectiveness, or Sept. 28, 2021.