Publication or Submission of Quotations Without Specified Information, 68124-68207 [2020-20980]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 85, Number 208 (Tuesday, October 27, 2020)]
[Rules and Regulations]
[Pages 68124-68207]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20980]



[[Page 68123]]

Vol. 85

Tuesday,

No. 208

October 27, 2020

Part II





 Securities and Exchange Commission





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17 CFR Parts 230 and 240





 Publication or Submission of Quotations Without Specified Information; 
Final Rule

Federal Register / Vol. 85 , No. 208 / Tuesday, October 27, 2020 / 
Rules and Regulations

[[Page 68124]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 240

[Release Nos. 33-10842; 34-89891; File No. S7-14-19]
RIN 3235-AM54


Publication or Submission of Quotations Without Specified 
Information

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

DATES: 
    Effective date: December 28, 2020. Compliance date: The compliance 
dates are discussed in Part II.P of this release.

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

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to 
Rule 15c2-11 under the Exchange Act [15 U.S.C. 78a et seq.] and a 
conforming amendment to 17 CFR 230.144(c)(2) under the Securities Act 
of 1933 (the ``Securities Act'') [15 U.S.C. 77a et seq.].

Table of Contents

I. Overview
II. Discussion of the Final Amendments
    A. Unlawful Activity
    1. Current and Publicly Available Issuer Information--Rule 15c2-
11(a)(1)(i)(B), (a)(2)(ii)
    2. Qualified IDQS That Complies With the Information Review 
Requirement--Rule 15c2-11(a)(2)(i) Through (iv)
    3. Broker-Dealer That Relies on a Qualified IDQS's Publicly 
Available Determination That It Complied With the Information Review 
Requirement--Rule 15c2-11(a)(1)(ii)
    4. Policies and Procedures for Making Certain Publicly Available 
Determinations--Rule 15c2-11(a)(3)
    B. Specified Information
    1. Current Reports--Rule 15c2-11(b)(3)(i) Through (iv)
    2. Reporting Issuer Provision--Rule 15c2-11(b)(3)
    3. Catch-All Issuer Information--Rule 15c2-11(b)(5)(i)
    4. Requirement To Make Catch-All Issuer Information Available 
Upon Request--Rule 15c2-11(b)(5)(ii)
    5. Application of the Catch-All Issuer Provision--Rule 15c2-
11(b)(5)(ii)
    6. Specified Information Provision for Crowdfunding Issuers--
Rule 15c2-11(b)(3)(iii)
    C. Supplemental Information Requirement--Rule 15c2-11(c)
    D. Piggyback Exception
    1. Increased Transparency of Issuer Information--Rule 15c2-
11(f)(3)(i)(C)(1) through (3)
    2. One-Way Priced Quotations--Rule 15c2-11(f)(3)(i)(A)
    3. Following a Trading Suspension--Rule 15c2-11(f)(3)(i)(B)
    4. Shell Company Exclusion--Rule 15c2-11(f)(3)(i)(B)
    5. Frequency of Quotation Requirement--Rule 15c2-11(f)(3)(i)(A)
    6. Grace Period--Rule 15c2-11(f)(3)(ii)
    7. Removal of Certain Piggyback Exception Provisions Under the 
Former Rule
    E. Unsolicited Quotation Exception--Rule 15c2-11(f)(2)
    F. ADTV and Asset Test Exception--Rule 15c2-11(f)(5)
    G. Underwritten Offering Exception--Rule 15c2-11(f)(6)
    H. Publicly Available Determination That an Exception Applies--
Rule 15c2-11(f)(7)
    I. Recordkeeping Requirement--Rule 15c2-11(d)
    J. Definitions
    1. Current--Rule 15c2-11(e)(2)
    2. Shell Company--Rule 15c2-11(e)(9)
    3. Publicly Available--Rule 15c2-11(e)(5)
    4. Qualified Interdealer Quotation System--Rule 15c2-11(e)(6)
    5. Company Insider--Rule 15c2-11(e)(1)
    K. Removal of Outdated Provisions
    L. Exemptive Authority--Rule 15c2-11(g)
    M. Technical Amendments
    N. Conforming Rule Change--Rule 144(c)(2)
    O. Guidance
    1. Introduction
    2. Source Reliability
    3. Information Review Requirement
    4. Examples of Red Flags
    P. Compliance Date
III. Comments on the Concept Release
    A. Information Repositories
    B. Other Issues
IV. Other Matters
V. Paperwork Reduction Act Analysis
    A. Background
    B. Respondents Subject to the Rule
    C. Summary of Collections of Information
    1. Burden Associated With the Initial Publication or Submission 
of a Quotation in a Quotation Medium
    2. Other Burden Hours
    3. Collection of Information Is Mandatory
    4. Confidentiality
    5. Retention Period of Recordkeeping Requirement
VI. Economic Analysis
    A. Background
    B. Baseline and Affected Parties
    1. Affected Parties
    2. Baseline
    C. Discussion of Economic Effects
    1. Effects of Rule 15c2-11 Amendments
    2. Efficiency, Competition, and Capital Formation
    D. Reasonable Alternatives
    1. Eliminating the Piggyback Exception
    2. Maintaining the Piggyback Exception for the Securities of 
Non-Transparent Issuers
    3. Eliminating or Maintaining the Piggyback Exception for Shell 
Companies
    4. Alternative Thresholds for Exceptions
    5. Quotations With Both Bid and Offer Prices for the Piggyback 
Exception
    6. Alternative Required Frequency of Current and Publicly 
Available Information
VII. Regulatory Flexibility Act Certification
VIII. Statutory Authority

I. Overview

    The Commission is adopting amendments to Rule 15c2-11, which sets 
out certain requirements for a broker-dealer seeking to initiate (or 
resume) quotations for securities in the OTC market.\1\ The amendments 
are

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designed to modernize the Rule and to enhance investor protection by 
requiring that current and publicly available issuer information be 
accessible to investors. Specifically, the amendments provide greater 
transparency to the investing public by requiring information about the 
issuer and its security \2\ to be current and publicly available before 
a broker-dealer can begin quoting that security.
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    \1\ For purposes of this release, Rule 15c2-11, as amended, is 
referred to as the ``amended Rule.'' A ``quotation'' is defined as 
any bid or offer at a specified price with respect to a security, or 
any indication of interest by a broker-dealer in receiving bids or 
offers from others for a security, or any indication by a broker-
dealer that wishes to advertise its general interest in buying or 
selling a particular security. Amended Rule 15c2-11(e)(7). A 
``quotation medium'' is defined as any ``interdealer quotation 
system'' or any publication or electronic communications network or 
other device that is used by broker-dealers to make known to others 
their interest in transactions in any security, including offers to 
buy or sell at a stated price or otherwise, or invitations of offers 
to buy or sell. Amended Rule 15c2-11(e)(8). An ``interdealer 
quotation system'' is defined as any system of general circulation 
to brokers or dealers that regularly disseminates quotations of 
identified broker-dealers. Amended Rule 15c2-11(e)(3). A ``national 
securities exchange'' is an exchange, as defined under Section 
3(a)(1) of the Exchange Act and Rule 3b-16 thereunder, that is 
registered with the Commission under Sections 5 and 6 of the 
Exchange Act. The amendments adopted do not change the definitions 
of the terms ``quotation,'' ``quotation medium,'' and ``interdealer 
quotation system'' under the Rule.
    \2\ This information is listed in paragraph (a) of the former 
Rule and in paragraph (b) of the proposed Rule and amended Rule. For 
purposes of this release, the documents and information specified in 
paragraph (b) of the proposed Rule and amended Rule are referred to 
as ``paragraph (b) information.''
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    Securities that trade in the OTC market are primarily owned by 
retail investors.\3\ Many issuers of quoted OTC securities publicly 
disclose current information about themselves.\4\ However, in other 
cases, there is no or limited current public information available 
about certain issuers of quoted OTC securities to allow investors or 
other market participants to make informed investment decisions. A lack 
of current and public information about these companies disadvantages 
retail investors because it may prevent them from estimating return 
probabilities and generating positive returns in OTC stocks.\5\ It can 
contribute to incidents of fraud and manipulation by preventing retail 
investors from being able to counteract misinformation.\6\ A majority 
of the Commission enforcement cases involving allegations of fraudulent 
behavior in the OTC securities market has involved delinquent filings, 
which result in a lack of current, accurate, or adequate information 
about an issuer.\7\ As broker-dealers play an integral role in 
facilitating investor access to OTC securities and serve an important 
gatekeeper function, Rule 15c2-11 is designed to prevent fraud and 
manipulation by requiring that broker-dealers review key, basic 
information about an issuer before initiating a quoted market in an OTC 
security. In practice, however, certain of the Rule's outdated 
exceptions often have resulted in a quoted market for the securities of 
issuers for which there is no current and publicly available 
information for analysis by market participants, including broker-
dealers and retail investors. In some cases, a quoted market may 
continue for the securities of issuers that no longer exist or have 
ceased operations.\8\ Providing greater transparency of OTC issuers to 
retail investors so that they can make better-informed investment 
decisions and counteract misinformation promotes the Commission's 
important mission of protecting investors.\9\
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    \3\ See Andrew Ang et al., Asset Pricing in the Dark: The Cross-
Section of OTC Stocks, 26 Rev. Fin. Studs. 2985-3028 (2013).
    \4\ See infra Part VI.B.2.b, Table 3 (describing how, of the 
9,895 companies that issue securities that are quoted in the OTC 
market, 6,886 of those issuers have public information available).
    \5\ See, e.g., Joshua T. White, Outcomes of Investing in OTC 
Stocks (Dec. 16, 2016), https://www.sec.gov/files/White_OutcomesOTCinvesting.pdf.
    \6\ See Rajesh Aggarwal & Guojun Wu, Stock Market Manipulations, 
79 J. Bus. 1915 (2006); Thomas Renault, Market Manipulation and 
Suspicious Stock Recommendations on Social Media, Universite Paris I 
Pantheon-Sorbonne--Centre d'Economie de la Sorbonne (Dec 20, 2017), 
https://ssrn.com/abstract=3010850; infra Part VI.C.1.a.
    \7\ For instance, one study looked at a broad sample of 
litigated securities cases between January 2005 and June 2011 and 
identified 1,880 cases involving OTC securities and 1,157 cases 
involving securities listed on national securities exchanges in the 
United States. Of the OTC securities cases, the majority--1,148 
cases, or 61 percent--were related to delinquent filings, 151 (eight 
percent) were related to a pump-and-dump scheme, 159 (eight percent) 
were related to financial fraud, 12 (one percent) were related to 
insider trading, and 212 (11 percent) were related to other 
fraudulent misrepresentation or disclosure. See Douglas J. Cumming & 
Sofia Johan, Listing Standards and Fraud, 34 Managerial & Decision 
Econ. 451-70 (2013) (``We stress the fact that litigated cases of 
fraud are not necessarily representative of actual cases of fraud. 
The difference between actual cases and litigated cases depend on 
rule setting (listing standards and exchange trading rules), 
surveillance (the people and technology available to detect fraud), 
and the quality of enforcement (the process and expenditures to 
enable cases to go forward and the effectiveness of courts).''); see 
also infra Part VI.B.2.c.
    \8\ See Publication or Submission of Quotations Without 
Specified Information, Exchange Act Release No. 87115, at 7-8 (Sept. 
25, 2019), 84 FR 58206, 58207 (Oct. 30, 2019) (``Proposing Release'' 
or the ``proposal'').
    \9\ See Proposing Release at 58210-11 (discussing key regulatory 
approaches that the Commission has implemented to combat retail 
investor fraud).
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    Further, the OTC market has changed significantly since the Rule 
was initially adopted in 1971\10\ (approximately 49 years ago) and last 
substantively amended in 1991 (over 29 years ago).\11\ For example, use 
of the internet is much more widespread today than it was when the Rule 
was last substantively amended. In 1991, it was significantly more 
difficult to obtain information about issuers of OTC securities and to 
continuously update and widely disseminate quotations for OTC 
securities. The internet and other forms of electronic communication 
and innovation have made it far less costly and burdensome to access, 
update, and disseminate information on a global scale.
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    \10\ See Initiation or Resumption of Quotations by a Broker or 
Dealer Who Lacks Certain Information, Exchange Act Release No. 9310 
(Sept. 13, 1971), 36 FR 18641 (Sept. 18, 1971).
    \11\ See Initiation or Resumption of Quotations Without 
Specified Information, Exchange Act Release No. 29094 (Apr. 17, 
1991), 56 FR 19148 (Apr. 25, 1991) (``1991 Adopting Release'').
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    Responding to these developments, and as part of the Commission's 
overall efforts to protect retail investors from fraud and 
manipulation,\12\ the Commission is adopting amendments that are 
designed to modernize the Rule to: (1) Promote investor protection by 
providing greater transparency to the investing public regarding 
issuers of OTC securities, (2) facilitate capital formation for issuers 
for which information is current and publicly available, and (3) reduce 
unnecessary burdens on broker-dealers and enhance the efficiency of the 
OTC market.
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    \12\ See supra note 9.
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    The amended Rule continues to require a broker-dealer to obtain and 
review basic information about an issuer of an OTC security before 
initiating or resuming a quoted market in the issuer's security.\13\ 
The amended Rule also continues to require the broker-dealer to have a 
reasonable basis for believing that the information about the issuer, 
when considered along with any supplemental information, is accurate 
and from a reliable source. In addition to broker-dealers, under the 
amended Rule, qualified interdealer quotation systems (each, a 
``qualified IDQS'') \14\ are permitted to comply with the information 
review requirement, and broker-dealers may rely upon a qualified IDQS's 
publicly available determination that it has complied with the 
information review requirement to publish or submit a quotation to 
initiate or resume a quoted market in an issuer's security.
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    \13\ For purposes of this release, the term ``information review 
requirement'' refers to the requirement for broker-dealers and 
qualified interdealer quotation systems to obtain and review certain 
issuer information before a broker-dealer publishes a quotation for 
a security in the absence of an exception.
    \14\ See infra Part II.J.4 for a discussion of the proposed 
definition of the term ``qualified interdealer quotation system'' 
and how that term is defined in the amended Rule.
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    The information review requirement in the amended Rule includes 
additional provisions that are designed to enhance transparency of 
issuer information and help to foster the integrity of the OTC market. 
Importantly, the amended Rule requires that the documents and 
information that a broker-dealer or qualified IDQS reviews generally 
must be current and publicly available. The amended Rule specifies 
under paragraph (b) the documents and information that must

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be reviewed with respect to issuers, including a new provision to 
recognize companies that issue securities in reliance on Regulation 
Crowdfunding (``crowdfunding issuers''), and expands the list of 
documents and information that must be reviewed for certain other types 
of issuers. In addition, the amended Rule requires that a broker-dealer 
or qualified IDQS identify whether the quotation is published on behalf 
of the issuer or a company insider and also expands the list of market 
participants that must review supplemental information to comply with 
the information review requirement to include qualified IDQSs.
    The amended Rule contains several exceptions to the information 
review requirement. The amended Rule continues to provide an exception 
that permits broker-dealers to publish a quotation for unsolicited 
customer orders without complying with the information review 
requirement.\15\ However, the amendments to the Rule prohibit broker-
dealers from relying on this exception for an affiliate of the issuer 
or a company insider, unless information about the issuer is current 
and publicly available. This exception, as amended, permits a broker-
dealer to rely on a representation from the customer's broker that such 
customer is not an affiliate of the issuer or a company insider.
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    \15\ See Amended Rule 15c2-11(f)(2).
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    The amended Rule also adds three new exceptions. First, the amended 
Rule adds an exception for highly liquid securities of well-capitalized 
issuers if the security meets a multi-prong test involving the 
security's worldwide average daily trading volume value and its 
issuer's total assets and shareholders' equity.\16\ Second, the amended 
Rule adds an underwritten offerings exception for quotations for a 
security by a broker-dealer that is named as an underwriter in the 
registration statement or offering statement for such security.\17\ 
Finally, the amended Rule adds an exception to permit broker-dealers to 
rely on publicly available determinations by a qualified IDQS or a 
registered national securities association that the requirements of 
certain other exceptions are met.\18\ The qualified IDQS or registered 
national securities association must establish, maintain, and enforce 
reasonably designed written policies and procedures with respect to 
making the determinations.
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    \16\ See Amended Rule 15c2-11(f)(5).
    \17\ See Amended Rule 15c2-11(f)(6).
    \18\ These exceptions are the exchange-traded security 
exception, the municipal security exception, the ``piggyback'' 
exception, and the exception for the highly liquid securities of 
well-capitalized issuers. See Amended Rule 15c2-11(f)(7).
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    In addition, the amended Rule modifies the ``piggyback'' exception, 
which allows a broker-dealer to rely on the quotations of another 
broker-dealer that initially complied with the information review 
requirement.\19\ The amended Rule permits broker-dealers to rely on the 
piggyback exception based on at least a one-way priced quotation, so 
long as there are no more than four business days in succession without 
a quotation,\20\ and prohibits reliance on the exception if the issuer 
of the security is a shell company after a certain prescribed period or 
was the subject of a trading suspension order issued by the Commission 
until 60 calendar days after the expiration of such order.\21\ The 
exception also now requires issuer information to be, depending on the 
regulatory status of the issuer, one of the following: (1) Current and 
publicly available, as defined by the amended Rule; (2) timely filed 
(i.e., filed by the prescribed due date for a report or statement as 
required by an Exchange Act or Securities Act reporting obligation); or 
(3) filed within 180 calendar days from a specified period. The 
exception also now includes a grace period that permits broker-dealers 
to continue quoting the securities for a limited period of up to 15 
calendar days once a qualified IDQS or register national securities 
association makes a publicly available determination that issuer 
information is no longer current and publicly available, timely filed, 
or filed within 180 calendar days from the applicable specified time 
frame. The piggyback exception no longer requires that there be 
quotations on each of at least 12 days within the previous 30 calendar 
days to establish piggyback eligibility.
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    \19\ See Amended Rule 15c2-11(f)(3). Once the requirements of 
this exception are met, a broker-dealer can ``piggyback'' on either 
its own or other broker-dealers' previously published quotations.
    \20\ See Amended Rule 15c2-11(f)(3)(i)(A). The piggyback 
exception under the amended Rule no longer includes provisions 
contained in the piggyback exception under the former Rule for: (1) 
A broker-dealer quotation in an IDQS that does not identify the 
quotation as an unsolicited quotation, which provision permitted 
broker-dealers to publish or submit quotations in reliance on the 
piggyback exception in an IDQS that did not make known to others 
unsolicited quotations; and (2) self-piggybacking by market makers, 
which provision permitted broker-dealers to publish or submit 
quotations in reliance on their own quotations if all of the other 
requirements of the piggyback exception were met.
    \21\ See Amended Rule 15c2-11(f)(3)(i)(B).
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    Generally, under the amended Rule, broker-dealers, qualified IDQSs, 
and a national securities association must preserve the applicable 
documents and information they reviewed, including to demonstrate 
reliance on an exception and in relation to publicly available 
determinations, for at least three years, the first two years in an 
easily accessible place.\22\ These entities are not required to 
preserve documents and information available on the Commission's 
Electronic Data Gathering, Analysis, and Retrieval System 
(``EDGAR'').\23\ A broker-dealer that publishes a quotation in reliance 
on a publicly available determination of a qualified IDQS or a 
registered national securities association need only preserve a record 
of the name of such qualified IDQS or registered national securities 
association.\24\
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    \22\ The requirement for broker-dealers and other entities to 
keep certain records that support their compliance with the 
information review requirement or reliance on an exception, as 
applicable, is referred to throughout this release as the 
``recordkeeping requirement.''
    \23\ See Amended Rule 15c2-11(d)(1), (2).
    \24\ See Amended Rule 15c2-11(d)(2)(ii).
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    The amended Rule also adds definitions for the terms ``company 
insider,'' ``current,'' ``publicly available,'' ``qualified interdealer 
quotation system,'' and ``shell company.'' \25\ Finally, the Commission 
is providing guidance regarding source reliability and the information 
review requirement, with modifications to incorporate and update the 
red flags guidance provided in 1999.\26\
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    \25\ See Amended Rule 15c2-11(e).
    \26\ See Publication or Submission of Quotations Without 
Specified Information, Exchange Act Release No. 41110 (Feb. 25, 
1999), 64 FR 11126 (Mar. 8, 1999) (``1999 Reproposing Release'').
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II. Discussion of the Final Amendments

    In general, the final amendments: (1) Provide greater transparency 
to retail investors and other market participants regarding issuers of 
quoted OTC securities, (2) limit the use of certain exceptions under 
the Rule to better protect retail investors from fraud and 
manipulation, and (3) add new exceptions to reduce unnecessary burdens 
on broker-dealers and to enhance the efficiency of the OTC market. As 
discussed in greater detail below, commenters supported many aspects of 
the proposal. For example, commenters stated that the proposal would 
help to modernize the Rule, better protect investors by facilitating 
increased availability of issuer information for OTC securities and 
their issuers,\27\ and make the OTC market

[[Page 68127]]

more efficient.\28\ Some commenters supported the amendments as 
proposed.\29\ Many commenters generally supported amending the Rule to 
better protect investors but suggested certain changes to the 
proposal,\30\ including, for example, to permit broker-dealers to 
publish quotations for securities of issuers whose paragraph (b) 
information is current and publicly available on an annual basis, as 
opposed to on a six-month basis, to maintain a quoted market in such 
issuers' securities.\31\
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    \27\ Letter from Marcia E. Asquith, Executive Vice President, 
Board and External Relations, Financial Industry Regulatory 
Authority, Inc., to Vanessa Countryman, Sec'y, SEC (Feb. 11, 2020) 
(``FINRA Letter''); Letter from Ted Haberfield, Chairman & 
President, MZHCI, LLC, to SEC (Sept. 2, 2020) (``MZ Letter''); 
Letter from John B. Lowy, P.C., to SEC (July 26, 2020) (``Lowy 
Letter''); see Letter from Gerald Adler, Adler Silverberg PLLC, to 
SEC (Mar. 3, 2020) (``Adler Silverberg Letter''); Sherwood E. Neiss, 
Co-founder, GUARDD and Principal, Crowdfund Capital Advisors, 
Douglass S. Ellenoff, Esq., Co-founder, GUARDD and Founding Partner, 
Ellenoff Grossman & Schole LLP, James P. Dowd, CPA, CFA, Co-founder 
GUARDD and CEO North Capital Private Securities Corporation, GUARDD, 
Inc., to Div. Trading & Mkts., SEC (Jan. 13, 2020) (``GUARDD 
Letter''); Letter from Aseel M. Rabie, Managing Director and 
Associate General Counsel, and Bernard V. Canepa, Vice President and 
Assistant General Counsel, Securities Industry and Financial Markets 
Association, to Vanessa Countryman, Sec'y, SEC (Dec. 23, 2019) 
(``SIFMA Letter''); Letter from James Toes, President and CEO, and 
Chris Halverson, Chairman of the Board, Security Traders 
Association, to Vanessa Countryman, Sec'y, SEC (Jan. 23, 2020) 
(``STA Letter''); Letter from Robert Verderese, Head of Cash 
Trading, Virtu Financial, to Vanessa Countryman, Sec'y, SEC (Feb. 7, 
2020) (``Virtu Letter'') (stating that stocks that meet the 
definition of a penny stock and are not providing current 
information would not be eligible for quoting under the Rule); 
Letter from Andrew F. Viles, U.S. General Counsel, Canaccord Genuity 
LLC, to Vanessa Countryman, Sec'y, SEC (Mar. 20, 2020) (``Canaccord 
Letter'').
    \28\ Letter from William F. Galvin, Sec'y of the Commonwealth, 
Commonwealth of Massachusetts, to Vanessa Countryman, Sec'y, SEC 
(Dec. 30, 2019) (``Massachusetts Letter''); Letter from Sherry J. 
Sandler, Global OTC, to Vanessa Countryman, Sec'y, SEC (Mar. 3, 
2020) (``Global OTC Letter''); see MZ Letter.
    \29\ Steven Barber (Dec. 30, 2019); Barry Gleicher (Nov. 7, 
2019); Massachusetts Letter.
    \30\ See, e.g., R. Cromwell Coulson, CEO, OTC Mkts. Grp. Inc. 
(May 6, 2020) (citing R. Cromwell Coulson, Exploring the Investor 
Impact of an SEC Rule Proposal, Traders Magazine (May 1, 2020), 
available at https://www.tradersmagazine.com/departments/regulation/exploring-the-investor-impact-of-an-sec-rule-proposal/) (``Coulson 
Comment''); FINRA Letter; Global OTC Letter; Letter from Peter 
Goldstein, Managing Member, Exchange Listing LLC, to Vanessa 
Countryman, Sec'y, SEC (May 8, 2020) (``Exchange Listing Letter''); 
Letter from Sara Hanks, CEO, CrowdCheck, Inc., to Vanessa 
Countryman, Sec'y, SEC (May 22, 2020) (``CrowdCheck Letter''); 
Letter from Joseph M. Lucosky, Managing Partner, Lawrence Metelitsa, 
Partner, and Scot E. Linsky, Counsel, Lucosky Brookman LLP, to SEC 
(May 29, 2020) (``Lucosky Brookman Letter''); Letter from David 
Menn, CEO, MCAP LLC, to Vanessa Countryman, Sec'y, SEC (May 15, 
2020) (``MCAP Letter''); Richard Revelins, Executive Director, 
Peregrine Corporate Limited (July 10, 2020) (``Peregrine Comment''); 
Letter from Robin Sosnow, Managing Partner, & Manuel Pesendorfer, 
Attorney, Sosnow & Associates PLLC, to Vanessa Countryman, Sec'y, 
SEC (May 14, 2020) (``Sosnow & Associates Letter''); SIFMA Letter; 
STA Letter; Letter from Louis Taubman, Partner, Hunter Taubman 
Fischer & Li LLC, to Vanessa Countryman, Sec'y, SEC (May 28, 2020) 
(``HTFL Letter''); Virtu Letter.
    \31\ See, e.g., Letter from Stephen M. Brophy, President, Aztec 
Land and Cattle Company, Limited, to SEC (Dec. 27, 2019) (``Aztec 
Letter''); Brett Dorendorf (Nov. 23, 2019); Al Gonzalez, President, 
Beacon Redevelopment Industrial Corp. (Dec. 8, 2019) (``Beacon 
Redevelopment Letter''); Michael Hess (Sept. 27, 2019); Doug Mohn 
(Nov. 8, 2019); Ariel Ozick (Dec. 30, 2019); Robert E. Schermer, Jr. 
(Dec. 20, 2019); Tom H. Sleeter, Chief Investment Officer, Total 
Clarity Wealth Management, Inc. (``Total Clarity Comment''); Letter 
from David Waters, President, Alluvial Capital Management, LLC (Oct. 
9, 2019) (``Alluvial Letter'').
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    Other commenters, however, believed that the proposal would not be 
effective in deterring fraud and manipulation, including pump-and-dump 
schemes,\32\ and stated that the proposal was too broad and overly 
expansive.\33\ For example, one commenter stated its belief that the 
proposal would not effectively deter fraud but would negatively affect 
liquidity in the OTC market, which, according to this commenter, 
ultimately would impair capital formation.\34\
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    \32\ Laura Coffman (Nov. 7, 2019); Alexandra Elliott (Oct. 10, 
2019); Christian Gabis (Nov. 26, 2019); Letter from Ari Rubenstein, 
Co-Founder and Chief Executive Officer, Global Trading Systems, LLC, 
to Vanessa Countryman, Sec'y, SEC (Feb. 26, 2020) (``GTS Letter''); 
Reid McKenzie (Oct. 31, 2019); Joshua Marino (Oct. 4, 2019); Letter 
from James E. Mitchell, General Partner, Mitchell Partners, L.P., to 
Vanessa Countryman, Sec'y, SEC (Oct. 9, 2019) (``Mitchell Partners 
Letter 1''); Letter from Erik S. Nelson, President, Coral Capital 
Partners, Inc., to Vanessa Countryman, Sec'y, SEC (Dec. 30, 2019) 
(``Coral Capital Letter''); Virtu Letter; see Christopher J. DiIorio 
(Feb. 4, 2020).
    \33\ Coral Capital Letter; Ron Lefton (Nov. 11, 2019); Letter 
from Jon Norberg, to Chairman Clayton (Nov. 19, 2019) (``Norberg 
Letter''); Debby Valentijn (Dec. 21, 2020). Another commenter 
highlighted that, because there are many different types of 
companies in the OTC market, the proposed regulatory solutions are 
not always effective. Mitchell Partners Letter 1; see John Gardiner, 
President and CEO, Taranis Resources, Inc. (Mar. 4, 2020) (``Taranis 
Comment''); GTS Letter.
    \34\ Coral Capital Letter.
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    As discussed further below, the Commission agrees that there may be 
a negative impact on liquidity for dark issuers (i.e., issuers that do 
not make their information publicly available) as a result of broker-
dealers not being able to continuously quote their securities and 
understands that existing shareholders of non-reporting issuers may be 
negatively impacted from the loss of a quoted market for such 
securities, even if the securities migrate to the grey market.\35\ The 
Commission, however, believes that the amendments should incentivize 
issuers to make their information current and publicly available to 
allow broker-dealers to continuously quote their securities.\36\ As 
discussed further below, the Commission believes the amendments will 
enhance transparency overall, which will facilitate price discovery, 
provide investors with information that will allow them to make better-
informed investment decisions and help counteract misinformation about 
the issuers of such securities that can contribute to incidents of 
fraud and manipulation.\37\ The Commission further believes that this 
requirement, in combination with the addition of new, targeted 
exceptions, will enhance the efficiency of the OTC market.\38\
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    \35\ The Commission, however, believes that the potential for 
such harm would be limited by the ability of broker-dealers to rely 
on exceptions to publish quotations, including the unsolicited 
quotation exception, and the ability of existing shareholders to 
continue to trade their securities. See infra note 216 and 
accompanying text.
     The Commission does not expect the amended Rule to affect the 
liquidity and pricing of securities in the entire OTC market, as 
this commenter stated. A delinquent reporting issuer's security 
could experience a discount in price resulting from the risk that 
the issuer may not file its required report within 180 days from the 
end of a specified period. In such case, as discussed below in Part 
II.D.1, broker-dealers would not be able to rely on the piggyback 
exception to publish or submit quotations for such issuer's security 
if its paragraph (b) information were not ``current'' and ``publicly 
available.'' This scenario involving a particular subset of OTC 
securities is not expected to affect the liquidity and pricing of 
all quoted securities in the OTC market because individual 
securities in the OTC market generally are not included in a market 
index or benchmark that would be affected by any one security's 
liquidity or pricing. Further, to the extent an OTC security is 
included in an index or benchmark, such an index or benchmark would 
require that issuer information be current and publicly available. 
See, e.g., OTC Markets Indices, OTC Mkts. Grp. Inc., https://www.otcmarkets.com/market-activity/indices (last visited Aug. 31, 
2020).
    \36\ See infra Part VI.C.1.a.
    \37\ Several academic studies have found that higher levels of 
disclosure are associated with higher levels of liquidity in the OTC 
markets. See infra Part VI.C.1.
    \38\ See infra Part VI.C.1.a, c.
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    Other commenters stated that additional regulation would make it 
more expensive to trade OTC securities.\39\ The Commission believes, as 
discussed below, that the amended Rule contains provisions that help 
mitigate costs associated with quoting OTC securities (e.g., the 
ability for a broker-dealer to rely on publicly available 
determinations of a qualified IDQS or a registered national securities 
association, new exceptions to broker-dealers' compliance with the 
information review requirement, and flexibility to make current 
information about an issuer publicly available on any of several 
different websites).
---------------------------------------------------------------------------

    \39\ Frank Danna, III (Nov. 10, 2019); James Duade (Dec. 26, 
2019); Christian Gabis.
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    Some commenters stated that the Rule should be left as is.\40\ 
Specifically, some commenters stated that the amendments are 
unnecessary because, according to

[[Page 68128]]

these commenters, investors are aware of the risks when they buy OTC 
securities,\41\ other Commission rules and regulations have superseded 
the original purpose of Rule 15c2-11,\42\ and state law already 
provides investor protections that the proposal seeks to provide.\43\ 
While investor protections can be provided through a variety of means 
(e.g., from sales practice rules to registration requirements), the 
specific manner in which Rule 15c2-11 governs the publication or 
submission of broker-dealers' quotations in a quotation medium serves 
to cement the broker-dealer's role as a gatekeeper for many investors, 
including retail investors, to the OTC market. Further, as discussed 
above, in light of technological developments that have transformed the 
OTC market since the Rule was adopted and last substantively amended, 
the Commission believes that it is appropriate to update and modernize 
the Rule with the goals of providing greater transparency and better 
combatting fraud.
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    \40\ Letter from Steven Erickson, CFA, Anbec Partners, LP, to 
Hon. Jay Clayton, Chairman, SEC (Oct. 23, 2019) (``Anbec Partners 
Letter''); Ariel Ozick; Michael E. Reiss (Oct. 25, 2019).
    \41\ David Aldridge (Oct. 1, 2019); R. Berkvens (Oct. 3, 2019); 
Dana Blanc (Oct. 10, 2019); Joe Helmer, CFA, Caldwell Sutter Capital 
(Dec. 24, 2019) (``Caldwell Sutter Capital Comment''); Frank Danna, 
III; Ralf Erz (Oct. 8, 2019); Philippe Goodwill (Oct. 1, 2019); 
Letter from Matthew Kerchner, CFA, Terravoir Venture, to Hon. Jay 
Clayton, Chairman, SEC (Nov. 25, 2019) (``Terravoir Venture 
Letter''); Richard Kogut (Oct. 8, 2019); Aharon Levy (Oct. 12, 
2019); Tracy Michaels (Sept. 30, 2019); Michael E. Reiss; Robert 
Ringelberg (Oct. 13, 2019); Jim Rivest (Sept. 29, 2019); Letter from 
David Sanders, to SEC (Oct. 10, 2019) (``Sanders Letter''); Thomas 
Schiessling (Oct. 30, 2019); Lucas H. Selvidge (Oct. 23, 2019); 
Kevin Ward (Oct. 8, 2019); see Philippe Goodwill. Another commenter 
specified that broker-dealers require purchasers of OTC stocks to 
sign multiple agreements and disclaimers before they are eligible to 
purchase OTC stocks and that broker-dealers require annual income 
qualifications and tax bracket verification when opening accounts. 
Letter from Darian Andersen, General Counsel, P.C., to Vanessa 
Countryman, Sec'y, SEC (Dec. 23, 2019) (``Andersen Letter'').
    \42\ See Letter from James J. Angel, Ph.D., CFA, Associate 
Professor of Finance, Georgetown University, McDonough School of 
Business, to SEC (Jan. 24, 2020) (``Professor Angel Letter'').
    \43\ Letter from Douglas Raymond, Drinker Biddle & Reath (Nov. 
21, 2019) (``Drinker Letter'').
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    Another commenter stated that, instead of amending the Rule, the 
Commission should focus on enforcing rules governing market makers.\44\ 
Some commenters stated that the Commission should instead focus its 
enforcement efforts on bad actors.\45\ For example, one commenter 
stated that the most effective way to protect retail investors is by 
suspending trading in securities that are implicated in conduct that 
appears suspicious or ``illegitimate.'' \46\ For the reasons discussed 
throughout this release, the Commission believes that the amended Rule 
is an important tool to combat fraud and manipulation and enhance 
investor protection, in addition to trading suspensions and other 
enforcement actions.
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    \44\ Hans Brost (Nov. 15, 2019).
    \45\ See, e.g., Caldwell Sutter Capital Comment; Exchange 
Listing Letter; Braxton Gann (Oct. 11, 2019); Joshua Marino; Daniel 
Raider (Oct. 2, 2019); see Canaccord Letter.
    \46\ Canaccord Letter.
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    While certain of the Commission's initiatives to protect investors 
involve addressing fraudulent conduct that has already occurred, such 
as through the Commission's examination and enforcement programs, the 
Commission has also been proactive in taking measures that are designed 
to prevent fraudulent activity before it occurs.\47\ The Commission 
believes that the amendments facilitate such efforts by, for example, 
addressing the lack of current and publicly available information about 
companies to the disadvantage of retail investors in comparison to 
other market participants.\48\ The amendments are narrowly tailored to 
further the Commission's ongoing effort to protect retail investors 
from fraud and manipulation in the OTC market, maintain the integrity 
of the OTC market, promote a more efficient and effective OTC market, 
and facilitate capital formation for issuers that make their 
information current and publicly available.\49\
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    \47\ See Proposing Release at 58210.
    \48\ Id. For example, the Commission stated in the Proposing 
Release its concern that market participants can take advantage of 
exceptions from the Rule's information review requirement to the 
detriment of retail investors. Without current public information 
about an issuer, it is difficult for an investor or other market 
participant to evaluate the issuer and the risks involved in 
purchasing or selling its securities. See id. at 58208.
    \49\ See infra Part VI.C.2.
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    The Commission is adopting substantially as proposed several 
amendments to the Rule, as discussed above. However, the Commission has 
modified the proposed Rule in a number of respects. Summarized below 
are key modifications from the proposal:
     Piggyback Exception. The Commission is adopting the 
proposed amendments to the piggyback exception with several targeted 
modifications: Requiring at least a one-way priced quotation (as 
opposed to two-way priced quotations); \50\ removing from the exception 
the 30-calendar-day window but still requiring that no more than four 
days in succession elapse without a quotation; \51\ permitting broker-
dealers to rely on the piggyback exception to publish quotations for 
the security of a shell company for the 18 months following the initial 
priced quotation for an issuer's security that is published or 
submitted in an IDQS; \52\ and providing a limited, conditional grace 
period to permit broker-dealers to continue to rely on the piggyback 
exception to publish quotations for an issuer in certain instances when 
the issuer's paragraph (b) information ceases to be, depending on the 
regulatory status of the issuer, current and publicly available, timely 
filed, or filed within 180 calendar days from a specified time 
frame.\53\
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    \50\ Amended Rule 15c2-11(f)(3)(i)(A).
    \51\ Amended Rule 15c2-11(f)(3)(i)(A). As discussed above, the 
former Rule required that quotations must have appeared on each of 
at least 12 days during the previous 30 calendar days, with no more 
than four consecutive business days in succession without a 
quotation. Former Rule 15c2-11(f)(3)(i), (ii).
    \52\ See Amended Rule 15c2-11(f)(3)(i)(B)(2).
    \53\ See Amended Rule 15c2-11(f)(3)(ii).
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     Specified Information. The Commission is adopting a 
provision to clarify that issuers that make filings pursuant to 
Regulation Crowdfunding are reporting issuers for purposes of the 
Rule.\54\ For catch-all issuers, the Commission is also: (1) Expanding 
the list of information specified in paragraph (b) to include the 
address of the issuer's principal place of business, the state of 
incorporation of each of the issuer's predecessors (if any), the ticker 
symbol of the issuer's security (if assigned), and the title of each 
company insider; \55\ and (2) requiring the issuer's most recent 
balance sheet to be as of a date less than 16 months before the 
publication or submission of a broker-dealer's quotation and the 
issuer's profit and loss and retained earnings statements to be for the 
12 months preceding the date of the most recent balance sheet.\56\
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    \54\ Amended Rule 15c2-11(b)(3)(iii).
    \55\ See paragraphs (b)(5)(i)(B), (C), (D), and (K) of the 
amended Rule, respectively, for such requirements.
    \56\ See Amended Rule 15c2-11(b)(5)(i)(L). As discussed below in 
Part II.B.3, the Commission has determined not to adopt the proposed 
requirement for a catch-all issuer's balance sheet that is not as of 
a date less than six months before the publication or submission of 
the broker-dealer's quotation to be accompanied with profit and loss 
and retained earnings statements for the period from the date of 
such balance sheet to a date that is less than six months before the 
publication or submission of the quotation.
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     Unsolicited Quotation Exception. The Commission is 
limiting reliance on the exception for a quotation on behalf of either 
a company insider, as proposed, or an affiliate of the issuer if the 
issuer's paragraph (b) information is not current and publicly 
available; modifying the exception to permit broker-dealers to rely on 
a written representation from a customer's broker that such customer is 
not a company insider or an affiliate; \57\ and clarifying

[[Page 68129]]

that broker-dealers may rely on a publicly available determination by a 
qualified IDQS or a registered national securities association that an 
issuer's information is current and publicly available.\58\
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    \57\ See Amended Rule 15c2-11(f)(2)(iii)(A). While the 
Commission proposed this limitation with respect to quotations that 
are published or submitted on behalf of company insiders, the 
amended Rule also applies this limitation with respect to affiliates 
of the issuer.
    \58\ See Amended Rule 15c2-11(f)(2)(iii)(B).
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     ADTV and Asset Test Exception. The Commission is 
clarifying in the rule text that the worldwide ADTV value must be 
``reported'' and eliminating the term ``unaffiliated'' from the 
shareholders' equity prong of the three-part test.\59\
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    \59\ See infra Part II.F.
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     Publicly Available Determination That an Exception 
Applies. The Commission is adopting the proposed exception for a 
broker-dealer to rely on a qualified IDQS's or registered national 
securities association's publicly available determination that an 
exception applies; however, the Commission is not adopting the 
provision in the exception that would have required a qualified IDQS or 
registered national securities association to make a publicly available 
determination that an issuer's information is current and publicly 
available in addition to its determination that an exception 
applies.\60\ The Commission is adding a new provision that a qualified 
IDQS or a registered national securities association that makes certain 
publicly available determinations must establish, maintain, and enforce 
certain reasonably designed written policies and procedures.\61\ The 
Commission is making conforming changes in the rule text to clarify 
that a broker-dealer may rely on publicly available determinations 
regarding the exception for exchange-traded securities, the piggyback 
exception, the exception for municipal securities, and the ADTV and 
asset test exception.\62\
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    \60\ See Proposed Rule 15c2-11(f)(8)(i).
    \61\ Amended Rule 15c2-11(a)(3). The Commission, therefore, is 
not adopting in each of the exceptions that reference a publicly 
available determination the proposed requirement for a qualified 
IDQS or a national securities association to make a publicly 
available determination that it ``has'' certain reasonably designed 
written policies and procedures, as proposed paragraph (f)(8)(iii) 
would have required.
    \62\ See Amended Rule 15c2-11(f)(7).
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     Location of Publicly Available Specified Information. The 
Commission is expanding the list of locations where issuer information 
may be made publicly available to include (in addition to EDGAR and the 
website of a qualified IDQS, a registered national securities 
association, an issuer, and a broker-dealer) the website of: (1) A 
state or federal agency, and (2) an electronic delivery system that is 
generally available to the public in the primary trading market of a 
foreign private issuer.\63\
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    \63\ Amended Rule 15c2-11(e)(5).
---------------------------------------------------------------------------

A. Unlawful Activity

1. Current and Publicly Available Issuer Information--Rule 15c2-
11(a)(1)(i)(B), (a)(2)(ii)
    The Commission is adopting, largely as proposed, the amendment that 
requires an issuer's paragraph (b) information to be current and 
publicly available \64\ for a broker-dealer to publish or submit an 
initial quotation for that issuer's security. Consistent with the 
proposed Rule, the amended Rule provides that the particular 
information that a broker-dealer must obtain and review is determined 
by an issuer's regulatory status: Whether the issuer (1) filed a 
registration statement under the Securities of Act of 1933 (a 
``prospectus issuer''), (2) filed an offering statement under 
Regulation A \65\ (a ``Reg. A issuer''), (3) is subject to the periodic 
reporting requirements of the Exchange Act, Regulation A or Regulation 
Crowdfunding, or is the issuer of a security covered by Section 
12(g)(2)(G) of the Exchange Act (a ``reporting issuer''), or (4) is a 
foreign private issuer that is exempt from registration under Exchange 
Act Section 12(g) pursuant to Rule 12g3-2(b) (an ``exempt foreign 
private issuer''). Such issuers are subject to statute- or rule-based 
disclosure and reporting requirements under the federal securities 
laws. An issuer that does not fall within any of these categories and 
is generally not subject to similar statute- or rule-based disclosure 
and reporting requirements under the federal securities laws is 
referred to as a ``catch-all issuer.'' \66\ Consistent with the 
proposed Rule, the amended Rule requires that an issuer's paragraph (b) 
information be current and publicly available for all issuers, 
including catch-all issuers, for a broker-dealer to initiate or resume 
a quoted market in an issuer's security.\67\
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    \64\ For purposes of this release, the terms ``current'' and 
``publicly available'' have the same meaning as their definitions in 
paragraphs (e)(2) and (e)(5) of the amended Rule, respectively. See 
infra Part II.J.1. The definition of the term ``current'' as used in 
this release may differ from its meaning in other Commission rules 
(e.g., Securities Act Rule 144).
    \65\ See Rules 251 and 252 of Regulation A. The proposal used 
the term ``notification'' instead of ``offering statement'' to refer 
to the specified information for a Reg. A issuer, and the Commission 
is making a technical edit in the amended Rule to use the term 
``offering statement'' to be consistent with Regulation A. See 
Amended Rule 15c2-11(b)(2).
    \66\ For purposes of this release, the term ``catch-all issuer'' 
refers to issuers for which documents and information are specified 
in paragraph (b)(5) of the proposed Rule and amended Rule. As 
discussed in more detail below, this term refers to an issuer for 
which the documents and information specified in paragraphs (b)(1) 
through (b)(4) of the proposed Rule or amended Rule do not apply. As 
discussed below in Part II.B.5, the amended Rule treats reporting 
issuers that are delinquent in their filing obligations (i.e., their 
paragraph (b) information is not ``current'') as catch-all issuers 
only for purposes of initiating or resuming a quoted market in these 
issuers' securities. However, other catch-all issuers may have no 
Exchange Act or Securities Act reporting or disclosure obligation 
whatsoever.
    \67\ Specifically, the amended Rule requires an issuer's 
paragraph (b) information (excluding, in the case of a catch-all 
issuer, the documents and information specified in paragraphs 
(b)(5)(i)(N) through (P)) to be current and publicly available. See 
Amended Rule 15c2-11(a)(1)(i)(B), (a)(2)(ii). Paragraph (b) 
information must be current and publicly available, consistent with 
(1) a broker-dealer's determination, as part of its compliance with 
the information review requirement, that an issuer's paragraph (b) 
information is current and publicly available or a qualified IDQS's 
publicly available determination that it has complied with the 
information review requirement, including the requirement in 
paragraph (a)(2)(ii) that the issuer's paragraph (b) information is 
current and publicly available; and (2) the broker-dealer publishing 
or submitting a quotation within three business days after it 
complies with the information review requirement or the qualified 
IDQS makes such publicly available determination. As discussed below 
in Part II.A.3, this three-business-day requirement is designed to 
promote the commencement of a quoted market in a security 
concomitant with current information about the issuer of that 
security.
---------------------------------------------------------------------------

    The Commission sought comment about the proposal's requirement that 
an issuer's paragraph (b) information be current and publicly available 
for a broker-dealer to publish or submit, after complying with the 
information review requirement or after relying on the review performed 
by a qualified IDQS,\68\ an initial quotation for that issuer's 
security in a quotation medium.\69\

[[Page 68130]]

Certain commenters supported the principle of increased access to 
issuer information to support informed investment decisions,\70\ 
observing that the internet has created new ways of accessing and 
storing information, as well as the rise of online brokerages, which 
has made trading securities easier and less expensive than it was when 
the Rule was last substantively amended.\71\ The Commission also 
received comments that did not support increased transparency; in 
particular, the Commission received numerous comments on the proposed 
requirement for an issuer's paragraph (b) information to be current and 
publicly available to remain eligible for the piggyback exception, as 
discussed below in Part II.D.1. However, the Commission did not receive 
any comments specifically relating to the proposed requirement for 
current and publicly available information in the context of publishing 
or submitting an initial quotation for an issuer's security. The 
Commission is adopting this provision related to broker-dealers' 
initial quotations largely as proposed.
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    \68\ For purposes of this release, the ``proposed qualified IDQS 
review exception'' refers to the proposed exception provided in 
paragraph (f)(7) of the proposed Rule. The ability of a broker-
dealer to initiate or resume a quoted market in a security in 
response to a qualified IDQS's publicly available determination that 
it complied with the information review requirement is substantively 
adopted; however, this provision no longer appears as an exception 
under paragraph (f) of the amended Rule and, instead, appears in the 
amended Rule's unlawful activity provision under paragraph 
(a)(1)(ii). For a discussion of this amendment, see infra Part 
II.A.3.
    \69\ Proposed Rule 15c2-11(a)(1)(ii), (a)(2)(ii). While the 
Commission proposed to require that an issuer's paragraph (b) 
information be current and publicly available for a broker-dealer to 
rely on certain exceptions to publish or submit quotations for that 
issuer's security (e.g., the proposed amendments to the piggyback 
exception), paragraph (a) of the proposed Rule and the amended Rule 
address broker-dealers' initial quotations that are published or 
submitted to commence a quoted market once they have either complied 
with the information review requirement or relied on a qualified 
IDQS's publicly available determination that it complied with the 
information review requirement.
    \70\ See, e.g., Letter from Christopher Gerold, President, North 
American Securities Administrators Association, Inc., to Vanessa 
Countryman, SEC (Dec. 27, 2019) (``NASAA Letter''); Letter from 
Brenda Hamilton, Hamilton & Associates Law Group, P.A., to Vanessa 
Countryman, Sec'y, SEC (Oct. 15, 2019) (``Hamilton & Associates 
Letter''); Josh Lawler, Partner, Zuber Lawler & Del Duca LLP (Feb. 
24, 2020) (``Zuber Lawler Letter''); Michael E. Reiss; Jim Rivest; 
Robert E. Schermer, Jr.; Michael Tofias (Oct. 21, 2019); see Peter 
Kniffin (Oct. 12, 2019); Sosnow & Associates Letter.
    \71\ See Hamilton & Associates Letter (``The result has been the 
entry of large numbers of new investors into the once-obscure OTC 
market. Revisions to the Rule are long overdue.''); see Dana Blanc; 
Doug Mohn.
---------------------------------------------------------------------------

    As discussed below in relation to the piggyback exception, the 
Commission believes that the public availability of an issuer's 
paragraph (b) information helps to alleviate concerns that limited or 
no information for certain OTC issuers, such as catch-all issuers, 
exists or that such information is difficult for retail investors to 
find.\72\ However, the Commission also believes that the amended Rule's 
requirement that an issuer's paragraph (b) information be current and 
publicly available for a broker-dealer to quote the issuer's security 
should not result in an obligation for the public availability of 
current information for catch-all issuers that is more onerous than the 
disclosure obligations for reporting issuers under the federal 
securities laws. The Commission believes that this is important because 
not all catch-all issuers have a reporting or disclosure obligation 
under the federal securities laws, and catch-all issuers' paragraph (b) 
information might not be updated more frequently than annually if the 
issuer's state or local disclosure regulations do not impose such a 
requirement. Accordingly, the Commission has made a modification to the 
proposed information review requirement for broker-dealers to publish 
or submit initial quotations. For broker-dealers to publish or submit 
initial quotations (and also for broker-dealers to rely on the 
piggyback exception, as discussed below), the Commission is not 
requiring certain financial information for catch-all issuers to be as 
of a date less than six months of the publication or submission of a 
broker-dealer's quotation for a catch-all issuer's security.\73\ 
Instead, the Commission is requiring that the issuer's: (1) Most recent 
balance sheet must be as of a date less than 16 months before the 
publication or submission of the broker-dealer's quotation, and (2) 
profit and loss and retained earnings statements must be as of a date 
for the 12 months preceding the date of such balance sheet.\74\ 
Consistent with the proposed Rule, the amended Rule provides that, for 
a broker-dealer to initiate or resume a quoted market in a catch-all 
issuer's security, the catch-all issuer information specified in 
paragraph (b)(5)(i), excluding the issuer's financial information 
described above, must be as of a date within 12 months before the 
publication or submission of the quotation.\75\
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    \72\ See, e.g., Ulf Br[uuml]ggemann et al., The Twilight Zone: 
OTC Regulatory Regimes and Market Quality, 31 Rev. Fin. Stud. 898, 
907 (2018) (noting difficulties in accessing information about 
companies, even information filed with state regulators); Jeff 
Swartz, The Twilight of Equity Liquidity, 34 Cardozo L. Rev. 531, 
573 (2012) (stating that this situation is particularly problematic 
because unsophisticated investors make up a large portion of OTC 
market participants); see also Michael K. Molitor, Will More 
Sunlight Fade the Pink Sheets? Increasing Public Information About 
Non-Reporting Issuers with Quoted Securities, 39 Ind. L. Rev. 309, 
311, 337 (2006). In addition, increasing the public availability of 
current information about OTC issuers has the potential to 
counteract misinformation, which can proliferate through promotions 
and other channels. See infra Part VI.B.2.c.
    \73\ See infra Part II.B.3.
    \74\ See Amended Rule 15c2-11(b)(5)(i)(L); see also infra Part 
II.J.1.
    \75\ See Amended Rule 15c2-11(b)(5)(i).
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2. Qualified IDQS That Complies With the Information Review 
Requirement--Rule 15c2-11(a)(2)(i) Through (iv)
    The Commission is expanding the scope of market participants that 
may comply with the information review requirement.\76\ Paragraph 
(a)(2) of the amended Rule permits a qualified IDQS to make known to 
others the publication or submission of a quotation by a broker-dealer 
that relies on a qualified IDQS's compliance with the information 
review requirement, so long as certain criteria are met (a ``qualified 
IDQS review quotation'').\77\ The qualified IDQS that makes known to 
others the quotation of a broker-dealer that is published or submitted 
pursuant to paragraph (a)(1)(ii) of the amended Rule must first have 
complied with paragraphs (a), (b), and (c) of the amended Rule, which 
require the qualified IDQS to review the issuer's paragraph (b) 
information and any of its supplemental information in compliance with 
the information review requirement. In addition, a qualified IDQS that 
complies with the information review requirement must also comply with 
the recordkeeping requirement in paragraph (d)(1)(i)(B) of the amended 
Rule.
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    \76\ See Proposing Release at 58212. Consistent with the 
proposal, paragraph (a)(2) of the amended Rule does not impose an 
affirmative obligation on a qualified IDQS to comply with the 
information review requirement; rather, paragraph (a)(2) makes it an 
unlawful activity for a qualified IDQS to make known to others the 
publication or submission of a quotation by a broker-dealer that 
relies on the qualified IDQS's compliance with the information 
review requirement, unless the qualified IDQS has obtained and 
reviewed the applicable specified issuer documents and information 
in compliance with the information review requirement and made a 
publicly available determination of such compliance.
    \77\ Amended Rule 15c2-11(a)(2). The definition of the term 
``qualified interdealer quotation system'' under the amended Rule is 
discussed below in Part II.J.4.
---------------------------------------------------------------------------

    The Commission proposed to permit a qualified IDQS to make known to 
others the publication or submission of a qualified IDQS review 
quotation.\78\ The Commission also proposed to define the term 
``qualified interdealer quotation system'' to mean any IDQS that meets 
the definition of an ``alternative trading system'' (an ``ATS'') under 
Rule 300(a) of Regulation ATS and operates pursuant to the exemption 
from the definition of an ``exchange'' under Rule 3a1-1(a)(2) of the 
Exchange Act.'' \79\ Under the proposed Rule, broker-dealers would have 
been able to publish or submit quotations based on their reliance on a 
qualified IDQS's publicly available determination that it complied with 
the information review requirement.\80\ In addition, under the proposed 
Rule, the activities that satisfy the information review requirement 
that

[[Page 68131]]

would apply to a qualified IDQS (i.e., obtaining and reviewing the 
applicable paragraph (b) information and supplemental information) 
would be the same as those that would apply to a broker-dealer.\81\
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    \78\ See Proposing Release at 58213.
    \79\ Proposed Rule 15c2-11(e)(5).
    \80\ See Proposing Release at 58213; see also Proposed Rule 
15c2-11(f)(7).
    \81\ See Proposing Release at 58213.
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    The Commission sought comment about the proposed amendment to 
permit qualified IDQSs to comply with the information review 
requirement.\82\ This aspect of the proposal received no comment in 
opposition, and commenters who supported the proposal stated that it 
expands the types of entities that may comply with the information 
review requirement, modernizes the information review process, and 
makes the process more efficient.\83\ The Commission has determined to 
adopt this provision substantially as proposed, with technical 
edits.\84\
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    \82\ Proposed Rule 15c2-11(a)(2).
    \83\ See, e.g., Letter from James Berns, Berns & Berns, to 
Vanessa Countryman, Sec'y, SEC (Aug. 31, 2020); Coral Capital 
Letter; CrowdCheck Letter; see also HTFL Letter; Lowy Letter.
    \84\ The amended Rule replaces the phrase ``required by'' with 
``specified in'' and adds the word ``the'' to the requirement that 
``[s]uch qualified interdealer quotation system ha[ve] in its 
records the documents and information specified in paragraph (b) of 
this section . . . .'' Amended Rule 15c2-11(a)(2)(i) (emphasis 
added). Paragraph (a)(2) of the amended Rule also includes the 
phrase ``for publication'' to mirror the text of paragraph (a)(1), 
updates the cross-reference to paragraph (a)(1)(ii) of the amended 
Rule, and removes in three instances the word ``and.''
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    A qualified IDQS's requirements under paragraph (a)(2) of the 
amended Rule mirror the requirements for broker-dealers under paragraph 
(a)(1) of the amended Rule.\85\ The amended Rule's recordkeeping 
requirements for broker-dealers and qualified IDQSs should aid in 
Commission oversight of compliance with the Rule's provisions. Finally, 
the notice and reporting requirements for an IDQS that operates as an 
ATS under the Exchange Act contribute to the Commission's effective 
oversight of ATSs.
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    \85\ The shell company limitation in paragraph (f)(7)(i) of the 
proposed qualified IDQS review exception is not incorporated into 
the information review requirement for qualified IDQSs under the 
amended Rule. The Commission believes that the investor protections 
provided from a qualified IDQS's compliance with the information 
review requirement for a shell company helps to ensure that a quoted 
market for its security is less susceptible to fraudulent or 
manipulative schemes because the qualified IDQS must have a 
reasonable basis for believing that the shell company's information 
is accurate in all material respects and from a reliable source 
before a broker-dealer can initiate or resume a quoted market in the 
shell company's security.
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3. Broker-Dealer That Relies on a Qualified IDQS's Publicly Available 
Determination That It Complied With the Information Review 
Requirement--Rule 15c2-11(a)(1)(ii)
    The Commission is adopting a new provision in the amended Rule to 
allow broker-dealers to rely on a qualified IDQS's publicly available 
determination that it complied with the information review 
requirement.\86\ The amended Rule, consistent with the proposed Rule, 
sets forth certain criteria for a broker-dealer to publish or submit a 
quotation in reliance on a qualified IDQS's compliance with the 
information review requirement.
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    \86\ See Amended Rule 15c2-11(a)(1)(ii).
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    The Commission sought comment about the proposal for an exception 
to permit a broker-dealer to publish or submit a qualified IDQS review 
quotation.\87\ The Commission received comment supporting this 
provision.\88\ Commenters who supported the proposed exception stated 
that it would: (1) Reduce burdens for broker-dealers by expanding the 
scope of entities that may comply with the information review 
requirement, (2) modernize and make the Rule more efficient, and (3) 
promote more competition to improve the overall process.\89\ One 
commenter also stated that the qualified IDQS review exception should 
be collapsed into the Rule's unlawful activity provision to simplify 
the Rule.\90\
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    \87\ Proposed Rule 15c2-11(f)(7). The Commission stated that the 
proposed exception would have reduced the burden on broker-dealers 
in connection with initiating or resuming a quoted market in an OTC 
security. Under the proposed exception: (1) A broker-dealer would 
need to have published or submitted a quotation within three 
business days after the qualified IDQS made its determination 
publicly available, and (2) broker-dealers could rely on the 
exception only during the 30 calendar days after the first quotation 
was published or submitted in reliance on the proposed exception. 
These timing requirements were intended, among other things, to 
ensure that the broker-dealer would commence a quoted market shortly 
after the qualified IDQS makes the applicable publicly available 
determination and to provide an opportunity for the broker-dealer to 
establish the frequency of quotations that the proposed amendments 
to the piggyback exception would require. See Proposing Release at 
58231. Further, the proposed exception would not have applied if the 
issuer of a security were a shell company. See Proposed Rule 15c2-
11(f)(7)(i).
    \88\ Coral Capital Letter (stating that the exception should 
apply to the securities of shell companies and penny stocks); 
Canaccord Letter; Letter from Daniel Zinn, General Counsel, and Cass 
Sanford, Associate General Counsel, OTC Mkts. Grp. Inc., to SEC 
(Nov. 25, 2019) (``OTC Markets Group Letter 1''); Letter from Daniel 
Zinn, General Counsel, and Cass Sanford, Associate General Counsel, 
OTC Mkts. Grp. Inc., to SEC (Dec. 30, 2019) (``OTC Markets Group 
Letter 2''); Letter from F. Mark Reuter, Partner, Keating, Muething 
& Klekamp (Dec. 13, 2019) (``Keating Letter''); SIFMA Letter. 
Commenters also supported the proposal with respect to publicly 
available determinations that issuer information is current and 
publicly available. Zuber Lawler Letter.
    \89\ Coral Capital Letter; see Keating Letter.
    \90\ See Letter from Daniel Zinn, General Counsel, and Cass 
Sanford, Associate General Counsel, OTC Mkts. Grp. Inc., to SEC 
(Apr. 8, 2020) (``OTC Markets Group Letter 3''). This commenter also 
suggested a reordering of the Rule such that there would no longer 
exist a need to distinguish between initial versus ongoing quoting 
requirements, according to the commenter. Id.
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    The Commission is adopting new paragraph (a)(1)(ii) of the amended 
Rule,\91\ which substantively is the same as the proposed exception to 
permit broker-dealers to rely on a qualified IDQS's publicly available 
determination that it complied with the information review 
requirement.\92\ Specifically, this provision requires a broker-
dealer's quotation to be published or submitted within three business 
days after the qualified IDQS makes a publicly available 
determination.\93\ Unlike the proposed Rule, the amended Rule does not 
include a 30-calendar-day limitation for broker-dealers to rely on a 
qualified IDQS's publicly available determination.\94\ To ensure that 
there is current issuer information at the initiation of a quoted 
market in such issuer's security, the Commission has determined to 
adopt the proposed requirement that a broker-dealer's quotation must be 
published within three business days of the qualified IDQS making 
publicly available its determination. This three-business-day window is 
designed to help ensure that there is a very limited time period 
between the information review conducted by the qualified IDQS and the 
first quotation published or submitted by a broker-dealer in reliance 
on the qualified IDQS's publicly available determination that it 
complied with the information review requirement.\95\ As discussed 
below,

[[Page 68132]]

broker-dealers that publish quotations pursuant to paragraph (a)(1)(ii) 
need only to preserve the name of the qualified IDQS that made the 
publicly available determination that it has complied with the 
information review requirement.\96\
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    \91\ This provision is substantively the same as that in the 
proposed exception but is achieved through different means; the 
amended Rule provides this ability in a single place, under the 
unlawful activity provision, while the proposed Rule largely 
provided this through an exception. The amendments as modified are 
designed to streamline the amended Rule and facilitate compliance.
    \92\ See Proposed Rule 15c2-11(f)(7).
    \93\ See infra note 95 (stating that this three-business-day 
window is consistent with the time frame specified for the required 
manner in which current reports must be obtained under paragraph 
(b)(3) of the amended Rule).
    \94\ As discussed below in Part II.D.5, the piggyback exception 
under the amended Rule no longer has a timing requirement of 30 
calendar days following the initiation (or resumption) of a quoted 
market for securities to establish piggyback eligibility.
    \95\ The requirement for a broker-dealer's quotation to be 
published within three business days of the qualified IDQS making 
publicly available its determination is consistent with the time 
frame specified for the required manner in which current reports 
must be obtained under amended Rule 15c2-11(b)(3), as discussed 
below in Part II.B.1. Further, this three-business-day window is 
designed to take account of the fact that certain issuer information 
(e.g., a current report) is not filed at regular intervals. 
Accordingly, the three-business-day window provides a limited time 
frame during which a quoted market for an issuer's security can be 
initiated following the potential disclosure of new information 
about the issuer. This requirement that a broker-dealer's quotation 
be published within three business days of the qualified IDQS making 
its publicly available determination applies equally for publicly 
available determinations across all issuers, including those that do 
not have a reporting or disclosure obligation under the federal 
securities laws, to promote the investor protections that result 
from the commencement of a quoted market in a security concomitant 
with current information about the issuer of that security.
    \96\ See infra Part II.I (discussing the recordkeeping 
requirement).
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    In response to a comment stating that entities other than a broker-
dealer or a qualified IDQS should be able to comply with the 
information review requirement,\97\ the Commission does not believe 
that it would be appropriate to further expand the scope of entities 
that may comply with the Rule's information review requirement. The 
Commission's oversight of, and regulatory requirements for, broker-
dealers and qualified IDQSs under the Exchange Act would help to 
promote compliance with the information review requirement and enhance 
investor protection.\98\ Other commenters stated that the Rule should 
permit broker-dealers to rely on the determination of a qualified IDQS: 
(1) To initiate quotes in these securities without requiring a broker-
dealer or qualified IDQS to file a separate Form 211 with the Financial 
Industry Regulatory Authority (``FINRA''),\99\ and (2) to publish 
subsequent quotations without the 30-calendar-day ``piggyback 
eligibility'' period following the initial quotation.\100\ One 
commenter requested clarification on whether a qualified IDQS would 
need to submit a Form 211 to FINRA for a broker-dealer to rely on a 
qualified IDQS's publicly available determination that it complied with 
the information review requirement before it could publish a quotation 
for some or all categories of securities.\101\ The requirement to file 
a Form 211 falls under FINRA Rule 6432. The amended Rule does not 
impose obligations with respect to FINRA Rule 6432 and does not require 
qualified IDQSs, or broker-dealers relying on a qualified IDQS's 
publicly available determination that an exception applies, to file 
Forms 211 with FINRA. During and after the transition period, the 
Commission will continue to monitor the operation of this market and 
expects FINRA to do the same, including through examinations of 
qualified IDQSs. The Commission's staff expects to work with FINRA on 
an ongoing basis regarding the implementation of the amended Rule.\102\
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    \97\ Coral Capital Letter.
    \98\ See Proposing Release at 58236.
    \99\ Canaccord Letter; STA Letter; Virtu Letter.
    \100\ Letter from Laura Anthony, Anthony L.G., PLLC, to SEC 
(Feb. 26, 2020) (``Anthony Letter''); Letter from Leonard Burningham 
to SEC (Dec. 30, 2019), and Letter from Leonard Burningham to SEC 
(Dec. 30, 2019) (collectively, the ``Leonard Burningham Letters''); 
OTC Markets Group Letter 2; OTC Markets Group Letter 3 (advocating 
for an elimination of the three-business-day requirement for 
reliance on the exception); SIFMA Letter.
    \101\ FINRA Letter (stating that its current rules do not 
contemplate that a qualified IDQS would be required to submit a Form 
211 to FINRA and that the Form 211 includes a certification 
attesting that the submitting broker-dealer has not accepted and 
will not accept payments from the issuer of the security to be 
quoted for market making, which applies to the filing of a Form 
211).
    \102\ As discussed below in Part II.P, the Commission staff 
intends to offer assistance and support to covered entities during 
the transition period and thereafter, with the aim of helping to 
ensure that the investor protections and other benefits of the 
amended Rule are implemented in an efficient and effective manner.
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4. Policies and Procedures for Making Certain Publicly Available 
Determinations--Rule 15c2-11(a)(3)
    The Commission has determined to require a qualified IDQS or 
registered national securities association that makes certain publicly 
available determinations in accordance with the amended Rule to 
establish, maintain, and enforce reasonably designed written policies 
and procedures associated with making such a determination. Such 
publicly available determinations may pertain to whether: (1) An 
issuer's paragraph (b) information is current and publicly available 
for purposes of the unsolicited quotation exception,\103\ (2) the 
piggyback exception's grace period applies,\104\ or (3) the 
requirements of a certain exception (i.e., the exchange-traded security 
exception, the piggyback exception, the municipal security exception, 
or the ADTV and asset test exception) are met.\105\ Under the proposed 
Rule, the qualified IDQS or registered national securities association 
would have had to make a publicly available determination that it has 
reasonably designed policies and procedures in place and being 
maintained and enforced to determine whether the applicable paragraph 
(b) information is current and publicly available, and that the 
requirements of an exception are met.\106\
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    \103\ See Amended Rule 15c2-11(f)(2)(iii)(B).
    \104\ See Amended Rule 15c2-11(f)(3)(ii)(A).
    \105\ See Amended Rule 15c2-11(f)(7).
    \106\ Proposing Release at 58232; see Proposed Rule 15c2-
11(f)(8)(iii).
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    Commenters expressed general concern that the proposal would weaken 
Commission oversight of compliance with the Rule.\107\ The Commission 
is strengthening the proposed Rule's policies and procedures 
requirements for making such publicly available determinations. Instead 
of requiring a qualified IDQS or registered national securities 
association to make a publicly available determination that it ``has'' 
reasonably designed policies and procedures, the amended Rule requires 
such entities to establish, maintain, and enforce reasonably designed 
written policies and procedures to make the particular publicly 
available determination.
---------------------------------------------------------------------------

    \107\ See, e.g., Steven Gereau, Mayfair Plastics Inc. (Sept. 30, 
2019); Tom Prenger (Sept. 30, 2019).
---------------------------------------------------------------------------

    Specifically, paragraph (a)(3) under the amended Rule requires a 
qualified IDQS or registered national securities association that makes 
a publicly available determination regarding whether issuer information 
is current and publicly available, and, in some instances, whether the 
requirements of an exception are met, to establish, maintain, and 
enforce reasonably designed written policies and procedures to 
determine whether: (1) Paragraph (b) information is current and 
publicly available, and (2) the requirements of the paragraph (f)(7) 
exception are met.\108\ The obligation to establish, maintain, and 
enforce written policies and procedures specified in paragraph (a)(3) 
of the amended Rule is designed to help promote the integrity of such 
publicly available determinations and to facilitate Commission 
oversight of the qualified IDQS or registered national securities 
association that makes them.
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    \108\ Amended Rule 15c2-11(a)(3). Paragraph (a)(3) of the 
amended Rule applies to registered national securities associations 
(and qualified IDQSs) that make publicly available determinations, 
but a registered national securities association is not eligible to 
comply with the information review requirement, as provided in 
paragraphs (a)(1)(i)(A) through (C) and (a)(2)(i) through (iii) of 
the amended Rule.
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B. Specified Information

1. Current Reports--Rule 15c2-11(b)(3)(i) Through (iv)
    The Commission is adopting as proposed\109\ the requirement that a

[[Page 68133]]

broker-dealer or a qualified IDQS obtain current reports as of a date 
up to three business days before the publication or submission of the 
quotation in connection with the information review requirement.\110\ 
The Commission proposed to update and streamline the timing requirement 
for obtaining certain reports about material events affecting the 
issuer of a quoted security, such as a Form 8-K or Form 6-K, in 
connection with the information review requirement.\111\ Prior to the 
amendment, the Rule required that a broker-dealer obtain such reports 
on the earlier of five business days before: (1) The initial 
publication or submission of a quotation; or (2) the date of submission 
of certain information pursuant to applicable rules of FINRA or its 
successor.\112\
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    \109\ See Proposing Release at 58214. The proposed Rule would 
revise the timing requirement from five business days to three 
business days and would streamline the timing standard associated 
with obtaining current reports by removing the requirement regarding 
a broker-dealer's demonstration of its compliance with the Rule by 
filing a form (i.e., a Form 211) with FINRA, which must be received 
at least three business days before the broker-dealer's quotation is 
published or displayed in a quotation medium. Thus, the proposed 
Rule would require that a broker-dealer or qualified IDQS obtain all 
current reports as of a date up to three business days before the 
initial publication or submission of a quotation. The proposed 
timing requirement was intended to reflect that, in today's market, 
reports, such as a Form 8-K, are easily accessible and can be 
obtained in a timely manner. In addition, the proposed requirement 
to obtain all current reports as of a certain date is related to the 
initiation or resumption of a quoted market for a security, not to 
the requirements of applicable FINRA rules for a broker-dealer to 
submit certain information to FINRA. See id. These changes were 
intended to require broker-dealers and qualified IDQSs to obtain 
current reports closer in time to the initial publication or 
submission of a quotation.
    \110\ Amended Rule 15c2-11(b)(3)(i) through (iii).
    \111\ Proposed Rule 15c2-11(b)(3)(i) through (iii). Current 
reports filed with the Commission include, but are not limited to, 
current reports on Form 8-K pursuant to Section 13 or 15(d) of the 
Exchange Act and current reports on Form 1-U pursuant to Rule 
257(b)(4) of Regulation A. See Proposing Release at 58214 n.58.
    \112\ Former Rule 15c2-11(d)(2)(i). The timing standard for 
obtaining current reports in paragraph (d)(2)(i) of the former Rule 
was incorporated, with a modification, into paragraphs (b)(3)(i) 
through (iii) of the proposed Rule.
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    In response to the proposal, one commenter expressed concern that 
the proposal imposed a requirement to wait three business days before 
publishing quotations,\113\ while another suggested that the Commission 
remove the three-day-window.\114\ After consideration of these 
comments, the Commission has determined to adopt the provision as 
proposed. As discussed in the Proposing Release, events that require 
the filing of current reports, such as a Form 8-K or Form 6-K, 
generally involve material events affecting an issuer.\115\ The three-
business-day period recognizes that current reports are not filed at 
regular intervals, and thus removing the entire period would be 
impractical. For example, a reporting issuer might file a current 
report, such as a Form 8-K, minutes before a broker-dealer publishes a 
quotation for such security. Therefore, the amended Rule, like the 
proposed Rule, provides a period during which such recently filed 
current reports will not be required paragraph (b) information for 
issuers that have a reporting obligation under Section 13 or 15(d) of 
the Exchange Act or Regulation A, although the amended Rule shortens 
the former Rule's five-day period to a three-day period.
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    \113\ See Coral Capital Letter.
    \114\ OTC Markets Group Letter 3.
    \115\ See Proposing Release at 58214.
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    This amendment is not designed to serve as a waiting period, as one 
commenter suggested,\116\ but rather as a cutoff date at which a 
broker-dealer is not required to consider a more recently filed current 
report to comply with the information review requirement prior to 
publishing or submitting a quote. For example, a broker-dealer could 
publish a quotation on the same day that it complies with the 
information review requirement or on the same day that a qualified IDQS 
makes a publicly available determination that it has complied with the 
information review requirement. The Commission believes that removing 
the three-business-day period would create an impractical result and 
require broker-dealers and qualified IDQSs to continuously monitor for 
the filing of current reports with the Commission in the three business 
days leading up to the publication or submission of a broker-dealer's 
quotation. The three-business-day period provides a degree of certainty 
in regard to compliance burdens for the uncertain timing surrounding 
current reports, while at the same time shortening the previously 
existing period to better achieve the Commission's goals.
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    \116\ See Coral Capital Letter.
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2. Reporting Issuer Provision--Rule 15c2-11(b)(3)
    To simplify the amended Rule and improve its readability, the 
Commission is breaking out the provisions governing paragraph (b) 
information for reporting issuers by addressing each type of issuer in 
a separate paragraph. This amendment would not have changed any 
substantive obligations for a broker-dealer under the Rule and would 
remove from the list of issuers those that are covered by Section 
12(g)(2)(B) under the Exchange Act because such issuers have a 
reporting obligation under Section 13 or 15(d) under the Exchange Act 
and would, therefore, already be covered by paragraph (b)(3)(i) under 
the proposed Rule.\117\ The Commission sought comment about this aspect 
of the proposal but did not receive any comment. The Commission is 
adopting the reorganized structure, as proposed.\118\
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    \117\ See Proposing Release at 58214.
    \118\ See Amended Rule 15c2-11(b)(3)(i) through (v). To make the 
amended Rule easier to read, the Commission is making a streamlining 
edit from the proposal by not adopting the proposed requirement in 
paragraphs (b)(3)(i)(B), (b)(3)(ii)(B), and (b)(3)(iii)(B) for a 
broker-dealer or qualified IDQS to have a reasonable basis for 
believing that the issuer is current in filing the applicable 
specified information. This requirement was redundant with the 
proposed Rule's information review requirement--and would have been 
redundant with the amended Rule's information review requirement--
that a broker-dealer or a qualified IDQS must have a reasonable 
basis for believing that the specified information is ``current and 
publicly available.'' See Amended Rule 15c2-11(a)(1)(i)(B) and (C), 
(a)(2)(ii) and (iii); Proposed Rule 15c2-11(a)(1)(ii) and (iii), 
(a)(2)(iii); see also infra Parts II.J.1 and 3 (discussing how 
paragraph (b) information that is filed by the applicable time 
frames specified in paragraph (b) for the issuer is current and 
publicly available for purposes of the amended Rule). Instead, 
paragraph (b)(3) of the amended Rule provides that the specified 
information for reporting issuers is a current copy of the documents 
and information that are listed under the applicable subparagraph 
under paragraph (b). This technical edit is appropriate because the 
definition of current for purposes of the amended Rule pertains to 
an issuer's paragraph (b) information and not to the issuer itself. 
See Amended Rule 15c2-11(e)(2); infra Part II.J.1. For a description 
of non-structural changes to the specified information provision for 
reporting issuers, see infra Part II.B.6, which discusses the 
addition of a specified information provision for crowdfunding 
issuers under the amended Rule.
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3. Catch-All Issuer Information--Rule 15c2-11(b)(5)(i)
    The Commission is also expanding the list of specified paragraph 
(b) information for catch-all issuers to include the identity of 
company officers and large shareholders, along with additional 
information that commenters suggested, and is lengthening the amount of 
time for all catch-all issuer information to be updated for such 
information to meet the definition of ``current.'' \119\ The Commission 
proposed to expand the list of specified paragraph (b) information 
associated with catch-all issuers to include the identity of company 
officers and large shareholders of the company.\120\ The proposed 
requirement to make such information publicly available was designed to 
make it easier for investors and other market participants to identify 
a more complete list of persons who are associated with the issuer and 
to research their backgrounds.\121\
---------------------------------------------------------------------------

    \119\ See Amended Rule 15c2-11(b)(5)(i).
    \120\ Proposed Rule 15c2-11(b)(5)(i)(K).
    \121\ See Proposing Release at 58214-15.
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    The Commission sought comment about the proposal to expand the list 
of

[[Page 68134]]

paragraph (b) information for catch-all issuers to include the identity 
of company insiders and larger shareholders of the company; the ticker 
symbol of the security being quoted; the address of the issuer's 
principal place of business if that address differs from the address of 
the issuer's principal executive offices; and any additional 
information to help accurately identify company insiders (e.g., job 
title). One commenter stated that a variety of securities trade in the 
OTC market and advocated for greater flexibility in the specified 
information that is required to be current and publicly available.\122\ 
The Commission believes that, by requiring different types of paragraph 
(b) information to address the wide variety of OTC issuers\123\ and by 
providing flexible requirements for such information to be current and 
publicly available,\124\ the amended Rule is appropriately tailored to 
each type of covered issuer. Further, the Commission believes that the 
list of catch-all issuer information that is required to be current and 
publicly available appropriately balances the fact that some catch-all 
issuers do not have a reporting obligation while protecting investors 
through the disclosure of a relatively limited amount of information 
that could help investors access information about the catch-all issuer 
before making an investment decision.
---------------------------------------------------------------------------

    \122\ Mitchell Partners Letter 1; see Letter from Philip Milner, 
Jr., to Hon. Jay Clayton (Nov. 26, 2019) (``Milner Letter''); 
Norberg Letter; Kyle M. Peeples (Dec. 1, 2019); Debby Valentijn.
    \123\ This specified information ranges from a registration 
statement for prospectus issuers to a list of specified information 
for a catch-all issuer. See Amended Rule 15c2-11(b)(1) through (5). 
Further, the paragraph (b) information for catch-all issuers that 
must be obtained and reviewed for a broker-dealer to initiate a 
quoted market does not approach the level of comprehensiveness that 
is required with respect to a company with reporting obligations 
under the federal securities laws. As discussed above, except for 
certain financial information, most paragraph (b) information for 
catch-all issuers is current if it is publicly available on an 
annual basis. In contrast, certain reporting issuers may have an 
obligation to file a report on a quarterly basis.
    \124\ For example, certain information for a catch-all issuer is 
not required to be current and publicly available for a broker-
dealer to rely on the piggyback exception. See Amended Rule 15c2-
11(f)(3)(i)(C)(3).
---------------------------------------------------------------------------

    Another commenter stated that the Rule's requirements for paragraph 
(b) information for catch-all issuers to be current and publicly 
available should not be as onerous as the disclosure obligations 
imposed on reporting companies and that information that is required to 
be current and publicly available should not be too complicated for an 
investor to read.\125\ The Commission believes that the information 
that is required to be current and publicly available for catch-all 
issuers includes basic information about the issuer and does not 
include the type of detail or complexity as is required for reporting 
issuers under the federal securities laws. For example, the amended 
Rule's specified information for catch-all issuers does not require 
that the issuer's balance sheet be audited. Other commenters requested 
that paragraph (b) information for catch-all issuers also include: Any 
trade sanctions to which the issuer is subject; \126\ the security's 
ticker symbol and CUSIP number; \127\ the address of the issuer's 
principal place of business if that address differs from the address of 
the issuer's principal executive office; \128\ the job titles of 
company insiders; \129\ the number of freely tradeable securities; 
\130\ and additional information with regard to an issuer's recent 
predecessors (over the prior five years), along with their state of 
incorporation and the CUSIP numbers of any equity securities issued by 
those predecessors.\131\ The Commission agrees that it is appropriate 
that some of this information be required to be disclosed to the 
investing public regarding catch-all issuers before a broker-dealer can 
publish or submit a quotation for securities of such issuers and, 
therefore, has determined to expand the former Rule's list of paragraph 
(b) information for catch-all issuers to include, in paragraph 
(b)(5)(i) of the amended Rule, the identity of company officers and 
large shareholders, as proposed, along with certain additional 
information that commenters suggested: (1) Job titles for company 
insiders, (2) the names of all of an issuer's predecessors during the 
past five years, (3) the issuer's principal place of business, (4) the 
state of incorporation or registration of each of the issuer's 
predecessors (if any) during the past five years, and (5) the ticker 
symbol (if assigned) during the past five years.\132\ The Commission 
has determined not to require all of the information suggested by 
commenters because the Commission believes that the catch-all issuer 
information required in paragraph (b) of the amended Rule strikes an 
appropriate balance between (1) ensuring that important basic 
information about an issuer is current and publicly available to 
commence a quoted market or rely on many of the amended Rule's 
exceptions (e.g., the piggyback exception), and (2) allowing broker-
dealers to facilitate demand in a quoted market for OTC securities 
without an overly burdensome list of information to prepare, obtain, 
and review.\133\ The public availability of this additional information 
about catch-all issuers will provide a more comprehensive look at the 
company and its operations for those making investment decisions before 
a broker-dealer can publish quotations for such issuers' securities.
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    \125\ Beacon Redevelopment Letter.
    \126\ Jean-Paul Tres (Dec. 29, 2019).
    \127\ Coral Capital Letter.
    \128\ Id.
    \129\ Id.
    \130\ FINRA Letter.
    \131\ Id.
    \132\ See Amended Rule 15c2-11(b)(5)(i).
    \133\ See infra Part VI.C.1.a.
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    One commenter suggested that the list of persons described in 
paragraph (b)(5)(i)(K) of the proposed Rule include the word 
``executive'' in front of the word ``officer'' because, according to 
the commenter, an issuer may employ many persons with the title of 
``officer'' who do not direct company-wide policies and do not manage 
the company.\134\ As stated in the proposal, the Commission believes 
that investors could benefit from knowing the identity of officers who 
manage a company.\135\ Further, the term ``officer'' refers to a 
person's management functions as opposed to his or her title. For 
example, under the amended Rule, while the term ``officer'' could be 
used to refer to a president, vice president, secretary, treasurer or 
principal financial officer, comptroller or principal accounting 
officer of a company, it can also refer to any person routinely 
performing corresponding functions with respect to the company.\136\ In 
complying with the information review requirement, a broker-dealer or 
qualified IDQS may rely on information regarding officers provided by a 
person whom the broker-dealer has a reasonable basis for believing is a 
reliable source, such as the issuer.\137\ Paragraph (b)(5)(i)(K) of the 
amended Rule uses the newly defined term ``company insider'' to replace 
the list of persons delineated in paragraph (b)(5)(i)(K) of the 
proposed Rule.\138\ As discussed below in Part II.L.5, this term is 
designed to capture persons who manage a company or have a greater 
degree of access to issuer information and who may have a heightened 
incentive to engage in fraudulent or manipulative conduct.\139\
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    \134\ Brian Brown, Chief Financial Officer and Treasurer, 
Computer Services, Inc. (Mar. 10, 2020) (``Computer Services 
Letter'').
    \135\ See Proposing Release at 58214.
    \136\ See Exchange Act Rule 3b-2.
    \137\ See infra Part II.O.
    \138\ Amended Rule 15c2-11(e)(1).
    \139\ For example, company insiders may stand to profit by 
selling the company shares they own during a pump-and-dump scheme. 
Proposing Release at 58225.

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[[Page 68135]]

    Finally, the Commission has determined not to adopt the proposed 
requirement that would have required certain catch-all issuer financial 
information--the issuer's profit and loss and retained earnings 
statements--to be as of a date less than six months before the 
publication or submission of a broker-dealer's quotation for a catch-
all issuer's security if the issuer's balance sheet were not as of a 
date within six months before such publication or submission of a 
quotation.\140\ As discussed below in Part II.D.1, the Commission also 
has lengthened the time period for financial information of catch-all 
issuers to be current and publicly available under the piggyback 
exception. Among other reasons, including those discussed below, the 
Commission believes that requiring such financial information for 
catch-all issuers to be compiled and published more frequently than 
annually would require an allocation of resources to the preparation of 
financial statements that is not justified in light of the facts that a 
catch-all issuer generally does not have any reporting or disclosure 
obligation under the federal securities laws and that an issuer's 
reporting obligations under state law generally are annual. In 
addition, the Commission believes that this time frame, in addition to 
the expansion of the list of specified information for catch-all 
issuers, as discussed above, will help provide investors with the 
appropriate tools to make better-informed investment decisions. 
Accordingly, the amended Rule specifies that, for a broker-dealer to 
initiate, resume, or maintain a quoted market in a catch-all issuer's 
security: \141\ (1) Such issuer's balance sheet is current if its most 
recent balance sheet is as of a date less than 16 months before the 
publication or submission of the broker-dealer's quotation,\142\ and 
(2) the issuer's profit and loss and retained earnings statements are 
current if they are for the 12 months preceding the date of such 
balance sheet.\143\ Consistent with the proposed Rule, the amended Rule 
also provides that catch-all issuer information specified in paragraph 
(b)(5)(i), excluding the issuer's financial information, is current if 
it is as of a date within 12 months before the publication or 
submission of the quotation.\144\
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    \140\ Amended Rule 15c2-11(b)(5)(i)(L).
    \141\ The timing requirements for a catch-all issuer's paragraph 
(b) information to be current (and publicly available) are the same 
notwithstanding whether a broker-dealer is initiating or resuming a 
quoted market in a catch-all issuer's security pursuant to paragraph 
(a) of the amended Rule or whether it is relying on the piggyback 
exception to maintain a quoted market in a catch-all issuer's 
security. For a discussion of the requirement for catch-all issuer 
information to be current and publicly available for a broker-dealer 
to initiate or resume a quoted market in a catch-all issuer's 
security, see supra Part II.A.1. For a discussion of the requirement 
for catch-all issuer information to be current and publicly 
available for a broker-dealer to maintain a quoted market in a 
catch-all issuer's security by relying on the piggyback exception, 
see infra Part II.D.1.
    \142\ As discussed above, the Commission is not requiring such 
financial information for catch-all issuers to be current and 
publicly available on a six-month basis, as proposed, because such a 
requirement would result in a catch-all issuer's financial 
information being compiled and published on a more frequent basis 
than the information of certain issuers that have a reporting or 
disclosure obligation under the federal securities laws, such as 
crowdfunding issuers. A period of 16 months allows time to finalize 
and make publicly available an annual balance sheet.
    \143\ See Amended Rule 15c2-11(b)(5)(i)(L).
    \144\ Amended Rule 15c2-11(b)(5)(i); see Amended Rule 15c2-
11(e)(2). The Commission is also making technical edits to the 
proposed Rule so that the amended Rule is easier to read. First, 
while the proposed Rule would have used the phrase ``the documents 
and information required by paragraph (b),'' the amended Rule uses 
the term ``the documents and information specified in paragraph 
(b).'' This technical edit is intended to reflect that paragraph (b) 
specifies the documents and information regarding an issuer that a 
broker-dealer or qualified IDQS must obtain and review to comply 
with the information review requirement or determine that the 
requirements of an exception are met. Second, the Commission is not 
adopting the requirement in proposed paragraph (b)(5)(i) that catch-
all issuer information must be ``current and made publicly 
available.'' The Commission believes that this change from the 
proposal is appropriate, given the requirement that such information 
be current and publicly available for a broker-dealer or qualified 
IDQS to comply with the information review requirement, or for a 
broker-dealer to rely on certain of the amended Rule's exceptions. 
This streamlining amendment does not change any of the timing 
components for such information to be considered current and 
publicly available.
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4. Requirement To Make Catch-All Issuer Information Available Upon 
Request--Rule 15c2-11(b)(5)(ii)
    To facilitate investor access to information, the amended Rule 
requires broker-dealers that comply with the information review 
requirement to make catch-all issuer information available upon the 
request of a person expressing an interest in a proposed transaction in 
the issuer's security, such as by providing the requesting person with 
appropriate instructions regarding how to obtain publicly available 
information electronically.\145\ The Commission proposed to permit 
broker-dealers to provide persons who express an interest in a proposed 
transaction involving a catch-all issuer with instructions regarding 
how to obtain publicly available information electronically.\146\ This 
proposed amendment was intended to make it easier for retail investors 
to locate and easily access catch-all issuer information.\147\ This 
proposed amendment would not limit other ways in which a broker-dealer 
could make information available to persons expressing an interest in a 
proposed transaction in a security of a catch-all issuer; it simply 
recognized that the internet provides a cost-effective means to 
distribute catch-all issuer information to such persons.\148\
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    \145\ Amended Rule 15c2-11(b)(5)(ii).
    \146\ Proposed Rule 15c2-11(b)(5)(ii). Proposed Rule 15c2-
11(b)(4) included a similar requirement to permit a broker-dealer to 
provide to persons who express an interest in a proposed transaction 
in a security of an exempt foreign private issuer appropriate 
instructions regarding how to obtain the information electronically.
    \147\ See Proposing Release at 58215.
    \148\ See id. Additionally, as the Commission explained in the 
Proposing Release, ``to the extent the broker-dealer has information 
regarding proposed paragraphs (b)(5)(i)(N) through (P), the broker-
dealer would be required to make such information available to 
persons who request the information pursuant to proposed paragraph 
(b)(5)(ii).'' Id.
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    The Commission sought comment on this aspect of the proposal and 
received support.\149\ The Commission has determined to adopt the 
proposed amendment regarding the manner in which a broker-dealer may 
provide this information. To alleviate the concern that issuer 
information may be difficult for investors to locate on their own, this 
amendment is designed to make such information easier to find while 
providing a cost-effective means for broker-dealers to distribute 
catch-all issuer information to all investors, not just those that 
request such information.\150\ In this regard, if such information is 
located on different websites, broker-dealers may provide the website 
addresses at which investors can find the information that is required 
to be publicly available. The Commission is also adopting a technical 
edit.\151\ Consistent with the proposal, the amended Rule requires 
that, to the extent the broker-dealer also has catch-all issuer 
information, the broker-dealer must make such information available to 
persons who request such information.\152\ A broker-dealer that 
publishes a quotation in reliance on a publicly available determination 
of a qualified IDQS that the qualified IDQS complied with the 
information review requirement, therefore, is not required to make 
catch-all issuer information available upon request because such 
broker-dealer is not itself complying

[[Page 68136]]

with the information review requirement.
---------------------------------------------------------------------------

    \149\ Coral Capital Letter.
    \150\ See Proposing Release at 58215.
    \151\ Paragraph (b)(5)(ii) of the amended Rule replaces the 
words ``required by'' with the words ``specified in'' and includes 
the word ``the'' so that the broker-dealer ``must make the 
information specified in paragraph (b)(5)(i) of this section'' 
available upon request. See Amended Rule 15c2-11(b)(5)(ii) (emphasis 
added).
    \152\ See Amended Rule 15c2-11(b)(5)(ii).
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5. Application of the Catch-All Issuer Provision--Rule 15c2-
11(b)(5)(ii)
    Consistent with the Commission's efforts to increase transparency 
about OTC securities for all investors, the Commission is adopting, as 
proposed, the provision that specifies that an issuer would be a 
``catch-all issuer'' if the documents and information specified in 
paragraphs (b)(1) through (b)(4) of the amended Rule do not apply to 
the issuer.\153\ As discussed below, however, the amended Rule treats 
reporting issuers that are delinquent in their filing obligations 
(i.e., their paragraph (b) information is not ``current,'' as that term 
is defined in paragraph (e)(2) of the amended Rule) as catch-all 
issuers only for purposes of initiating or resuming a quoted market in 
these issuers' securities.
---------------------------------------------------------------------------

    \153\ See Amended Rule 15c2-11(b)(5)(ii). While proposed Rule 
15c2-11(b)(5)(ii) would have applied ``to any security of an issuer 
that is not included in paragraphs (b)(1) through (b)(4) of [the 
Rule],'' amended Rule 15c2-11(b)(5)(ii) requires that ``[t]he 
documents and information specified in paragraph (b)(5) of [the 
amended Rule] must be reviewed where paragraphs (b)(1) through 
(b)(4) of [the amended Rule] do not apply to such issuer.'' This 
technical change from the proposal addresses the fact that paragraph 
(b) specifies an issuer's documents and information.
    One commenter stated that the term ``catch-all issuer'' is a 
term that many market participants will not understand. Hamilton & 
Associates Letter. This term, however, is used only for purposes of 
this release to refer to issuers for which documents and information 
are specified in paragraph (b)(5) of the amended Rule.
---------------------------------------------------------------------------

    The Commission sought comment about the provision in paragraph 
(b)(5)(ii) of the proposed Rule that specified the two circumstances in 
which an issuer would be a catch-all issuer: (1) If an issuer is not a 
type of reporting issuer enumerated in (b)(1) through (b)(4) of the 
proposed Rule, and (2) if the information required to be reported by 
the particular type of reporting issuer is not current because, for 
example, it is not timely filed. One commenter stated that a company 
with a reporting obligation that files a Form NT and provides notice 
that it will not file a periodic report on a timely basis may become a 
catch-all issuer and thus be ineligible for quoting pursuant to the 
piggyback exception because, under paragraph (b)(5)(i)(L) of the 
proposed Rule, its financial information would be older than six 
months.\154\
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    \154\ OTC Markets Group Letter 2 (recommending that the 
Commission align references in paragraph (b) to the timing of 
disclosure with relevant Commission rules that apply to smaller 
reporting companies). The amended Rule's timing requirements for 
piggyback eligibility provide a longer window than reporting issuers 
have to comply with their Exchange Act reporting obligations, and 
are aligned with the requirements of Commission rules that apply to 
smaller reporting companies, by requiring that the documents and 
information specified in paragraph (b) be either filed within 180 
calendar days from a specified period, for issuers with an Exchange 
Act reporting obligation, or timely filed for issuers with a 
reporting obligation under Regulation A or Regulation Crowdfunding. 
See infra Part II.D.1. In addition, the piggyback exception under 
the amended Rule includes a grace period that permits broker-dealers 
to continue to rely on the piggyback exception for a time-limited 
period if a report that must be filed pursuant to an Exchange Act or 
Securities Act reporting obligation has not been timely filed or 
filed within 180 days from the end of the specified period. See 
infra Part II.D.6.
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    The Commission has determined to modify the proposed provision that 
specified that a reporting issuer would be a catch-all issuer if its 
information is no longer ``current,'' \155\ by limiting its application 
to compliance with the information review requirement for a broker-
dealer to initiate a quoted market for an issuer's security. 
Accordingly, the amended Rule treats reporting issuers that are 
delinquent in their filing obligations as catch-all issuers only for 
purposes of initiating or resuming a quoted market in these issuers' 
securities, and thus a broker-dealer or a qualified IDQS would be 
required to comply with the information review requirement using the 
catch-all issuer's information required under the amended Rule only if 
a broker-dealer were initiating or resuming a quoted market in the 
issuer's security.\156\ Notably, the amended Rule does not treat 
delinquent reporting issuers as catch-all issuers for purposes of the 
piggyback exception, as discussed below in Part II.D.1.
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    \155\ See Amended Rule 15c2-11(e)(2); infra Part II.J.1.
    \156\ Specifically, paragraph (b)(5)(ii) of the amended Rule 
provides that, for purposes of compliance with paragraph 
(a)(1)(i)(C) (broker-dealer complies with the information review 
requirement) or (a)(2)(ii) (qualified IDQS complies with the 
information review requirement) of the amended Rule, the documents 
and information specified in paragraph (b)(5) must be reviewed for 
an issuer for which the documents and information specified in 
paragraph (b)(1), (b)(2), (b)(3), or (b)(4) of the amended Rule 
regarding such issuer are not current. See Amended Rule 15c2-
11(b)(5)(ii).
    While proposed Rule 15c2-11(b)(5)(ii) would have required that 
``[p]aragraph (b)(5) of this section [ ] apply to any security of an 
issuer if information described in paragraphs (b)(1) through (b)(4) 
of [the proposed Rule] is not current,'' amended Rule 15c2-
11(b)(5)(ii) requires that ``the documents and information specified 
in paragraph (b)(5) of [the amended Rule] must be reviewed for an 
issuer for which the documents and information specified in 
paragraph (b)(1), (b)(2), (b)(3), or (b)(4) of [the amended Rule] 
regarding such issuer are not current.'' This technical change from 
the proposal addresses the fact that paragraph (b) specifies an 
issuer's documents and information.
---------------------------------------------------------------------------

    In the context of maintaining a quoted market for an issuer's 
security, this change from the proposal (i.e., limiting the treatment 
of delinquent reporting issuers as catch-all issuers to the initiation 
or resumption of a quoted market for an issuer's security) enhances the 
Rule's investor protections by reducing the potential for broker-
dealers to sustain the false appearance of an active market in the 
securities of issuers that remain delinquent in their reporting 
obligations or no longer exist.\157\ Consistent with the proposed 
amendment, the amended Rule does not change an issuer's statute- or 
rule-based reporting or disclosure obligation.\158\ In response to a 
comment regarding an issuer that is granted an extension to file its 
annual report, and as discussed below, such an issuer will remain a 
reporting issuer \159\ for purposes of the amended Rule's piggyback 
exception, and thus the broker-dealer would need to comply with the 
provisions of the piggyback exception that apply to reporting issuers 
(i.e., paragraph (f)(3)(i)(C)(1) or (2)), depending on the category of 
reporting issuer, and not the provision that applies to catch-all 
issuers (i.e., paragraph (f)(3)(i)(C)(3)).\160\
---------------------------------------------------------------------------

    \157\ See infra Part II.D.1.a (discussing the time frame 
requirements associated with the transparency of reporting issuer 
information under the amended Rule's piggyback exception).
    \158\ See Amended Rule 15c2-11(b)(5)(ii) (using the phrase 
``specified in'' instead of ``required by'' to clarify that the Rule 
does not impose any obligation on issuers).
    \159\ See Exchange Act Rule 12b-25(b) (providing that a 
registrant's report shall be deemed to be filed on the prescribed 
due date for such report if, among other things, the issuer 
represents in the Form 12b-25 that the subject annual report will be 
filed no later than the fifteenth calendar day following the 
prescribed due date).
    \160\ See infra Part II.D.1.
---------------------------------------------------------------------------

6. Specified Information Provision for Crowdfunding Issuers--Rule 15c2-
11(b)(3)(iii)
    The Commission has determined to add paragraph (b)(3)(iii) to the 
amended Rule as a technical amendment to align the amended Rule with 
Regulation Crowdfunding \161\ and to tailor the provision to the 
specific regulatory status and existing disclosure and reporting 
obligations of a crowdfunding issuer, similar to how the amended Rule 
is tailored to recognize issuers that have an ongoing reporting 
obligation under the Exchange Act and Regulation A. Before the 
amendments, the Rule did not contain a provision tailored to the 
specific regulatory status and existing disclosure and reporting 
obligations of a crowdfunding issuer. A broker-dealer, therefore, would 
have been able to review the documents and information for a catch-all 
issuer to comply with the information review requirement before a 
broker-dealer could publish a quotation

[[Page 68137]]

for the crowdfunding issuer's security. However, under the amended 
Rule, a crowdfunding issuer would not be treated as a catch-all issuer, 
and thus a broker-dealer or qualified IDQS would need to obtain and 
review the documents and information specified in the specific 
provision for crowdfunding issuer information to comply with the 
information review requirement (assuming the issuer is not delinquent 
in its reporting obligations, as discussed above).\162\ In light of the 
addition of a specified information provision for crowdfunding issuers, 
a broker-dealer or qualified IDQS would need to obtain and review the 
documents and information in paragraph (b)(3)(iii) of the amended Rule 
(rather than paragraph (b)(5) for catch-all issuers, as proposed) to 
determine if the requirements of certain exceptions are met.
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    \161\ E.g., Rules 201 through 203 of Regulation Crowdfunding.
    \162\ This new provision regarding the documents and information 
of crowdfunding issuers is provided in paragraph (b)(3)(iii) of the 
amended Rule. Paragraphs (b)(3)(iii) and (iv) of the proposed Rule 
pertained to the documents and information regarding (1) issuers 
that file annual statements referred to in Section 12(g)(2)(G)(i) of 
the Exchange Act and any periodic and current reports pursuant to 
Section 13 or 15(d) of the Exchange Act and (2) issuers of 
securities that fall within the provisions of Section 12(g)(2)(G) of 
the Exchange Act and that file annual statements referred to in 
Section 12(g)(2)(G)(i) of the Exchange Act, respectively. Such 
paragraphs are now contained in paragraphs (b)(3)(iv) and (b)(3)(v) 
of the amended Rule, respectively, in light of the addition of the 
specified information provision for crowdfunding issuers in 
paragraph (b)(3)(iii) of the amended Rule.
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    Paragraph (b)(3)(iii) of the amended Rule specifies that the 
applicable information for a crowdfunding issuer is the issuer's most 
recent annual report \163\ because such report is the only periodic 
report required by Regulation Crowdfunding to be filed with the 
Commission.\164\ The amended Rule also provides that, until a 
crowdfunding issuer files an annual report, the applicable paragraph 
(b) information is the Form C (the offering statement for securities 
offered under Regulation Crowdfunding) \165\ filed by the issuer within 
the prior 16 months, together with any Form C/A (amendments to the 
offering statement) \166\ and Form CU (updates on meeting targeted 
offering amounts) \167\ filed thereafter.\168\ The amended Rule allows 
broker-dealers and qualified IDQSs to review the issuer's Form C, 
together with any Form C/A and Form CU filed thereafter as an 
alternative to obtaining and reviewing the issuer's annual report when 
the issuer's first annual report may not have been filed due to a gap 
between: (1) The end of the issuer's fiscal year after initially 
offering securities pursuant to Regulation Crowdfunding, and (2) the 
prescribed due date for the issuer to file its first annual report. 
Form C, together with Form C/A and Form C/U, includes substantially the 
same information that is required by an annual report.\169\ In 
addition, paragraph (b)(3)(iii) of the amended Rule requires that a 
broker-dealer or qualified IDQS have a reasonable basis under the 
circumstances for believing that the issuer is current in filing such 
reports described in this paragraph (b)(3)(iii).\170\ Paragraph 
(b)(3)(iii) of the amended Rule closely tracks the document and 
information provisions regarding issuers with an Exchange Act or 
Securities Act reporting or disclosure obligation, and includes 
provisions specific to crowdfunding issuers in accordance with the 
thrust of the amended Rule to separate information requirements by the 
type of issuer.
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    \163\ See Amended Rule 15c2-11(b)(3)(iii).
    \164\ See Rule 202 of Regulation Crowdfunding.
    \165\ See Rule 203(a)(1) of Regulation Crowdfunding.
    \166\ See Rule 203(a)(2) of Regulation Crowdfunding.
    \167\ See Rule 203(a)(3) of Regulation Crowdfunding.
    \168\ Amended Rule 15c2-11(b)(3)(iii). Under the amended Rule, a 
recently filed Form C offering statement is not specified as 
paragraph (b) information because securities sold under Regulation 
Crowdfunding are generally not transferable for one year from 
issuance.
    \169\ See Rule 202 of Regulation Crowdfunding.
    \170\ Amended Rule 15c2-11(b)(3)(iii)(B).
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C. Supplemental Information Requirement--Rule 15c2-11(c)

    To help support the integrity of the OTC market and to promote 
investor protection by helping to ensure that market participants 
consider material information prior to the initiation of a quoted 
market for an issuer's security, the Commission is extending the 
application of the Rule's obligations regarding supplemental 
information \171\ to cover all market participants that comply with the 
Rule's information review requirement, including broker-dealers and 
qualified IDQSs alike.\172\ Under the amended Rule, a broker-dealer and 
a qualified IDQS, in complying with the information review requirement, 
must consider supplemental information about the issuer of an OTC 
security as part of its evaluation of whether the amended Rule's 
specified information is materially accurate. The type of information 
that is considered to be supplemental information (e.g., a copy of a 
trading suspension order issued by the Commission pursuant to Exchange 
Act Section 12(k)) includes information about the issuer of the 
security that comes to the knowledge or possession of the broker-dealer 
before the broker-dealer publishes or submits a quotation for the 
issuer's security,\173\ including records of transactions involving the 
issuer and company insiders.\174\ The Commission has determined to 
adopt paragraph (c) as proposed, with one technical modification.\175\
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    \171\ For purposes of this release, this requirement is referred 
to as the ``supplemental information requirement.''
    \172\ See Proposing Release at 58217. As stated in the Proposing 
Release, this modification was designed to help ensure that all 
market participants that comply with the information review 
requirement would be subject to the same requirements regarding 
supplemental information. See Proposing Release at 58218. Proposed 
paragraph (c) would not require that a qualified IDQS (or a broker-
dealer) affirmatively seek additional information about the issuer. 
Rather, proposed paragraph (c) would require that a qualified IDQS 
(or broker-dealer) that complies with the information review 
requirement keep records of the documents and information specified 
in proposed paragraphs (c)(1) through (c)(3) (excluding documents 
and information available on EDGAR), including any information 
regarding the transactions actually provided to the qualified IDQS 
(or broker-dealer).
    \173\ See Proposed Rule 15c2-11(c); 1999 Reproposing Release at 
11146-47 (explaining that, while a broker-dealer is not required to 
affirmatively seek out information about the issuer beyond that 
specifically required by the Rule, material information about the 
issuer that comes to the broker-dealer's knowledge or possession--
orally or in writing--must be taken into account by the broker-
dealer in assessing whether the issuer information is accurate and 
from a reliable source).
    \174\ As stated in the Proposing Release, such information is 
important to consider, in conjunction with the issuer's paragraph 
(b) information and any other supplemental information, because 
persons such as company insiders might be able to exert control over 
the issuer of an OTC security and have a heightened incentive to 
manipulate the price of the security. See Proposing Release at 
58218. The proposed Rule would not have required that company 
insider status automatically lead a broker-dealer or qualified IDQS 
to conclude that the issuer's information is not accurate in all 
material respects or from a reliable source. Instead, such 
information would need to have been evaluated in conjunction with 
the issuer's paragraph (b) information, along with any other 
supplemental information that has come to the knowledge or 
possession of the broker-dealer or qualified IDQS, in forming a 
reasonable basis to believe that the issuer's information is 
accurate and from a reliable source. The Commission stated that the 
knowledge that a quotation is by or on behalf of a company insider 
could aid investors by alerting the broker-dealer or qualified IDQS 
to the possibility that the quotation is being made on behalf of a 
person who may have a heightened incentive to manipulate the price 
of an issuer's security. See id.
    \175\ Specifically, paragraph (c)(3) of the amended Rule uses 
the newly defined term ``company insider'' to capture persons who 
are associated with an issuer, manage the company, or have 
heightened access to issuer information and who may have a 
heightened incentive to engage in fraudulent or manipulative 
conduct. See infra Part II.J.5.
---------------------------------------------------------------------------

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

[[Page 68138]]

company insiders.\176\ One commenter stated that broker-dealers and 
qualified IDQSs that comply with the information review requirement 
should not be required to affirmatively seek additional information 
about the issuer because such a requirement would effectively turn 
broker-dealers into a combination of due diligence firms and private 
investigative agencies.\177\ While the supplemental information 
requirement places an affirmative obligation on broker-dealers and 
qualified IDQSs that comply with the information review requirement to 
consider and record information beyond the paragraph (b) information, 
the Commission believes that this provision will help to support the 
integrity of the OTC market and promote investor protection by 
requiring that broker-dealers and qualified IDQSs consider material 
information before commencing a quoted market.\178\ The Commission also 
believes that the provision, as amended, is appropriately tailored to 
minimize burdens on broker-dealers and qualified IDQSs. Broker-dealers 
and qualified IDQSs are required to seek out only certain supplemental 
information (e.g., the identity of the person on whose behalf the 
quotation is made, company insider status, and recent trading 
suspensions). The requirement to obtain information regarding for whom 
a quotation is being published and whether the security has been 
subject to a trading suspension is not a new requirement. Obtaining 
such information does not require any particular due diligence or 
private investigation skills. For example, the broker-dealer can 
ascertain the identity of a person who is requesting that an initial 
quotation for a security be published or submitted by asking the person 
when the person contacts the broker-dealer. Additionally, whether a 
security has been the subject of a trading suspension is available on 
the Commission's website and is easily accessible.\179\
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    \176\ See Proposing Release at 58216-17.
    \177\ See Coral Capital Letter.
    \178\ As discussed below in Part II.O, the supplemental 
information requirement places an affirmative requirement on such 
broker-dealers and qualified IDQSs to consider and have in their 
records the following documents and information: (1) Records related 
to the identity of the person or persons for whom the quotation is 
being published or submitted, whether such person or persons is the 
issuer or a company insider, and any information regarding the 
transactions that such person or person has provided to the broker-
dealer or qualified IDQS; and (2) a copy of any trading suspension 
order issued by the Commission pursuant to Section 12(k) of the 
Exchange Act regarding any securities of the issuer or its 
predecessor (if any) during the 12 months preceding the date of the 
publication or submission of the quotation or a copy of the public 
release issued by the Commission announcing such trading suspension 
order. However, such broker-dealers or qualified IDQSs must consider 
and record a copy or a written record of any other material 
information (including adverse information) regarding the issuer 
only if it comes to the knowledge or possession of the broker-dealer 
or qualified IDQS before the quotation is published or submitted.
    \179\ Trading Suspensions, https://www.sec.gov/litigation/suspensions.shtml (last visited Aug. 27, 2020).
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    A broker-dealer or qualified IDQS is required to consider and 
record other supplemental information only if such information: (1) Is 
provided to the broker-dealer or qualified IDQS by the person on whose 
behalf the quotation is published (e.g., information regarding 
transactions),\180\ or (2) comes to the knowledge or possession of the 
broker-dealer or qualified IDQS (e.g., other material information 
regarding the issuer).\181\ Considering and recording such information 
does not require a broker-dealer or qualified IDQS to conduct a due 
diligence review or a private investigation into facts that have not 
otherwise been provided to the broker-dealer or qualified IDQS, or that 
have not come to the knowledge or possession of the broker-dealer or 
qualified IDQS. The Commission believes structuring the supplemental 
information provision in this way strikes an appropriate balance of 
achieving the objectives of the Rule without placing unduly burdensome 
obligations on broker-dealers and qualified IDQSs.
---------------------------------------------------------------------------

    \180\ Amended Rule 15c2-11(c)(1).
    \181\ Amended Rule 15c2-11(c)(3).
---------------------------------------------------------------------------

    Another commenter stated that information regarding the identity of 
the retail end-customer is not required to be publicly disclosed, so it 
is difficult for a broker-dealer that receives orders from 
correspondent brokers to have this information in its records on a 
transaction-by-transaction basis.\182\ The Commission appreciates that 
a broker-dealer that publishes a quotation may not have a direct 
relationship with the retail customer on whose behalf the quotation is 
published and that such customer's broker is not required to publicly 
disclose the customer's identity.\183\ Prior to the amendment, the Rule 
already required that a broker-dealer that complies with the 
information review requirement retain a record of the identity of the 
person or persons for whom the quotation is submitted or published. The 
Commission believes that it is operationally feasible for a broker-
dealer to obtain this information (e.g., the customer's retail broker 
might provide information to the broker-dealer about the identity of 
its customer) when such broker-dealer is reviewing the issuer's 
information and commencing a quoted market at the behest of a customer. 
While the amended Rule requires that broker-dealers and qualified IDQSs 
record the identity of the person on whose behalf the initial quotation 
is made, the Commission believes that requiring a record of the 
identity of the person on whose behalf the quotation is made when 
commencing a quoted market furthers the objectives of the Rule without 
imposing undue burdens associated with individual quotations and may 
aid Commission oversight of broker-dealers' and qualified IDQSs' 
compliance with the amended Rule. Further, the Commission understands 
that the majority of quotations are currently, and expects that they 
will continue to be, published in reliance on exceptions to the amended 
Rule and not in reliance on the performance of the information review 
requirement.
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    \182\ OTC Markets Group Letter 3.
    \183\ See infra Part II.E (discussing the final amendments to 
the unsolicited quotation exception).
---------------------------------------------------------------------------

    This commenter also requested that the supplemental information 
regarding company insiders be limited to information that has come to 
the knowledge or possession of the broker-dealer or qualified 
IDQS.\184\ The Commission has determined not to limit the amended 
Rule's specified supplemental information regarding status as an issuer 
and company insider to information that has come to the knowledge or 
possession of the broker-dealer or qualified IDQS. Because the amended 
Rule requires a broker-dealer or qualified IDQS to consider 
supplemental information only for initial quotations when initiating or 
resuming a quoted market, the Commission does not believe that it is 
unreasonable to require a broker-dealer or qualified IDQS to know the 
identity of the person making the request to commence a quoted market 
in this limited circumstance. Issuers and company insiders can have a 
heightened incentive to engage in misconduct to artificially affect the 
price and trading volume of the issuer's security. The Commission 
believes that application of the supplemental information requirement 
only to information that has come to the knowledge or possession of the 
broker-dealer or qualified IDQS would be inconsistent with the 
Commission's goal of enhancing the Rule to better protect retail 
investors from fraud and

[[Page 68139]]

manipulation orchestrated by company insiders.
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    \184\ OTC Markets Group Letter 3.
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    The Commission continues to believe that certain supplemental 
information is relevant for a broker-dealer or qualified IDQS to 
evaluate in establishing a reasonable basis under the circumstances for 
believing that an issuer's paragraph (b) information is accurate in all 
material respects and from a reliable source.\185\ Consequently, 
paragraph (c) of the amended Rule adds qualified IDQSs to the Rule's 
list of market participants that must have in their records 
supplemental information to help ensure that all market participants 
that comply with the information review requirement are subject to the 
same requirements.\186\ Under the amended Rule, broker-dealers and 
qualified IDQSs that comply with the information review requirement 
must retain a copy or a written record of three categories of 
supplemental information: (1) Records related to the publication or 
submission of the quotation, including the identity of the person on 
whose behalf the quotation is made, whether such person is an issuer or 
a company insider, and any information regarding the transaction 
provided to the broker-dealer or qualified IDQS; (2) a copy of any 
trading suspension order issued by the Commission during the 12 months 
preceding the date of publication or submission of the quotation or a 
copy of the press release announcing such suspension; and (3) any other 
material information regarding the issuer that comes onto the knowledge 
or possession of broker-dealer or qualified IDQS.\187\
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    \185\ Amended Rule 15c2-11(c).
    \186\ Paragraph (c) of the amended Rule also adds to the former 
Rule's list of records related to the submission or publication of a 
quotation for a security a record of whether such submission or 
publication is on behalf of an issuer or company insider because 
such individuals might be able to influence or control the issuer of 
an OTC security. See Amended Rule 15c2-11(c), (c)(1); Proposing 
Release at 58218.
    \187\ Amended Rule 15c2-11(c)(1) through (3).
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    The Commission is amending the Rule as proposed to require that the 
entity that complies with the information review requirement must have 
in its records the documents and information related to the identity of 
the person or persons for whom the quotation is being submitted or 
published, including whether such person is the issuer or a company 
insider \188\ because the knowledge that a quotation is by or on behalf 
of the issuer or a company insider could promote investor protection by 
alerting the broker-dealer or qualified IDQS conducting the required 
review to the possibility that the quotation is being made on behalf of 
a person who may have a heightened incentive to manipulate the price of 
the security.\189\ Whether the quotation is being made on behalf of 
such person is information that must be considered, together with any 
other supplemental information or paragraph (b) information, by the 
broker-dealer or qualified IDQS in forming a reasonable basis under the 
circumstances for believing that the issuer's paragraph (b) information 
is accurate in all material respects and from a reliable source.\190\
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    \188\ Amended Rule 15c2-11(c)(1).
    \189\ See Proposing Release at 58218.
    \190\ See Amended Rule 15c2-11(a)(1)(i)(C), (a)(2)(iii) 
(requiring a broker-dealer or qualified IDQS that complies with the 
information review requirement to have a reasonable basis under the 
circumstances for believing that the issuer's paragraph (b) 
information is accurate in all material respects and that the 
sources of such paragraph (b) information are reliable based upon a 
review of the issuer's paragraph (b) information, together with any 
other supplemental information, as applicable); see also supra notes 
174-175 and accompanying text (discussing how this requirement helps 
to promote the Rule's investor protection goals).
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D. Piggyback Exception

    The Commission is adopting various amendments to the piggyback 
exception, paragraph (f)(3), as discussed below.
1. Increased Transparency of Issuer Information--Rule 15c2-
11(f)(3)(i)(C)(1) Through (3)
    The Commission is requiring that an issuer's paragraph (b) 
information be current and publicly available, timely filed, or filed 
within 180 calendar days from a specified time frame,\191\ in reference 
to the underlying timing obligations for each of the types of issuers 
under paragraph (b), for a broker-dealer to rely on the piggyback 
exception to publish quotations for the issuer's security.\192\
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    \191\ As discussed below, this requirement with respect to the 
paragraph (b) information of certain types of reporting issuers is 
measured from the end of the issuer's most recent fiscal year or any 
quarterly reporting period that is covered by a report required by 
Exchange Act Section 13 or 15(d), as applicable. See Amended Rule 
15c2-11(f)(3)(i)(C)(1). For purposes of this release, the phrase 
``filed within 180 calendar days from [a/the] specified period'' 
refers to the phrase ``filed within 180 calendar days from the end 
of the issuer's most recent fiscal year or any quarterly reporting 
period that is covered by a report required by [S]ection 13 or 15(d) 
of the [Exchange] Act), as applicable,'' as specified in the rule 
text. See Amended Rule 15c2-11(f)(3)(i)(C)(1).
    \192\ See Amended Rule 15c2-11(f)(3)(i)(C)(1) through (3). For a 
discussion of the requirements for an issuer's paragraph (b) 
information to be current and publicly available before an issuer's 
security is initially quoted, see supra Part II.A.1.
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(a) Current and Publicly Available Issuer Information
    The Commission sought comment about the proposed amendment, 
including whether to permit a broker-dealer to rely on the piggyback 
exception to publish or submit quotations for the securities of catch-
all issuers only where the issuer's proposed paragraph (b) information 
is current and has been made publicly available within six months 
before the date of publication or submission of such quotation. 
Commenters who supported this aspect of the proposal stated that it 
would help to strengthen investor protections by offering the investing 
public access to information about OTC companies \193\ and to enhance 
market efficiency and transparency.\194\ One commenter stated that it 
is inconsistent for the proposal to both: (1) State that the piggyback 
exception's historical basis is that regular and continual priced 
quotations are an appropriate substitute for information about the 
issuer that would otherwise be relevant in establishing a quotation, 
and (2) require that issuer information be current and publicly 
available for a broker-dealer to rely on the piggyback exception.\195\ 
The Commission continues to believe that the piggyback exception serves 
an important purpose in helping to facilitate liquidity. The 
Commission, however, does not believe that the historical basis for the 
piggyback exception--that ``regular and continual priced quotations are 
an appropriate substitute for information about the issuer which would 
otherwise be relevant in establishing a

[[Page 68140]]

quotation'' \196\--adequately takes account of current industry and 
investor practices in today's OTC market, nor does it sufficiently 
promote investor protection or the broker-dealer's role as a gatekeeper 
to the OTC market.\197\ In particular, prior to the amendments, the 
piggyback exception resulted in quoted markets persisting for 
securities of issuers that no longer exist and certain securities of 
issuers that do not make their information publicly available 
sustaining the false appearance of an active market.\198\ These 
securities, which primarily are owned by retail customers,\199\ 
historically have been more susceptible to fraud and manipulation.\200\ 
The Commission believes that transparency of issuer information is 
essential for investors to be able to effectively analyze the issuer, 
its security, and the market for its security, particularly in light of 
the substantial reductions in information acquisition and dissemination 
costs due to the internet and modern technology. The Commission 
believes that the modern ease of accessing and disseminating 
information allows investors to more easily form inferences about the 
value of OTC securities based upon current and publicly available 
information rather than relying principally upon inferences based on 
the prices of piggybacked quotes.\201\
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    \193\ See, e.g., Hamilton & Associates Letter; Massachusetts 
Letter; NASAA Letter.
    \194\ E.g., OTC Markets Group Letter 2; SIFMA Letter; see FINRA 
Letter; Letter from J. Brad Wiggins, President and Legal Counsel, 
Securities Law USA (``Securities Law USA Letter''); Zuber Lawler 
Letter.
    \195\ Letter from Larry E. Bergmann, Partner, Murphy & 
McGonigle, P.C., to Vanessa Countryman, Sec'y, SEC (Dec 10, 2019) 
(``Murphy & McGonigle Letter''). This commenter wrote that, because 
the proposal's discussion about the policy rationale behind the 
piggyback exception--that regular and frequent quotations, including 
regular and frequent two-sided market making, reflect independent 
supply and demand forces--draws no distinction among the types of 
securities that are the subject of trading suspensions, it is 
unclear if the ``current and publicly available'' information 
requirement for catch-all issuers in the proposed provision would 
apply to catch-all issuers that were the subject of a trading 
suspension. Id. The paragraph (b) information of a catch-all issuer 
must be current and publicly available for a broker-dealer to 
publish or submit quotations for the catch-all issuer's security 
following the termination of a trading suspension for the issuer's 
security. See Amended Rule 15c2-11(f)(3)(i)(C)(3).
    \196\ See Initiation or Resumption of Quotations Without 
Specified Information, Exchange Act Release No. 21470 (Nov. 8, 
1984), 49 FR 45117 (Nov. 15, 1984).
    \197\ See, e.g., supra Part I.
    \198\ See Proposing Release at 58219; see also infra Part 
VI.B.2.c (discussing how OTC market may attract those seeking to 
engage in fraudulent practices, such as pump-and-dump schemes, due 
to a lack of publicly available current information about certain 
issuers of quoted OTC securities).
    \199\ See Proposing Release at 58207; see also Ang et al., supra 
note 3.
    \200\ Douglas Cumming et al., Financial Market Misconduct and 
Agency Conflicts: A Synthesis and Future Directions, 34 J. Corp. Fin 
150-68 (2015).
    \201\ See infra Part VI.A. In this regard, increasing the public 
availability of current information about OTC issuers has the 
potential to counteract misinformation, which can proliferate 
through promotions and other channels. See infra Part VI.B.2.c.
---------------------------------------------------------------------------

    One commenter suggested that the Commission should repeal the 
piggyback exception because, as the commenter stated, it is ``a 
loophole that has permitted broker-dealers to solicit interest from and 
sell OTC securities to retail investors without verifying any of the 
details of the security, including, whether the issuer actually 
exists.'' \202\ Another commenter stated that repealing the piggyback 
exception entirely would harm existing shareholders in OTC securities 
because it would cause many broker-dealers to cease market making or 
quoting prices in many OTC securities, draining or even eliminating 
liquidity in the OTC market.\203\ The Commission believes that the 
piggyback exception serves an important purpose in helping to 
facilitate liquidity but remains concerned that the OTC market may 
attract those seeking to engage in fraudulent practices, such as pump-
and-dump schemes, due to a lack of publicly available current 
information about certain issuers of quoted OTC securities.\204\ This 
concern is amplified by the fact that the primary investors in the OTC 
market are retail investors. The amendments to the piggyback exception 
under the amended Rule are designed to facilitate liquidity in the OTC 
market while making narrowly tailored updates that promote investor 
protection and market efficiency, including the prevention of fraud and 
manipulation.\205\
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    \202\ Letter from Dennis M. Kelleher, President and CEO, and Lev 
Bagramian, Senior Securities Policy Advisor, Better Markets, Inc., 
to Vanessa Countryman, Sec'y, SEC (Dec. 30, 2020) (``Better Markets 
Letter'').
    \203\ NASAA Letter.
    \204\ Proposing Release at 58282.
    \205\ See infra Part VI.C.1.b.
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    Some commenters stated their concern that prohibiting quotations 
for securities of companies that do not provide current and publicly 
available information would not prevent fraud and manipulation \206\ 
but would destroy liquidity,\207\ be inconsistent with the proposal's 
goal of promoting a fair and orderly market for OTC securities,\208\ 
and make dark companies' shares ``worthless.'' \209\ Commenters stated 
that some of these companies have longstanding histories of operation 
and profit, and suggested that issuers of securities with certain 
characteristics should be exempt from the requirement that their 
information be current and publicly available.\210\
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    \206\ See Anbec Partners Letter; Franklin Antonio; Caldwell 
Sutter Capital Comment; Alexandra Elliott; Braxton Gann; Han Han 
(Oct. 15, 2019); Peter Hayman; Norberg Letter; Daniel Raider; Jim 
Rivest; Mark Schepers (Oct. 15, 2019); STA Letter; Terravoir Venture 
Letter; Tiercel Capital Comment; Michael Tofias; Alex Toppan (Oct. 
14, 2019); Debby Valentijn; Virtu Letter; Don C. Whitaker; see also 
Coral Capital Letter (stating that the loss of a quoted market would 
harm the ability of an issuer to become current in its reporting 
obligations by reducing access to capital that is necessary to pay 
expenses associated with regaining its current status). One 
commenter argued that closed-end funds that hold securities of 
issuers that are not current in their reporting requirements would 
need to fair value those securities rather than calculate net asset 
value using recent trades. Sanders Letter (arguing that such a 
result could provide investors with less reliable information to 
make informed investment decisions). The Investment Company Act of 
1940 prescribes the method for closed-end funds to value their 
portfolio securities, whether or not market quotations are readily 
available. See, e.g., Investment Company Act Section 2(a)(41); see 
also Good Faith Determinations of Fair Value, Investment Company 
Release No. 33845 (Apr. 21, 2020), 85 FR 28734 (May 13, 2020).
    \207\ See, e.g., Alluvial Letter; Andersen Letter; Franklin 
Antonio (Dec. 27, 2019); Hank Armested (Oct. 24, 2019); Thomas M. 
Amenda (Oct. 23, 2019); R. Berkvens; Tyler Black (Nov. 25, 2019); 
J.H. Broekhoven (Nov. 16, 2019); Brad Christensen (Oct. 3, 2019); 
Caldwell Sutter Capital Comment; Laura Coffman; Connor Davis, 
Founder and Principal, Lake Highlands Capital Management (``Lake 
Highlands Comment''); Douglas DiSanti (Nov. 18, 2019); Brett 
Dorendorf; Drinker Letter; Alexandra Elliott; David J. Flood (Oct. 
8, 2019); Braxton Gann; Letter from Matt Geiger, Managing Partner, 
MJG Capital Fund, LP, to Chairman Clayton (Oct. 28, 2019) (``MJG 
Capital Fund Letter''); Carlton Getz, Winter Harbor Advisors, LLC 
(``Winter Harbor Advisors Comment''); Chris Girand (Oct. 25, 2019); 
Bradley Grasl, Chief Investment Officer, Tiercel Capital Texas 
(``Tiercel Capital Comment''); Peter Hayman (Dec. 31, 2019); Gary 
Huscher (Nov. 1, 2019); Matt Jester (Oct. 8, 2019); Richard 
Krejcarek (Jan. 2, 2020); Ron Lefton (Nov. 11, 2020); Aharon Levy; 
Guarang Merani (Oct. 15, 2019); Michael Milchen (Oct. 10, 2019); 
Milner Letter; Mitchell Partners Letter 1; William E. Mitchell (Oct. 
24, 2019); Norberg Letter; Peter Quagliano (Nov. 1, 2019); Daniel 
Raider; Charles M. Rardon (Oct. 1, 2019); Michael E. Reiss; Ronald 
Ringelberg; Jim Rivest; GTS Letter; David Schiff (Oct. 22, 2019); 
Eric Schleien, Investment Manager, Granite State Capital Management 
(``Granite State Capital Comment''); Dan Schum (Oct. 7, 2019); Lucas 
H. Selvidge (Oct. 23, 2019); Chris Soule (Oct. 10, 2019); Andrew 
Summers, CFA, Managing Partner, Summers Value Partners LLC 
(``Summers Value Partners Comment''); Total Clarity Comment; 
Franklin Urdaneta (Dec. 3, 2019); Debby Valentijn (Dec. 21, 2019); 
S. Van den Hoogenhoff (Dec. 9, 2019); Virtu Letter; Don C. Whitaker 
(Sept. 29, 2019); Samuel J. Yake (Oct. 5, 2019); see generally Logan 
Kemper (Nov. 6, 2019) Professor Angel Letter; Winter Harbor Advisors 
Comment.
    \208\ Brett Dorendorf; Peter Hayman; Kyle M. Peeples; Norberg 
Letter; S. Van den Hoogenhoff; Debby Valentijn.
    \209\ Andersen Letter. Other commenters were primarily concerned 
with the proposed amendments' effect on liquidity of securities of 
dark companies and what they perceived as potential harm to 
shareholders of those companies. E.g., Exchange Listing Letter; GTS 
Letter; Virtu Letter; see OTC Markets Group Letter 3. Comments 
regarding a general opposition to the proposed amendments with 
respect to this perceived impact are discussed above, in Part II.
    \210\ See Aztec Letter; Caldwell Sutter Capital Comment; 
Lawrence Goldstein, President, SMP Asset Management LLC (``SMP Asset 
Management Comment''); Ron Lefton; William E. Mitchell; Mitchell 
Partners Letter 1; Doug Mohn; Norberg Letter; Peter Quagliano; 
Michael E. Reiss; Jim Rivest; Mark Schepers; Total Clarity Comment; 
Debby Valentijn; Don C. Whitaker; David Wright (Dec. 16, 2019); 
Michael A. Zgayb (Oct. 23, 2019); see also James Duade; Eric Speron 
(Nov. 27, 2019); Michael Tofias; Virtu Letter.
---------------------------------------------------------------------------

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

[[Page 68141]]

such as debt,\211\ and existing shareholders of non-reporting issuers 
can be negatively impacted from the loss of a quoted market for such 
securities, even if the securities migrate to the grey market.\212\ The 
Commission believes, however, that undertaking to try to determine what 
constitutes a ``legitimate'' issuer, as suggested by commenters,\213\ 
may require the Commission to make a merit-based determination that 
weighs certain characteristics of OTC issuers in relation to, or to the 
exclusion of, other characteristics of other OTC issuers. In addition, 
the limited available data regarding dark issuers would hamper 
analysis.
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    \211\ See infra Part VI.C.2 (discussing how issuers may 
nevertheless be able to access capital through transactions in the 
grey market).
    \212\ See infra Part VI.C.1.a.
    \213\ See, e.g., Doug Mohn; Taranis Comment.
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    Further, the Commission does not believe the fact that such 
companies have longstanding histories of operation and profit obviates 
the need for their information to be current and publicly available for 
a broker-dealer to publish quotations for such securities. The 
Commission does not believe that these issuers with operations and 
profitability will become ``worthless'' \214\ as a result of the 
amendments. The amendments can adversely affect these issuers and their 
shareholders; however, these issuers, even without a quotation for 
their securities by a broker-dealer, presumably would continue to 
operate and generate profits for their shareholders. These OTC 
securities would continue to represent an ownership interest on these 
profits and the issuer's assets. For newer issuers with prospective 
future profits, OTC shares would similarly represent a claim on these 
prospective profits. The Commission also believes that the potential 
harm to existing shareholders is (1) limited by the ability of broker-
dealers to rely on exceptions to publish quotations, including the 
unsolicited quotation exception,\215\ and the ability of existing 
shareholders to continue to trade their securities; and (2) mitigated 
by the decrease in exposure to fraudulent activity involving the 
securities of non-transparent companies (due to broker-dealers' 
inability to rely on the piggyback exception) to engage in manipulative 
schemes, such as pump-and-dump schemes.\216\
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    \214\ Andersen Letter.
    \215\ See infra Part VI.C.1.a.
    \216\ See infra Part VI.C.2; see also Proposing Release at 
58258, 58259 (stating that requirements for the transparency of 
issuer information could have a deterrent effect in inhibiting 
fraudulent activity related to quoted OTC securities). In addition, 
as discussed below in this Part II.D.1, the formation of an ``expert 
market,'' see infra note 269 and accompanying text, may alleviate 
these concerns, as well.
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    However, the Commission understands that market participants may 
have unique facts and circumstances as to how the amended Rule affects 
their activities, and the Commission will consider requests from market 
participants, including issuers, investors, or broker-dealers, for 
exemptive relief from the amended Rule for OTC securities that are 
currently eligible for the piggyback exception yet may lose piggyback 
eligibility due to the amendments to the Rule.\217\ In considering 
whether an exemption from the Rule (pursuant to Section 36 of the 
Exchange Act and paragraph (g) of the amended Rule) \218\ under these 
circumstances is necessary or appropriate and in the public interest, 
and is consistent with the protection of investors, the Commission may 
consider a number of factors, such as whether, based on data or other 
facts and circumstances provided by requestors, the issuers and/or 
securities are less susceptible to fraud or manipulation. In this 
regard, the Commission may consider, among other things, securities 
that have an established prior history of regular quoting and trading 
activity; issuers that do not have an adverse regulatory history; 
issuers that have complied with any applicable state or local 
disclosure regulations that require that the issuer provide its 
financial information to its shareholders on a regular basis, such as 
annually; issuers that have complied with any tax obligations as of the 
most recent tax year; issuers that have recently made material 
disclosures as part of a reverse merger; or facts and circumstances 
that present other features that are consistent with the goals of the 
amended Rule of enhancing protections for investors, particularly 
retail investors. The Commission encourages requests to be submitted 
expeditiously during the nine-month transition period of the amended 
Rule to avert potential interruptions in quotations in such securities 
that may occur on or after implementation.\219\
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    \217\ Issuers and investors that may be interested in requesting 
any such exemptive relief may coordinate with broker-dealers to 
submit requests. Because the amended Rule governs publications or 
submissions by broker-dealers, the requirements of the amended Rule 
and any conditions of any such exemptive relief would likely be 
undertaken to be complied with by a broker-dealer rather than an 
investor or issuer.
    \218\ See infra Part II.L. Paragraph (g) of the amended Rule 
states that ``[u]pon written application or upon its own motion, the 
Commission may, conditionally or unconditionally, exempt by order 
any person, security, or transaction, or any class or classes of 
persons, securities, or transactions, from any provision or 
provisions of this section, to the extent that that such exemption 
is necessary or appropriate in the public interest, and is 
consistent with the protection of investors.''
    \219\ The amended Rule has a compliance date that is nine months 
after the effective date of the amended Rule, and the compliance 
date for paragraph (b)(5)(i)(M) of the amended Rule is two years 
after the effective date of the amended Rule. See infra Part II.P. 
Prior to the compliance date, broker-dealers may continue to publish 
quotations in reliance on the piggyback exception even if an 
issuer's paragraph (b) information is not current and publicly 
available.
---------------------------------------------------------------------------

    In addition, the Commission believes that the amendments are 
appropriate to help protect investors against potential exposure to 
fraud and manipulation that can occur when current information about an 
issuer is not publicly available. The Commission recognizes that 
shareholders of OTC securities may incur costs related to a loss of 
liquidity when broker-dealers cannot rely on the piggyback exception 
because there is no current and publicly available paragraph (b) 
information. However, on balance, the Commission believes that any such 
costs would be warranted by the attendant benefits. The Commission 
continues to believe that requiring issuer information to be current 
and publicly available will facilitate investor protection and 
transparency that will assist retail investors in making better-
informed investment decisions and will counteract misinformation that 
can proliferate through promotions and other channels, thereby helping 
to prevent fraud and manipulation. More specifically, the amended 
Rule's requirements could have a deterrent effect in inhibiting 
fraudulent activity related to quoted OTC securities. Investors could 
benefit from decreased exposure to investment losses as a result of 
diminished fraudulent activity in the OTC market.\220\ Further, 
academic studies have highlighted the relationship between the breadth 
and quality of firm disclosures and liquidity in the OTC market.\221\ 
The Commission also believes that, because prices may become less 
susceptible to manipulation as a result of the trading activity of 
informed investors who have access to paragraph (b) information, the 
efficiency of prices (i.e., the degree to which prices reflect the 
fundamental value of the security) could improve in the OTC market. 
These investors could buy underpriced securities and sell overpriced 
securities, pushing

[[Page 68142]]

mispriced securities toward fundamental values.\222\
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    \220\ See infra Part VI.C.1.a; see also Proposing Release at 
58255.
    \221\ See supra note 6 and accompanying text.
    \222\ See infra Part VI.C.2.
---------------------------------------------------------------------------

    Another commenter suggested that the Rule should explicitly except 
market makers who do not solicit retail customers and that other 
broker-dealers should not be permitted to piggyback on market makers 
relying on the piggyback exception.\223\ Although such market makers 
may not directly solicit retail customers, retail investors may access 
these market makers' quotations that are published or submitted in an 
IDQS. Such quotations may thereby serve as an advertisement (for 
interest in a particular security) to these retail investors to 
purchase shares in the quoted company, which could be a dark issuer. 
Accordingly, this suggested exception would undermine the amended 
Rule's goal of providing transparency of the OTC market because it 
would allow broker-dealers that provide liquidity as market makers to 
publish or submit quotations for any security, including the security 
of an issuer for which information is not current and publicly 
available. Because the investor protection goals of this requirement 
are achieved, in part, by greater transparency and the public 
availability of current issuer information, and not by the mere fact 
that a broker-dealer provides liquidity as a market maker, the 
Commission does not believe that it would be appropriate to except 
broker-dealers who do not solicit retail customers, as suggested by the 
commenter.
---------------------------------------------------------------------------

    \223\ Professor Angel Letter (stating that market makers provide 
important liquidity to the market and produce important price 
information that is useful to investors and as a tool for 
enforcement).
---------------------------------------------------------------------------

    Other commenters stated that the elimination of a quoted market for 
securities of issuers for which paragraph (b) information is not 
current and publicly available would disadvantage minority shareholders 
\224\ or non-company insiders.\225\ For example, some commenters 
believed that the proposal could encourage companies to go dark to 
destroy a public market in their stock.\226\ The Commission 
acknowledges that existing shareholders, including minority 
shareholders, of companies that do not have current and publicly 
available paragraph (b) information will be negatively impacted if 
broker-dealers cease publishing quotations for the securities of such 
companies and OTC firm insiders repurchase shares from outside 
investors at lower stock prices.\227\ However, the Commission believes 
that such impact would affect a limited number of existing shareholders 
in the overall market because the Commission expects a majority of 
issuers may not engage in such activity. To the extent that issuers 
engage in such activity, however, the Commission believes that any such 
impact is justified by the benefits of deterring potential fraud and 
manipulation, incentivizing greater issuer transparency and 
contributing to more efficient price formation.\228\ In addition, the 
requirement for current and publicly available issuer information for a 
broker-dealer to rely on the piggyback exception to maintain a quoted 
market could also benefit existing shareholders, including minority 
shareholders or non-company insiders, due to more efficient pricing of 
securities of issuers for which information is current and publicly 
available.
---------------------------------------------------------------------------

    \224\ Caldwell Sutter Capital Comment; Ron Lefton; Milner 
Letter; Professor Angel Letter.
    \225\ Caldwell Sutter Capital Comment; Brad Christensen; James 
Duade; Michael Hess; Richard Krejcarek; Ron Lefton; Milner Letter; 
William E. Mitchell; MJG Capital Fund Letter; Doug Mohn; Ariel 
Ozick; Peter Quagliano; Dan Schum; Eric Speron; Michael Tofias; Don 
C. Whitaker.
    \226\ Anbec Partners Letter; Tim Bergin (Oct. 9, 2019); Lucas 
Elliott (Oct. 9, 2019); Ralf Erz; Braxton Gann; James Gibson (Oct. 
25, 2019); Han Han; William E. Mitchell; Daniel Raider; Michael E. 
Reiss; Mark Schepers; Dan Schum (``These companies enjoy operating 
in the shadows.''); Michael Tofias; Raymond Webb (Oct. 7, 2019).
    \227\ See infra Part VI.C.1.a.
    \228\ See infra Part VI.C.1.a. Further, as discussed above, the 
Commission will consider requests for exemptive relief regarding 
issuers that currently do not make their information publicly 
available.
---------------------------------------------------------------------------

    Another commenter stated that certain OTC companies have decades of 
profits and cash yields without any operations or staff to manage the 
distribution of financial information, so the public distribution of 
financial information through a website, for example, would come 
directly at the expense of the cash yield to investors.\229\ The 
Commission recognizes that the requirement for current and publicly 
available issuer information could come at the expense of cash yield to 
investors but believes that this requirement will promote investor 
protection by facilitating investors' access to information that they 
could use to make better-informed investment decisions. While an issuer 
may choose to make its financial information publicly available on its 
website using its own operations, an issuer may also choose to make 
information ``publicly available'' on a wide range of venues, including 
on the website of, and using the services of, a qualified IDQS, a 
registered national securities association, or a registered broker-
dealer. Indeed, an investor may choose to coordinate with a broker-
dealer or a qualified IDQS to have an issuer's current information made 
publicly available on, for example, the website of a broker-dealer or 
qualified IDQS.\230\
---------------------------------------------------------------------------

    \229\ William E. Mitchell.
    \230\ See infra Part II.J.3.
---------------------------------------------------------------------------

    Some commenters opposed the requirement for current and publicly 
available information because, according to them, it is inconsistent 
with the fact that not all issuers have a reporting or disclosure 
obligation under the federal securities laws.\231\ The amended Rule, 
however, does not place any obligation on an issuer to file or furnish 
information with the Commission--any such obligation already would 
exist for the issuer--and some issuers may choose to make current 
information about themselves publicly available while others may 
not.\232\
---------------------------------------------------------------------------

    \231\ David Aldridge; R. Berkvens; Tyler Black; J.H. Broekhoven; 
Brandon Cline (Dec. 7, 2019); David A. Moeller, CIMA, Director of 
Investment Planning, Symphony Financial, Ltd., Co. (``Symphony 
Financial Comment''); Anthony Perala (Oct. 25, 2019); Michael E. 
Reiss; Jim Rivest; Robert Schmidt (Nov. 5, 2019); Michael Tofias; 
Alex Toppan; Debby Valentijn; S. Van den Hoogenhoff. But see 
Peregrine Comment (``I[n] the case of companies who say that the 
cost of providing basic reporting and accounting information is 
overly complex or expensive, then these companies are probably too 
small, unprofessional and/or under resourced to be publicly traded 
in the first place and should probably remain private.'').
    \232\ Further, the Rule does not prevent an issuer from 
terminating or suspending its reporting obligations under the 
Exchange Act. Such an issuer, however, would become a catch-all 
issuer for purposes of the amended Rule. Under those circumstances, 
a broker-dealer would only be able to initiate a quoted market in 
that issuer's security if certain information specified in amended 
Rule 15c2-11(b)(5)(i) is current and publicly available.
---------------------------------------------------------------------------

    Commenters expressed concern regarding the potential for reduced 
access to capital for small companies that have chosen to ``go dark'' 
to reduce compliance costs.\233\ While the Commission recognizes that 
these companies could be negatively affected by the amended Rule, the 
Commission is unable to quantify the potential impact on liquidity and 
value.\234\ Further, as discussed above, the Commission recognizes that 
the loss of a quoted market and the information embedded in prices may 
reduce an issuer's ability to raise capital through stock issuances or 
through other channels, such as debt.\235\ The Commission recognizes 
that some companies may choose to remain dark

[[Page 68143]]

over the objections of minority shareholders whose shares could lose 
value as a result of the amendments. However, non-transparent issuers 
with productive investment opportunities could opt to disclose 
information to maintain a quoted market and alleviate effects on 
capital formation. Therefore, a decision by the issuer to remain non-
transparent may result in the issuer being less likely to have 
productive investment opportunities because the issuer may have less 
access to capital to use for productive investments than those that opt 
to disclose.\236\ In addition, the Commission believes that the 
amendments could result in reduced investment in securities more 
susceptible to fraud and increased investment in securities less 
susceptible to fraud.\237\
---------------------------------------------------------------------------

    \233\ See, e.g., Anbec Partners Letter; Caldwell Sutter Capital 
Comment; Laura Coffman; Paul Lucot (Oct. 16, 2019); Michael Tofias; 
Michael A. Zgayb; see James Duade; Terravoir Venture Letter.
    \234\ See infra Part VI.C.1.a.
    \235\ See infra Part VI.C.2.
    \236\ See infra Part VI.C.1.a.
    \237\ See infra Part VI.C.1.a.
---------------------------------------------------------------------------

    Some commenters stated that broker-dealers should not be prohibited 
from relying on the piggyback exception to publish quotations for 
securities of delinquent reporting companies because, according to the 
commenter, price discovery that is created by publishing a quotation is 
``a significant and important function of the market.'' \238\ The 
Commission agrees that price discovery is an important function of the 
market and, therefore, has adopted an amendment to the piggyback 
exception allowing broker-dealers to rely on the exception based on 
one-way priced quotations (so long as the other requirements of the 
exception are met) that will help to facilitate price discovery in the 
OTC market.\239\ Further, as discussed above \240\ and below in Part 
VI.C.2, the Commission believes that efficiency of prices could improve 
in the OTC market as a result of greater issuer transparency. However, 
the Commission believes that investor protection requires that broker-
dealers be prohibited from relying on the piggyback exception for an 
unlimited period to quote securities of reporting issuers that do not 
have current and publicly available information or are delinquent in 
their filing obligations. The Commission's belief is informed by 
studies that show a greater incidence of litigated cases involving 
pump-and-dump schemes brought against issuers of OTC securities 
relative to cases brought against issuers of exchange-listed 
securities.\241\
---------------------------------------------------------------------------

    \238\ Coral Capital Letter; see Coulson Comment.
    \239\ See infra Part II.D.2.
    \240\ See supra note 222 and accompanying text.
    \241\ See Cumming & Johan, supra note 7.
---------------------------------------------------------------------------

    One commenter stated that the proposal would hurt valuation 
multiples for OTC securities because investors would be reluctant to 
invest in a company that might fall two quarters behind in its public 
disclosure requirements, which would lower share prices and trading 
volumes, thereby making it more difficult to meet the listing standards 
of exchanges.\242\ While the Commission acknowledges, as discussed in 
the Economic Analysis below, that the proposed amendments may cause 
capital to migrate from opaque to more transparent companies,\243\ the 
Commission does not believe that the requirement for issuer information 
to be current and publicly available makes it more difficult for 
issuers whose information is not current and publicly available to meet 
the listing standards of national securities exchanges because, in 
part, exchange listing standards already require such issuer 
information to be current and publicly available.\244\ As discussed 
below in the Economic Analysis, securities of issuers with higher 
levels of disclosure typically experience an increase in liquidity, 
while the securities of issuers that do not disclose information 
typically experience a decrease in liquidity,\245\ and liquid 
securities often trade at higher prices based on lower costs associated 
with their resale.\246\ The amended Rule's requirement that issuer 
information be current and publicly available for a broker-dealer to 
maintain a quoted market in an issuer's security has the potential to 
increase the liquidity and price of securities of issuers for which 
information is current and publicly available, thereby benefiting such 
issuers such that they may consider seeking to list on a national 
securities exchange.\247\
---------------------------------------------------------------------------

    \242\ Coral Capital Letter.
    \243\ See infra Part VI.C.2 (citing James J. Angel, et al., From 
Pink Slips to Pink Sheets: Liquidity and Shareholder Wealth 
Consequences of NASDAQ Delistings (Working Paper, Nov. 4, 2004), 
available at https://www.researchgate.net/profile/Jeffrey_Harris7/publication/4893245_From_Pink_Slips_to_Pink_Sheets_Liquidity_and_Shareholder_Wealth_Consequences_of_Nasdaq_Delistings/links/02e7e527daa56e7612000000.pdf (explaining that less liquid OTC 
securities could migrate away from the quoted OTC market as a result 
of the proposed restrictions on the piggyback exception)); see also 
Proposing Release at 58259.
    \244\ The listing standards of national securities exchanges are 
more extensive than the amended Rule's requirement regarding current 
and publicly available information. See, e.g., Original Listing 
Application for Equity Securities, New York Stock Exchange, 
available at https://www.nyse.com/publicdocs/nyse/listing/Full_Application.pdf (last visited June 13, 2020) (requiring, among 
other things, that the applicant issuer agree to file all required 
periodic financial reports with the Commission, including annual 
reports, and where applicable, quarterly or semi-annual reports, by 
the due dates established by the Commission).
    \245\ See infra Part VI.C.1.a.
    \246\ See Ang et al., supra note 3 (finding that the return 
premium for illiquid stocks is much higher in OTC markets than in 
listed markets).
    \247\ See, e.g., infra note 690 and accompanying text.
---------------------------------------------------------------------------

    Another commenter stated that to require yet another reporting 
layer at the holding company level for community banks could lead many 
to ``decide they cannot afford to trade at all.'' \248\ The Commission 
recognizes that broker-dealers may not publish quotations pursuant to 
the piggyback exception (but may publish quotations pursuant to the 
unsolicited quotation exception, as discussed in the next paragraph) 
for the securities of issuers if issuer information, including that of 
holding companies for community banks,\249\ is not current and publicly 
available, and that investors may incur costs associated with a loss of 
liquidity and possible associated decrease in share value.\250\ 
However, the Commission believes that, on balance, by requiring current 
and publicly available issuer information--information regarding the 
holding company that is the issuer of the quoted security, not 
information limited to the bank that is the issuer's subsidiary--for a 
broker-dealer to maintain a quoted market in an issuer's security, the 
amended Rule promotes investor protection and facilitates efficiencies 
in price discovery by providing greater access to issuer information 
that investors can use to make more informed investment decisions. 
Moreover, fraudsters could have more difficulty in driving up the price 
for an OTC security in pump-and-dump and other manipulative schemes, 
which may be facilitated by investors' inability to analyze information

[[Page 68144]]

contained in promotion campaigns when issuer information is not current 
and publicly available, because quotations for such issuers' securities 
would not be published or submitted for retail investors to 
access.\251\ Further, a promoter may be less likely to engage in a 
fraudulent or manipulative scheme for the security of an issuer for 
which there is current and publicly available information; the presence 
of current and publicly available issuer information can be a deterrent 
to a potential fraudster.\252\
---------------------------------------------------------------------------

    \248\ William E. Mitchell. Under the amended Rule, catch-all 
issuer information must be current and publicly available on an 
annual basis, with the exception of certain financial information, 
not on a quarterly basis, as this commenter suggested. See Amended 
Rule 15c2-11(f)(3)(i)(C)(3); Amended Rule 15c2-11(b)(5)(i).
    \249\ Financial information that is posted on the website of a 
federal banking regulator, such as https://cdr.ffiec.gov/ and 
https://www.ffiec.gov/, generally includes the following financial 
information for companies that is specified in paragraph 
(b)(5)(i)(L) of the amended Rule: The issuer's balance sheet, income 
statements, and retained earnings statement. However, the Commission 
notes that a bank's financial information provided on such a website 
might not include the relevant financial information of the bank's 
holding company (i.e., the issuer of the security), which would have 
to be current and publicly available for a broker-dealer to publish 
a quotation.
    \250\ See infra Part VI.C.1.a (stating that the cessation of 
published quotations and the migration to the grey market for some 
OTC securities can be followed by subsequent drops in price and 
trading volume but that a causal relationship is difficult to 
establish because of other contemporaneous factors, such as 
financial distress).
    \251\ See infra Part VI.C.1.b; Proposing Release at 58255 n.267 
and accompanying text.
    \252\ Cf. Karen K. Nelson et al., Are Individual Investors 
Influenced by the Optimism and Credibility of Stock Spam 
Recommendations?, 40 J. Business Fin. & Acct. 1155-83 (2013) 
(stating that ``stock spam invariably targets small securities with 
relatively little publicly available financial or other 
information'').
---------------------------------------------------------------------------

    Trading in the grey market, where no quoted prices are available 
for buyers and sellers to transact, will result in some costs from loss 
of liquidity \253\ for certain securities because it involves manual 
efforts to locate the other side of a trade. However, these increased 
search costs associated with grey market trading may be limited or 
avoided if broker-dealers are able to rely on the unsolicited quotation 
exception to publish quotations on behalf of an investor that is not a 
company insider or affiliate of the issuer.\254\ Rule 15c2-11 governs 
broker-dealers' publications or submissions of quotations for OTC 
securities in a quotation medium; the Rule does not govern trading in 
OTC securities altogether (e.g., in the grey market, without 
quotations).\255\
---------------------------------------------------------------------------

    \253\ See, e.g., Br[uuml]ggemann et al., supra note 72 (stating 
that ``both market quality proxies change monotonically when moving 
from the [quoted market] to the [g]rey [m]arket'' and that ``[t]he 
decline in liquidity and increase in crash risk are consistent with 
a ranking of these venues in terms of their regulatory strictness 
and disclosure requirements'').
    \254\ See Amended Rule 15c2-11(f)(2).
    \255\ See Amended Rule 15c2-11(a).
---------------------------------------------------------------------------

    Some commenters who opposed a requirement for current and publicly 
available information stated that some dark companies provide 
information,\256\ such as an audited annual report, on an annual basis 
to their existing shareholders \257\ or by request,\258\ and that these 
dark issuers may not make this information more widely available to 
avoid revealing confidential financial and business information to 
competitors, to allow insiders to be the buyer of last resort at low 
prices, to have fewer shareholders, and to take advantage of tax 
benefits.\259\ The Commission recognizes that compliance with this 
requirement, including with respect to the financial information for an 
issuer that does not have a statute- or rule-based reporting 
obligation, such as a catch-all issuer, may reveal confidential 
financial or business information to competitors. The Commission 
acknowledges there may be costs associated with potentially revealing 
(or revealing more widely) confidential information, but requiring the 
public availability of current issuer information can help to better 
facilitate informed investment decisions by both existing investors 
\260\ and potential investors in addition to potentially limiting 
incidents of fraud and manipulation in OTC securities. The public 
availability of current issuer information improves the overall mix of 
information about issuers that is readily and easily accessible to 
investors. Further, the public availability of current issuer 
information can also promote market efficiency and pricing integrity of 
catch-all issuers' securities, which may facilitate capital formation 
and lead to more efficient prices that are less susceptible to 
manipulation.\261\
---------------------------------------------------------------------------

    \256\ Such catch-all issuer information is discussed above in 
Part II.B.3.
    \257\ See Duane DeYoung (Oct. 26, 2019); Brett Dorendorf; 
Christian Gabis; Michael Hess; Matt Jester; Lake Highlands Comment; 
Dave Peirce (Oct. 16, 2019); Anthony Perala.
    \258\ Anbec Partners Letter; Gary Huscher (Nov. 1, 2019); see 
Duane DeYoung; SMP Asset Management Comment; Michael P. Kruger (Oct. 
10, 2019); Lucas Selvidge (Oct. 23, 2019).
    \259\ Peter Quagliano; Michael Tofias; see Alluvial Letter; 
Drinker Letter. But see NASAA Letter (stating that paragraph (b) 
information does not involve trade secrets, proprietary business 
operations, or other highly sensitive business information).
    \260\ Securities of well-established issuers that provide 
information to existing shareholders can still be subject to fraud 
and manipulation. See infra Part VI.C.1.a.
    \261\ See infra Part VI.C.1.a. Rule 15c2-11 does not impose any 
disclosure obligations upon issuers.
---------------------------------------------------------------------------

    In response to the Commission's request for comment, one commenter 
stated that the securities of issuers that have undergone a 
reorganization, any major merger or acquisition, reverse merger, or 
significant restructuring should be eligible for the piggyback 
exception,\262\ stating that companies that have undergone reverse 
mergers already are required to disclose ``a significant amount of 
information'' publicly by filing a ``[F]orm 8-K12(g),'' which the 
commenter stated is ``nearly identical'' to a Form 10, and that the 
Commission should require the disclosure of more information on this 
form if it is not satisfied with the amount of information a Form 8-K 
filer must disclose if it engages in a reverse merger.\263\ The amended 
Rule does not prevent broker-dealers from relying on the piggyback 
exception for the securities of issuers that undergo major corporate 
transactions, so long as certain requirements are met. To the extent 
that the reports and filings specified in paragraph (b) require the 
disclosure of any major corporate action, such as a reorganization, 
merger, acquisition, or reverse merger, and such paragraph (b) 
information is current and publicly available, timely filed, or filed 
within 180 calendar days from the specified period, as applicable, for 
an issuer that has undergone such transaction, a broker-dealer would be 
able to rely on the piggyback exception for that issuer's security, so 
long as the other requirements of the piggyback exception are met.
---------------------------------------------------------------------------

    \262\ Coral Capital Letter. But see NASAA Letter (encouraging 
the Commission to amend the Rule so that broker-dealers cannot rely 
on the piggyback exception to publish quotations for securities of 
issuers that undergo material business developments, including, but 
not limited to, declarations of bankruptcy, re-organizations, and 
mergers, unless information regarding such development ``has been 
disclosed'').
    \263\ Coral Capital Letter.
---------------------------------------------------------------------------

    Another commenter stated that the proposal would not increase the 
availability of information that would help investors.\264\ The 
Commission believes, however, that some market participants, such as a 
qualified IDQS or broker-dealer, may choose to make current issuer 
information publicly available in response to the amended Rule and that 
doing so would increase access to issuer information that could help 
investors to make better-informed investment decisions.\265\ Further, 
allowing broker-dealers only to quote securities when information is 
``publicly available'' (consistent with the amended Rule's 
requirements) on any online location within a broad list of regulated 
market participants' websites and an issuer's website, in addition to 
EDGAR or the website of a state or federal agency, would increase 
access to issuer information, such as balance sheets, profit and loss 
statements, and retained earnings statements that investors could use 
to analyze in making better-informed investment decisions. The public 
availability of current information, in addition to the expansion of 
the Rule's specified paragraph (b) information for catch-all issuers, 
could enable investors to better assess information contained in 
promotion campaigns and, therefore, could have a deterrent effect in

[[Page 68145]]

inhibiting fraudulent activity related to quoted OTC securities.\266\
---------------------------------------------------------------------------

    \264\ John Sheehy (Oct. 15, 2019).
    \265\ See, e.g., Aztec Letter (stating that ``Aztec . . . could, 
and is willing to, publish on its website the annual information 
required by Rule 15c2-11(b)[(5)(i)(A) through (M)]'').
    \266\ See infra Part VI.C.1.b; Proposing Release at 58255.
---------------------------------------------------------------------------

    Some commenters provided examples of where they believed paragraph 
(b) information would be unnecessary to make an informed decision: 
Sophisticated investors with sufficient investment experience; active, 
self-directed traders that use professional products offered by 
electronic brokers; institutions and regulated investment advisers; 
broker-to-broker transactions; sales by all non-affiliate, retail 
investors; \267\ and existing shareholders or short-term traders or 
speculators.\268\ The Commission recognizes that investors may have 
varying needs for an issuer's paragraph (b) information to be current 
and publicly available due to different approaches in analyzing the 
issuer and the market for its security. The Commission also does not 
believe that the requirement for an issuer's paragraph (b) information 
to be current and publicly available would prevent investors from 
utilizing their own methods for analyzing issuers and their securities. 
Instead, the Commission believes that, on balance, by requiring 
paragraph (b) information to be current and publicly available for a 
broker-dealer to be able to publish quotations for issuers' securities, 
the amendments will require that a minimum amount of information be 
available about these quoted securities, which can be used by investors 
to make better-informed investment decisions. In addition, the public 
availability of paragraph (b) information should help to alleviate 
concerns that limited or no information for certain issuers of quoted 
OTC securities exists or that such information is difficult or 
impossible for retail investors to find.
---------------------------------------------------------------------------

    \267\ OTC Markets Group Letter 2; see also Securities Law USA 
Letter; Zuber Lawler Letter.
    \268\ Coral Capital Letter.
---------------------------------------------------------------------------

    Some commenters suggested that securities of companies that do not 
make their information publicly available or otherwise fail to meet an 
exception should be eligible for quoting on a market where quote 
distribution would be limited to ``professional investors'' and certain 
non-institutional investors would only be allowed to liquidate 
holdings.\269\ These comments do not provide sufficient detail to 
address how such a market would function while ensuring that the Rule's 
goals would be achieved through such alternative means. The Commission 
recognizes, however, that investors in securities that migrate to the 
grey market (as a result of the amendments) may be more susceptible to 
fraud and less efficient pricing, and, as one commenter stated, may 
lack electronic mechanisms to facilitate best execution.\270\ The 
Commission believes that, under certain conditions and circumstances, 
it could be beneficial to establish an ``expert market'' that would 
enhance liquidity for sophisticated or professional investors in grey 
market securities, as well as for small companies seeking growth 
opportunities that might prefer to be quoted in a market limited to 
such persons. To facilitate the formation and implementation of such a 
market, the Commission has the authority to issue exemptive relief by 
order pursuant to Section 36 of the Exchange Act and paragraph (g) of 
the amended Rule \271\ that is necessary or appropriate in the public 
interest, and is consistent with the protection of investors. In this 
regard, the Commission may consider, among other things, the types of 
investors who could access quotations in this market and the types of 
securities that would be quoted in such a market.
---------------------------------------------------------------------------

    \269\ E.g., OTC Markets Group Letter 2. Specifically, this 
commenter suggested that (what the commenter called) an ``Expert 
Market'' should be exempt from the definition of an IDQS under the 
Rule. OTC Markets Group Letter 2; OTC Markets Group Letter 3 
(mentioning Qualified Institutional Buyers, accredited investors, 
certain registered entities, and banks); see Coulson Comment. 
Several commenters agreed that there should be a way to trade 
securities that would no longer be eligible for a quoted public 
market, including such an ``Expert Market.'' OTC Markets Group 
Letter 1; see Canaccord Letter; CrowdCheck Letter; HTFL Letter; 
Lucosky Brookman Letter; MCAP Letter; Sosnow & Associates Letter; 
Securities Law USA Letter; Zuber Lawler Letter; see also Caldwell 
Sutter Capital Comment; Taranis Comment; Ron Lefton; Letter from 
James E. Mitchell, General Partner, Mitchell Partners, L.P., to Hon. 
Jay Clayton, Chairman, SEC (Mar. 13, 2020) (``Mitchell Partners 
Letter 3''); STA Letter; Virtu Letter. One commenter stated that 
such a market, however, could compound systemic risks. Jean-Paul 
Tres.
    \270\ See OTC Markets Group Letter 2.
    \271\ See infra Part II.L. Paragraph (g) of the amended Rule 
states that ``[u]pon written application or upon its own motion, the 
Commission may, conditionally or unconditionally, exempt by order 
any person, security, or transaction, or any class or classes of 
persons, securities, or transactions, from any provision or 
provisions of this section, to the extent that that such exemption 
is necessary or appropriate in the public interest, and is 
consistent with the protection of investors.''
---------------------------------------------------------------------------

    In considering any such exemptive relief, the Commission 
preliminarily believes that any such expert market must not have the 
potential to develop into a parallel market for which quotations are 
accessible by retail investors and the general public. To protect 
retail investors from the harms resulting from incidents of fraud and 
manipulation in OTC securities for which no or limited publicly 
available information about the issuers exists to help counteract 
misinformation, such exemptive relief could focus on the types of 
investors that have the ability to assess an investment opportunity, 
including the ability to analyze the risks and rewards.\272\ Thus, the 
Commission preliminarily believes that any such exemptive relief should 
be narrowly tailored to limit access to sophisticated investors, such 
as qualified institutional buyers, as defined in Securities Act Rule 
144A(a)(1); accredited investors, as defined in Securities Act Rule 
501(a); investment companies registered under the Investment Company 
Act of 1940; investment advisers registered under Section 203 of the 
Investment Advisers Act of 1940; banks, bank holding companies, savings 
associations, depository institutions, or foreign banks, as defined in 
Section 3 of the Federal Deposit Insurance Act; and broker-dealers.
---------------------------------------------------------------------------

    \272\ See, e.g., Amending the ``Accredited Investor'' 
Definition, Securities Act Release No. 10824 (Aug. 26, 2020), __ FR 
__ (__. __, 2020).
---------------------------------------------------------------------------

    The Commission may consider any appropriate factors or conditions 
for any such expert market including certain safeguards such as, for 
example, requiring that any participating security: (1) Is of an issuer 
that has an active license from its state of incorporation or domicile 
to carry on any business for which a license is required; and (2) was 
the subject of a quotation that was published or submitted pursuant to 
either paragraph (f)(1) (the exchange-traded security exception) or 
(f)(3) (the piggyback exception) of the amended Rule on the business 
day preceding the initial quotation in any such expert market.
    Some commenters stated that certain catch-all issuers provide their 
paragraph (b) information to their shareholders (e.g., on an annual 
basis), and so questioned the requirement for public availability of 
issuer information.\273\ The amended Rule seeks to equalize 
opportunities for informed investment decisions based on information 
access between existing and potential shareholders by requiring that an 
issuer's financial information be current and publicly available before 
a broker-dealer can publish or submit a quotation for that issuer. The 
Commission recognizes that the type of information that investors may 
require to make an informed investment decision may vary based on their 
investment objectives, as well as on other factors. The Commission, 
however, believes that

[[Page 68146]]

allowing quotations absent current and publicly available financial 
information, regardless of investment strategy, would benefit existing 
shareholders who may have access to information that potential 
investors may lack because existing shareholders, for example, may be 
sent such information on a regular basis or upon request. Further, such 
an outcome could facilitate a market where demand is based on 
significant information asymmetries.
---------------------------------------------------------------------------

    \273\ E.g., Duane DeYoung; Brett Dorendorf; Michael Hess; Matt 
Jester; Lake Highlands Comment; Dave Peirce; Anthony Perala; see 
Christian Gabis.
---------------------------------------------------------------------------

    One commenter stated that the proposed piggyback exception would 
not be available for foreign private issuers that restrict access by 
U.S. persons to their disclosure documents,\274\ and the Commission 
agrees. However, this restriction on the ability of a broker-dealer to 
maintain a quoted market in the securities of such foreign private 
issuers, in the absence of current and publicly available issuer 
information, aligns with the amendments' objective of providing 
additional transparency to investors, including retail investors, so 
that they can make better-informed investment decisions and more easily 
evaluate the issuer, its security, and the market for the 
security.\275\
---------------------------------------------------------------------------

    \274\ Murphy & McGonigle Letter.
    \275\ The amended Rule also expands the definition of the term 
``publicly available'' to align the Rule with Exchange Act Rule 
12g3-2(b) and include an electronic information delivery system that 
is generally available to the public in the primary trading market 
of a foreign private issuer, which accommodates information that is 
available on a foreign regulator's website. See infra Part II.J.3.
---------------------------------------------------------------------------

    As discussed above, the proposed Rule would have required that a 
catch-all issuer's financial information be current and publicly 
available within six months from a broker-dealer's publication or 
submission of a quotation for a broker-dealer to rely on the piggyback 
exception for the catch-all issuer. Some commenters specifically 
addressed the six-month requirement in the proposed Rule as too short 
an amount of time for a catch-all issuer's information to be current 
and publicly available.\276\ One commenter opposed the six-month time 
frame because, according to the commenter, such an amount of time would 
place an undue burden on small issuers, create a compliance burden on 
broker-dealers, and negatively impact the ability of small issuers to 
raise capital.\277\ Some commenters stated that certain well-
established, thinly traded non-reporting issuers make their financial 
information \278\ available to their existing shareholders only on an 
annual basis, which would not meet the standard of ``current'' for 
purposes of paragraph (b)(5)(i)(L) of the proposed Rule.\279\
---------------------------------------------------------------------------

    \276\ See Coral Capital Letter; Joshua Marino.
    \277\ Coral Capital Letter.
    \278\ See infra Part II.B.3 for a discussion of such issuer 
information.
    \279\ See, e.g., Alluvial Letter; Aztec Letter; Beacon 
Redevelopment Letter; Brett Dorendorf; Michael Hess; Doug Mohn; 
Ariel Ozick; Robert E. Schermer, Jr.; Total Clarity Comment.
---------------------------------------------------------------------------

    The Commission has determined not to require catch-all issuer 
information to be current and publicly available within six months 
before the date of publication or submission of a broker-dealer's 
quotation for the broker-dealer to rely on the piggyback exception. 
Instead, for a broker-dealer to rely on the piggyback exception to 
publish or submit a quotation for a catch-all issuer's security, such 
issuer's balance sheet is current if its most recent balance sheet is 
as of a date less than 16 months \280\ before the publication or 
submission of the broker-dealer's quotation, and the issuer's profit 
and loss and retained earnings statements are current if they are for 
the 12 months preceding the date of such balance sheet.\281\ Such 
catch-all issuer's other information specified in paragraph (b)(5)(i), 
except for the information specified in paragraphs (b)(5)(i)(N) through 
(P), must be as of a date within 12 months before the publication or 
submission of the quotation.\282\
---------------------------------------------------------------------------

    \280\ See supra note 142.
    \281\ See Amended Rule 15c2-11(b)(5)(i)(L); infra Part II.J.1 
(discussing the amended Rule's definition of the term ``current'').
    \282\ See Amended Rule 15c2-11(b)(5)(i). Consistent with the 
proposed Rule, the amended Rule does not require the information 
specified in paragraphs (b)(5)(i)(N) through (P) to be current and 
publicly available because those paragraphs are not issuer-specific 
and, instead, refer to information about the publication or 
submission of the quotation and the broker-dealer publishing or 
submitting the quotation.
---------------------------------------------------------------------------

    While the Commission recognizes investors' need for current 
financial information, the Commission is also cognizant of the 
anticipated costs to issuers of producing and updating paragraph (b) 
information. As discussed in Part II.B.3, a more frequent disclosure 
requirement for catch-all issuer financial information would require an 
allocation of resources to the preparation of financial statements that 
the Commission does not believe is justified in light of the fact that 
catch-all issuers may not have an ongoing reporting or disclosure 
obligation. In addition, the Commission believes that catch-all issuer 
information made publicly available on an annual basis, in addition to 
the expansion of the list of specified information for catch-all 
issuers,\283\ will help provide investors with appropriate information 
to make better-informed investment decisions. Furthermore, as some 
commenters observed, the extension of time for catch-all issuer 
financial information to be current and publicly available aligns with 
current industry standards and practices regarding when issuers provide 
information to their investors \284\ and certain requirements under 
state law to provide financial information to investors on an annual 
basis.\285\ Therefore, the Commission believes the extension of time 
for the disclosure of catch-all issuer financial information (as 
compared to the proposed Rule's semi-annual requirement) strikes an 
appropriate balance between facilitating capital formation and issuer 
and market transparency to provide investors with information to make 
better-informed investment decisions.
---------------------------------------------------------------------------

    \283\ See supra Part II.B.3.
    \284\ See, e.g., Alluvial Letter; Aztec Letter; Beacon 
Redevelopment Letter; Brett Dorendorf; Michael Hess; Doug Mohn; 
Ariel Ozick; Robert E. Schermer, Jr.; Total Clarity Comment.
    \285\ See Drinker Letter.
---------------------------------------------------------------------------

    As discussed above, the proposed Rule would have treated an issuer 
as a catch-all issuer if it were delinquent in its reporting or 
disclosure obligations as a result of not timely filing a report, as 
required by the Exchange Act or Securities Act. Accordingly, if an 
issuer had not timely filed a required report by the prescribed due 
date for such report, its information would not be current for purposes 
of the proposed Rule, and the issuer would be treated as a catch-all 
issuer until the issuer were to file its required report. In this 
instance, a broker-dealer would not have been able to rely on the 
piggyback exception to publish or submit a quotation for the issuer's 
security if the information specified in proposed paragraph 
(b)(5)(i)(L) for such issuer were not current and publicly available as 
of a date within six months from the publication or submission of the 
broker-dealer's quotation. This treatment of delinquent reporting 
issuers as catch-all issuers in the proposed Rule would have created 
different outcomes with respect to when information is current and 
publicly available for purposes of relying on the piggyback exception 
based on the frequency of Exchange Act or Securities Act reporting and 
disclosure obligations. For example, if an issuer did not file a 
required quarterly report by its prescribed due date, broker-dealers 
would continue to be able to publish a quotation in

[[Page 68147]]

reliance on the piggyback exception so long as the last day of the 
reporting period covered by the issuer's most recently filed quarterly 
report were as of a date within six months from the date of the 
publication or submission of the broker-dealers' quotations; the 
delinquent reporting issuer would have been treated as a catch-all 
issuer, but it would not immediately have lost its quoted market. In 
contrast, a broker-dealer would not have been able to publish a 
quotation in reliance on the piggyback exception for an issuer with a 
reporting obligation under Regulation A if the issuer failed to file 
its semi-annual or annual report by the prescribed due date for such 
report. Here, even though the issuer is delinquent in its reporting and 
would be treated as a catch-all issuer, its information would not be 
current and publicly available within the six-month time frame for the 
piggyback exception, and its quoted market must be discontinued, unless 
its information were made current and publicly available. To simplify 
the application of the piggyback exception, and to address the 
potential for disparate treatment under the piggyback exception of 
issuers that may have different reporting obligations, the piggyback 
exception under the amended Rule groups issuers based on their 
regulatory status in regard to Exchange Act or Securities Act reporting 
obligations. Accordingly, issuers with Exchange Act or Securities Act 
reporting or disclosure obligations are not treated as catch-all 
issuers for purposes of the piggyback exception.\286\
---------------------------------------------------------------------------

    \286\ See Amended Rule 15c2-11(f)(3)(i)(C).
---------------------------------------------------------------------------

(b) Time Frame Requirements for Issuer Information
    The following table summarizes the time frames for which paragraph 
(b) information must be current and publicly available, timely filed, 
or filed within 180 calendar days from the specified period, as 
applicable, for purposes of piggyback exception eligibility:

    Table 1--Piggyback Exception Requirements Regarding Paragraph (b)
                               Information
------------------------------------------------------------------------
  Documents and information
        specified in:              Paragraph (b) information must be:
------------------------------------------------------------------------
Paragraphs (b)(3)(i),          Filed within 180 calendar days following
 (b)(3)(iv), and (b)(3)(v)      the end of the reporting period (e.g.,
 for reporting issuers that     the fiscal year or fiscal quarter, as
 have an Exchange Act           applicable).
 reporting obligation.
Paragraph (b)(3)(ii) for       Filed within 120 calendar days following
 reporting issuers that have    the end of the issuer's fiscal year \a\
 a reporting obligation under   and 90 calendar days after the end of a
 Regulation A.                  semi-annual period.\b\
Paragraph (b)(3)(iii) for      Filed within 120 calendar days following
 crowdfunding issuers.          the end of the issuer's fiscal year.\c\
Paragraph (b)(4) for exempt    Since the first day of its most recently
 foreign private issuers.       completed fiscal year, information that
                                has been made public as required by the
                                laws of the country of the issuer's
                                incorporation, organization or domicile;
                                or has filed with the principal stock
                                exchange in its primary trading market
                                on which its securities are traded.\d\
Paragraph (b)(5) for catch-    Current and publicly available annually,
 all issuers.                   except for certain financial
                                information: The issuer's most recent
                                balance sheet must be as of a date less
                                than 16 months before the publication or
                                submission of a broker-dealer's
                                quotation, and the issuer's profit and
                                loss and retained earnings statements
                                for the 12 months preceding the date of
                                the most recent balance sheet.
------------------------------------------------------------------------
\a\ See Form 1-K., General Instructions, A.(2) (specifying that annual
  reports filed on Form 1-K shall be filed within 120 calendar days
  after the end of the fiscal year covered by the report).
\b\ See Form 1-SA, General Instructions, A.(2).
\c\ See Rule 203(b) of Regulation Crowdfunding.
\d\ See Exchange Act Rule 12g3-2(b)(1)(iii), (b)(3)(ii).

    To facilitate issuer transparency in connection with a broker-
dealer's reliance on the piggyback exception to maintain a quoted 
market in the issuer's security, the amended Rule requires that an 
issuer's documents and information be filed within 180 calendar days 
from the end of the issuer's most recent fiscal year or any quarterly 
reporting period that is covered by a report required by Section 13 or 
15(d) of the Exchange Act for reporting issuers for which documents and 
information are specified in paragraphs (b)(3)(i), (b)(3)(iv), and 
(b)(3)(v) of the amended Rule. The requirement under the amended Rule 
that an issuer's documents and information be filed within 180 calendar 
days from the specified period allows broker-dealers to continue to 
rely, for a limited period, on the piggyback exception to publish or 
submit quotations for securities of issuers that have not filed a 
required report by the prescribed due date for such report. Consistent 
with the proposed Rule, the amended Rule allows a broker-dealer to 
continue to rely on the piggyback exception to publish quotations, for 
a limited period, for a delinquent reporting issuer's security.\287\ 
The provision of this limited time period balances the Rule's goals of 
preventing fraudulent and manipulative activity (specifically, in this 
case, in delinquent issuers' securities) while preserving liquidity in 
the OTC market.\288\ By providing a specific, limited period for these 
reporting issuers to file reports before a broker-dealer can no longer 
rely on the piggyback exception for the issuer's security, the amended 
Rule limits the potential for the disruption and loss of a broker-
dealer quoted market resulting from the failure of such issuer to file 
a required report by the prescribed due date for the report, which, at 
the same time, provides time for: (1) The issuer's paragraph (b) 
information to become current and publicly available for investors to 
access and utilize to make investment decisions, and (2) investors to 
sell securities if they so choose in a market that is maintained by 
broker-dealer quotations for a limited time.
---------------------------------------------------------------------------

    \287\ See infra note 291.
    \288\ See infra Part VI.B.2.c.
---------------------------------------------------------------------------

    The reports referenced in the amended Rule for issuers with a 
reporting obligation under Regulation A (i.e., paragraph (b)(3)(ii)) 
and for crowdfunding issuers (i.e., paragraph (b)(3)(iii)) must be 
``timely filed'' for a broker-dealer to rely on the piggyback 
exception. Because issuers with a reporting obligation under Regulation 
A and crowdfunding issuers are not required to file reports more 
frequently than on a semi-annual or annual basis,\289\ the due date for 
filing such

[[Page 68148]]

reports will always be greater than 180 days from the end of the prior 
reporting period covered by such a report. By requiring that issuer 
information be timely filed (i.e., by the prescribed due date for a 
form or as required by Regulation A or Regulation Crowdfunding), the 
piggyback exception under the amended Rule is consistent with the time 
frames for issuers' Exchange Act or Securities Act reporting 
obligations.
---------------------------------------------------------------------------

    \289\ See Form 1-SA, General Instructions, A.(2) (specifying 
that semi-annual reports on Form 1-SA shall be filed within 90 
calendar days after the end of the semi-annual period covered by the 
report, which would result in a report being filed 270 calendar days 
(180 calendar days + 90 calendar days) from the end of the prior 
reporting period); Rule 203(b) of Regulation Crowdfunding 
(specifying that annual reports filed on Form C-AR shall be filed no 
later than 120 days after the end of the fiscal year covered by the 
report, which would result in a report being filed 485 days (365 
days + 120 days) from the end of the prior reporting period).
---------------------------------------------------------------------------

    Paragraph (f)(3)(i)(C)(1) under the amended Rule provides that the 
piggyback exception shall apply to the publication or submission of a 
quotation for a security of a reporting issuer (other than a 
crowdfunding issuer or an issuer that has a reporting obligation under 
Regulation A) \290\ if the applicable paragraph (b) information is 
current and publicly available within 180 calendar days from the end of 
the issuer's most recent fiscal year or any quarterly reporting 
period.\291\ For example, if an issuer with a quarterly reporting 
obligation, such as an issuer that has information specified in 
paragraph (b)(3)(i), (b)(3)(iv), or (b)(3)(v), were to file an annual 
report for a fiscal year that ended on December 31, 2020, a quotation 
for that issuer's security that was published or submitted by a broker-
dealer in an IDQS, between January 1, 2021, and, inclusive of, June 29, 
2021, would comply with the requirements in paragraph (f)(3)(i)(C) of 
the piggyback exception. If, however, the same issuer were to file a 
quarterly report for the quarters ending on March 31, 2021, and June 
30, 2021, and was required but failed to file a quarterly report for 
the quarter that ended on September 30, 2021, a quotation for such 
issuer's security that was published or submitted, by a broker-dealer 
in an IDQS, between July 1, 2021, and, inclusive of, December 27, 2021, 
would meet the requirements of paragraph (f)(3)(i)(C) of the piggyback 
exception. In this same scenario, where the issuer failed to file a 
quarterly report for the quarter that ended on September 30, 2021, a 
quotation for such issuer's security that was published or submitted, 
by a broker-dealer in an IDQS, on December 28, 2021, would not meet the 
requirements of paragraph (f)(3)(i)(C) of the piggyback exception 
because the applicable paragraph (b) information was not current and 
publicly available with respect to any reporting period that ended 180 
calendar days before the publication or submission of the 
quotation.\292\
---------------------------------------------------------------------------

    \290\ As discussed below, the requirements for the paragraph (b) 
information of such issuers are included in paragraph 
(f)(3)(i)(C)(2) of the amended Rule and provide that: (1) A 
crowdfunding issuer's paragraph (b) information would be timely 
filed if it were filed within 120 calendar days following the end of 
the issuer's fiscal year, or (2) paragraph (b) information for an 
issuer with a reporting obligation under Regulation A would be 
timely filed if it were filed within 120 calendar days following the 
end of the issuer's fiscal year and 90 calendar days after the end 
of semi-annual period.
    \291\ Amended Rule 15c2-11(f)(3)(i)(C)(1). As proposed, a 
reporting issuer that was delinquent in its reporting obligation 
would have been treated as a catch-all issuer. See Proposed Rule 
15c2-11(b)(5)(ii). As such, the issuer's information would need to 
have been current and made publicly available within six months (or 
180 calendar days) before the date of publication or submission of 
such quotation for a broker-dealer to rely on the piggyback 
exception to publish quotations for its security. See Proposed Rule 
15c2-11(f)(3)(ii). As discussed above, the amended Rule's piggyback 
exception does not impose the proposed six-month requirement for 
catch-all issuer information to be current and publicly available. 
In addition, the amended Rule treats delinquent reporting issuers as 
catch-all issuers only with respect to compliance with the 
information review requirement so that a broker-dealer can publish 
or submit an initial quotation to commence a quoted market in an 
issuer's security. See amended Rule 15c2-11(b)(5)(ii). In light of 
these changes from the proposal, the amended Rule's piggyback 
exception requires that an issuer's information specified in 
paragraph (b)(3)(i), (b)(3)(iv), or (b)(3)(v) be filed within 180 
calendar days from the end of the issuer's most recent fiscal year 
or any quarterly reporting period that is covered by a report 
required by section 13 or 15(d) of the Exchange Act, as applicable, 
to avoid disparate treatment of issuers by imposing a requirement 
for such information that has an unduly short time frame. Although 
decreased access to current issuer information may have the 
potential to hamper an investor's ability to counteract 
misinformation, the Commission believes that the amendments to the 
piggyback exception appropriately balance these concerns (i.e., 
disparate treatment of issuers and transparency of issuer 
information) by permitting broker-dealers to quote the securities of 
certain reporting issuers for a time-limited period (i.e., so long 
as their paragraph (b) information is filed within 180 calendar days 
from the end of the issuer's most recent fiscal year or any 
quarterly reporting period that is covered by a report required by 
section 13 or 15(d) of the Exchange Act).
    \292\ A broker-dealer or qualified IDQS may comply with the 
information review requirement by reviewing the specified 
information for a catch-all issuer in paragraph (b)(5) of the 
amended Rule so that a broker-dealer can publish a quotation for the 
issuer's security if such issuer's information is current and 
publicly available. See Amended Rule 15c2-11(b)(5)(ii); supra Part 
II.B.5 (discussing the application of the catch-all issuer 
provision). Until the issuer's required report is filed, however, 
the broker-dealer would not be able to maintain a quoted market for 
such issuer's security in reliance on the piggyback exception.
---------------------------------------------------------------------------

    If an issuer with an annual filing obligation (i.e., an issuer for 
which documents and information are specified in paragraph (b)(3)(v) of 
the amended Rule) were to file its annual statement, pursuant to the 
requirements of section 12(g)(2)(G)(i) of the Exchange Act, for the 
period that ended on December 31, 2020, the quotation for such issuer's 
security that was published or submitted, by a broker-dealer in an 
IDQS, between January 1, 2021, and, inclusive of, June 29, 2022, would 
comply with the requirements in paragraph (f)(3)(i)(C) of the piggyback 
exception. If, however, the same (b)(3)(v) issuer failed to file an 
annual statement for the period that ended on December 31, 2020, a 
quotation for such issuer's security that was published or submitted, 
by a broker-dealer in an IDQS after June 29, 2021 (i.e., 180 days after 
the end of issuer's fiscal year), would not comply with the 
requirements of paragraph (f)(3)(i)(C) of the piggyback exception.
    Paragraph (f)(3)(i)(C)(2) under the amended Rule provides that the 
piggyback exception shall apply to the publication or submission of a 
quotation for a security of an issuer with a reporting obligation under 
Regulation A or a crowdfunding issuer so long as the applicable 
paragraph (b) information is timely filed.\293\ If an issuer for which 
documents and information are specified in paragraph (b)(3)(ii) of the 
amended Rule that has reporting obligations under Regulation A were to 
file an annual report within 120 calendar days from the end of a fiscal 
year that ended on December 31, 2020,\294\ the quotation for such 
issuer's security that was published or submitted, by a broker-dealer 
in an IDQS, between January 1, 2021, and, inclusive of, September 28, 
2021,\295\ would comply with the requirements of paragraph (f)(3)(i)(C) 
of the piggyback exception. If, however, the same issuer were to fail 
to timely file a semi-annual report by September 28, 2021, for the 
period that ended June 30, 2021, the quotation for such issuer's 
security that was published or submitted, by a broker-dealer in an 
IDQS, on September 29, 2021, would not comply with paragraph 
(f)(3)(i)(C) of the piggyback exception. In this example, a broker-
dealer would not be able to rely on the piggyback exception to publish 
a quotation for the issuer's security beginning on September 29, 2021,

[[Page 68149]]

because the issuer failed to timely file its semi-annual report 
pursuant to Rule 257(b)(3).\296\ If, however, the same issuer were to 
timely file its semi-annual report by September 28, 2021, a broker-
dealer could rely on the piggyback exception to publish or submit a 
quotation for the issuer's security through, and inclusive of, April 
30, 2022 (i.e., 120 days from the end of the issuer's 2021 annual 
reporting period).
---------------------------------------------------------------------------

    \293\ Amended Rule 15c2-11(f)(3)(i)(C)(2).
    \294\ For purposes of this example, this date represents the 
deadline for this issuer to file an annual report pursuant to Rule 
257(b)(1) of Regulation A.
    \295\ In this example, September 28, 2020, is 90 calendar days 
after the end of the issuer's semi-annual reporting period, the 
deadline to file its semi-annual report.
    \296\ As discussed below, amended Rule 15c2-11(f)(3)(ii) 
provides a limited grace period that would allow broker-dealers to 
continue to rely on the piggyback exception for a time-limited 
period to quote the security of an issuer that files a tardy report. 
Further, if the required report is filed during the grace period, 
broker-dealers could continue to rely on the piggyback exception 
even after the expiration of such grace period. See Rule 15c2-
11(f)(3)(ii)(C); see also infra Part II.D.6.
---------------------------------------------------------------------------

    If a crowdfunding issuer, which has documents and information 
specified in paragraph (b)(3)(iii) under the amended Rule, were to 
timely file by April 30, 2021, an annual report for a fiscal year that 
ended on December 31, 2020 (i.e., 120 days after the end of the 
issuer's most recent fiscal year), a quotation for the issuer's 
security that was published or submitted, by a broker-dealer in an 
IDQS, between January 1, 2021, and, inclusive of, April 30, 2022, would 
comply with the requirements of paragraph (f)(3)(i)(C) of the piggyback 
exception. The 120-day requirement in the piggyback exception under the 
amended Rule--and, in this example, the period January 1, 2021, through 
April 30, 2022--reflects the requirements of a crowdfunding issuer to 
file a report within 120 days from the end of its fiscal year. If, 
however, the same crowdfunding issuer were to fail to timely file by 
April 30, 2021, an annual report for its fiscal year that ended on 
December 31, 2020, the quotation for such issuer's security that was 
published or submitted, by a broker-dealer in an IDQS, beginning on May 
1, 2021, would not comply with the requirements of paragraph 
(f)(3)(i)(C) of the piggyback exception because the issuer's paragraph 
(b) information would not be timely filed within 120 days from the end 
of the issuer's most recent fiscal year.
    Paragraph (f)(3)(i)(C)(3) under the amended Rule provides that the 
piggyback exception shall apply to the publication or submission of a 
quotation for a security of an exempt foreign private issuer or a 
catch-all issuer, so long as the applicable paragraph (b) information 
is current and publicly available.\297\ If an exempt foreign private 
issuer, which has documents and information specified in paragraph 
(b)(4) of the amended Rule, were to publish its annual report, pursuant 
to a requirement of the laws of the country of the issuer's 
incorporation or the rules of its primary trading market, for the 
period that ended on December 31, 2020, the quotation for such issuer's 
security that was published or submitted, by a broker-dealer in an 
IDQS, between January 1, 2021, and the day the issuer is required to 
publish its next annual report, would comply with the requirements of 
paragraph (f)(3)(i)(C) of the piggyback exception. If, however, the 
same exempt foreign private issuer failed to publish its annual report 
pursuant to a requirement of the laws of the country of the issuer's 
incorporation or the rules of its primary trading market, the quotation 
for such issuer's security that was published or submitted on the day 
after such issuer was required to publish its annual report would not 
comply with the requirements of paragraph (f)(3)(i)(C) of the piggyback 
exception because the information specified in paragraph (b)(4) of the 
amended Rule would not be current and publicly available.
---------------------------------------------------------------------------

    \297\ Amended Rule 15c2-11(f)(3)(i)(C)(2).
---------------------------------------------------------------------------

    Finally, for a broker-dealer to publish or submit in an IDQS a 
quotation for the security of a catch-all issuer, which has documents 
and information specified in paragraph (b)(5) of the amended Rule, on 
or before February 1, 2023, the broker-dealer would comply with the 
requirements of paragraph (f)(3)(i)(C) of the piggyback exception if 
the information specified in paragraph (b)(5) of the amended Rule for 
such issuer were current and publicly available as of February 1, 2022 
(a date that is within 12 months prior to the publication or submission 
of the broker-dealer's quotation), including if its balance sheet were 
dated as of October 1, 2021 (a date less than 16 months before the 
publication or submission of the quotation), and its profit and loss 
and retained earnings statements were for the 12 months preceding the 
date of the balance sheet. However, the broker-dealer's quotation for 
such issuer's security that was published or submitted on or after 
February 1, 2022, would not meet the requirements of paragraph 
(f)(3)(i)(C) of the piggyback exception if the issuer's paragraph (b) 
information were not current and publicly available as of February 1, 
2021, including if its balance sheet were dated before October 1, 2020, 
and its profit and loss and retained earnings statements were for a 
period older than the 12 months preceding the date of the balance 
sheet, the specified information would not be current and publicly 
available within the time frame specified in paragraph (b)(5) of the 
amended Rule.
(c) Publicly Available Determinations Regarding Issuer Information
    As discussed below, a qualified IDQS may make a publicly available 
determination that issuer information is current and publicly 
available, and broker-dealers may rely upon such publicly available 
determinations to submit or publish a quotation in an OTC security. In 
response to a comment requesting clarification as to whether a 
qualified IDQS's obligation to determine whether an issuer's paragraph 
(b) information is current and publicly available is ongoing,\298\ the 
Commission clarifies that a qualified IDQS that makes a publicly 
available determination that the piggyback exception is available must 
establish, maintain, and enforce reasonably designed written policies 
and procedures to determine, on an ongoing basis, whether the documents 
and information specified in paragraph (b) are, depending on the type 
of issuer, current and publicly available, timely filed, or filed 
within 180 days from the end of a reporting period, as applicable.\299\ 
While the obligation is ongoing, the frequency with which a qualified 
IDQS or registered national securities association must make such 
determination depends on the frequency with which an issuer's reports 
are required to (1) be filed with the Commission, according to the 
issuer's Exchange Act or Securities Act reporting obligation, or (2) be 
as of a certain date and publicly available (in the case of a catch-all 
issuer).\300\ For example, a qualified IDQS or registered national 
securities association may determine that an issuer's paragraph (b) 
information, such as a required annual or semi-annual report, is timely 
filed once or twice a year, respectively, based on the prescribed due 
date for such issuer's report in compliance with its reporting 
obligation under Regulation A.\301\ A broker-dealer relying on a

[[Page 68150]]

publicly available determination made by a qualified IDQS or registered 
national securities association, however, does not have an independent 
obligation to confirm the continued public availability of current 
issuer information, though such broker-dealer would have a 
recordkeeping requirement to support its reliance on the piggyback 
exception,\302\ including its reliance on the piggyback exception's 
grace period.\303\
---------------------------------------------------------------------------

    \298\ FINRA Letter.
    \299\ See supra Part II.A.4 (discussing policies and procedures 
for qualified IDQSs and registered national securities associations 
that make publicly available determinations, including requirements 
for ongoing obligations).
    \300\ Amended Rule 15c2-11(a)(3) (stating that a qualified IDQS 
that makes a publicly available determination must establish, 
maintain, and enforce reasonably designed written policies and 
procedures to determine ``whether'' the requirements of an exception 
are met); see supra Part II.A.4 (discussing the policies and 
procedures requirements for publicly available determinations to be 
made by a qualified IDQS or registered national securities 
association).
    \301\ See Form 1-SA, General Instructions, A.(2).
    \302\ See Amended Rule 15c2-11(d)(2).
    \303\ See infra Part II.D.6.
---------------------------------------------------------------------------

2. One-Way Priced Quotations--Rule 15c2-11(f)(3)(i)(A)
    To facilitate price discovery in a quoted market, the Commission is 
modifying the piggyback exception to require at least a one-way priced 
quotation (as opposed to adopting the proposed requirement that 
quotations represent both a bid and an offer at specified prices) for 
broker-dealers to rely on the piggyback exception. The Commission 
sought comment about the proposal to require that a security be the 
subject of both a bid and an offer at specified prices, in an IDQS, for 
a broker-dealer to rely on the piggyback exception to publish or submit 
a quotation for such security. Two commenters provided general support 
for this aspect of the proposal.\304\ Commenters who opposed this 
aspect of this proposal stated that securities with a one-sided priced 
quotation should be eligible for the piggyback exception. Some stated 
that a one-sided priced bid should be eligible for the piggyback 
exception because, according to one commenter, one-sided priced bids 
provide sufficient evidence of legitimate, independent market 
interest,\305\ while other commenters stated that allowing broker-
dealers to rely on the piggyback exception based on one-sided priced 
quotations helps to protect minority shareholders \306\ and provides 
price discovery and market development.\307\
---------------------------------------------------------------------------

    \304\ FINRA Letter (stating that two-way priced quotations are 
appropriate to support broker-dealers' reliance on the piggyback 
exception because, by entering priced quotations, the broker-dealer 
provides substantive market information concerning its view about 
the value of the security); Massachusetts Letter.
    \305\ OTC Markets Group Letter 2; see Securities Law USA Letter; 
Zuber Lawler Letter. One commenter stated that there is value in 
permitting piggyback eligibility for securities with a one-sided 
priced bid quotation. OTC Markets Group Letter 1.
    \306\ Mitchell Partners Letter 1. While permitting broker-
dealers to rely on the piggyback exception based on one-sided 
quotations could protect minority shareholders, as this commenter 
suggested, the amendments are designed to provide protections to all 
investors. See, e.g., supra Part I (discussing the objectives of the 
amended Rule).
    \307\ Coral Capital Letter; OTC Markets Group Letter 2 (``A 
priced bid indicates a firm desire to buy the security, which itself 
acts as a valid price discovery mechanism.''); see Securities Law 
USA Letter; Zuber Lawler Letter.
---------------------------------------------------------------------------

    The Commission has determined to permit broker-dealers to rely on 
the piggyback exception for securities that have at least either a bid 
quotation at a specified price or an offer quotation at a specified 
price \308\ instead of requiring that both bid and offer quotations be 
at specified prices, as proposed. After considering the comments, and 
in light of other requirements of the piggyback exception and self-
regulatory organization (``SRO'') rules that apply to the quotations of 
a broker-dealer,\309\ the Commission believes that the requirement for 
at least a one-sided quotation at a specified price is an appropriate 
element of a multi-prong exception that strikes the right balance of 
updating the piggyback exception to reduce the likelihood that its use 
could facilitate a potential fraudulent or manipulative scheme without 
unduly hampering the development of liquidity in the OTC market.
---------------------------------------------------------------------------

    \308\ Amended Rule 15c2-11(f)(3)(i)(A). The Commission is making 
a technical edit from the proposal to use the word ``offer'' instead 
of the word ``ask'' to make the wording of the piggyback exception 
consistent with the Rule's definition of ``quotation,'' which uses 
the word ``offer'' instead of the word ``ask.''
    \309\ See, e.g., FINRA Rule 5220.
---------------------------------------------------------------------------

    A one-sided quotation at a specified price can contribute to price 
discovery and the commencement of a quoted market, each of which are 
important, especially in a thinly traded market, to an efficient and 
liquid OTC market. The Commission believes that expanding this part of 
the piggyback exception to require a one-sided quotation at a specified 
price rather than two-sided quotations at specified prices may avoid 
unduly impeding liquidity for investors and capital formation for 
issuers while still addressing the vulnerability of the piggyback 
exception to be used to facilitate potential fraud and manipulation. As 
amended, the multiple prongs of the piggyback exception, including the 
paragraph (f)(3)(i)(B) provision regarding shell companies and the 
paragraph (f)(3)(i)(C) provision regarding current and publicly 
available information for all issuers, both of which are discussed 
below, are designed to work together to help reduce the potential for 
fraudulent and manipulative activity when a broker-dealer relies on the 
piggyback exception, without unduly hampering liquidity in the OTC 
market.\310\
---------------------------------------------------------------------------

    \310\ While the provision in proposed Rule 15c2-11(f)(3)(ii) 
referenced ``an issuer included in paragraph (b)(5),'' the provision 
in amended Rule 15c2-11 references the documents and information 
regarding an issuer that are specified in the applicable 
subparagraph of the amended Rule regarding such documents and 
information. This technical change from the proposal addresses the 
fact that paragraph (b) specifies an issuer's documents and 
information. In addition, while the proposed Rule's provision in the 
piggyback exception regarding shell companies, trading suspensions, 
and current and publicly available catch-all issuer information was 
contained in a single paragraph under proposed Rule 15c2-
11(f)(3)(ii), the amended Rule has split the provision into multiple 
paragraphs. Amended Rule 15c2-11(f)(3)(i)(B) provides a provision 
regarding shell companies and trading suspensions, while amended 
Rule 15c2-11(f)(3)(i)(C)(1) through (3) provides a provision 
regarding an issuer's paragraph (b) information that is current and 
publicly available, timely filed, or filed within 180 calendar days 
from a specified period. This clarifying edit from the proposal has 
been made to make the provision easier to read.
---------------------------------------------------------------------------

    In response to a Commission solicitation of comment about whether 
there is a certain price threshold below which the piggyback exception 
should not apply, one commenter stated it was generally opposed to the 
establishment of a price threshold because, according to the commenter, 
price thresholds interfere with the normal functioning of a 
market.\311\ The Commission has determined that a price threshold test 
would be inappropriate for the piggyback exception in light of its 
concerns that such a test could be subject to abuse through, for 
example, reverse stock splits.
---------------------------------------------------------------------------

    \311\ Coral Capital Letter.
---------------------------------------------------------------------------

3. Following a Trading Suspension--Rule 15c2-11(f)(3)(i)(B)
    The Commission is eliminating the ability of a broker-dealer to 
rely on the piggyback exception during the first 60 calendar days after 
the termination of a Commission trading suspension under Section 12(k) 
of the Exchange Act, as proposed. The Commission sought comment on this 
aspect of the proposal. One commenter stated that requiring current and 
publicly available issuer information for a broker-dealer to rely on 
the piggyback exception, in conjunction with the proposed 60-calendar-
day ``cooling off'' period following a trading suspension, should serve 
to enhance market transparency.\312\
---------------------------------------------------------------------------

    \312\ SIFMA Letter.
---------------------------------------------------------------------------

    The Commission has determined to adopt, without modification, the 
proposal to eliminate the ability of a broker-dealer to rely on the 
piggyback exception during the first 60 calendar days after the 
termination of a trading suspension order issued by the

[[Page 68151]]

Commission under Section 12(k) of the Exchange Act.\313\ The Commission 
continues to believe that such a period provides the appropriate amount 
of time for investors to consider new or additional information about 
an issuer that may arise following the expiration of a trading 
suspension order issued by the Commission. Among other things, a 
Commission trading suspension could indicate uncertainty about the 
accuracy of publicly available issuer information or questions about 
trading in the issuer's security.\314\ The ability of investors to 
analyze information about an issuer is crucial to making informed 
investment decisions about the security of an issuer, and transparency 
into the market for an issuer's security for which trading has been 
suspended is especially important following the circumstances that lead 
to a trading suspension, such as the occurrence of deceptive or 
manipulative conduct.
---------------------------------------------------------------------------

    \313\ Amended Rule 15c2-11(f)(3)(i)(B). As the Commission 
explained in the Proposing Release, ``adding 30 days to the 
piggyback exception's existing timing requirement of 30 days,'' 
which would result in ``a longer period of 60 calendar days[,] 
should provide investors with a better opportunity to consider new 
or additional information that may arise in the period following the 
conclusion of the issuer's trading suspension. The Commission 
believes that this proposed limitation would help to ensure that 
regular and frequent quotations for the securities of formerly 
suspended issuers generally reflect market supply and demand and are 
based on informed pricing decisions rather than on pricing decisions 
that are based on information that is no longer accurate or that 
(potentially) had led the issuer to be suspended.'' Proposing 
Release at 58222.
    \314\ See id.
---------------------------------------------------------------------------

    Although the 60-calendar-day period, as proposed, was intended to 
incorporate the 30-calendar-day timing requirement to establish 
piggyback eligibility under the proposed Rule,\315\ and although the 
amended Rule no longer includes such a requirement,\316\ the Commission 
continues to believe that the process of re-establishing eligibility 
for the piggyback exception should not occur any sooner than 60 
calendar days following the termination of a suspension order issued by 
the Commission. The Commission believes that the 60-calendar-day period 
before a broker-dealer may rely on the piggyback exception remains an 
appropriate period during which new or additional information about an 
issuer could be reviewed, which should promote informed investment 
decisions following a trading suspension. The Commission believes that 
a shorter amount of time would be inconsistent with the promotion of 
investor protection and the integrity of the OTC market.
---------------------------------------------------------------------------

    \315\ Proposing Release at 58222. After the expiration of a 
trading suspension at the conclusion of the 10-day period, the 
trading suspension no longer applies (i.e., trading can resume, even 
if quoting does not automatically do so). See Exchange Act Section 
12(k)(1)(A).
    \316\ Compare Amended Rule 15c2-11(f)(3)(i)(A), with Proposed 
Rule 15c2-11(f)(3)(i)(A), (B).
---------------------------------------------------------------------------

4. Shell Company Exclusion--Rule 15c2-11(f)(3)(i)(B)
    The Commission has determined to adopt, with some modification, the 
proposal to prohibit broker-dealers from relying on the piggyback 
exception for shell companies. Specifically, under this modified 
approach, a broker-dealer may rely on the piggyback exception to quote 
the security of an issuer that the broker-dealer has a reasonable basis 
under the circumstances for believing is a shell company \317\ for the 
18 months following the initial priced quotation for an issuer's 
security that is published or submitted in an IDQS. This approach will 
help protect retail investors by preventing such companies, which can 
be used as vehicles for fraud, from maintaining a quoted market 
indefinitely,\318\ while promoting capital formation by preserving for 
a time-limited period a cost-effective means for companies to maintain 
a broker-dealer quoted market. The Commission remains concerned about 
the potential that a continuously quoted market facilitated by the 
piggyback exception could be used to entice investors to make an 
investment decision based on what appears to be an active and 
independent market when, in fact, the investor may be considering an 
artificially increased price for the shell company's security due to 
inaccurate and misleading promotional information.\319\ The Commission, 
however, is also concerned that a blanket prohibition on broker-
dealers' ability to rely on the piggyback exception for shell companies 
may negatively impact capital formation opportunities for privately 
held companies that seek to merge into OTC shell companies (through 
reverse mergers) as an alternative to an initial public offering 
(``IPO'').\320\ The amended Rule appropriately balances the promotion 
of investor protection and the facilitation of capital formation by 
allowing broker-dealers to maintain a quoted market in the securities 
of shell companies to provide opportunities for privately held 
companies to engage in reverse mergers with such publicly quoted shell 
companies, for a limited period of 18 months.
---------------------------------------------------------------------------

    \317\ Alternatively, a broker-dealer may rely on the publicly 
available determination of a qualified IDQS or registered national 
securities association that the exception is available. However, 
such qualified IDQS or registered national securities association 
must have a reasonable basis for believing that the issuer is a 
shell company in making a publicly available determination that the 
requirements of the piggyback exception are met. The Commission is 
also making a technical edit from the provision in the proposed 
Rule's piggyback exception to focus on the broker-dealer, rather 
than the issuer. Whereas the proposed Rule specified that the 
piggyback exception ``shall not apply to the security of an 
issuer,'' see Proposed Rule 15c2-11(f)(3)(ii), the provision in the 
amended Rule's piggyback exception specifies that the piggyback 
exception ``shall not apply to a quotation that is published or 
submitted by a broker or dealer for the security of an issuer,'' see 
Amended Rule 15c2-11(f)(3)(i)(B).
    \318\ Proposed Rule 15c2-11(f)(3)(ii). As explained in the 
Proposing Release, ``[a] continuously quoted market can increase the 
share price of a shell company that may have been promoted using 
inaccurate or misleading representations and could allow fraudsters 
to more easily fool new investors into believing there is an active 
and independent market for its security.'' Proposing Release at 
58222.
    \319\ See id.
    \320\ See Coral Capital Letter; see also Anthony Letter.
---------------------------------------------------------------------------

    The Commission sought comment about the proposal to eliminate the 
ability of a broker-dealer to rely on the piggyback exception for the 
securities of ``shell companies.'' Commenters who supported this 
limitation stated that it should reduce fraud and abuse of OTC 
securities,\321\ especially in the context of reverse mergers.\322\ 
Those who opposed this aspect of the proposal stated that it would be 
difficult to implement, leaving room for interpretation and potentially 
harming capital formation for those companies and their securities' 
liquidity.\323\ The Commission appreciates that a security's liquidity 
may be negatively impacted if a broker-dealer declines to rely on the 
piggyback exception under the amended Rule because it believes that a 
determination (that the issuer of a security is not a shell company) 
cannot be made with certainty. As discussed more fully below, the 
definition of a shell company in the amended Rule tracks the definition 
of shell company in Rule 405 of Regulation C and in Exchange Act Rule 
12b-2, the provisions of which apply to registrants, and comports with 
the provisions of Securities Act Rule 144(i)(1)(i) regarding the 
availability of that safe harbor for the resale of securities initially 
issued by certain

[[Page 68152]]

issuers.\324\ In light of the concern that such determination cannot be 
made with certainty, however, the amended Rule applies a ``reasonable 
basis'' standard for making such determination. Accordingly, a broker-
dealer may rely on the piggyback exception to quote the security of an 
issuer that the broker-dealer has a reasonable basis under the 
circumstances for believing is a shell company for the 18 months 
following the initial priced quotation for an issuer's security.\325\ 
In addition, a qualified IDQS or registered national securities 
association may make a publicly available determination that the 
requirements of the piggyback exception are met based, in part, on its 
having a reasonable basis under the circumstances for believing that 
the issuer is a shell company.\326\
---------------------------------------------------------------------------

    \321\ See Massachusetts Letter; see also Peregrine Comment.
    \322\ FINRA Letter (requesting that, given the fluidity of 
corporate actions, the Commission clarify how often a broker-dealer 
or qualified IDQS is expected to confirm that a company is not a 
shell company); Michael Goode, Managing Member, Morning Light 
Mountain, LLC (Dec. 16, 2019) (``Morning Light Mountain Comment''); 
Hamilton & Associates Letter.
    \323\ Coral Capital Letter; see Leonard Burningham Letters; 
Letter from William T. Hart, Hart & Hart, LLC, to SEC (Feb. 24, 
2020); Sosnow & Associates Letter.
    \324\ See Proposing Release at 58236. While the definition of 
``shell company'' in amended Rule 15c2-11 mirrors the definition of 
``shell company'' in Rule 405 of Regulation C and in Rule 12b-2, 
these provisions apply to registrants, and the definition of shell 
company for purposes of Rule 15c2-11 is not limited to companies 
that have filed a registration statement or have an obligation to 
file reports under Section 13 or Section 15(d) of the Exchange Act. 
Instead, the definition of ``shell company'' covers all issuers of 
securities because the provisions of Rule 15c2-11 apply to 
publications and submissions of quotations for securities of 
reporting issuers as well as catch-all issuers. Id.
    \325\ See Amended Rule 15c2-11(f)(3)(i)(B)(2).
    \326\ See Amended Rule 15c2-11(f)(3)(i)(B)(2); Amended Rule 
15c2-11(f)(7).
---------------------------------------------------------------------------

    As discussed below in Part II.J.2, a broker-dealer, qualified IDQS, 
or registered national securities association has a reasonable basis 
under the circumstances for determining that an entity is a shell 
company by relying on an issuer's self-identification as a shell 
company (or not) by reviewing, for example, the issuer's financial 
information, or, alternatively, by reviewing a description of its 
business, as specified in paragraph (b)(5)(i)(H) of the amended Rule or 
in any disclosures provided to the Commission pursuant to reporting 
obligations under the federal securities laws, without reviewing the 
issuer's financial information.\327\ Broker-dealers have experience in 
making determinations of shell company status in other contexts that 
should help to provide increased certainty regarding shell company 
determinations for purposes of the Rule.\328\ Further, as discussed 
more fully below, the amended Rule provides a new exception that 
permits broker-dealers to publish or submit quotations in reliance on 
the publicly available determination of a qualified IDQS or a 
registered national securities association that certain exceptions are 
available, including the piggyback exception.\329\ This new exception 
may help to alleviate burdens on broker-dealers associated with 
determining whether an issuer is a shell company. How often a broker-
dealer, qualified IDQS, or registered national securities association 
may need to determine whether an issuer is a shell company for a 
broker-dealer to rely on the piggyback exception is based on how 
frequently information for that issuer is filed or made current and 
publicly available.\330\ For example, a broker-dealer, qualified IDQS, 
or registered national securities association may determine that a 
reporting issuer is a shell company when its annual or periodic reports 
are filed. Similarly, a broker-dealer, qualified IDQS, or registered 
national securities association may determine that a catch-all issuer 
is a shell company on an annual basis.\331\
---------------------------------------------------------------------------

    \327\ See infra note 473 and accompanying text.
    \328\ For example, broker-dealers have experience in making such 
determination in deciding whether Securities Act Rule 144 is 
available for the resale of securities. See infra note 333 and 
accompanying text.
    \329\ Amended Rule 15c2-11(f)(7).
    \330\ See infra Part V.C.2.b.
    \331\ For example, a broker-dealer, qualified IDQS, or 
registered national securities association could make such 
determination based on a review of the description of the issuer's 
business, as specified in paragraph (b)(5)(i)(H) of the amended 
Rule.
---------------------------------------------------------------------------

    Further, consistent with Commission guidance regarding the 
definition of ``shell company'' for purposes of Rule 144(i)(1)(i), the 
Commission believes that it is appropriate in the context of this Rule 
to reiterate that startup companies, or companies that have a limited 
operating history, such as early-stage biotechnology companies with no 
or limited assets and revenues and substantial expenses,\332\ are not 
intended to be captured by the definition of ``shell company'' because 
the Commission believes that such companies do not meet the condition 
of having ``no or nominal operations.'' \333\ A startup company that 
has limited operating history would not meet the condition of having 
``no or nominal operations'' in paragraph (e)(9)(i) of the amended 
Rule's definition of shell company. This is consistent with the 
Commission's recognition that providing avenues for liquidity 
encourages investment in companies,\334\ to promote opportunities for 
liquidity in the securities of such start-up companies.
---------------------------------------------------------------------------

    \332\ See, e.g., Wendy Tsai & Stanford Erickson, Early-Stage 
Biotech Companies: Strategies for Survival and Growth, 3 Biotech. 
Healthcare 49-53 (2006).
    \333\ See Revisions to Rules 144 and 145, Securities Act Release 
No. 8869 (Dec. 6, 2007), 72 FR 71546, 71557 n.172 *Dec. 17, 2007) 
(``Rules 144 and 145 Release'').
    \334\ See Amendments for Small and Additional Issues Exemptions 
Under the Securities Act (Regulation A), Securities Act Release No. 
9741 (Mar. 25, 2015), 80 FR 21806, 21814 (Apr. 20, 2015).
---------------------------------------------------------------------------

    As discussed above, the Commission believes that the amended Rule 
appropriately balances the promotion of investor protection and the 
facilitation of capital formation with respect to broker-dealers' 
reliance on the piggyback exception to publish or submit quotations for 
the securities of shell companies. For example, the Commission believes 
that permitting broker-dealers to publish or submit quotations for the 
securities of shell companies for a time-limited period of 18 months 
following the publication or submission of the initial priced quotation 
for such issuers' securities in an IDQS would facilitate capital 
formation and liquidity by permitting broker-dealers to maintain a 
quoted market in these securities during a defined period while 
limiting the risk that they could become the subject of a pump-and-dump 
scheme(s) if such quotations were permitted for an indefinite period. 
Further, even during the 18-month period that broker-dealers may rely 
on the piggyback exception to quote the securities of shell companies, 
broker-dealers are nevertheless subject to liability under the 
antifraud provisions of the securities laws, such as Exchange Act 
Section 10(b) and Rule 10b-5, if they publish quotations for the 
securities of shell companies with the intent to further a fraudulent 
or manipulative scheme.
    Other commenters who opposed this part of the proposal stated that 
the proposal would prevent existing shareholders from being able to 
recover losses from investing in companies that become shell companies 
subsequent to purchasing shares in those companies.\335\ Shell 
companies can be used for valid reasons; however, the Commission has 
noted that unregistered reverse mergers between privately held 
companies and publicly traded shell companies commonly are used to 
develop a market for the merged entity's securities, often as part of a 
pump-and-dump scheme.\336\ The Commission recognizes that shareholders 
of shell companies may suffer a loss on their investment as a result of 
broker-dealers not being able to rely indefinitely on the piggyback 
exception to publish or submit quotations for the shell

[[Page 68153]]

company's security,\337\ but the Commission also recognizes the 
potential for investor harm as a result of the securities of shell 
companies being used in fraudulent and manipulative schemes, such as 
pump-and-dump schemes. Therefore, the Commission has determined to 
preclude a broker-dealer from relying on the piggyback exception to 
maintain a market in the security of an issuer that the broker-dealer 
(or any qualified IDQS or registered national securities association 
pursuant to a publicly available determination) has a reasonable basis 
for believing is a shell company unless such quotation is published or 
submitted within the 18 months following the initial quotation for such 
issuer's security that is the subject of a bid or offer quotation in an 
IDQS at a specified price.\338\ Other commenters believed that broker-
dealers should be able to maintain a quoted market in the securities of 
shell companies so long as their paragraph (b) information is current 
and publicly available.\339\
---------------------------------------------------------------------------

    \335\ See, e.g., Tom Amenda; Letter from Ronald A. Woessner, 
Principal, Woessner & Associates, to SEC (Apr. 16, 2020) (``Woessner 
& Associates Letter'').
    \336\ See, e.g., Registration of Securities on Form S-8, 
Securities Act Release No. 7646 (Feb. 25, 1999), 64 FR 11103, 11106 
(Mar. 8, 1999).
    \337\ See infra Part VI.C.1.b.
    \338\ See Amended Rule 15c2-11(f)(3)(B)(2).
    \339\ Woessner & Associates Letter; see OTC Markets Group Letter 
3.
---------------------------------------------------------------------------

    Under the amended Rule, a broker-dealer may maintain a quoted 
market for the security of an issuer that the broker-dealer has a 
reasonable basis under the circumstances for believing is a shell 
company by relying on the piggyback exception during the 18-month 
period following the initial publication or submission of a priced bid 
or offer quotation for the security in an IDQS, assuming all other 
requirements of the piggyback exception are met.\340\ After such period 
ends, the broker-dealer may publish or submit a quotation for the 
issuer's security if the broker-dealer complies with the information 
review requirement or relies on a publicly available determination of a 
qualified IDQS that the qualified IDQS complied with the information 
review requirement.\341\ Such compliance involves, among other things, 
the broker-dealer or qualified IDQS having a reasonable basis under the 
circumstances for believing that such issuer's paragraph (b) 
information is accurate in all material respects and is from a reliable 
source.\342\ Thereafter, the broker-dealer may continue to publish or 
submit a quotation for the issuer's security so long as either the 
broker-dealer continues to comply with the information review 
requirement or relies on a publicly available determination of a 
qualified IDQS that such qualified IDQS complied with the information 
review requirement. The Commission believes that compliance with the 
information review requirement is needed following the 18-month period 
to appropriately balance the facilitation of capital formation and the 
promotion of investor protection. In this regard, compliance with the 
information review requirement before a broker-dealer may publish a 
subsequent quotation for the security of an issuer that the broker-
dealer has a reasonable basis under the circumstances for believing is 
a shell company helps to promote the Rule's investor protection goals. 
Specifically, such compliance is designed to prevent the security of an 
issuer that has yet to engage in a reverse merger with a privately held 
company during the 18-month period from being used in a pump-and-dump 
scheme. As part of such compliance, the broker-dealer must continuously 
monitor the amended Rule's specified information regarding such issuer 
to form a reasonable basis that the issuer's paragraph (b) information 
is accurate in all material respects and is from a reliable source.
---------------------------------------------------------------------------

    \340\ See Amended Rule 15c2-11(f)(3)(i)(B)(2).
    \341\ See Amended Rule 15c2-11(a)(1)(i), (ii).
    \342\ See Amended Rule 15c2-11(a)(1)(i)(C), (a)(2)(iii).
---------------------------------------------------------------------------

    Further, one commenter stated that this aspect of the proposal 
would harm the ability of privately held companies to become publicly 
traded issuers by engaging in a reverse merger,\343\ while other 
commenters who advocated for broker-dealers to be able to rely on the 
piggyback exception for self-identified shell companies stated that the 
reverse merger process, as opposed to the IPO process, is an economical 
and attractive alternative for companies seeking to become publicly 
traded and gain greater access to capital markets.\344\ The amended 
Rule does not affect a private operating company's ability to become a 
publicly traded company by engaging in a reverse merger with a quoted 
shell company. Although there can be significant existence of and 
potential for fraud arising from shell companies in the context of 
reverse mergers,\345\ reverse mergers are also an important tool for 
capital formation.\346\ The piggyback exception under the amended Rule 
appropriately balances these concerns by permitting broker-dealers to 
publish quotations for the securities of shell companies but only for a 
limited period. Investor protection will be furthered by preventing 
broker-dealers from relying on the piggyback exception to publish 
quotations for the securities of shell companies indefinitely.\347\ 
However, in response to capital formation concerns raised by 
commenters, the Commission is permitting broker-dealers to rely on the 
piggyback exception to quote the security of a shell company for the 18 
months following the initial priced bid or offer quotation for an 
issuer's security that is published or submitted in an IDQS.\348\
---------------------------------------------------------------------------

    \343\ Woessner & Associates Letter.
    \344\ Coral Capital Letter; see Anthony Letter.
    \345\ See Proposing Release at 58223. As stated in the Proposing 
Release, a Commission staff analysis of 4,000 SEC litigation 
releases between 2003 and 2012 found that the majority of alleged 
violations involving issuers of OTC securities were primarily 
classified as reverse mergers of shell companies or as market 
manipulation. See id. at 58252 (citing Spotlight on Microcap Fraud 
(Feb. 22, 2019), https://www.sec.gov/spotlight/microcap-fraud.shtml).
    \346\ Proposing Release at 58223 (stating that the Commission 
has previously brought enforcement actions involving fraud arising 
from shell companies, often in the context of reverse mergers).
    \347\ See, e.g., id. at 58223.
    \348\ See Amended Rule 15c2-11(f)(3)(i)(B)(2).
---------------------------------------------------------------------------

    The Commission believes that permitting broker-dealers to rely on 
the piggyback exception for the 18 months following the initial 
publication or submission of a bid or offer quotation at a specified 
price for an issuer's security provides a sufficient amount of time for 
a quoted shell company to engage in a reverse merger with a private 
operating company and is similar to the time frame specified in other 
Commission rules governing acquisitions and mergers.\349\ Following the 
merger of an operating company into a shell company, the combined 
entity would not meet the definition of a shell company, and broker-
dealers may continue to rely on the piggyback exception to publish or 
submit quotations for the issuer's security so long as the other 
requirements of the piggyback exception are met.\350\
---------------------------------------------------------------------------

    \349\ See, e.g., Securities Act Rule 419(e)(2)(iv) (requiring 
that funds held in an escrow or trust account be returned if a 
consummated acquisition(s) meeting the requirements of Rule 419 has 
not occurred by a date 18 months after the effective date of the 
initial registration statement).
    \350\ For a discussion of this process, see Proposing Release at 
58222-23.
---------------------------------------------------------------------------

    Other commenters suggested, instead, that the regulation of 
quotations for shell companies should focus on insiders, affiliates, 
and enhanced corporate governance because the problems that the 
Commission identified in the proposal regarding shell companies are 
driven by insiders and affiliates.\351\ According to this

[[Page 68154]]

commenter, such an approach would involve the restriction of trading by 
company insiders and stronger corporate governance requirements to 
promote transparency.\352\ This commenter stated that the Rule should 
require additional disclosure from shell companies regarding their 
operations and insider and affiliate activities.\353\ The Commission 
agrees with commenters that much of the risk regarding shell companies 
involves activities of individuals closely associated with the company 
using public markets to distribute unregistered shares. The Commission 
will continue to monitor the operation of this market, including the 
quoting and trading of shell companies' securities, to consider whether 
any further amendments to Rule 15c2-11, or any amendments to other 
Commission rules involving issuer disclosure, enhanced corporate 
governance, or trading restrictions by company insiders, are warranted.
---------------------------------------------------------------------------

    \351\ OTC Markets Group Letter 2; OTC Markets Group Letter 3; 
see Securities Law USA Letter; Zuber Lawler Letter. Commenters 
stated that much of the risk arising from shell companies concerns 
activities of individuals closely associated with the company using 
public markets to distribute unregistered shares. OTC Markets Group 
Letter 2; see Adler Silverberg Letter; Securities Law USA Letter; 
Sosnow & Associates Letter; Zuber Lawler Letter.
    \352\ OTC Markets Group Letter 2.
    \353\ OTC Markets Group Letter 3; see Sosnow & Associates 
Letter.
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5. Frequency of Quotation Requirement--Rule 15c2-11(f)(3)(i)(A)
    In light of technological advances that have taken place since the 
Rule was last amended, the Commission is eliminating both the 12-
business-day requirement and the 30-calendar-day window from the 
frequency of quotation requirement. The proposal would have replaced 
the requirement that quotations occur on each of at least 12 days 
within the previous 30 calendar days, with no more than four business 
days in succession without a quotation, with a requirement that 
quotations occur within the previous 30 calendar days, with no more 
than four business days in succession without a quotation. Commenters 
on this aspect of the proposal also requested the removal of the 30-
calendar-day piggyback-eligibility period following an initial 
quotation for a security, given market-based solutions that render 
obsolete the need for a 30-calendar-day window.\354\ Commenters also 
stated that there should be no limit on the number of broker-dealers 
that are permitted to publish quotations for a security after a 
qualified IDQS makes a publicly available determination to allow the 
initiation for a quoted market because, according to the commenter, the 
30-calendar-day period delays and impedes the creation of a larger, 
more efficient public market for a security, and allowing multiple 
broker-dealers to publish quotations for such securities would remove 
an ``artificial barrier'' to price transparency, promoting competition, 
and enhancing liquidity.\355\
---------------------------------------------------------------------------

    \354\ OTC Markets Group Letter 1; OTC Markets Group Letter 2; 
see Securities Law USA Letter; Zuber Lawler Letter. One commenter 
represented that it already performs, and would continue to perform, 
an ongoing review of issuer disclosure to make determinations as to 
whether broker-dealers should be allowed to continue to quote in 
accordance with the Rule. OTC Markets Group Letter 2.
    \355\ OTC Markets Group Letter 2; see Securities Law USA Letter; 
Zuber Lawler Letter.
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    The Commission has determined to adopt the proposed amendment to 
eliminate the 12-business-days frequency of quotation requirement 
because technological advances that have taken place since this 
provision was adopted have obviated the need for it, given that it is 
now easier for broker-dealers to continuously update and widely 
disseminate quotations and information about issuers to investors.\356\ 
As suggested by commenters, the Commission has also determined to 
eliminate the 30-calendar-day window from the frequency of quotation 
requirement in the amended Rule. Under the amended Rule, for a broker-
dealer to rely on the piggyback exception, a quoted OTC security of an 
issuer would need to be the subject of a bid or offer quotation, in an 
IDQS, at a specified price, with no more than four business days in 
succession without such a quotation.\357\
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    \356\ Proposing Release at 58223.
    \357\ Amended Rule 15c2-11(f)(3)(i)(A).
---------------------------------------------------------------------------

    The frequency of quotation requirement is designed to permit a 
broker-dealer to rely on the piggyback exception only when quotations 
are continuous. A requirement that quotations occur with no more than 
four business days in succession without such a quotation generally 
requires one quotation per week. The presence or elimination of the 30-
calendar-day window does not alter this requirement. For that reason, 
the Commission believes that the 30-calendar-day window is not 
necessary to ensure that quotations are continuous for purposes of the 
piggyback exception (assuming all other requirements of the exception 
are met).
    The Commission believes that the elimination of the 30-calendar-day 
window could contribute to a more liquid, efficient market because 
broker-dealers could rely on the piggyback exception to publish or 
submit quotations immediately after a quoted market is initiated (i.e., 
after a broker-dealer publishes an initial quotation after complying 
with the information review requirement).\358\ Further, the Commission 
does not believe that the elimination of the 30-calendar-day window 
would lessen the effects of the amended Rule's investor protections 
because the remaining requirements of the piggyback exception under the 
amended Rule are sufficient to help prevent misuse of the exception.
---------------------------------------------------------------------------

    \358\ The amended Rule does not impose any limit on the number 
of broker-dealers that are permitted to publish quotations for a 
security after a qualified IDQS makes a publicly available 
determination to allow the initiation for a quoted market. See 
Amended Rule 15c2-11(f)(7).
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6. Grace Period--Rule 15c2-11(f)(3)(ii)
    The Commission posed a question in the Proposing Release about 
whether the piggyback exception should include a grace period during 
which a broker-dealer could continue to publish or submit quotations 
following the expiration of the proposed six-month period specified in 
paragraph (f)(3)(ii) of the proposed Rule.\359\ The Commission inquired 
about the length of such a grace period and the role of an IDQS or the 
use of tags to identify quotations for any security of an issuer if its 
information has not been made publicly available within a specified 
time frame.
---------------------------------------------------------------------------

    \359\ Proposed paragraph (f)(3)(ii) would have required catch-
all issuer information, including financial information, to be 
current and publicly available within six months of the date of the 
publication or submission of a broker-dealer's quotation in reliance 
on the piggyback exception.
---------------------------------------------------------------------------

    Several commenters offered solutions to address broker-dealer 
quotations that are no longer eligible for the piggyback exception. 
These commenters supported the idea of a ``grace period'' with respect 
to companies that are no longer eligible to be publicly quoted (e.g., 
because their information is no longer ``current'' or because a broker-
dealer cannot rely on any exception to the Rule) to serve as a notice 
to investors and issuers, allow time to take appropriate action before 
the loss of quote eligibility (e.g., remedy the absence of current and 
publicly available information),\360\ and facilitate investor 
transactions in the securities.\361\ One commenter advocated for a 
minimum of 90 days for such a grace period.\362\ Another commenter 
requested clarification as to, if such a grace period were implemented, 
when a broker-dealer would be required to cease publishing or 
submitting quotations (e.g., whether the broker-dealer would be 
required to cease

[[Page 68155]]

publishing or submitting quotations on the next business day rather 
than intra-day).\363\
---------------------------------------------------------------------------

    \360\ OTC Markets Group Letter 2; see Securities Law USA Letter; 
Zuber Lawler Letter.
    \361\ SIFMA Letter (suggesting also that a ``tag'' on a 
quotation and notice on the website of a qualified IDQS would help 
in these types of scenarios).
    \362\ Coral Capital Letter.
    \363\ FINRA Letter.
---------------------------------------------------------------------------

    The Commission has determined to adopt a grace period in the 
piggyback exception to permit broker-dealers to continue quoting 
securities of any issuer for a limited period once the requisite 
information for such issuer is, depending on the regulatory status of 
the issuer, no longer current and publicly available, timely filed, or 
filed within 180 calendar days from a specified period.\364\ This 
limited, conditional grace period is designed to provide the 
opportunity for investors to liquidate positions into a broker-dealer-
quoted market for up to 15 calendar days from the publicly available 
determination that the issuer's information is no longer current and 
publicly available, timely filed, or filed within 180 calendar days 
from a specified period. A longer period of time, such as 90 days, as 
suggested by one commenter, would allow a quoted market for an issuer's 
security to be maintained in the absence of issuer transparency, which 
is inconsistent with the objective of the amendments to the Rule.
---------------------------------------------------------------------------

    \364\ The grace period under the amended Rule extends to all 
issuers because the piggyback exception's requirement under the 
amended Rule for an issuer's information to be current and publicly 
available, timely filed, or filed within 180 calendar days from a 
certain reporting period, and publicly available similarly extends 
to all issuers. See Amended Rule 15c2-11(f)(3)(i)(C)(1) through (3).
---------------------------------------------------------------------------

    Specifically, paragraph (f)(3)(ii) of the amended Rule provides a 
limited grace period to rely on the piggyback exception if issuer 
information is, depending on the regulatory status of the issuer, no 
longer current and publicly available, timely filed, or filed within 
180 calendar days from a specified period--or, the time frames 
specified in paragraph (f)(3)(i)(C) of the amended Rule--so long as 
three conditions are met. First, a qualified IDQS or registered 
national securities association must make a publicly available 
determination that the specified information for such issuer is no 
longer current and publicly available, timely filed (with respect to an 
issuer for which documents and information are specified in paragraph 
(b)(3)(ii) or (b)(3)(iii) of the amended Rule), or filed within 180 
calendar days from a specified period (with respect to an issuer for 
which documents and information are specified in paragraph (b)(3)(i), 
(b)(3)(iv), or (b)(3)(v) of the amended Rule) \365\ within the first 
four business days that such information is no longer current and 
publicly available, timely filed, or filed within 180 calendar days 
from the specified period, as applicable.\366\ Accordingly, if the 
qualified IDQS or registered national securities association were to 
make a publicly available determination five business days after the 
issuer's information is, depending on the regulatory status of the 
issuer, no longer current and publicly available, timely filed, or 
filed within 180 calendar days from the specified period, broker-
dealers would not be afforded a grace period to quote the issuer's 
security. The Commission believes that this condition is important to 
facilitate immediate notice to market participants--including retail 
investors--that an issuer's information is no longer current and 
publicly available, timely filed, or filed within 180 calendar days 
from the specified period, as applicable.\367\
---------------------------------------------------------------------------

    \365\ This requirement is measured from the end of the issuer's 
most recent fiscal year or any quarterly reporting period that is 
covered by a report required by Exchange Act Section 13 or 15(d), as 
applicable. See Amended Rule 15c2-11(f)(3)(ii) (referencing the 
applicable paragraph (f)(3)(i)(C)(1) of the amended Rule for this 
category of issuer).
    \366\ Amended Rule 15c2-11(f)(3)(ii)(A). This four-business-day 
window mirrors the time frame provided in the requirement in the 
piggyback exception that quotations occur with no more than four 
business days in succession without a priced quotation. See Amended 
Rule 15c2-11(f)(3)(i). Accordingly, the requirement that such 
publicly available determination be made during this four-business-
day window allows broker-dealers to maintain the frequency of 
quotation requirement of the piggyback exception, as specified in 
paragraph (f)(3)(i)(A) of the amended Rule. Because such publicly 
available determinations are likely to be made through an automated 
process, the Commission expects that such publicly available 
determinations generally will be made on the business day following 
the date on which issuer information is no longer current and 
publicly available, timely filed, or filed within 180 calendar days 
from the specified period, as applicable.
    \367\ While only a qualified IDQS or registered national 
securities association must make any such publicly available 
determination, an investor or broker-dealer may choose to alert a 
qualified IDQS or national securities association that the issuer's 
paragraph (b) information is no longer current and publicly 
available, timely filed, or filed within 180 calendar days from the 
specified period, as applicable. In such scenario, the qualified 
IDQS or registered national securities association must comply with 
its policies and procedures, as required under paragraph (a)(3) of 
the amended Rule, for making such publicly available determination.
---------------------------------------------------------------------------

    Further, as discussed below in Part II.H, the Commission is 
requiring that any qualified IDQS or registered national securities 
association that makes a publicly available determination that a 
broker-dealer may rely on the piggyback exception must subsequently 
make a publicly available determination if that issuer's paragraph (b) 
information is no longer current and publicly available, timely filed, 
or filed within 180 calendar days from the specified period, as 
applicable. The qualified IDQS or registered national securities 
association must make such subsequent publicly available determination 
within the first four business days that such documents and information 
are no longer current and publicly available, timely filed, or filed 
within 180 calendar days.\368\ To ensure the wide availability of such 
notice to market participants, the Commission strongly encourages, and 
Commission staff intends to offer assistance and support to,\369\ 
qualified IDQSs and the registered national securities association to 
establish a means to tag, or otherwise provide freely available public 
indication of notice, that an issuer's paragraph (b) information is no 
longer current and publicly available, and that, as a result, the 
security has entered the 15-calendar-day grace period before it is 
ineligible to maintain its quoted market through reliance on the 
piggyback exception. However, the Commission also recognizes the 
importance of accommodating the flexibility of qualified IDQSs and 
national securities associations in displaying notices and information 
to broker-dealers, market participants, and investors; therefore, the 
indication of such notice may take different forms. In this regard, a 
registered national securities association could append a fifth letter 
identifier to the security's symbol, or an indicator could be displayed 
on the website of a qualified IDQS or a registered national securities 
association next to the security's name or quote, to provide sufficient 
notice to investors and other market participants that the issuer's 
security has entered the 15-calendar-day grace period.
---------------------------------------------------------------------------

    \368\ See Amended Rule 15c2-11(f)(7); infra Part II.H.
    \369\ See infra Part II.P.
---------------------------------------------------------------------------

    Second, the grace period is conditioned on the broker-dealer's 
compliance with the requirements of paragraphs (d)(2) and (f)(3)(i), 
except for the requirement regarding the public availability of current 
issuer information, timely filed issuer information, or issuer 
information that is filed within 180 calendar days from the specified 
period, as applicable.\370\ In other words, under the amended Rule, a 
broker-dealer may rely on the piggyback exception during the grace 
period only if each of the other conditions in the piggyback exception 
is met--the quotation must not be for the security of a shell company 
(unless the quotation is published or submitted within 18 months of the 
initial priced

[[Page 68156]]

quotation for such issuer's security in an IDQS), the quotation must 
represent a bid or an offer at a specified price, and no more than four 
days in succession may elapse without a quotation for the security--and 
the broker-dealer must comply with the recordkeeping requirements in 
paragraph (d)(2).
---------------------------------------------------------------------------

    \370\ Amended Rule 15c2-11(f)(3)(ii)(B).
---------------------------------------------------------------------------

    Lastly, paragraph (f)(3)(ii)(C) of the amended Rule specifies the 
duration of the grace period: The shorter of the period beginning with 
the date on which a qualified IDQS or registered national securities 
association makes a publicly available determination identified in 
paragraph (f)(3)(ii)(A) and ending on either (1) the specified issuer 
information being current and made publicly available or filed, or (2) 
the fourteenth calendar day following the date on which such publicly 
available determination was made.\371\ Therefore, if the specified 
issuer information is current and made publicly available, or is filed, 
during the fourteen calendar days following the publicly available 
determination identified in paragraph (f)(3)(ii)(A), the grace period 
ends on that date. While the grace period ends on such date, piggyback 
eligibility under paragraph (f)(3)(i)(A) of the amended Rule resumes on 
such date, assuming all conditions in that paragraph are met.\372\ 
Specifically, broker-dealers may continue to rely on the piggyback 
exception to publish quotations after the grace period ceases to apply 
if: (1) The documents and information specified in paragraph (b)(3) of 
the amended Rule for a reporting issuer were filed within 15 calendar 
days starting on the date on which the qualified IDQS or registered 
national securities association makes a publicly available 
determination that the issuer's paragraph (b) information is no longer 
timely filed or filed within 180 calendar days from a specified 
period,\373\ and (2) all other requirements in paragraph (f)(3)(i) were 
met. Similarly, broker-dealers may continue to rely on the piggyback 
exception to publish quotations after the grace period ceases to apply 
if: (1) The documents and information specified in paragraph (b)(4) or 
paragraph (b)(5)(i) are current and publicly available within 15 
calendar days starting on the date on which the qualified IDQS or 
registered national securities association makes a publicly available 
determination that the issuer's paragraph (b) information is no longer 
current and publicly available, and (2) all other requirements in 
paragraph (f)(3)(i) were met. However, if the specified issuer 
information is not made current and publicly available, or is not 
filed, during the 15 calendar days starting on the date of a publicly 
available determination identified in paragraph (f)(3)(ii)(A), a 
broker-dealer may no longer rely on the piggyback exception and would 
need to either comply with the information review requirement or rely 
on another of the amended Rule's exceptions to resume a quoted market 
in the security.
---------------------------------------------------------------------------

    \371\ Amended Rule 15c2-11(f)(3)(ii)(C).
    \372\ Broker-dealer quotations that are published or submitted 
in reliance on the grace period are not required to cease intra-day 
upon such public availability of current issuer information.
    \373\ See Amended Rule 15c2-11(f)(3)(i)(C)(4).
---------------------------------------------------------------------------

7. Removal of Certain Piggyback Exception Provisions Under the Former 
Rule
    The Commission is removing certain provisions of the former Rule's 
piggyback exception to streamline the piggyback exception under the 
amended Rule. The Commission sought comment about eliminating 
paragraphs (f)(3)(ii) and (f)(3)(iii) of the former Rule.\374\ 
Paragraph (f)(3)(ii) of the former Rule allowed broker-dealers to rely 
on the piggyback exception to publish or submit quotations in an IDQS 
that does not identify unsolicited customer indications of interest. In 
addition, paragraph (f)(3)(iii) of the former Rule allowed broker-
dealers to piggyback off their own quotations. Commenters did not 
address the issue of eliminating such paragraphs and did not raise any 
concerns about any potential negative consequences that could result 
from removing these paragraphs from the piggyback exception. Further, 
no comment was received regarding the Commission's understanding that 
broker-dealers tend to rely on the piggyback exception as provided in 
paragraph (f)(3)(i) of the former Rule.\375\ In light of the above, the 
Commission has determined to eliminate paragraphs (f)(3)(ii) and 
(f)(3)(iii) of the former Rule.
---------------------------------------------------------------------------

    \374\ See Proposing Release at 58225.
    \375\ See id.
---------------------------------------------------------------------------

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

    The Commission has determined to adopt the unsolicited quotation 
exception, substantially as proposed, with modifications from the 
proposal to enhance the effectiveness of the proposed amendments' 
investor protections and, specifically, to: (1) Prohibit reliance on 
the exception for a quotation on behalf of an affiliate of the issuer 
if the issuer's information is not current and publicly available, and 
(2) permit reliance on written representations that a customer is not a 
company insider or an affiliate of the issuer. The Commission sought 
comment about the proposal to require that certain issuer information 
be current and publicly available for a broker-dealer to rely on the 
unsolicited quotation exception to publish or submit a quotation on 
behalf of a company insider.\376\ The Commission also solicited comment 
about whether affiliates of the issuer should be specified as persons 
for whom the unsolicited quotation exception would be unavailable, 
unless the issuer's paragraph (b) information is current and publicly 
available.
---------------------------------------------------------------------------

    \376\ The proposed amendment was intended to help prevent the 
potential misuse of the exception by company insiders who might 
create the appearance of an active market in quoted OTC securities 
to entice new investors to invest, or to facilitate pump-and-dump 
schemes. See id.
---------------------------------------------------------------------------

    Some commenters supported this aspect of the proposal,\377\ one of 
whom suggested easing the burden on broker-dealers by removing the 
obligation to identify company insiders from the exception and 
requiring additional disclosures (in Commission rules other than Rule 
15c2-11) from certain market participants.\378\ In the Proposing 
Release, the Commission did not propose to require the identification 
of company insiders and affiliates in Commission rules other than Rule 
15c2-11. However, the Commission believes that permitting reliance on a 
written representation from the customer's broker that such customer is 
not a company insider or an affiliate of the issuer would help to 
alleviate burdens on broker-dealers associated with the identification 
of company insiders and affiliates.
---------------------------------------------------------------------------

    \377\ See, e.g., SIFMA Letter.
    \378\ OTC Markets Group Letter 1; OTC Markets Group Letter 2.
---------------------------------------------------------------------------

    The Commission believes that imposing a limitation, such that the 
customer requesting that a quote be published is not a company insider 
or affiliate, helps to prevent misuse of the unsolicited quotation 
exception by company insiders and affiliates who may take advantage of 
access to information about the company that is not available to non-
insiders. Therefore, the Commission has determined to make the 
unsolicited quotation exception in the amended Rule unavailable for 
company insiders and affiliates if the information required to be 
reviewed under the Rule is not current and publicly available.\379\ 
This limitation, under paragraph (f)(2)(ii)(B) of the amended Rule, is 
being adopted with modifications.\380\ The exception, as

[[Page 68157]]

adopted, adds the term ``affiliate'' for the same reasons the 
Commission believes the exception should be unavailable to company 
insiders. The definition of the term ``affiliate'' in the rule text is 
the same as the definition of that term in Securities Act Rule 
144(a)(1) because the Commission believes that the definition 
appropriately captures the scope of persons other than company 
insiders, as that term is defined in paragraph (e)(1) of the amended 
Rule, who also may have the potential for a heightened incentive to 
manipulate the price of a security. In addition, the Commission 
believes that broker-dealers, qualified IDQSs, and registered national 
securities associations have experience in applying this definition to 
determine whether a person is an affiliate because it is a well-
established and broadly used definition in other areas of the federal 
securities laws. The Commission remains concerned about the increased 
potential for fraud and manipulation when securities trade in the 
absence of information about the issuer and the heightened incentive 
for company insiders and affiliates to engage in misconduct to 
artificially affect the price and trading volume of an OTC security. 
The Commission believes that protecting retail investors from fraud and 
manipulation in the OTC market requires a limitation on quotations on 
behalf of company insiders and affiliates when certain information is 
not current and publicly available. In response to a comment requesting 
that the Commission ``reinforce the principle that allowing insiders to 
trade in dark companies results in an uneven playing field and often 
constitutes a Rule 10b-5 violation,'' \381\ the Commission reiterates 
to market participants that any transaction by a company insider or an 
affiliate is subject to applicable anti-fraud and anti-manipulation 
rules.
---------------------------------------------------------------------------

    \379\ See Proposing Release at 58225.
    \380\ The adopted exception uses the newly defined term 
``company insider,'' which is defined in paragraph (e)(1) of the 
amended Rule.
    \381\ OTC Markets Group Letter 2. This commenter also stated 
that insiders, affiliates, and employees should not be permitted to 
transact in securities of companies for which paragraph (b) 
information is not current and publicly available because market 
makers are unable to distinguish between affiliate and non-affiliate 
quotations. OTC Markets Group Letter 3.
---------------------------------------------------------------------------

    Other commenters expressed the concern that the broker-dealer 
publishing a quotation might not have a direct relationship with a 
customer (e.g., when a retail customer order is routed from a retail 
broker to a broker-dealer acting as a market maker), which commenters 
stated would make it difficult to know whether that customer is a 
company insider.\382\ Some commenters suggested that the Rule permit a 
broker-dealer to rely on an affidavit from the investor regarding 
whether that investor is an accredited investor, unaffiliated with the 
issuer, and not listed in the SEC Action Lookup for Individuals,\383\ 
or by relying on a negative consent letter or similar approach from the 
broker-dealer that has the relationship with the ultimate customer to 
meet this requirement of the exception.\384\ The Commission appreciates 
that the customer on whose behalf a quotation is published or submitted 
may not be the direct customer of the broker-dealer. Therefore, the 
amended Rule includes a provision designed to ease the burden on 
broker-dealers obligated to determine whether the person on whose 
behalf the quotation is published or submitted is a company insider or 
an affiliate. For purposes of the unsolicited quotation exception, the 
amended Rule permits a broker-dealer to rely on a written 
representation from the customer's broker that such customer is not a 
company insider or an affiliate if two conditions are met.\385\ The 
written representation and the reasonable basis requirements provide a 
degree of assurance with regard to who the customer is, without 
imposing the higher burden that would result from mandating an 
affidavit or other sworn statement.
---------------------------------------------------------------------------

    \382\ E.g., Canaccord Letter; CrowdCheck Letter; STA Letter. But 
see Leonard Burningham Letters (stating that gatekeepers--broker-
dealers, lawyers, transfer agents, and issuers--should be able to 
determine when transactions of insiders are affiliates).
    \383\ Mitchell Partners Letter 1 (stating that the display of 
unsolicited orders increases competition but that accredited 
investors do not need the Rule's investor protections). Launched in 
2018, the SEC Action Lookup for Individuals is a search feature on 
the Commission's website that allows users to look up information 
about individuals who have been named as defendants in SEC federal 
court actions or respondents in SEC administrative hearings. See SEC 
Action Lookup--Individuals, https://www.sec.gov/litigations/sec-action-look-up (last visited June 13, 2020); see also Press Release, 
SEC Launches Additional Investor Protection Search Tool, (May 2, 
2018), https://www.sec.gov/news/press-release/2018-78. While this 
tool allows for respondents' information to be researched, it may 
not necessarily provide information about insider or affiliate 
status.
    \384\ Canaccord Letter.
    \385\ Amended Rule 15c2-11(f)(2)(iii)(A).
---------------------------------------------------------------------------

    The first condition is that the broker-dealer publishing or 
submitting the quotation receives the written representation before, 
and on the same day that, the quotation representing the customer's 
unsolicited indication of interest is published or submitted. This 
condition is designed to promote the accuracy of the representation 
because a person's status as a company insider or an affiliate may 
change over time. The second condition is that the broker-dealer 
publishing or submitting the quotation has a reasonable basis under the 
circumstances for believing that the customer's broker is a reliable 
source.\386\ For example, the broker-dealer publishing or submitting 
the quotation may receive information or a certification from the 
customer's broker regarding the reasonable steps that the customer's 
broker takes to determine whether its customers are company insiders or 
affiliates. Moreover, the broker-dealer publishing or submitting the 
quotation should question the reliability of the customer's broker if 
circumstances indicate that the customer's broker may be an unreliable 
source.
---------------------------------------------------------------------------

    \386\ The condition mirrors the requirement to have ``a 
reasonable basis under the circumstances for believing'' that is 
used elsewhere in the Rule. Former Rule 15c2-11(a); Proposed Rule 
15c2-11(a)(1)(iii), (a)(2)(iii); Amended Rule 15-11(a)(1)(iii), 
(a)(2)(iii).
---------------------------------------------------------------------------

    The Commission believes that permitting a broker-dealer to rely on 
a written representation from the customer's broker that such customer 
is not a company insider or an affiliate is a more narrowly tailored 
approach to achieve the objectives of these amendments than requiring 
issuers or other market participants to comply with new disclosure 
requirements in other rules in an effort to alleviate burdens on 
broker-dealers for purposes of the unsolicited quotation exception. 
Further, as one commenter acknowledged, the suggestion to revise the 
disclosure requirements in other Commission rules is outside the scope 
of the amendments.\387\ The Commission believes that the use of a 
written representation, as provided in paragraph (f)(2)(iii)(A) of the 
amended Rule, responds to comments about easing broker-dealer burdens 
in connection

[[Page 68158]]

with the publication or submission of quotations without necessitating 
amendments to Commission rules other than Rule 15c2-11 and that could 
require disclosure of information even in circumstances where a broker-
dealer is not publishing or submitting a quotation. Moreover, the 
customer's broker and the broker-dealer acting as a market maker 
typically already have processes in place for sharing information, such 
as information about the quotation, and the Commission believes broker-
dealers have a variety of ways to share information related to the 
written statement. The Commission has determined to narrowly tailor the 
written representation to require the broker-dealer to provide only a 
statement that the customer is not a company insider or an affiliate. 
The Commission believes limiting the representation to a simple 
statement, without imposing additional costs and burdens associated 
with supplying extra information in the written representation that may 
not be needed by the broker-dealer, helps to prevent misuse of the 
unsolicited quotation exception while balancing considerations related 
to the benefits and burdens of affidavits or other additional types of 
disclosures in other Commission rules.
---------------------------------------------------------------------------

    \387\ See OTC Markets Group Letter 2. This commenter stated 
that, because ``Rule 15c2-11 is fairly limited in scope, regulating 
only the publication of quotations by broker-dealers[,] . . . the 
Rule on its own cannot solve the breakdown in the information 
`supply chain.' '' Id. The commenter suggested the following for the 
Commission to ``more effectively address these issues outside the 
scope of the Rule, in large part by requiring additional disclosure 
from powerful market participants'': (1) Affiliates, insiders, and 
paid promoters should not be afforded the ability to hide their 
positions in anonymous objecting beneficial owner accounts; (2) 
disclosure of transaction information for officers and affiliates of 
non-reporting issuers should be required in a manner similar to 
Forms 3, 4, and 5; (3) institutions should be required to disclose 
their holdings in non-exchange listed securities under Exchange Act 
Section 13(f); (4) Securities Act Section 17(b) should be amended to 
require additional disclosure from paid stock promoters; and (5) 
transfer agent regulations should be updated to require disclosure 
of share issuance and transfer information, and broker-dealers 
should be permitted to rely on this information in facilitating 
transactions in restricted and control securities. Id.
---------------------------------------------------------------------------

    One commenter sought clarity regarding the ability of a broker-
dealer that publishes or submits a quotation pursuant to the 
unsolicited quotation exception to rely on a qualified IDQS's 
determination that issuer information is current and publicly available 
for purposes of the unsolicited quotation exception.\388\ The 
Commission is modifying the unsolicited quotation exception text to 
allow a broker-dealer to rely on publicly available determinations by a 
qualified IDQS or a registered national securities association that 
paragraph (b) information is current and publicly available. This 
revision is designed to clarify that a broker-dealer may rely on a 
publicly available determination by a qualified IDQS or a registered 
national securities association that paragraph (b) information is 
current and publicly available when relying on the unsolicited 
quotation exception, specifically.
---------------------------------------------------------------------------

    \388\ SIFMA Letter.
---------------------------------------------------------------------------

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

    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 where the Rule's goals 
can be achieved through alternative means, the Commission is adopting 
the ADTV and asset test exception substantially as proposed, with 
modifications, as discussed below. Specifically, the proposed exception 
would have permitted a broker-dealer to publish or submit quotations 
without complying with the information review requirement where: (1) A 
security has a worldwide average daily trading volume value (the ``ADTV 
value'') of at least $100,000 during the 60 calendar days immediately 
before the publication of a quotation for such security, and (2) the 
issuer of such security has at least $50 million in total assets and 
$10 million in unaffiliated shareholders' equity as reflected in the 
issuer's publicly available audited balance sheet issued within six 
months after the end of its most recent fiscal year.\389\ In addition, 
the proposed exception would also have required that paragraph (b) 
information about the issuer be current and publicly available.\390\ 
The Commission sought comment on such an exception. Commenters 
expressed support for an exception for highly liquid securities of 
well-capitalized issuers.\391\
---------------------------------------------------------------------------

    \389\ Proposed Rule 15c2-11(f)(5).
    \390\ Proposed Rule 15c2-11(f)(5)(ii).
    \391\ See MCAP Letter; OTC Markets Group Letter 2; SIFMA Letter; 
Virtu Letter (stating, however, its concern that the proposal would 
not reach enough securities, specifically those of issuers that have 
not been involved in market manipulation and fraud).
---------------------------------------------------------------------------

    Because a pump-and-dump scheme often involves a thinly traded 
security of an issuer with limited assets, this exception recognizes 
that such fraudulent and manipulative activity generally does not 
involve issuers with substantial assets.\392\ The Commission believes 
that the exception (i.e., one that is based on a security's ADTV value 
and the issuer's total assets and shareholders' equity) will help to 
ensure that the Rule's policy goal of deterring broker-dealers from 
commencing quotations for quoted OTC securities that may facilitate a 
fraudulent or manipulative scheme is not undermined.\393\ Further, the 
Commission believes that the exception's three thresholds of ADTV 
value, total assets, and shareholders' equity are tailored to 
appropriately capture issuers of securities that are less susceptible 
to fraud and manipulation based on the liquidity of the security and 
size of the issuer.\394\
---------------------------------------------------------------------------

    \392\ See Proposing Release at 58226.
    \393\ See id. at 58228.
    \394\ See infra Part VI.C.1.c.
---------------------------------------------------------------------------

    Some commenters stated their view that identifying ``unaffiliated'' 
shareholders' equity can be difficult, if not impossible.\395\ 
Commenters also stated that using the proposed requirement of $10 
million in unaffiliated shareholders' equity may be difficult to 
measure in practice because information regarding affiliated versus 
unaffiliated shareholders' equity may be unavailable \396\ or that this 
proposed requirement was problematic because large companies can have 
negative shareholders' equity.\397\ In response to these commenters, 
paragraph (f)(5) of the amended Rules uses a ``shareholders' equity'' 
prong instead of ``unaffiliated shareholders' equity'' as proposed. 
With this modification, the Commission intends to address commenters' 
concerns regarding the operational difficulty in determining 
unaffiliated shareholders' equity, particularly where unaffiliated 
shareholders' equity is not disclosed by the issuer. The shareholders' 
equity must also be as reflected in the issuer's publicly available 
audited balance sheet.\398\ One commenter, however, expressed concern 
that financial statements may not be reliable, such as when the issuer 
finds a mistake and states that the financial statements cannot be 
relied upon.\399\ Depending on the facts and circumstances, a broker-
dealer may no longer be able to rely on the ADTV and asset test 
exception to publish or submit quotations if the issuer finds a mistake 
and states that the financial statements cannot be relied upon. The 
asset test and shareholders' equity prong under amended Rule, however, 
require use of an audited balance sheet, which should help mitigate any 
potential concerns about the reliability of the financial information.
---------------------------------------------------------------------------

    \395\ OTC Markets Group Letter 2; OTC Markets Group Letter 3; 
SIFMA Letter.
    \396\ Canaccord Letter; SIFMA Letter.
    \397\ Professor Angel Letter (stating that it is not uncommon 
for large companies to have negative equity in certain cases, such 
as legitimate start-ups with losses or after a leveraged 
recapitalization). The Commission does not believe that the 
exception should apply to the securities of companies with negative 
equity because such securities may be more prone to manipulation as 
a result of being inexpensive to acquire for fraudulent purposes, 
which could possibly allow for more issuers that could be vulnerable 
to pump-and-dump schemes to be admitted within the exception, thus 
increasing investor exposure to fraud. See infra Part VI.C.1.c.
    \398\ The shareholders' equity prong is based on total permanent 
equity and includes noncontrolling interests presented within 
permanent equity in the issuer's consolidated financial statements. 
See, e.g., Financial Accounting Standards Board Accounting Standards 
Codification (ASC) 505-10-05-3; ASC 810-10-45-15 through 45-16; 
paragraph 54 of International Accounting Standard 1, Presentation of 
Financial Statements; and Rule 5-02 of Regulation S-X.
    \399\ See Professor Angel Letter.

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[[Page 68159]]

    Some commenters suggested that certain parts of the test be 
replaced. One commenter suggested that market capitalization of $150 
million should replace the unaffiliated shareholders' equity prong of 
the exception,\400\ while another suggested that the asset test should 
be replaced with a market capitalization test.\401\ The Commission does 
not believe that market capitalization is an appropriate alternative 
for either of these two prongs of the exception because market 
capitalization fluctuates based on share price. In the ``pump'' phase 
of a pump-and-dump scheme, a security's market price may rise to an 
artificially high level. As a result, market capitalization (which 
rises as market price rises) may quickly exceed this $150 million 
threshold. Shareholders' equity, however, is independent of market 
price and thus less susceptible to pump-and-dump schemes that may 
impact the price of a security.
---------------------------------------------------------------------------

    \400\ OTC Markets Group Letter 2.
    \401\ Professor Angel Letter.
---------------------------------------------------------------------------

    Paragraph (f)(5)(i) of the amended Rule has been modified from the 
proposed rule text to clarify that a security must have a ``reported'' 
worldwide ADTV value of at least $100,000 during the 60 calendar days 
immediately before the publication or submission of a quotation of such 
security. The addition of the term ``reported'' clarifies that the 
exception requires that the standard for determining ADTV value be 
based on information that is publicly available.\402\ This modification 
is consistent with and clarifies the Commission statement in the 
Proposing Release that ADTV value could be determined from information 
that is publicly available and from a reliable source (i.e., trading 
volume as reported by a self-regulatory organization or comparable 
entity, or an electronic information system that regularly provides 
information regarding securities in markets around the world).\403\ 
Thus, to satisfy the ADTV value prong in the amended Rule, a broker-
dealer or qualified IDQS would need to determine the value of a 
security's ADTV from information that is publicly available. Further, 
the amended Rule permits that any reasonable and verifiable method may 
be used, as proposed.\404\
---------------------------------------------------------------------------

    \402\ See Proposing Release at 58227.
    \403\ See id. at 58227 nn.119, 120.
    \404\ See id. at 58227 n.120.
---------------------------------------------------------------------------

    Further, the requirements of the exception, as adopted, have been 
streamlined. While paragraph (f)(5)(ii) of the proposed Rule also would 
have expressly required that the issuer's paragraph (b) information be 
current and publicly available,\405\ this requirement is unnecessary in 
paragraph (f)(5) of the amended Rule because, in addition to requiring 
a security's ADTV to be based on information that is publicly available 
during a specific 60-calendar-day period, paragraph (f)(5)(ii) of the 
amended Rule expressly requires that an issuer's audited balance sheet 
be publicly available and issued within six months after the end of its 
most recent fiscal year, which results in the public availability of 
financial information that is specified in paragraph (b).
---------------------------------------------------------------------------

    \405\ See OTC Markets Group Letter 3 (suggesting that the 
requirement in the exception that paragraph (b) information be 
current and publicly available should be removed).
---------------------------------------------------------------------------

    The Commission has determined not to adopt certain other 
modifications suggested by commenters. One commenter requested a 30-
calendar-day period to review the information required by the Rule if a 
quoted OTC security ceases to qualify for the ADTV and asset test 
exception and if the piggyback exception is unavailable.\406\ The 
Commission believes that permitting a 30-calendar-day period to comply 
with the information review requirement if the conditions of the ADTV 
and asset test exception were not met and no other exception were 
available would be inconsistent with investor protection because the 
targets of pump-and-dump schemes are often thinly traded securities of 
issuers with limited assets, and such an extension could provide the 
opportunity for a pump-and-dump scheme to be carried out where the 
Rule's objectives cannot be achieved through the requirements of this 
exception, any of the amended Rule's other exceptions, or the Rule's 
information review requirement being met.\407\
---------------------------------------------------------------------------

    \406\ Coral Capital Letter.
    \407\ See, e.g., Andreas Hackethal et al., Who Falls Prey to the 
Wolf of Wall Street? Investor Participation in Market Manipulation 
(ECGI, Working Paper No. 446, 2019), available at https://ecgi.global/sites/defalt/files/working_papers/douments/finalleuzmeyermulhnsolteshackethal.pdf (stating that, in pump-and-
dump schemes, promoters often target thinly traded penny stocks for 
which limited liquidity leads to fast price increases when demand 
rises); see also Michael Hank & Florian Hause, On the effects of 
stock spam emails, 11 J. Fin. Mkts 57, 60 (2008).
---------------------------------------------------------------------------

    One commenter suggested that the Rule exempt securities of issuers 
with over $10 million in equity, as demonstrated by audited financial 
statements no older than 18 months, and that have been trading for more 
than $10 per share since January 1, 2017.\408\ As discussed in the 
Economic Analysis, the Commission considered alternatives based on 
other thresholds, including price.\409\ As a result, the Commission 
believes that the thresholds of the amended Rule \410\ confine the 
exception to OTC securities that are not prone to fraudulent or 
manipulative activity.\411\
---------------------------------------------------------------------------

    \408\ Letter from Dan Kanter, President, and Craig Carlino, 
Chief Compliance Officer, Monroe Financial Partners, Inc. (Dec. 30, 
2019) (``Monroe Letter'').
    \409\ See infra Part VI.C.1.c.
    \410\ In addition to the exception's ADTV value threshold, as 
discussed above, the exception also provides a threshold requiring 
that the issuer have at least $50 million in total assets and $10 
million in shareholders' equity as reflected in the issuer's 
publicly available audited balance sheet issued within six months 
after the end of its most recent fiscal year. See Amended Rule 15c2-
11(f)(5)(ii).
    \411\ As stated in the Economic Analysis, the Commission has 
found that zero issuers in 2019 that simultaneously met the $50 
million total assets, $10 million shareholders' equity, and $100,000 
ADTV value thresholds were subject to trading suspensions or caveat 
emptor status. See infra Part VI.C.1.c.
---------------------------------------------------------------------------

    Three commenters supported an exemption that would allow broker-
dealers to publish quotations for the securities of exempt foreign 
private issuers that satisfy the ADTV test, are traded on an ``offshore 
securities market'' that meets the requirements in Securities Act Rule 
902(b)(2), and are not suspended to trade by a foreign financial 
regulatory authority.\412\ The Commission recognizes that the expansion 
of the exception to securities of foreign private issuers that are 
traded on a ``designated offshore securities market'' within the 
meaning of Securities Act Rule 902(b)(2) could reduce burdens on 
broker-dealers in publishing quotations for securities of certain types 
of issuers, though the Commission believes that such a test would cover 
many of the same securities that would qualify for the ADTV and asset 
test exception, which already is designed to accommodate foreign 
private issuers. In addition, the Commission is concerned that 
securities that might not satisfy the asset test prong of the ADTV and 
asset test may meet the requirements of this suggested ``offshore 
securities market'' exception, and the Commission believes that the 
thresholds included by both prongs of the ADTV and asset test under the 
amended Rule appropriately capture issuers and their securities that 
are less susceptible to fraud and manipulation based on the liquidity 
of the securities and size of the issuer.\413\ Further, the Commission 
believes that compliance with such an alternative would raise practical 
and implementation issues with respect to, for example, whether a

[[Page 68160]]

particular offshore market or jurisdiction has comparable securities 
regulations and market practices and standards.
---------------------------------------------------------------------------

    \412\ Canaccord Letter; MCAP Letter; Virtu Letter.
    \413\ See infra Part VI.C.1.c; Proposing Release at 58226.
---------------------------------------------------------------------------

    One commenter suggested that the exception be expanded to include 
other categories of issuers, such as banks and insurance companies that 
provide information to their regulators, companies that undergo 
bankruptcy proceedings and provide information to a bankruptcy court, 
and other issuers that have a verifiable operating history and revenues 
and that pay dividends.\414\ The Commission believes that the proposed 
exception appropriately identifies those well-capitalized issuers of 
securities that are highly liquid and thus are less likely to be 
susceptible to the type of fraudulent and manipulative conduct that 
Rule 15c2-11 is designed to prevent. The Commission does not believe 
that it would be appropriate to except from the requirement for current 
and publicly available information securities of banks and insurance 
companies that provide certain information to their regulators, which 
generally is not the same as the information specified in paragraph (b) 
of the amended Rule.\415\ Further, the regulation of banks' and 
insurance companies' capital and reserves is not designed to provide 
the same investor protections that the amended Rule provides. In 
particular, the information review requirement is designed to help 
ensure that a quoted market for a security is less susceptible to 
fraudulent or manipulative schemes.\416\ Similarly, an exception for 
securities based on an issuer's status of undergoing a bankruptcy 
proceeding and providing information to a bankruptcy court would not 
provide the same investor protections that the amended Rule provides. 
Finally, the Commission does not believe it would be appropriate to 
except all securities of issuers that pay dividends in light of its 
concerns that the payment of dividends alone does not prevent the 
securities of such issuers from being used as part of a fraudulent or 
manipulative scheme or indicate that an issuer is any less likely to be 
part of a fraudulent or manipulative scheme. The Commission, however, 
will continue to monitor trading in this market to consider whether any 
further expansion of this exception is warranted.
---------------------------------------------------------------------------

    \414\ Virtu Letter.
    \415\ See also supra note 249.
    \416\ See Proposing Release at 58208.
---------------------------------------------------------------------------

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

    To help expedite the availability of securities to retail investors 
in the OTC market following an underwritten offering, and to facilitate 
capital formation, the Commission is adopting the underwritten offering 
exception, as proposed. The Commission sought comment about an 
exception from the information review requirement that permits a 
broker-dealer to publish or submit quotations for a security issued in 
an underwritten offering if: (1) The broker-dealer is named as an 
underwriter in the registration statement or offering statement for the 
underwritten offering, and (2) the broker-dealer that is the named 
underwriter publishes or submits the quotation.\417\ All commenters on 
the proposed underwritten offering exception supported the proposal, 
except for one.\418\ One of the comments also stated that the liability 
standards and professional obligations of underwriters in registered 
and Regulation A offerings are a sufficient basis for the 
exception.\419\
---------------------------------------------------------------------------

    \417\ Proposed Rule 15c2-11(f)(6). Although the proposed Rule 
used the term ``circular,'' the amended Rule uses the term 
``statement'' to be consistent with Regulation A. See Amended Rule 
15c2-11(f)(6). The Commission is also making a technical edit to the 
proposed Rule to replace the word ``identified'' with the word 
``specified'' so that the underwritten offering exception is 
consistent with the amended Rule's other provisions.
    \418\ Better Markets Letter. This commenter stated generally 
that the proposed new exception further ``fragments markets and 
introduces unnecessary complexity.'' Id. The Commission does not 
believe that the underwritten offering exception would fragment the 
OTC market because this exception does not change any existing 
market structure. Rather, this exception provides an alternative 
means for broker-dealers to initiate a quoted market. In addition, 
the Commission disagrees with the comment that the underwritten 
offering exception would introduce unnecessary complexity because 
the requirements of the exception are provided in a bright-line 
fashion: (1) The broker-dealer must be named as an underwriter in 
the registration statement or offering statement for the 
underwritten offering, and (2) the broker-dealer that is the named 
underwriter publishes or submits the quotation. The Commission does 
not believe that compliance with the requirements is operationally 
difficult or complex because any broker-dealer seeking to rely on 
the exception will know if it is named as an underwriter in the 
exception's specified documents. Further, the Commission believes 
that the underwritten offering exception appropriately eases broker-
dealer burdens in publishing quotations based on the performance of 
an activity (i.e., a review of the issuer) that such broker-dealers 
are likely to have already performed, as discussed below, while at 
the same time helping to ensure that a quoted market for a security 
is less susceptible to fraudulent or manipulative schemes.
    \419\ Coral Capital Letter.
---------------------------------------------------------------------------

    The Commission agrees and has determined to adopt the underwritten 
offering exception, as proposed, with a technical edit.\420\ To avoid 
requiring a redundant review where the objectives of the information 
review requirement have already been achieved, the amended Rule allows 
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, so long as the broker-dealer's quotation is 
published or submitted within a certain time frame.\421\ Specifically, 
paragraph (f)(6) of the amended Rule excepts the publication or 
submission of a quotation for a security by a broker-dealer that is 
named as an underwriter either in: (1) A registration statement that 
became effective fewer than 90 calendar days before the day on which 
such broker-dealer publishes or submits the quotation to the quotation 
medium, for an offering for that class of security, as is referenced in 
paragraph (b)(1), or (2) an offering statement that was qualified fewer 
than 40 calendar days before the day on which such broker-dealer 
publishes or submits the quotation to the quotation medium for an 
offering of that class of security, as referenced in paragraph (b)(2). 
Like the proposed Rule, the amended Rule includes a provision that the 
exception shall apply only for a limited period following the 
effectiveness of the registration statement or the qualification of the 
Regulation A offering statement.
---------------------------------------------------------------------------

    \420\ Amended Rule 15c2-11(f)(6). The technical edit in the 
amended Rule replaces the term ``circular'' with ``statement'' to be 
consistent with Regulation A.
    \421\ As the Commission explained in the Proposing Release, 
``[b]ecause of a broker-dealer's involvement in the registered or 
Regulation A offering, including their assumption of liability for 
misstatements or omissions in the prospectus or offering [statement] 
and public availability of the proposed paragraph (b) information on 
EDGAR, the Commission believes that a subsequent review requirement 
would be redundant and, thus, unnecessary.'' Proposing Release at 
58230.
---------------------------------------------------------------------------

    A comment suggested that the Commission broaden the exception to 
apply to: (1) Subscription rights, warrants, and units consisting of 
common stock and warrants, and (2) broker-dealers other than the 
underwriter.\422\ This aspect of paragraph (f)(6) of the amended Rule, 
which has not been changed from the proposed amendment, refers to a 
quotation for a security by a broker-dealer that is named as an 
underwriter in a registration statement or in an offering statement. 
Accordingly, the exception is available for the quotation of any 
security, including subscription rights, warrants, and units consisting 
of common stock

[[Page 68161]]

and warrants, so long as the conditions of the exception are met.
---------------------------------------------------------------------------

    \422\ Coral Capital Letter.
---------------------------------------------------------------------------

    Another commenter suggested that the exception be expanded to cover 
``any'' broker-dealer (including the underwriter), assuming the 
requirements in paragraphs (a) and (b) of the Rule are met.\423\ The 
Commission believes that extending the exception to include broker-
dealers that were not named as an underwriter would risk important 
investor protections and undermine the goals of the amended Rule, so it 
is not adopting this suggestion. As discussed in the Proposing Release, 
broker-dealers that act as underwriters in registered offerings or 
offerings conducted pursuant to Regulation A are subject to potential 
liability for misstatements and omissions in the related prospectus or 
offering statement.\424\ As a result, unlike broker-dealers acting as 
market makers, underwriters are highly incentivized to confirm that 
information provided to investors in the prospectus for a registered 
offering or in an offering statement for a Regulation A offering is 
materially accurate and from a reliable source.
---------------------------------------------------------------------------

    \423\ OTC Markets Group Letter 3.
    \424\ Proposing Release at 58229-30.
---------------------------------------------------------------------------

    Accordingly, an underwriter typically conducts a due diligence 
review to mitigate potential liability for misstatements and omissions 
in the related prospectus or offering statement (and, therefore, is 
likely to have already conducted a review of the issuer).\425\ Thus, 
the Commission believes that the underwritten offering exception should 
be unavailable for the publication or submission of a quotation by a 
broker-dealer that is not named as an underwriter.
---------------------------------------------------------------------------

    \425\ See id.
---------------------------------------------------------------------------

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

    The Commission has determined to adopt, with minor modifications, 
the proposal to permit a broker-dealer to rely on a publicly available 
determination by a qualified IDQS or a registered national securities 
association that certain exceptions are available. The proposed 
exception would have permitted broker-dealers to rely on the publicly 
available determination of a qualified IDQS or a registered national 
securities association that: (1) Paragraph (b) information is current 
and publicly available, or (2) a broker-dealer may rely on the proposed 
Rule's exchange-traded security exception, the piggyback exception, the 
municipal security exception, the ADTV and asset test exception, or the 
proposed qualified IDQS review exception. The Commission sought comment 
about this proposed exception to allow broker-dealers' reliance on 
publicly available determinations.
    Commenters supported this aspect of the proposal,\426\ stating that 
it would greatly enhance marketplace efficiency \427\ and improve 
liquidity.\428\ Commenters stated their confidence in certain market 
participants to make such determinations.\429\ The Commission is 
adopting the exception substantively as proposed, with certain 
technical, streamlining, and clarifying amendments in light of other 
amendments that the Commission is adopting.\430\ The Commission 
believes that this exception will make it easier for broker-dealers to 
maintain a market in OTC securities and promote the potential for 
liquidity in providing retail investors with greater opportunity to buy 
and sell such securities while at the same time achieving the 
amendments' investor protection goals, including through facilitating 
Commission oversight of the policies and procedures for making such 
determinations.\431\ The amended Rule also clarifies that the exception 
allows broker-dealers to rely on publicly available determinations by a 
regulated third party (i.e., a qualified IDQS or registered national 
securities association) that the following four exceptions are 
available: The exchange-traded security exception,\432\ the piggyback 
exception,\433\ the municipal security exception,\434\ and the ADTV and 
asset test exception.\435\
---------------------------------------------------------------------------

    \426\ Canaccord Letter; MCAP Letter; Robert E. Schermer, Jr.; 
Virtu Letter (stating that it could not estimate the potential 
financial burden, given that it was uncertain of the fees that a 
qualified IDQS would charge for providing such a service); Zuber 
Lawler Letter.
    \427\ OTC Markets Group Letter 1.
    \428\ Coral Capital Letter.
    \429\ Global OTC Letter; Keating Letter; see Coral Capital 
Letter (advocating for broker-dealers to be able to rely on the 
publicly available determinations of both qualified IDQSs and 
registered national securities associations).
    \430\ First, the paragraph that describes this exception in the 
amended Rule has been renumbered to paragraph (f)(7) in light of the 
fact that the Commission is adopting the proposed qualified IDQS 
review exception as part of paragraph (a) of the amended Rule rather 
than, as proposed, paragraph (f)(7). See supra Part II.A.3. Second, 
paragraph (f)(7) of the amended Rule has been streamlined and no 
longer contains the provision in proposed Rule 15c2-11(f)(8)(i) that 
described a publicly available determination that paragraph (b) 
information is current and publicly available because the 
requirement for paragraph (b) information to be current and publicly 
available has been incorporated into the amended Rule's individual 
exceptions. Third, while the Commission is adopting this amendment 
substantially as proposed, it includes a modification to explicitly 
incorporate into the unsolicited quotation exception the ability of 
broker-dealers to rely on publicly available determinations that 
paragraph (b) information is current and publicly available. See 
Amended Rule 15c2-11(f)(2)(iii)(B). Fourth, paragraph (f)(8)(ii) of 
the proposed Rule would have permitted broker-dealers to rely on the 
publicly available determination of a qualified IDQS or a registered 
national securities association that the exceptions in proposed 
paragraphs (f)(3)(i)(B) (i.e., one of the provisions of the 
piggyback exception that the amended Rule no longer contains) and 
(f)(7) (i.e., the proposed qualified IDQS review exception) are 
available. However, as discussed above, the piggyback exception in 
paragraph (f)(3)(i)(B) of the proposed Rule is not incorporated into 
the amended Rule and thus is not enumerated in paragraph (f)(7) of 
the amended Rule. Finally, paragraph (f)(8)(iii) of the proposed 
Rule, which would have provided a requirement regarding policies and 
procedures for making publicly available determinations, is also not 
incorporated into paragraph (f)(7) of the amended Rule because new 
paragraph (a)(3) of the amended Rule imposes a similar written 
policies and procedures requirement.
    \431\ See supra Part II.A.4.
    \432\ See Amended Rule 15c2-11(f)(1).
    \433\ See Amended Rule 15c2-11(f)(3)(i).
    \434\ See Amended Rule 15c2-11(f)(4).
    \435\ See Amended Rule 15c2-11(f)(5).
---------------------------------------------------------------------------

    One commenter stated that a broker-dealer should be permitted to 
publish a quotation pursuant to this exception in any IDQS based on the 
publicly available determination of a qualified IDQS or registered 
national securities association to create competition and avoid a 
monopoly based on issuers providing information necessary to make a 
publicly available determination to only one qualified IDQS.\436\ The 
Commission agrees, and this exception under the amended Rule does not 
include any such limitation. Another commenter requested that the 
Commission clarify: (1) Whether a broker-dealer that relies on a 
publicly available determination that an exception applies must 
independently verify the availability of the applicable exception, and 
(2) how often a qualified IDQS or registered national securities 
association must confirm the accuracy of its publicly available 
determination that an exception applies (e.g., whether the ADTV and 
asset test exception must be confirmed each day).\437\ The amended Rule 
does not require a broker-dealer that relies on a publicly available 
determination that an exception applies to independently verify the 
availability of that exception. As discussed above in Part II.A.4, 
qualified IDQSs and registered national securities associations that 
make publicly available determinations must establish, maintain, and 
enforce reasonably designed written policies and procedures to 
determine whether: (1) Paragraph (b) information is (or is not) current 
and publicly available and (2) the requirements of the applicable

[[Page 68162]]

paragraph (f) exceptions for which it has made a publicly available 
determination under paragraph (f)(7) are (or are not) met.\438\ The 
Commission believes that the qualified IDQS or registered national 
securities association that makes a publicly available determination 
that an exception applies must establish, maintain, and enforce 
reasonably designed written policies and procedures to determine when 
the requirements of an exception for which it made such publicly 
available determination are no longer met. For example, depending on 
the exception, the frequency with which a qualified IDQS or registered 
national securities association must make a subsequent determination 
may depend on the frequency with which an issuer's reports are required 
to be filed with the Commission, according to the issuer's Exchange Act 
or Securities Act reporting obligation, or be as of a certain date and 
publicly available (in the case of a catch-all issuer).\439\ In other 
cases, the frequency with which a qualified IDQS or registered national 
securities association must make such determination may be every 
trading day (e.g., with respect to a security's reported worldwide ADTV 
value).\440\
---------------------------------------------------------------------------

    \436\ Global OTC Letter.
    \437\ See FINRA Letter; see also Global OTC Letter.
    \438\ See Amended Rule 15c2-11(a)(3).
    \439\ See, e.g., Amended Rule 15c2-11(f)(3)(i)(C). For example, 
as discussed above in Part II.D.1, a qualified IDQS or registered 
national securities association may determine that an issuer's 
paragraph (b) information, such as a required annual or semi-annual 
report, is timely filed twice a year based on the prescribed due 
date for such issuer's report in compliance with its Regulation A 
reporting obligation. See Form 1-SA, General Instructions, A.(2).
    \440\ See Amended Rule 15c2-11(f)(5)(i).
---------------------------------------------------------------------------

    Finally, in light of the adoption of the piggyback exception's 
grace period,\441\ and because the loss of current and publicly 
available issuer information may impact individual investment decisions 
and the market for these securities, the Commission is requiring any 
qualified IDQS or registered national securities association that makes 
a publicly available determination that a broker-dealer may rely on the 
piggyback exception to subsequently make a publicly available 
determination if the issuer's paragraph (b) information is no longer 
current and publicly available, timely filed, or filed within 180 
calendar days from the specified period, as applicable. The qualified 
IDQS or registered national securities association must make such 
subsequent publicly available determination within the first four 
business days that such documents and information are no longer current 
and publicly available, timely filed, or filed within 180 calendar 
days, respectively.\442\
---------------------------------------------------------------------------

    \441\ See Amended Rule 15c2-11(f)(3)(ii); supra Part II.D.6.
    \442\ See Amended Rule 15c2-11(f)(7); see also supra note 366.
---------------------------------------------------------------------------

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

    The Commission is adopting the recordkeeping requirement 
substantially as proposed, with slight modifications from the proposal. 
The Commission sought comment about the recordkeeping requirement for: 
(1) Broker-dealers and qualified IDQSs that comply with the information 
review requirement, and (2) broker-dealers, qualified IDQSs, and 
registered national securities associations to demonstrate that the 
requirements of an exception to the information review requirement are 
met. One commenter stated that it is reasonable for market participants 
to keep records that support their information review or reliance on an 
exception.\443\ This commenter stated that it was difficult to follow 
the proposed recordkeeping requirement and that electronic copies of 
records should suffice, and that records should always be readily 
accessible.\444\ Similarly, another commenter suggested that paragraph 
(b) information that already is publicly available (e.g., in addition 
to on EDGAR, on the website of a broker-dealer, qualified IDQS, 
registered national securities association, or an issuer) should not be 
required to be preserved as part of the recordkeeping requirement.\445\
---------------------------------------------------------------------------

    \443\ Hamilton & Associates Letter.
    \444\ Id.
    \445\ OTC Markets Group Letter 3 (suggesting streamlining 
changes to the proposed Rule).
---------------------------------------------------------------------------

    The Commission has determined to adopt the recordkeeping 
requirement substantially as proposed, with modifications to: (1) Make 
clarifying edits to align the provisions regarding publicly available 
determinations with the corresponding recordkeeping requirement, and 
(2) eliminate the provisions stipulating that a broker-dealer or 
qualified IDQS document the paragraph (b) information that it reviewed 
that is available on EDGAR.\446\
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    \446\ Such documents and information already would be ``publicly 
available'' on EDGAR and, therefore, the Commission believes that a 
requirement for broker-dealers and qualified IDQSs to document such 
paragraph (b) information would result in unnecessary burdens for 
such broker-dealers and qualified IDQSs that would not facilitate 
the Commission's oversight because such paragraph (b) information is 
otherwise accessible. The Commission is making a technical edit from 
the proposal to define the term ``EDGAR'' in paragraph (d)(1)(i) of 
the amended Rule's recordkeeping requirement while removing the 
words ``Electronic Data Gathering, Analysis and Retrieval System'' 
in subsequent paragraphs of the rule text for streamlining purposes.
---------------------------------------------------------------------------

    The amendments to the recordkeeping requirement are designed to 
help facilitate the Commission's oversight of broker-dealers that rely 
on certain exceptions under the amended Rule. Paragraph (d)(1) of the 
amended Rule outlines the recordkeeping requirement associated with 
compliance by a broker-dealer or qualified IDQS with the information 
review requirement.\447\ This requirement applies to both a broker-
dealer that publishes or submits a quotation pursuant to paragraph 
(a)(1) and a qualified IDQS that makes known to others the quotation of 
a broker-dealer pursuant to paragraph (a)(2).
---------------------------------------------------------------------------

    \447\ Amended Rule 15c2-11(d)(1).
---------------------------------------------------------------------------

    Paragraph (d)(1)(i) provides that the records to be preserved are 
the documents and information required to be obtained and reviewed 
under paragraphs (a), (b), and (c) of the amended Rule with respect to 
compliance with the information review requirement, while paragraph 
(d)(1)(ii) provides that a broker-dealer that publishes a quotation in 
reliance on a broker-dealer's compliance with the information review 
requirement need only preserve a record of the name of the qualified 
IDQS that made the publicly available determination. The retention 
period for such records is not less than three years, the first two 
years in an easily accessible place. Further, unlike in the proposed 
Rule, paragraph (d)(1) of the amended Rule does not require that a 
broker-dealer or qualified IDQS document the paragraph (b) information 
that it reviewed on EDGAR. The Commission believes that such 
documentation is unnecessary and could create regulatory redundancies. 
Lastly, for purposes of complying with the amended Rule, broker-
dealers, qualified IDQSs, or registered national securities 
associations may comply with the amended Rule's recordkeeping 
requirement in the same manner as that described in Exchange Act Rule 
17a-4(f).\448\
---------------------------------------------------------------------------

    \448\ See, e.g., Exchange Act Rule 17a-4. Because the amended 
Rule requires the preservation of ``the documents and information 
required under paragraphs (a), (b), and (c)'' (e.g., that 
demonstrate that the requirements of a particular exception under 
the amended Rule are met), a broker-dealer, qualified IDQS, or 
registered national securities association may not satisfy the 
relevant recordkeeping requirement by relying on a link or similar 
reference to a record maintained by another entity, such as a link 
to an issuer's or qualified IDQS's website and must, instead, 
preserve its own copy of the relevant contents of such website dated 
from the period for which the entity is relying on such information 
for purposes of complying with the amended Rule. See Amended Rule 
15c2-11(d).
---------------------------------------------------------------------------

    Paragraph (d)(2) of the amended Rule applies to: (1) Any qualified 
IDQS or registered national securities association that makes a 
publicly available

[[Page 68163]]

determination described in the unsolicited quotation exception, the 
piggyback exception, and the exception for a publicly available 
determination by a qualified IDQS or a registered national securities 
association that an exception applies, and (2) any broker-dealer that 
publishes or submits a quotation pursuant to any exception provided in 
paragraph (f). Paragraph (d)(2) provides that the records to be 
preserved are the documents and information that demonstrate that the 
requirements of the following exceptions are met: The unsolicited 
quotation exception, the piggyback exception, the ADTV and asset test 
exception, the underwritten offering exception, or the exception for a 
publicly available determination by a qualified IDQS or a registered 
national securities association that an exception applies. The 
retention period for such records is not less than three years, the 
first two years in an easily accessible place. Consistent with the 
proposal, paragraph (d)(2) of the amended Rule does not require the 
preservation of records for the exchange-traded security exception or 
the municipal security exception because whether a security is 
exchange-traded or is a municipal security is widely known without the 
need for a broker-dealer, qualified IDQS, or a registered national 
securities association to preserve a separate record.\449\ Paragraph 
(d)(2) of the amended Rule also excepts from the recordkeeping 
requirement any paragraph (b) information that is available on EDGAR 
because such documents and information are readily and easily 
accessible on an electronic platform provided by the Commission.
---------------------------------------------------------------------------

    \449\ Proposing Release at 58234 (stating that whether a 
security is traded on an exchange or is a municipal security is 
widely known such that demonstrating that the requirements of those 
exceptions are met does not require independent preservation of 
records to support such reliance or to make a publicly available 
determination).
---------------------------------------------------------------------------

    Consistent with the proposal, the amended Rule limits the 
recordkeeping requirement for a broker-dealer that relies on a publicly 
available determination by a qualified IDQS or a registered national 
securities association that an exception is available or that an 
issuer's paragraph (b) information is current and publicly 
available.\450\ Specifically, if a broker-dealer relies on a publicly 
available determination described in paragraph (f)(2)(iii)(B) of the 
unsolicited quotation exception or (f)(3)(ii)(A) of the piggyback 
exception under the amended Rule, the broker-dealer must preserve: (1) 
The name of the qualified IDQS or registered national securities 
association that made such determination and (2) the documents and 
information that demonstrate that the other requirements of the 
exception provided in paragraph (f)(2) or (f)(3), respectively, are 
met. A broker-dealer that relies on a publicly available determination 
of a qualified IDQS or a registered national securities association 
that an exception applies (i.e., paragraph (f)(7) of the amended Rule) 
must preserve only a record of the exception for which the publicly 
available determination is made--whether the exchange-traded security 
exception, the piggyback exception, the municipal security exception, 
or the ADTV and asset test exception--and the name of the qualified 
IDQS or registered national securities association that made the 
publicly available determinations that the requirements of that 
exception are met. While the proposed recordkeeping requirement would 
have required such broker-dealer to document, among other things, the 
exception upon which the broker-dealer is relying,\451\ the Commission 
is clarifying in the amended Rule's recordkeeping requirement that the 
word ``exception'' refers to the exception for which the publicly 
available determination is made, not the exception provided in 
paragraph (f)(7).
---------------------------------------------------------------------------

    \450\ See Amended Rule 15c2-11(d)(2)(ii).
    \451\ See Proposed Rule 15c2-11(d)(2)(i)(B); Proposing Release 
at 58223 (stating that ``[a] broker-dealer that relies on a 
determination pursuant to proposed paragraph (f)(7) by a qualified 
IDQS or proposed paragraph (f)(8) by a qualified IDQS or a 
registered national securities association, however, is required 
only to document the exception upon which the broker-dealer is 
relying and the name of the qualified IDQS or registered national 
securities association that determined that the requirements of that 
exception are met'').
---------------------------------------------------------------------------

J. Definitions

    In light of the amendments that the Commission is adopting, as 
discussed above, the Commission is also adopting definitions of certain 
terms that are used throughout these amendments.
1. Current--Rule 15c2-11(e)(2)
    The Commission is adopting a definition of ``current'' only for 
purposes of the amended Rule to mean that 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). In addition, under the 
amended Rule's definition of ``current,'' the paragraph (b) information 
of a reporting issuer is current only for the purposes of Rule 15c2-11 
if it is the issuer's most recently required annual report or statement 
filed pursuant to Section 13 or 15(d) of the Exchange Act and any 
rule(s) thereunder, Regulation A, Regulation Crowdfunding, or Section 
12(G)(2)(g) of the Exchange Act, together with any subsequently 
required periodic reports or statements filed pursuant to Section 13 or 
15(d) of the Exchange Act and any rule(s) thereunder, Regulation A, 
Regulation Crowdfunding, or Section 12(G)(2)(g) of the Exchange 
Act.\452\ The Commission sought, but did not receive any, comment on 
the proposal to define ``current'' to mean filed, published, or 
disclosed, in accordance with the time frames specified in each of the 
paragraphs (b)(1) through (b)(5).\453\
---------------------------------------------------------------------------

    \452\ The Commission is making a clarifying change from the 
proposed definition of ``current'' to specify the application of the 
definition of the term ``current'' in light of the fact that some 
issuers have an Exchange Act reporting obligation while others do 
not. In addition, the Commission is also making technical edits from 
the proposed definition of current. First, the Commission is 
replacing the word ``disclosed'' (in the proposed definition) with 
the words ``are as of a date'' to align the amended Rule's 
definition of ``current'' with paragraph (b)(5)(i) of the amended 
Rule, which provides that a catch-all issuer's information must ``be 
. . . as of'' a certain date. Second, the amended Rule provides the 
definition of ``current'' in paragraph (e)(2) in light of the 
addition of the definition for the term ``company insider'' in 
paragraph (e)(1) of the amended Rule. The addition of the definition 
of ``company insider'' has changed the subparagraph numbers for 
other definitions under the amended Rule, and the Commission is also 
making technical amendments to include the term ``interdealer 
quotation system'' in paragraph (e)(3), ``issuer'' in paragraph 
(e)(4), ``quotation'' in (e)(7), and ``quotation medium'' in (e)(8) 
of the amended Rule.
    \453\ Proposed Rule 15c2-11(e)(1).
---------------------------------------------------------------------------

    The definition sets forth the time frames within which issuer 
information must be filed, be published, or be as of a certain date for 
the issuer's information to be current for purposes of the amended 
Rule. Paragraphs (b)(1) through (b)(5) of the amended Rule provide a 
comprehensive delineation of the documents and information that must be 
``current'' for purposes of the amended Rule, depending on the 
regulatory status of the issuer, including with respect to a 
crowdfunding issuer.\454\ Summarized below are examples of paragraph 
(b) information that would be current for purposes of the amended Rule:
---------------------------------------------------------------------------

    \454\ See Amended Rule 15c2-11(b)(1) through (5).
---------------------------------------------------------------------------

     A prospectus specified by section 10(a) of the Securities 
Act for an issuer that filed a registration statement under the 
Securities Act, other than a registration statement on Form F-6, that 
became effective fewer than 90 calendar days before the day on which 
such

[[Page 68164]]

broker-dealer publishes or submits the quotation to the quotation 
medium; \455\
---------------------------------------------------------------------------

    \455\ See Amended Rule 15c2-11(b)(1).
---------------------------------------------------------------------------

     An offering statement provided for under Regulation A for 
an issuer that has filed an offering statement under Regulation A that 
was qualified fewer than 40 calendar days before the day on which such 
broker-dealer publishes or submits the quotation to the quotation 
medium; \456\
---------------------------------------------------------------------------

    \456\ See Amended Rule 15c2-11(b)(2).
---------------------------------------------------------------------------

     An issuer's most recent annual report filed pursuant to 
Section 13 or 15(d) of the Exchange Act, together with any periodic or 
current reports that have been filed thereafter under the Exchange Act 
by the issuer, except for current reports filed during the three 
business days before the publication or submission of the quotation, 
provided that the issuer has filed all required annual and periodic 
reports within the time frames specified; \457\
---------------------------------------------------------------------------

    \457\ See Amended Rule 15c2-11(b)(3)(i).
---------------------------------------------------------------------------

     An issuer's most recent annual report filed pursuant to 
Regulation A, together with any periodic and current reports filed 
thereafter under Regulation A by the issuer, except for any current 
reports filed during the three business days before the publication or 
submission of the quotation, provided that the issuer has filed all 
required annual and periodic reports within the time frames specified; 
\458\
---------------------------------------------------------------------------

    \458\ See Amended Rule 15c2-11(b)(3)(ii).
---------------------------------------------------------------------------

     An issuer's most recent annual report filed pursuant to 
Regulation Crowdfunding, provided that the issuer has filed the 
required annual report within the time frame specified; \459\
---------------------------------------------------------------------------

    \459\ See Amended Rule 15c2-11(b)(3)(iii).
---------------------------------------------------------------------------

     An issuer's most recent annual statement referred to in 
Section 12(g)(2)(G)(i) of the Exchange Act, together with any periodic 
and current reports filed thereafter under the Exchange Act, except for 
current reports filed during the three business days before the 
publication or submission of the quotation, provided that the issuer 
has filed all required annual and statements within the time frame 
specified; \460\
---------------------------------------------------------------------------

    \460\ See Amended Rule 15c2-11(b)(3)(iv).
---------------------------------------------------------------------------

     The information that, since the first day of its most 
recently completed fiscal year, the issuer has published as required to 
establish the exemption from registration under Section 12(g) of the 
Exchange Act pursuant to Exchange Act Rule 12g3-2(b); \461\ and
---------------------------------------------------------------------------

    \461\ See Amended Rule 15c2-11(b)(4). The Commission is 
including technical edits to paragraph (b)(4) of the amended Rule to 
align the amended Rule with Exchange Act Rule 12g3-2(b), which 
refers to information required to be published for the foreign 
private issuer to avail itself of an exemption from registration 
under Section 12(g) of the Exchange Act. Accordingly, the amended 
Rule replaces the text ``beginning of its last fiscal year'' with 
``first day of its most recently completed fiscal year'' and added 
the text ``as required to establish the exemption from registration 
under section 12(g) of the Act.''
---------------------------------------------------------------------------

     The information specified in paragraph (b)(5)(i)(A) though 
(P) (excluding paragraph (b)(5)(i)(L)) of the amended Rule that is as 
of a date within 12 months before the publication or submission of the 
quotation in addition to: (1) The issuer's most recent balance sheet 
that is as of a date less than 16 months before the publication or 
submission of the quotation for the issuer's security, and (2) the 
profit and loss and retained earnings statements for the 12 months 
preceding the date of the most recent balance sheet.\462\
---------------------------------------------------------------------------

    \462\ See Amended Rule 15c2-11(b)(5)(i).
---------------------------------------------------------------------------

2. Shell Company--Rule 15c2-11(e)(9)
    The Commission has determined to adopt the definition of a ``shell 
company'' as proposed, with a technical edit from the proposal.\463\ 
The Commission sought comment regarding the proposal to define ``shell 
company'' to mean any issuer other than a business combination related 
shell company, as defined in Rule 405 of Regulation C, or an asset-
backed issuer, as defined in Item 1101(b) of Regulation AB, that has: 
(1) No or nominal operations; and (2) either: (a) No or nominal assets, 
(b) assets consisting solely of cash and cash equivalents, or (c) 
assets consisting of any amount of cash and cash equivalents and 
nominal other assets.\464\ As the Commission explained in the Proposing 
Release, this definition of shell company closely tracks the definition 
of shell company in Rule 405 of Regulation C and in Exchange Act Rule 
12b-2, the provisions of which apply to registrants, and comports with 
the provisions of Rule 144(i)(1)(i) regarding the availability of that 
safe harbor for the resale of securities initially issued by certain 
issuers.\465\
---------------------------------------------------------------------------

    \463\ The term ``shell company'' is defined in paragraph (e)(9) 
of the amended Rule in light of the addition of the definition for 
the term ``company insider'' in paragraph (e)(1) of the amended 
Rule.
    \464\ See Proposed Rule 15c2-11(e)(8).
    \465\ See Proposing Release at 58236.
---------------------------------------------------------------------------

    Commenters who opposed the proposed definition stated that, 
although there is a need to curtail abusive reverse mergers that can be 
facilitated by shell companies, the proposed definition would be 
ambiguous and difficult to apply.\466\ The Commission believes the 
definition of shell company is a well-established and broadly used 
definition in other areas of the federal securities laws. The 
definition of shell company that the Commission is adopting does not 
preclude a broker-dealer, qualified IDQS, or registered national 
securities association from determining that an entity is a shell 
company based on an observation that a company has identified itself as 
a shell company (or as not a shell company) or, alternatively, review 
of a company's financial information, including asset composition, 
operational expenditures, and income-related metrics. The definition of 
shell company under the amended Rule is consistent with the 
requirements of other established and broadly used Commission rules to 
provide market participants flexibility in analyzing the particular 
facts and circumstances involving an issuer, such as the issuer's 
financial information and information related to its operations.\467\
---------------------------------------------------------------------------

    \466\ Anthony Letter; Coral Capital Letter; Leonard Burningham 
Letters; OTC Markets Group Letter 1; Sosnow & Associates Letter; STA 
Letter. But see Lowy Letter.
    \467\ See, e.g., Proposing Release at 58236 n.157.
---------------------------------------------------------------------------

    Some commenters advocated for more of a bright-line definition of 
``shell company'' \468\ or examples of the types of attributes of 
companies that would meet the Rule's definition of shell company to 
reduce the likelihood of inconsistent determinations.\469\ One 
commenter stated that the definition should also include self-
identified shell companies and companies that are ``shell risk'' 
companies based on a review of a company's financial information, 
including asset composition, operational expenditures, and income-
related metrics.\470\ The Commission continues to believe that defining 
the term ``nominal'' with reference to quantitative thresholds would be 
unworkable in this context.\471\ However, in determining whether the 
requirements of the piggyback exception are met,\472\ a market 
participant may rely on an issuer's self-identification as a shell 
company (or as not a shell company), unless it has a reasonable basis 
to believe otherwise.\473\ Further, a

[[Page 68165]]

broker-dealer may rely on a catch-all issuer's self-identification as a 
shell company in its review of the issuer's documents and information 
in paragraph (b)(5)(i)(H) of the amended Rule regarding a description 
of the issuer's business or any other statement from the issuer 
regarding its status as a shell company. Consistent with the definition 
of shell company in the proposal, the definition of a shell company 
under the amended Rule applies to all issuers of securities, and is not 
limited to companies that have filed a registration statement or have 
an obligation to file reports under Section 13 or Section 15(d) of the 
Exchange Act, because Rule 15c2-11 applies to the publication and 
submission of quotations for the securities of all types of issuers, 
including reporting issuers and catch-all issuers.\474\ In response to 
comment,\475\ the Commission reiterates that startup companies, or, in 
other words, companies with a limited operating history, are not 
captured in the definition of ``shell company'' because such companies 
do not meet the condition of having ``no or nominal operations.'' \476\
---------------------------------------------------------------------------

    \468\ E.g., STA Letter; see Lucosky Brookman Letter. But see 
Peregrine Comment.
    \469\ FINRA Letter.
    \470\ OTC Markets Group Letter 2; OTC Markets Group Letter 3; 
see Coulson Comment; Sosnow & Associates Letter.
    \471\ See Proposing Release at 58236.
    \472\ See Amended Rule 15c2-11(f)(3)(i)(B)(2).
    \473\ In the absence of any information that, under the 
circumstances, reasonably indicates that the source is unreliable, a 
broker-dealer, qualified IDQS, or registered national securities 
association could satisfy the amended Rule's requirement regarding 
the reliability of the information source if that information were 
provided by the issuer of the security or its agents, including its 
officers and directors, attorneys, or accountants. See infra Part 
II.O.2. The Commission understands that some instances exist in 
which an issuer may not identify as a shell company, such as in the 
context of a reverse merger screening, but that other factors may 
suggest that the issuer is a shell company. See, e.g., Use of Form 
S-8, Form 8-K, and Form 20-F by Shell Companies, Securities Act 
Release No. 8587 (July 15, 2005), 70 FR 42234, 42236 nn.31, 32 (July 
21, 2005).
    \474\ See Proposing Release at 58236.
    \475\ See OTC Markets Group Letter 1.
    \476\ The Commission has stated that startup companies that have 
limited operating history do not meet the condition of having ``no 
or nominal operations'' for the purposes of Securities Act Rule 
144(i)(1)(i). See also Rules 144 and 145 Release at 71557 n.172. The 
Commission also believes that this is appropriate in the context of 
broker-dealers determining whether a company fits within the meaning 
of ``shell company'' as defined in the amended Rule when deciding 
whether they may rely on the piggyback exception because it is 
consistent with other Commission statements. See, e.g., id.
---------------------------------------------------------------------------

3. Publicly Available--Rule 15c2-11(e)(5)
    The Commission has determined to adopt the definition of ``publicly 
available'' substantially as proposed, with a modification to expand 
the proposed definition's list of locations to 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 market of a foreign private issuer, as defined in Rule 
3b-4 of the Exchange Act.\477\ In addition, the Commission is requiring 
that access to any specified location under the amended Rule's 
definition of ``publicly available'' must not be restricted by user 
name, password, fees, or other restraints.\478\ The Commission sought 
comment about the proposal to define ``publicly available'' to mean 
available on EDGAR, or on the website of a qualified IDQS, a registered 
national securities association, the issuer, or a registered broker-
dealer, provided that access is not restricted by user name, password, 
fees, or other restraints.\479\ Commenters supported this aspect of the 
proposal,\480\ acknowledging that, today, issuer information is 
available to the public on a wide variety of platforms--from EDGAR 
\481\ to issuers' own websites.\482\ Commenters generally agreed that 
the term ``publicly available'' should not apply if money is charged 
for access.\483\ One commenter did not foresee any privacy concerns 
associated with making paragraph (b) information publicly available on 
the internet.\484\
---------------------------------------------------------------------------

    \477\ See Amended Rule 15c2-11(e)(5). The Commission is also 
adopting a technical edit from the proposal to define the term 
``publicly available'' in paragraph (e)(5) of the amended Rule in 
light of the addition of the definition for the term ``company 
insider'' in paragraph (e)(1) of the amended Rule.
    \478\ As proposed, only access to paragraph (b) information was 
required to be unencumbered. See Proposed Rule 15c2-11(e)(4); 
Proposing Release at 58236. In addition, the Commission is also 
making a technical edit from the proposed definition of ``publicly 
available.'' Whereas the provision in the proposed Rule's definition 
of ``publicly available'' specified that the term ``publicly 
available shall not mean where access to documents and information . 
. . is restricted,'' see Proposed Rule 15c2-11(e)(4) (emphasis 
added), the provision in the amended Rule's definition of ``publicly 
available'' specifies that ``publicly available shall mean where 
access is not restricted,'' see Amended Rule 15c2-11(e)(5) (emphasis 
added).
    \479\ See Proposed Rule 15c2-11(e)(4).
    \480\ E.g., Global OTC Letter; NASAA Letter.
    \481\ Hamilton & Associates Letter.
    \482\ E.g., Leonard Marx, Jr., Retired Chairman & President, 
Merchants National Properties (Oct. 8, 2019); Mitchell Partners 
Letter 1; Braxton Gann.
    \483\ Canaccord Letter; Coral Capital Letter; NASAA Letter; see 
Global OTC Letter.
    \484\ NASAA Letter.
---------------------------------------------------------------------------

    Commenters suggested that the list of websites in the definition of 
``publicly available'' be expanded to include Canada's System for 
Electronic Document Analysis and Retrieval (``SEDAR'') or other similar 
foreign regulatory or exchange websites (so long as information is 
available in English and access is not restricted by user name, 
password, fees, or other restraints) \485\ and the websites of other 
financial regulators (e.g., the Federal Deposit Insurance Corporation's 
website).\486\ One commenter suggested that the Commission clarify that 
``publication'' by an exempt foreign private issuer of information 
required by Rule 12g3-2(b) means that the information must be 
``publicly available'' consistent with the definition of that term in 
proposed Rule 15c2-11(e)(4).\487\
---------------------------------------------------------------------------

    \485\ FINRA Letter.
    \486\ Monroe Letter.
    \487\ Murphy & McGonigle Letter.
---------------------------------------------------------------------------

    The expansion of the list of specified locations under the amended 
Rule to include the websites of state and federal agencies accommodates 
state and federal agency websites that routinely make paragraph (b) 
information available to the public (e.g., the Federal Deposit 
Insurance Corporation's website, which makes information about certain 
insured depositary institutions, including community banks, available 
for viewing by the public).\488\ In addition, the expansion of the list 
to include an electronic information delivery system that is generally 
available to the public in the primary trading market of a foreign 
private issuer,\489\ as defined in Rule 3b-4 of the Exchange Act, 
aligns the definition of publicly available in the amended Rule with 
Exchange Act Rule 12g3-2(b) and is appropriate because paragraph (b) 
information regarding an exempt foreign private issuer must, among 
other things, be publicly available for purposes of compliance with the 
information review requirement, reliance on an exception, or making a 
publicly available determination before a broker-dealer can publish a 
quotation for an exempt foreign private issuer's security.
---------------------------------------------------------------------------

    \488\ E.g., Securities Exchange Act Filings, Federal Deposit 
Insurance Corporation, https://efr.fdic.gov/fcxweb/efr/ 
(last visited June 1, 2020).
    \489\ See Exemption From Registration Under Section 12(G) of the 
Securities Exchange Act of 1934 for Foreign Private Issuers, 
Exchange Act Release No. 58465 (Sept. 5, 2008), 73 FR 52752, 52759 
(Sept. 10, 2008) (stating that Rule 12g3-2(b) permits issuers to 
meet the rule's electronic publication requirement concurrently with 
the publishing in English of a non-U.S. disclosure document through 
an electronic information delivery system generally available to the 
public in its primary trading market).
---------------------------------------------------------------------------

    While one commenter stated that the term ``publicly available'' 
correctly excludes websites that have barriers to access 
information,\490\ another commenter suggested that the term's 
definition be expanded to include receipt, free of charge, via the 
internet or upon request by email.\491\ The definition of ``publicly 
available'' for purposes of the amended Rule does not include delivery 
or receipt, free of charge, via the internet or upon request by 
email.\492\ The requirement for publicly available information is 
designed to give all investors free,

[[Page 68166]]

unfettered access to certain information about an issuer to reduce 
information asymmetries that all investors could use to better 
understand and evaluate the issuer and the issuer's security before 
making an investment decision. The Commission believes, therefore, that 
the definition of publicly available should not include transmissions 
of information that are made upon request or are not freely available 
to all market participants at once.
---------------------------------------------------------------------------

    \490\ Global OTC Letter.
    \491\ Coral Capital Letter; see Mitchell Partners Letter 1 
(commenting that some issuers have a policy of sending financial 
information to non-shareholders who inquire, which might not be 
captured in the definition of ``publicly available'').
    \492\ Nor does the definition under the amended Rule require 
availability in a centralized location.
---------------------------------------------------------------------------

    Further, the definition of ``publicly available'' does not require 
that an issuer itself make its information available. Instead, the 
amended Rule defines the term ``publicly available'' as ``available on 
. . . or through'' a specified list of locations so that an investor 
could work with a broker-dealer or a qualified IDQS to make an issuer's 
information publicly available on the website of a broker-dealer or a 
qualified IDQS.\493\
---------------------------------------------------------------------------

    \493\ See Amended Rule 15c2-11(e)(5).
---------------------------------------------------------------------------

    Some commenters suggested that companies make their information 
publicly available in an immediately downloadable form, from a 
centralized website or on their own website.\494\ While such a measure 
could facilitate access to such information, the Commission does not 
believe that it is necessary for such a measure to be required in the 
amended Rule, given that widespread use of the internet has made it 
easier and less burdensome to facilitate access to information in many 
different ways and that the definition of ``publicly available'' 
requires that access to information be unencumbered by user name, 
password, fees, or other constraints. Therefore, the Commission is not 
requiring under the amended Rule that information be in an immediately 
downloadable form, from a centralized website or from an issuer's own 
website, for such information to meet the definition of ``publicly 
available.'' Such publications would meet the amended Rule's definition 
of ``publicly available'' so long as: (1) The website is one of the 
enumerated locations in the definition (i.e., EDGAR; the website of a 
state or federal agency, a qualified IDQS, a registered national 
securities association, an issuer, or a registered broker-dealer; or an 
electronic information delivery system that is generally available to 
the public in the primary trading market of a foreign private issuer, 
as defined in Exchange Act Rule 3b-4); and (2) access to such 
centralized website is not restricted by user name, password, fees, or 
other restraints.
---------------------------------------------------------------------------

    \494\ Brett Dorendorf; Lake Highlands Comment; Ariel Ozick.
---------------------------------------------------------------------------

    Finally, to ensure the free and wide availability to market 
participants and investors, including retail investors, of publicly 
available determinations by any qualified IDQSs or registered national 
securities association regarding the public availability of current 
paragraph (b) information and the applicability of certain of the 
amended Rule's exceptions,\495\ the Commission is expanding the 
proposed requirement that access to paragraph (b) information must not 
be restricted by user name, password, fees, or other restraints.\496\ 
Rather, access to any specified location under the amended Rule's 
definition of ``publicly available'' must not be restricted by user 
name, password, fees, or other restraints. In this regard, access to a 
publicly available determination of a qualified IDQS or a registered 
national securities association, such as, for example, that the 
piggyback exception applies or a subsequent determination that an 
issuer's information is no longer current and publicly available, also 
must not be restricted by user name, password, fees, or other 
restraints.
---------------------------------------------------------------------------

    \495\ See, e.g., supra Part II.D.6.
    \496\ See Proposed Rule 15c2-11(e)(4).
---------------------------------------------------------------------------

4. Qualified Interdealer Quotation System--Rule 15c2-11(e)(6)
    The Commission has determined to adopt the definition of a 
qualified IDQS as proposed, with technical revisions.\497\ 
Specifically, paragraph (e)(6) of the amended Rule defines a 
``qualified interdealer quotation system'' to mean any interdealer 
quotation system that meets the definition of an ATS under Rule 300(a) 
of Regulation ATS and operates pursuant to the exemption from the 
definition of an ``exchange'' under Rule 3a1-1(a)(2) of the Exchange 
Act.
---------------------------------------------------------------------------

    \497\ The Commission is making a non-substantive change to 
replace references to Regulation ATS and Exchange Act Rule 3a1-
1(a)(2) in the proposed Rule with their Code of Federal Regulations 
cites. This technical edit does not change the meaning or operation 
of the term ``qualified interdealer quotation system'' in the 
amended Rule. Finally, the Commission is adopting a technical 
amendment to define the term ``qualified interdealer quotation 
system'' in paragraph (e)(6) of the amended Rule in light of the 
addition of the definition for the term ``company insider'' in 
paragraph (e)(1) of the amended Rule.
---------------------------------------------------------------------------

    The Commission sought comment regarding the proposal to define a 
``qualified interdealer quotation system'' as any IDQS that meets the 
definition of an ATS, as defined under Rule 300(a) of Regulation ATS, 
and operates pursuant to the exemption from the definition of an 
``exchange'' under Rule 3a1-1(a)(2) of the Exchange Act.\498\ Although 
the Commission received comment on other aspects of the proposed Rule 
regarding certain activities of qualified IDQSs,\499\ the Commission 
received no comment on the proposed definition of a qualified IDQS. The 
Commission continues to believe that the regulatory requirements for an 
IDQS that operates as an ATS under the Exchange Act--and the 
concomitant SRO and Commission oversight of this type of entity--would 
help to ensure investor protection and to prevent fraud and 
manipulation for the reasons discussed in the Proposing Release.\500\
---------------------------------------------------------------------------

    \498\ See Proposed Rule 15c2-11(e)(5).
    \499\ See, e.g., supra Part II.A.2 (discussing the requirements 
for a qualified IDQS to comply with the information review 
requirement).
    \500\ See Proposing Release at 58236-37. For example, the 
requirements of Regulation ATS would provide the Commission with 
relevant information about the IDQS function of the qualified ATS 
and quoting and trading activity in the ATS, and therefore 
contribute to Commission oversight of an ATS that may choose to 
operate as a qualified IDQS. The amendments do not change the 
definition of an alternative trading system under Rule 300(a) for 
Regulation ATS or the conditions to the ATS exemption provided under 
Exchange Act Rule 3a1-1(a)(2).
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5. Company Insider--Rule 15c2-11(e)(1)
    The Commission has determined to add a definition of the term 
``company insider.'' Specifically, paragraph (e)(1) of the amended Rule 
defines the term ``company insider'' to mean any officer or director of 
the issuer, or person that performs a similar function, or any person 
who is, directly or indirectly, the beneficial owner of more than 10 
percent of the outstanding units or shares of any class of any equity 
security of the issuer.\501\ As discussed below, this definition is 
consistent with the list of persons in the proposed rule text and with 
how the term ``company insider'' was used in the Proposing 
Release.\502\
---------------------------------------------------------------------------

    \501\ Amended Rule 15c2-11(e)(1).
    \502\ See Proposing Release at 58208 n.9.
---------------------------------------------------------------------------

    The Commission sought comment regarding whether the Rule should 
include the defined term ``company insiders'' to describe the list of 
persons specified in paragraphs describing the requirements for certain 
catch-all issuer information (i.e., paragraph (b)(5)(i)(K)), 
supplemental information (i.e., paragraph (c)(1)), and the unsolicited 
quotation exception (i.e., paragraph (f)(2)(ii)) and whether such a 
definition should include any other additional persons.\503\ Although 
the Commission received no comment specifically on the proposed 
definition of ``company insider,'' commenters suggested generally that 
the Rule's investor protections could be enhanced by increasing the 
amount of current and

[[Page 68167]]

publicly available information regarding insiders and affiliates of 
issuers.\504\ In addition, one commenter suggested that the Commission 
recognize that the financial decisions of lower level officers who do 
not manage the company are largely based on personal financial 
considerations, not on material non-public information.\505\
---------------------------------------------------------------------------

    \503\ See Proposing Release at 58237.
    \504\ See, e.g., OTC Markets Group Letter 2.
    \505\ See Computer Services Letter.
---------------------------------------------------------------------------

    Under the amended Rule, this definition applies to the same list of 
persons that were individually described in paragraphs (b)(5)(i)(K), 
(c)(1), and (f)(2) of the proposed Rule while also applying to any 
person that performs a similar function to that of an officer or 
director. Though this definition does not explicitly include the terms 
``chief executive officer'' and ``member of the board of directors,'' 
the definition nevertheless applies to such person so long as he or she 
is an officer, director, or person that performs a similar 
function.\506\ The Commission believes the definition of the term 
``company insider'' in the amended Rule appropriately captures persons 
who manage a company or have a greater degree of access to issuer 
information and who may have a heightened incentive to engage in 
fraudulent or manipulative conduct.
---------------------------------------------------------------------------

    \506\ See Amended Rule 15c2-11(e)(1).
---------------------------------------------------------------------------

K. Removal of Outdated Provisions

    The Commission is rescinding the Nasdaq security exception, as 
proposed, because the Nasdaq security exception is obsolete in light of 
Nasdaq's registration as a national securities exchange.\507\ The 
publication or submission of quotations by a broker-dealer of 
securities that are traded on a national securities exchange is already 
excepted from a broker-dealer's compliance with the information review 
requirement by paragraph (f)(1) of the amended Rule.
---------------------------------------------------------------------------

    \507\ The Commission received one comment in support of removing 
obsolete provisions from the Rule. Virtu Letter.
---------------------------------------------------------------------------

    The Commission is also rescinding the requirement in former Rule 
15c2-11(d)(1) that a broker-dealer that submits a quotation for the 
security of a catch-all issuer furnish to the IDQS, at least three 
business days before the quotation is published or submitted, the 
documents and information that the broker-dealer is required to 
maintain pursuant to paragraph (a)(5) of the former Rule. This 
requirement is unnecessary in light of the amendments to the 
recordkeeping requirement, which require that the applicable documents 
and information be preserved for a period of not less than three years, 
the first two years in an easily accessible place,\508\ that help to 
facilitate the Commission's oversight of broker-dealers that publish 
quotations after complying with the information review requirement 
themselves, by relying on a qualified IDQS's publicly available 
determination that it complied with the information review requirement, 
or by relying on certain of the amended Rule's exceptions.\509\ 
Accordingly, it is redundant to require broker-dealers both to submit 
information to an IDQS and to comply with the amended Rule's 
recordkeeping requirement. The Commission received no comment on this 
aspect of the proposal.
---------------------------------------------------------------------------

    \508\ See Amended Rule 15c2-11(d)(1), (2).
    \509\ See supra Part II.I.
---------------------------------------------------------------------------

    In addition, the Commission is rescinding the provision in the Rule 
that allowed a broker-dealer to comply with the requirement to obtain 
annual, quarterly, and current reports filed by the issuer where the 
broker-dealer has made arrangements to receive such reports when they 
are filed by the issuer and has regularly received reports from the 
issuer on a timely basis. As the Commission explained above and in the 
Proposing Release, this requirement is outdated because such reports 
can be obtained by broker-dealers through EDGAR.\510\ No commenters 
opposed the rescission of this requirement.
---------------------------------------------------------------------------

    \510\ See supra Part II.B.1; Proposing Release at 58237.
---------------------------------------------------------------------------

    Finally, the Commission is removing the ``Preliminary Note'' from 
the Rule and including new guidance to accompany the Rule. The 
Commission solicited comment on whether the Preliminary Note should be 
retained in its current form, in the form of guidance as proposed, or 
in a different form. The Commission received one comment in support of 
removing obsolete provisions from the Rule \511\ and, for the reasons 
discussed in the Proposing Release, is removing the Preliminary Note 
from the Rule and, instead, is including new guidance to accompany the 
amended Rule.\512\ This guidance is discussed in Part II.O below.
---------------------------------------------------------------------------

    \511\ Virtu Letter.
    \512\ As the Commission explained in the Proposing Release, if 
the Commission were to include new guidance to accompany the Rule, 
the guidance provided in the 1991 Adopting Release and referenced in 
the Preliminary Note to the Rule would be superseded. Proposing 
Release at 58239.
---------------------------------------------------------------------------

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

    The Commission is amending paragraph (g) to conform the standard 
for the amended Rule's exemptive authority to the provision for 
exemptive authority in Section 36 of the Exchange Act because the 
Commission believes that the appropriate standard for granting an 
exemption from Rule 15c2-11 should mirror the statutory standard. 
Specifically, paragraph (g) of the amended Rule provides that the 
Commission may grant, conditionally or unconditionally, an exemption 
from the Rule to the extent such exemption ``is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.'' As discussed in the Proposing Release, 
Section 36 was enacted after the most recent substantive amendments to 
this Rule were adopted.\513\ The Commission sought comment on this 
aspect of the proposal and received no comment.
---------------------------------------------------------------------------

    \513\ See Proposing Release at 58238.
---------------------------------------------------------------------------

M. Technical Amendments

    As discussed above in Parts II.A through II.K, and for the reasons 
discussed in the Proposing Release, the Commission is adopting non-
substantive technical amendments to the Rule's text. The Commission 
solicited comment on the proposed technical amendments, including 
whether any additional technical amendments would be appropriate and 
whether any of the Rule's text should be revised to improve the Rule's 
effectiveness and clarity. The Commission received one comment in 
support of streamlining the Rule and making technical, non-substantive 
changes \514\ and is adopting the technical amendments as proposed in 
light of other amendments to the Rule.
---------------------------------------------------------------------------

    \514\ Virtu Letter.
---------------------------------------------------------------------------

    Specifically, because the Commission is separating the review 
requirement from the Rule's specified information provisions, the 
Commission is re-lettering the Rule's provisions and making conforming 
edits to all cross-references within the Rule to reflect the re-
lettering. The Commission is also alphabetizing defined terms under the 
Rule's definitional section and re-lettering the Rule's definitional 
provisions.
    In addition, the Commission is adopting grammatical edits to the 
Rule. For example, the Commission is (1) amending the Rule's definition 
of ``quotation'' in paragraph (e)(7) by replacing the word ``he'' with 
``its,'' (2) replacing the word ``which'' with the word ``that'' where 
appropriate, (3) adding and deleting commas in paragraph (b)(5)(i)(P) 
to provide clarity, (4) fixing typographical errors, (5) replacing the 
phrase ``required by'' with the phrase ``specified in'' with respect to 
paragraph (b) information, and (6)

[[Page 68168]]

replacing the word ``specific'' with the word ``specified'' in the 
Rule's title. In addition, the Commission is spelling out all numbers 
that are less than 10.
    Further, the Commission is adopting amendments to aid in the Rule's 
readability. For example, the Commission is amending the Rule by adding 
headings before certain of the Rule's provisions and by addressing 
instances of inconsistent letter capitalization (e.g., by ensuring that 
all phrases such as ``Provided, however, that'' are written 
consistently throughout the Rule). In addition, the Commission is 
adding the term ``that is'' in paragraph (f)(1) when referring to a 
security that is admitted to trading on a national securities exchange. 
The Commission also is adopting amendments to replace the word 
``shall'' with ``must'' where appropriate (e.g., paragraph (b)(5), 
addressing catch-all issuer information), and is replacing the word 
``respecting'' with the word ``for'' (e.g., paragraph (f)(3), in the 
provisions of the piggyback exception).\515\ To be consistent with 
other rules under the Exchange Act, the Commission is replacing (1) any 
references to the Financial Industry Regulatory Authority, Inc. with a 
reference to a registered national securities association and (2) 
adding CFR citations where appropriate (e.g., replacing the words 
``under the Securities Act'' in the paragraph pertaining to Reg. A 
issuers with ``(Sec. Sec.  230.251 through 230.263 of this chapter)'' 
to reflect a reference to the CFR cite to Regulation A). In this 
regard, to align the amended Rule with Regulation A, the Commission is 
also adopting amendments in paragraph (b)(2) to replace the phrases (1) 
``authorized to commence the offering'' with the word ``qualified,'' 
and (2) ``offering circular provided for under'' with the phrase 
``exemption, with respect to such issuer,'' after the reference to 
Regulation A that existed in the former Rule. Similarly, to align the 
amended Rule with Exchange Act Rule 12g3-2(b), the Commission is 
adopting technical amendments to (1) replace the word ``beginning'' 
with the words ``first day'' and the word ``last'' with the phrase 
``most recently completed fiscal year,'' (2) add the phrase ``as 
required to establish the exemption from registration under section 
12(g) of the [Exchange] Act,'' and (3) delete the word ``reasonably'' 
before the phrase ``available at the request.'' In addition, the 
Commission is adding the phrase ``of the broker or dealer'' in 
paragraph (b)(5)(i)(N) to clarify that the specified information refers 
to any associated person of the broker-dealer. Also, the Commission is 
adopting conforming changes to begin each paragraph of paragraph (b) in 
the same manner to be consistent in listing the issuer information that 
the Rule requires. Further, the Commission is also adding the words 
``under the circumstances'' to paragraph (b)(5)(ii) so that the 
standard for source reliability of catch-all issuer information is the 
same standard that is stated for the accuracy of catch-all issuer 
information. The Commission is also making a technical amendment to the 
definition of ``quotation'' so that it is provided in the same style as 
the amended Rule's other definitions.
---------------------------------------------------------------------------

    \515\ While the proposed Rule would have used the word 
``concerning,'' the amended Rule uses the word ``for'' when 
describing publications or submissions of quotations to be 
consistent with the rule text in paragraph (a). In addition, the 
amended Rule uses the word ``regarding'' instead of the word 
``concerning,'' as proposed, when describing an issuer or its 
documents and information.
---------------------------------------------------------------------------

    The Commission also is adopting amendments to streamline and 
clarify the Rule's text. For example, the Commission is replacing the 
phrase ``a record of the circumstance involved in'' with the phrase 
``records related to'' in paragraph (c)(1). The Commission also is 
replacing ``customer's indication of interest and does not involve the 
solicitation of the customer's interest'' in paragraph (f)(2) with 
``customer's unsolicited indication of interest'' in paragraph (f)(2). 
The Commission is also replacing the list of ``any director, officer or 
any person, directly or indirectly the beneficial owner of more than 10 
percent of the outstanding units or shares of any equity security of 
the issuer'' with the newly defined term ``company insider.'' Finally, 
the Commission is deleting the word ``exact'' from paragraphs (a)(5)(i) 
and (iv) of the former Rule and replacing the phrase ``the nature'' 
with the phrase ``a description'' in paragraphs (a)(5)(viii), (ix), and 
(x).
    The Commission also is adopting amendments to avoid redundancy in 
the Rule's text. For example, the Commission is removing from the Rule 
all instances of the phrase ``as defined in this section'' because the 
text of the Rule's definitional section, paragraph (f), makes it 
sufficiently clear that all instances where a particular defined term 
is mentioned are for the purposes of the Rule, unless as otherwise 
specified. In addition, the Commission is deleting the word ``said'' 
from the former Rule's paragraph (d)(1) because the words ``of this 
section'' also appear in the text of the Rule. The Commission is also 
deleting the phrase ``the issuer's most recent'' from the phrase ``a 
copy of the issuer's most recent'' in paragraph (b)(3) and also 
replacing ``[i]ssuer's most recent'' with the word ``[a]n'' in the 
beginning of paragraphs (b)(3)(i) through (iv) to avoid a redundancy.
    Finally, the Commission is adopting amendments to paragraph (b)(2) 
of the amended Rule to align with Regulation A, which requires that all 
issuers who conduct offerings pursuant to Regulation A electronically 
file an offering statement on Form 1-A, on EDGAR.\516\ The amended Rule 
references the offering circular for the issuer's security, the 
description of an issuer's filing under Regulation A is updated to more 
closely reflect Regulation A's requirement for an issuer that conducts 
an offering pursuant to Regulation A to electronically file an offering 
statement (as opposed to an offering notification) on EDGAR.\517\ 
Further, paragraph (b)(2) of the amended Rule also reflects, consistent 
with Regulation A, that issuers are only permitted to begin selling 
securities pursuant to Regulation A once the offering statement has 
been qualified by the Commission.\518\
---------------------------------------------------------------------------

    \516\ Technical edits from the proposal include the deleting 
words ``under the Securities Act'' and adding Code of Federal 
Regulations (the ``CFR'') citations. In addition, the amended Rule 
includes technical edits from the proposed Rule to be consistent 
with Regulation A. For example, technical edits in this regard 
include changing the phrase ``a notification'' to ``an offering 
statement;'' changing text regarding commencing to ``qualified;'' 
and replacing the words ``offering circular provided for under'' 
with a reference to the Regulation A exemption with respect to the 
issuer. Lastly, technical edits have been made to delete the word 
``the'' before the word ``subject;'' and replacing the word ``of'' 
with the word ``to.'' See Amended Rule 15c2-11(b)(2). The Commission 
did not receive comment on the proposed amendments to paragraph 
(b)(2).
    \517\ Rule 251(f) of Regulation A.
    \518\ Rule 251(d)(2) of Regulation A.
---------------------------------------------------------------------------

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

    The Commission proposed to make conforming amendments to Rule 
144(c)(2) \519\ in light of the proposal to re-letter the provision 
addressing catch-all issuer information in paragraph (b)(5) of the 
proposed Rule. The Commission did not receive any comment on this 
aspect of the proposal. In light of the amendments adopted, the 
Commission is making conforming amendments to cross-references in the 
provisions of Rule 144(c)(2) that cite to Rule 15c2-11(a)(5). 
Specifically, the Commission is amending Rule 144(c)(2) to cross-
reference Rule 15c2-11(b)(5)(i)(A) to (N) and Rule 15c2-11(b)(5)(i)(P), 
and the Commission is removing the cross-references to Rule 15c2-
11(a)(5)(i) to (xiv) and Rule 15c2-11(a)(5)(xvi).
---------------------------------------------------------------------------

    \519\ Securities Act Rule 144(c)(2).

---------------------------------------------------------------------------

[[Page 68169]]

O. Guidance

    As discussed above, the Commission is removing the Preliminary Note 
from the former Rule and adopting as proposed the guidance that appears 
below. This guidance is based on the 1991 Adopting Release (the ``1991 
Guidance'') and the Appendix in the 1999 Reproposing Release (the 
``1999 Appendix'').\520\ The guidance includes targeted updates to: (1) 
The discussions related to source reliability and the information 
review requirement that were included in the 1991 Guidance,\521\ and 
(2) the examples of red flags that were included in the 1999 
Appendix.\522\ In addition, the guidance below discusses the 
obligations of broker-dealers and qualified IDQSs in considering 
supplemental information as part of complying with the information 
review requirement. The guidance below supersedes the 1991 Guidance 
that was referenced in the Preliminary Note.
---------------------------------------------------------------------------

    \520\ The Commission took no further action on the guidance 
included in the 1999 Appendix in the 1999 Reproposing Release.
    \521\ Proposing Release at 58239.
    \522\ 1999 Reproposing Release at 11145. The 1999 Appendix 
supplemented the guidance from the 1991 Adopting Release, which was 
incorporated into the Rule through the Preliminary Note, by 
providing additional guidance on, among other things, ``red flags'' 
regarding the issuer that broker-dealers should consider as part of 
complying with the information review requirement. See id. at 11145. 
The Commission had proposed in the Proposing Release to update the 
1991 Guidance. See Proposing Release at 58239.
---------------------------------------------------------------------------

    The Commission solicited comment on the guidance, including whether 
the 1999 Appendix should be incorporated into the new guidance. The 
1999 Appendix provided guidance to broker-dealers on the scope of the 
review required by the Rule and offered examples of red flags that 
broker-dealers should look for when reviewing issuer information. 
Commenters suggested that the Commission provide updated guidance to 
the industry on the process involved in complying with the Rule's 
information review requirement, particularly with respect to any ``red 
flags'' regarding an issuer or its securities.\523\ One commenter 
stated that broker-dealers' compliance with the provisions of the 
amended Rule involves the exploration of any red flags that may arise 
with respect to an issuer or security.\524\ For example, one commenter 
stated that pump-and-dump schemes occur where companies in ``hot'' 
sectors use constant streams of press releases and promotional 
announcements, implying large quick profits to create a fear of missing 
out in order to appeal to unsophisticated investors.\525\ Another 
commenter suggested that ``additional regulatory guidance is necessary 
to give effect to the proposed Rule.'' \526\
---------------------------------------------------------------------------

    \523\ See Coral Capital Letter; FINRA Letter; OTC Markets Group 
Letter 1.
    \524\ FINRA Letter. FINRA stated that both it and the industry 
rely on the 28 examples of red flags that the Commission provided in 
the 1999 Appendix. Further, FINRA stated that broker-dealers being 
alert to possible red flags during the review process is an 
important component to achieving the investor protection and market 
integrity benefits for which the Rule is designed. In particular, 
FINRA stated its view about the continued importance of several of 
the red flags examples to firms' reviews, including regarding 
concentration of ownership, the presence of unusual auditing issues, 
suspicious documents, and large reverse stock splits. FINRA stated 
that, while some of the red flag examples may be less prevalent 
today than others, it believes that the Commission should 
incorporate all of the red flag examples into the adopted guidance. 
Id.
    \525\ Caldwell Sutter Capital Comment.
    \526\ Anthony Letter.
---------------------------------------------------------------------------

    The Commission has determined to include the guidance, 
substantially as proposed, with a modification to include and update 
the red flags examples that were included in the 1999 Appendix. With 
one exception, the Commission continues to believe that all of the red 
flag examples from the 1999 Appendix, as updated, remain valid. The 
exception appeared in the section entitled, ``Offerings under Rule 504 
of Regulation D where [certain] factors are present.'' \527\ There have 
been amendments to Rule 504 of Regulation D and changes in the OTC 
market regarding use of that exemption since the list was last 
updated.\528\ As a result, the Commission no longer believes that 
including an example to highlight certain fact patterns only in the 
context of Rule 504 of Regulation D would be useful for broker-dealers 
or qualified IDQSs in identifying the particular types of circumstances 
that require additional scrutiny in complying with the information 
review requirement.
---------------------------------------------------------------------------

    \527\ See 1999 Reproposing Release at 11150 (describing the 
example of a Rule 504 offering that is preceded by an unregistered 
offering to insiders or others for services rendered at prices well 
below the price in the subsequent offering).
    \528\ See, e.g., Exemptions to Facilitate Intrastate and 
Regional Securities Offerings, Securities Act Release No. 10238 
(Oct. 26, 2016), 81 FR 83494 (Nov. 21, 2016).
---------------------------------------------------------------------------

1. Introduction
    Broker-dealers and qualified IDQSs complying with the information 
review requirement under the amended Rule must have a reasonable basis 
under the circumstances for believing, based on a review of paragraph 
(b) information, together with any supplemental information required by 
paragraph (c), that: (1) The paragraph (b) information is accurate in 
all material respects, and (2) the sources of the paragraph (b) 
information are reliable.\529\ Accordingly, the Commission is providing 
the following basic principles to guide broker-dealers and qualified 
IDQSs in complying with the information review requirement.
---------------------------------------------------------------------------

    \529\ Amended Rule 15c2-11(a)(1)(i)(C), (a)(2)(iii).
---------------------------------------------------------------------------

2. Source Reliability
    The amended Rule requires that the broker-dealer or qualified IDQS 
must have a reasonable basis for believing that any source of the 
paragraph (b) information is reliable. In the absence of any red flag 
(e.g., information that, under the circumstances, reasonably indicates 
that the source is unreliable), a broker-dealer or qualified IDQS could 
satisfy the amended Rule's requirement regarding the reliability of the 
information source if that information were provided by the issuer of 
the security or its agents, including its officers and directors, 
attorneys, or accountants, or was obtained from an independent 
information service, a document retrieval service, or standard research 
sources, such as reputable and commonly used internet websites used to 
research information related to securities issuers.
    Occasionally, a broker-dealer or qualified IDQS may receive 
information specified in paragraph (b) and required by paragraph (c) of 
the amended Rule about an issuer from someone other than another 
broker-dealer, the issuer or its agents, or an independent information 
service. In such situations, while the broker-dealer or qualified IDQS 
might be aware of the identity of the immediate source of the specified 
information, it might not have any knowledge about the person that 
compiled such information. However, to comply with the amended Rule's 
requirement regarding source reliability, the broker-dealer or 
qualified IDQS is required to ascertain the reliability of the sources 
of the information. In this regard, when the immediate source 
represents that the information was compiled by the issuer, the broker-
dealer generally should verify that representation by contacting the 
issuer directly.
    If, however, the broker-dealer or qualified IDQS receives the 
information from an independent and objective source representing that 
it received the information directly from the issuer, the broker-dealer 
or qualified IDQS could rely on that representation absent 
countervailing information. When a red flag regarding the source's 
reliability exists, the broker-dealer or qualified IDQS should conduct 
the inquiry called for under the circumstances to

[[Page 68170]]

reasonably assess whether the source of the information is reliable.
3. Information Review Requirement
    Once the broker-dealer or qualified IDQS has a reasonable belief as 
to the source's reliability, it should examine the materials in its 
records to make certain that all of the specified information has been 
obtained. Next, the broker-dealer or qualified IDQS should review the 
paragraph (b) information in the context of all other information, 
including supplemental information under paragraph (c), about the 
issuer that has come to its knowledge or is in its possession. 
Ordinarily, the broker-dealer or qualified IDQS need not take any 
further steps (e.g., look behind the financial statements or 
affirmatively seek out information about the issuer beyond that 
specifically required by the amended Rule). However, the broker-dealer, 
consistent with paragraphs (a)(1)(i)(C)(1) and (2), or qualified IDQS, 
consistent with paragraphs (a)(2)(iii)(A) and (B), should be alert to 
any red flags (i.e., information under the circumstances that 
reasonably indicates that one or more of the required items of 
information may be materially inaccurate or from an unreliable source). 
Red flags would be indicated, for example, by material inconsistencies 
in the paragraph (b) information or material inconsistencies between 
that information and other information that comes to the knowledge or 
possession of the broker-dealer or qualified IDQS. In the absence of 
red flags during the review of such information, a broker-dealer or 
qualified IDQS does not have an obligation to make further inquiries to 
determine whether it has a reasonable basis to believe that the issuer 
information is accurate.
    Where no red flags appear during this review process, the broker-
dealer or qualified IDQS could have a reasonable basis for believing 
that the information is accurate. If red flags appear, the broker-
dealer or qualified IDQS could attempt to reasonably address any red 
flags or decide not to publish or submit a quotation for the issuer's 
security. In such case, the specific efforts by the broker-dealer or 
qualified IDQS to satisfy the reasonable basis standard with respect to 
the accuracy of the information and the reliability of sources can vary 
with the circumstances and may require the broker-dealer or qualified 
IDQS to obtain additional information or seek to verify the accuracy of 
existing information. For example, the broker-dealer or qualified IDQS 
may have a reasonable basis to believe that the information is accurate 
in all material respects after questioning the issuer directly. When 
red flags are present such that they bring into question the 
reliability of an issuer or its officers and directors, attorneys, or 
accountants, as a source of information, the broker-dealer or qualified 
IDQS may need to consult independent sources, such as an attorney or 
accountant.
    As discussed above, the amended Rule requires that a broker-dealer 
or qualified IDQS have a reasonable basis under the circumstances for 
believing that paragraph (b) information, in light of any other 
documents and information required by the amended Rule, such as 
paragraph (c) information, is accurate in all material respects. 
However, the amended Rule does not require that, before submitting or 
publishing quotations for a security, a broker-dealer or qualified IDQS 
conduct an independent ``due diligence'' investigation regarding the 
issuer or its business operations and financial condition such as the 
investigation expected to be conducted by an underwriter. A broker-
dealer or qualified IDQS publishing quotations may have no relationship 
with or access to the issuer of the security. The amended Rule does not 
require that the broker-dealer or qualified IDQS develop such a 
relationship to obtain information about the issuer. Rather, as 
described above, the amended Rule specifies the information that must 
be gathered, and the information review requirement would be satisfied 
if the broker-dealer or qualified IDQS had a reasonable basis for 
believing that the information is accurate in all material respects and 
obtained from a reliable source, after reviewing that information.
    In short, a reasonable basis for belief in the accuracy of the 
paragraph (b) information can be founded solely on a careful review of 
the paragraph (b) information together with paragraph (c) information, 
provided that the paragraph (b) information was obtained from sources 
reasonably believed to be reliable and there are no red flags. When red 
flags are initially present, the broker-dealer or qualified IDQS may, 
upon inquiry, obtain additional information that provides a reasonable 
basis for believing that the information is accurate in all material 
respects and that the sources are reliable.
4. Examples of Red Flags
    The Commission is providing examples of red flags where the broker-
dealer or qualified IDQS may want to apply additional scrutiny. These 
examples, however, are not exhaustive. Conversely, the presence of 
these or other red flags is not necessarily an indication of fraud or 
inaccurate information; it simply means that the broker-dealer or 
qualified IDQS should consider questioning whether the issuer 
information is accurate, and in certain cases, from a reliable source. 
The more red flags that are present, the more a broker-dealer or 
qualified IDQS may want to scrutinize the issuer information.
    a. Commission and Foreign Trading Suspensions. Trading suspensions, 
including foreign trading suspensions, generally raise significant red 
flags as to whether the issuer's information is accurate and whether 
the sources of such information are reliable. Once a trading suspension 
terminates, and before a broker-dealer can publish a quote, a broker-
dealer or qualified IDQS must comply with the information review 
requirement if it cannot rely on an exception to the Rule. While 
conducting its information review under the amended Rule following a 
trading suspension, a broker-dealer or qualified IDQS may want to 
attempt to determine the basis for the suspension order and assess 
whether the issuer information that is current and publicly available 
following the trading suspension is accurate and whether its source is 
reliable. Such review may include seeking verification from the issuer 
or soliciting the views of an independent professional.
    b. Concentration of ownership of the majority of outstanding, 
freely tradeable stock. Concentration of ownership of freely tradeable 
securities is a prominent feature of microcap fraud cases. When one 
person or group controls the flow of freely tradeable securities, this 
person or persons can have a much greater ability to manipulate the 
stock's price than when the securities are widely held.
    c. Large reverse stock splits. Fraudulent and manipulative activity 
in OTC securities can involve the substantial concentration of the 
publicly traded float through a reverse stock split. The subsequent 
issuance of large amounts of stock to insiders increases their control 
over both the issuer and trading of the stock.
    d. Companies in which assets are large and revenue is minimal 
without any explanation. A red flag exists when the issuer assigns a 
high value on its financial statements to certain assets, often assets 
that are unrelated to the company's business and were recently acquired 
in a non-cash transaction. While assets that are unrelated to the 
business of the issuer are not always an indication of potential fraud, 
some unscrupulous issuers have overvalued these types of assets in an 
effort to

[[Page 68171]]

inflate their balance sheet. In such situations, the company's revenues 
often are minimal and there appears to be no valid explanation for such 
large assets and minimal revenues. Also, a red flag is present when the 
financial statements of a development stage issuer list as the 
principal component of the issuer's net worth an asset wholly unrelated 
to the issuer's line of business.
    e. Shell company's acquisition of private company or other material 
business development. Shell companies have been used as vehicles for 
fraud in a number of different fact patterns and schemes.\530\ The 
piggyback exception under the amended Rule prohibits broker-dealers 
from relying on the piggyback exception for shell companies after a 
certain period.\531\ The Commission remains concerned about the 
potential that a continuously quoted market could be used to entice 
investors to make an investment decision based on what appears to be an 
active and independent market when, in fact, the investor may be 
considering the security price of the shell company that increased due 
to inaccurate and misleading promotional information.\532\ A broker-
dealer should be mindful of the potential for abuse when reviewing 
issuer information where a shell company is involved, in particular if 
the shell company has acquired a privately held company or has 
undergone other material business developments (including, but not 
limited to, declarations of bankruptcy, re-organizations and mergers).
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    \530\ See, e.g., Proposing Release at 58222-23 (discussing fact 
patterns in which shell companies have been used to defraud 
investors). See Amended Rule 15c2-11(e)(9) for a definition of the 
term ``shell company.''
    \531\ See Amended Rule 15c2-11(f)(3)(i)(B).
    \532\ See Proposing Release at 58222-23.
---------------------------------------------------------------------------

    f. A registered or unregistered offering raises proceeds that are 
used to repay a bridge loan made or arranged by the underwriter where: 
(1) The bridge loan was made at a high interest rate for a short 
period; (2) the underwriter received securities at below-market rates 
prior to the offering; and (3) the issuer has no apparent business 
purpose for the bridge loan.
    g. Significant write-up of assets upon a company obtaining a patent 
or trademark for a product. The significant write-up of assets once an 
issuer obtains a patent or trademark for a product may be a technique 
used by issuers engaged in fraud to inflate their balance sheets.
    h. Significant assets consist of substantial amounts of shares in 
other OTC companies. Some fraudulent activity may involve issuers whose 
major assets are substantial amounts of shares in other OTC companies.
    i. Assets acquired for shares of stock when the stock has no market 
value. The issuer's financial statements often can indicate that the 
issuer acquired assets to which it assigned substantial value in 
exchange for its essentially worthless stock.
    j. Unusual auditing issues. Examples of this include auditors who 
refuse to certify financial statements or who issue audited reports 
containing a qualified opinion, where there has been an unexplained 
change of accountants, or an accountant has resigned or been dismissed. 
Rule 15c2-11 does not contemplate that a broker-dealer or qualified 
IDQS will scrutinize the issuer's financial statements with the 
expertise of an accountant. If, however, a broker-dealer or qualified 
IDQS sees any of these examples of red flags, it may wish to confirm 
the auditor's credentials with the appropriate state licensing 
authority, question the circumstances of the change in accountants, and 
carefully scrutinize the Rule's specified information.
    k. Significant write-up of assets in a business combination of 
entities under common control or extraordinary items in notes to the 
financial statements. Unusual related party transactions are sometimes 
found in fraud schemes and may be used to write up the value of an 
issuer's assets after a merger between the related parties.
    l. Suspicious documents. Examples can include inconsistent 
financial statements, altered financial statements, and altered 
certificates of incorporation. Issuer information that is altered on 
its face raises red flags that, at a minimum, could lead a broker-
dealer or qualified IDQS to determine it does not have a reasonable 
basis to believe the issuer's information is accurate.
    m. A broker-dealer or qualified IDQS receives substantially similar 
offering documents from different issuers with certain characteristics. 
Such characteristics include: The same attorney is involved; the same 
officers and directors are listed; or the same shareholders are listed. 
If a broker-dealer or qualified IDQS realizes, after reviewing the 
information for several issuers, that the same individuals are involved 
with these entities, the broker-dealer or qualified IDQS should 
consider inquiring further to determine whether it has a reasonable 
basis to believe that the issuer information is accurate.
    n. Extraordinary gains in year-to-year operations. Such gains may 
be achieved through assigning an artificially high value to certain 
assets or through other manipulative devices that are red flags, such 
as the significant write-up of assets upon merger or acquisition.
    o. Reporting company fails to file an annual report. A reporting 
company's failure to file an annual report suggests that there is a 
potential problem with the company.
    p. Disciplinary actions against an issuer's officers, directors, 
general partners, promoters, auditors, or control persons. The 
following types of disciplinary actions raise red flags: An indictment 
or conviction in a criminal proceeding; an order permanently or 
temporarily enjoining, barring, suspending or otherwise limiting an 
officer, director, general partner, promoter, auditor, or control 
person's involvement in any type of business, securities, commodities, 
or banking activities; an adjudication by civil court of competent 
jurisdiction, the Commission, the Commodity Futures Trading Commission 
or a state securities regulator of a violation of federal or state 
securities or commodities law; or an order by a SRO permanently or 
temporarily barring, suspending or otherwise limiting involvement in 
any type of business or securities activities.
    q. Significant events involving an issuer or its predecessor, or 
any of its majority owned subsidiaries. The following types of 
significant events raise red flags: Change in control of the issuer; 
substantial increase in equity securities; merger, acquisition, or 
business combination; acquisition or disposition of significant assets; 
bankruptcy proceedings; or delisting from any securities exchange. 
These are all examples of significant events involving the issuer, 
though they are not per se examples that reflect fraud and 
manipulation. However, certain events--a change in control of the 
issuer; merger, acquisition, or business combination; or acquisition or 
disposition of significant assets--can provide unscrupulous issuers an 
opportunity to artificially overvalue the issuer's assets to support an 
upward manipulation of the issuer's stock. An increase in the number of 
an issuer's equity securities provides the securities necessary for 
such manipulation. Bankruptcy proceedings or delisting from an exchange 
may also indicate facts surrounding an issuer that could lead a broker-
dealer or qualified IDQS to conclude that it does not have a reasonable 
basis to believe that the issuer's financial information is accurate.
    r. Request to publish both bid and offer quotes on behalf of a 
customer for the same stock. The highly unusual request from a customer 
for the broker-

[[Page 68172]]

dealer to publish both bid and offer quotes is a red flag that may 
indicate manipulative trading (e.g., wash trades) and may call for 
appropriate inquiry on the part of a broker-dealer or qualified IDQS.
    s. Issuer or promoter offers to pay a fee. If a broker-dealer 
receives an offer from an issuer, any affiliate or promoter thereof, to 
pay a fee in connection with making a market in the issuer's security, 
this is both a red flag and a potential FINRA rule violation. 
Specifically, it is a violation of FINRA Rule 5250 for a broker-dealer 
or any person associated with a broker-dealer to accept any payment or 
other consideration, directly or indirectly, from an issuer of a 
security, or any affiliate or promoter thereof, for publishing a 
quotation, acting as market maker in a security, or submitting an 
application in connection therewith.\533\
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    \533\ See FINRA Rule 5250, available at https://www.finra.org/rules-guidance/rulebooks/finra-rules/5250. FINRA Rule 5250, however, 
does not preclude: (1) Payment for bona fide services, including, 
but not limited to, investment banking services (including 
underwriting compensation and fees); (2) reimbursement of any 
payment for registration imposed by the Commission or state 
regulatory authorities and for listing of an issue of securities 
imposed by a SRO; and (3) any payment expressly provided for under 
the rules of a national securities exchange that are effective after 
being filed with, or filed with and approved by, the Commission 
pursuant to the Exchange Act.
---------------------------------------------------------------------------

    t. Regulation S transactions of domestic issuers. Regulation S 
provides a safe harbor from the registration requirements of the 
Securities Act for offers and sales of securities by both foreign and 
domestic issuers that are made outside the United States. In 1998, the 
Commission adopted amendments to Regulation S designed to prevent the 
abuses that relate to offshore offerings of equity securities of 
domestic issuers, in particular transactions involving large amounts of 
the securities of U.S. issuers for which little information was 
available. Broker-dealers and qualified IDQSs should be alert to any 
questionable activities involving Regulation S offerings.
    u. Form S-8 stock. Form S-8 is the short-form registration 
statement for offers and sales of a company's securities to its 
employees, including its consultants and advisors.
    v. ``Hot industry'' OTC stocks. Another characteristic of 
misconduct in the OTC market is that it often can involve stocks that 
are in vogue.
    w. Unusual activity in brokerage accounts of issuer affiliates, 
especially involving ``related'' shareholders. Fraudulent and 
manipulative activity in the OTC market can begin with the deposit and 
sale of large blocks of an obscure stock by a new and unfamiliar 
customer who often is affiliated with an issuer and a simultaneous 
request by the issuer that the broker-dealer make a market in the 
stock.
    x. Companies that frequently change their names or lines of 
business. The Commission and other regulators have brought enforcement 
actions in which this type of activity among OTC issuers has been a 
characteristic of the alleged misconduct.\534\
---------------------------------------------------------------------------

    \534\ See, e.g., Press Release, SEC Charges Eight for Roles in 
Widespread Pump-and-Dump Scheme Involving California-Based Microcap 
Company (Sept. 18, 2014), https://www.sec.gov/news/press-release/2014-202.
---------------------------------------------------------------------------

P. Compliance Date

    The Commission is providing a compliance date that is nine months 
after the effective date of the amended Rule, except for the compliance 
date for paragraph (b)(5)(i)(M) of the amended Rule. The compliance 
date for paragraph (b)(5)(i)(M) of the amended Rule is two years after 
the effective date of the amended Rule.\535\
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    \535\ In this regard, the compliance date for the requirement in 
the piggyback exception that a catch-all issuer's information that 
is specified in paragraph (b)(5)(i)(M) must be current and publicly 
available is two years after the effective date of the amended Rule. 
This compliance date is designed to provide a sufficient window 
during which such current information can be prepared and made 
publicly available.
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    After considering the comments received regarding the transition 
period for compliance with the amended Rule's provisions,\536\ the 
Commission believes that these compliance dates will provide sufficient 
time for broker-dealers to prepare to comply with the amended Rule, 
including by creating or updating any necessary systems or internal 
measures, such as training modules, and to develop and update any 
necessary policies and procedures, as appropriate, to achieve 
compliance with the amended Rule. The Commission further believes that 
these compliance dates provide sufficient time for qualified IDQSs and 
registered national securities associations to implement technological 
or other changes that they determine to make in light of the amended 
Rule.
---------------------------------------------------------------------------

    \536\ FINRA Letter (requesting nine months for covered entities 
to comply with the provisions of the amended Rule); Jason Hirschman 
(Oct. 8, 2019) (stating that there should be an ``extended 
transition period'' for the amended Rule).
---------------------------------------------------------------------------

    The Commission recognizes that there are market participants who 
are concerned about the loss of a quoted market for certain securities 
as a result of the amended Rule and that such market participants may 
wish to seek relief from the provisions of the amended Rule. The 
Commission encourages such persons to submit relief requests 
expeditiously during the nine-month transition period. The Commission 
notes, however, that it will consider relief requests at any time, 
including after the nine-month transition period.
    On and after the nine-month transition period, broker-dealers that 
publish or submit quotations in a quotation medium, qualified IDQSs 
that make known to others certain broker-dealer quotations and make 
certain publicly available determinations, and registered national 
securities associations that make certain publicly available 
determinations would be required to comply with the amended Rule when 
they perform those activities. The Commission staff intends to offer 
assistance and support to covered entities during the transition period 
and thereafter, with the aim of helping to ensure that the investor 
protections and other benefits of the amended Rule are implemented in 
an efficient and effective manner.

III. Comments on the Concept Release

A. Information Repositories

    The Commission is not making any changes in the regulatory 
structure around information repositories. The Commission solicited 
comment on the designation of certain entities as information 
repositories, including whether investors and other market participants 
would benefit from having access to proposed paragraph (b) information 
solely through a centralized location, such as an information 
repository. Two commenters supported the idea of a centralized location 
for paragraph (b) information,\537\ though both commenters stated that 
some companies may prefer to make current information available only on 
their websites or upon request.\538\ Because the amended Rule's 
definition of ``publicly available'' already provides the opportunity 
for, among other things, free access to issuer information through the 
internet, the Commission is not taking further action in this regard. 
One commenter advocated for the public availability of past issuer 
information in addition to current issuer information.\539\ On balance, 
the Commission believes that the requirement for the publicly 
availability of current paragraph (b) information provides appropriate 
information to

[[Page 68173]]

facilitate informed investment decisions without adding the potential 
for an overly burdensome requirement to make older issuer information 
publicly available in addition to current information.
---------------------------------------------------------------------------

    \537\ Coral Capital Letter; Hamilton & Associates Letter 
(observing that some market participants might be more useful than 
others in serving as an information repository).
    \538\ Coral Capital Letter; Hamilton & Associates Letter.
    \539\ Coral Capital Letter.
---------------------------------------------------------------------------

B. Other Issues

    Certain commenters urged the Commission to take additional or 
different regulatory and non-regulatory actions than the approach 
adopted, including actions that the Commission did not propose. These 
suggestions covered a variety of areas, including settlement 
cycles,\540\ short sale regulation,\541\ rules governing stock 
splits,\542\ state laws,\543\ changes regarding publication of 
information and ``offers'' under the federal securities laws,\544\ 
rules governing the sales of securities,\545\ shareholder of record 
rules,\546\ transfer agent rules,\547\ sales practice issues,\548\ paid 
promotions,\549\ and alternative venues.\550\ The Commission 
appreciates the helpful feedback on these issues and will take such 
views into account as part of its ongoing consideration of the markets 
and the federal securities rules and regulations. The Commission 
believes that they are outside the scope of the proposed Rule and that 
the amended Rule appropriately furthers the Commission's objectives of 
promoting investor protection, enhancing market efficiency, and 
facilitating capital formation by promoting greater transparency, 
efficiency, and capital formation and helping to prevent incidents of 
fraud and manipulation in OTC securities. Other suggestions covered 
FINRA rules.\551\ As discussed above, the Commission's staff expects to 
work with FINRA on an ongoing basis regarding the implementation of the 
amended Rule.\552\
---------------------------------------------------------------------------

    \540\ Alan S. Cameron (Nov. 24, 2019).
    \541\ OTC Markets Group Letter 2; see also Canaccord Letter; 
Christopher, DiIorio; GTS Letter; MCAP Letter; Professor Angel 
Letter; Securities Law USA Letter; Zuber Lawler Letter. In response 
to the Proposing Release's Q133, some commenters stated that it 
would be helpful to extend the close-out period for lower-volume 
securities. See, e.g., OTC Markets Group Letter 2; see also 
Canaccord Letter; GTS Letter; Securities Law USA Letter; Zuber 
Lawler Letter. These commenters stated that doing so might, for 
example, increase short sale volume in the OTC market. E.g., 
Canaccord Letter. Amending Regulation SHO to extend the close-out 
period for OTC securities is outside the scope of the proposed 
rulemaking.
    \542\ Christian Gabis (suggesting that any company trading below 
$1.00 for six months be required to perform a reverse split to 
``remain listed''); John Guerriero (Oct. 4, 2019) (advocating for 
reform to the grey market).
    \543\ Braxton Gann; Daniel Raider.
    \544\ Beacon Redevelopment Letter (changes to allow non-
reporting issuers to publish their information, in the spirit of the 
JOBS Act); Murphy & McGonigle Letter (changes necessary to allow 
exempt foreign private issuers to publish their Rule 12g3-2(b) 
information). One commenter also suggested that the Commission, as 
necessary, provide guidance that publication by an exempt foreign 
private issuer on its website (or on EDGAR) of the information 
required by Rule 12g3-2(b), ``without more,'' would not be an 
``offer'' under the Securities Act. Murphy & McGonigle Letter.
    \545\ GUARDD Letter.
    \546\ See Anbec Partners Letter; Franklin Antonio; Caldwell 
Sutter Capital Comment; Brett Dorendorf; Lucas Elliott; David J. 
Flood; Jason Hirschman; Letter from James E. Mitchell, General 
Partner, Mitchell Partners, L.P., to Hon. Hester M. Peirce, Comm'r, 
SEC (Oct. 11, 2019) (``Mitchell Partners Letter 2''); Ariel Ozick; 
Anthony Perala; Daniel Raider; Michael E. Reiss; Dan Schum; Michael 
Tofias; Don C. Whitaker.
    \547\ GTS Letter; STA Letter.
    \548\ See Raymond Balser (Oct. 27, 2019); Coulson Comment; James 
Duade; GTS Letter; Michael Tofias; Alex Toppan; Kevin Ward. For 
example, commenters stated that some issuers issue ``toxic notes'' 
that are convertible into shares at a deep discount to the market 
price that dilute existing shareholders. R. Berkvens; Coral Capital 
Letter; John Guerriero; Leonard Burningham Letters. Another 
commenter, however, suggested that warnings like ``caveat emptor'' 
and ``buyer beware'' do nothing to restore what victims of 
fraudulent and manipulative schemes have lost. Coral Capital Letter; 
Brett Dorendorf; David J. Flood; Braxton Gann; Jason Hirschman; Lake 
Highlands Comment; Ron Lefton; Ariel Ozick.
    \549\ Ariel Ozick; STA Letter.
    \550\ See Todd Blue (Oct. 9, 2019); Andersen Letter; GTS Letter 
(advocating for a ``task force''); see also supra Part II.A.1 
(discussing the suggestion to exempt quoting in OTC securities in a 
market for certain types of individuals).
    \551\ See Tyler Black (discussing securities that trade in the 
grey market for which broker-dealers desire to create a quoted 
market); Coral Capital Letter; CrowdCheck Letter; HTFL Letter; 
Mitchell Partners Letter 1; OTC Markets Group Letter 2 (stating that 
the process, which includes requests for additional information, can 
take anywhere from weeks to months, with the average amount of time 
for FINRA to process a Form 211 being 34 days); Sosnow & Associates 
Letter; see also Andersen Letter; Coral Capital Letter (stating 
that, as a result, only one broker-dealer remains that is willing to 
file a Form 211 for domestic issuers); FINRA Letter (requesting 
further guidance as to whether a new Form 211 would need to be filed 
when a broker-dealer relies on a publicly available determination 
that the piggyback exception--or any of the other exceptions--is 
available; whether such a requirement to file a new Form 211 for 
quotations that are published or submitted pursuant to the piggyback 
exception would apply only for securities of catch-all issuers; 
whether any transition period would be prolonged for the securities 
of catch-all issuers if a Form 211 were processed during the 12 
months before the adoption of the amendments; and whether any grace 
period would apply if an issuer's shell company status becomes 
unclear); Leonard Burningham Letters; Lucosky Brookman Letter; OTC 
Markets Group Letter 2; Securities Law USA Letter; STA Letter 
(advocating for qualified IDQSs to be permitted to file a Form 211 
with FINRA, or to allow broker-dealers to rely on a qualified IDQS's 
compliance with the information review requirement without filing a 
Form 211 at all); Zuber Lawler Letter. As explained in the Proposing 
Release, FINRA Rule 6432 requires broker-dealers to file a Form 211 
when the Rule requires them to comply with the information review 
requirement. Proposing Release at 58242. The amended Rule does not 
impose obligations with respect to FINRA Rule 6432, as discussed 
above in Part II.A.3, and does not require broker-dealers that rely 
on a publicly available determination that the piggyback exception--
or any of the other exceptions--is available to file Forms 211 with 
FINRA. The Commission will continue to monitor the operation of this 
market and expects FINRA to do the same, including through 
examinations of qualified IDQSs. See supra Part II.A.3.
    \552\ As discussed above in Part II.P, the Commission staff 
intends to offer assistance and support to covered entities during 
the transition period and thereafter, with the aim of helping to 
ensure that the investor protections and other benefits of the 
amended Rule are implemented in an efficient and effective manner.
---------------------------------------------------------------------------

    Some commenters advocated that persons complying with the 
information review requirement should have a reasonable basis for 
believing that the issuer's information is complete and from a reliable 
source, rather than accurate and from a reliable source.\553\ The 
Commission believes a review for ``completeness'' rather than for 
``accuracy'' would weaken the important investor protections that the 
Rule is designed to provide. Broker-dealers are required ``to give some 
measure of attention to financial and other information about the 
issuer of a security before it commences trading that security.'' \554\ 
However, as discussed in above in Part II.O, the requirements of the 
amended Rule do not contemplate that, before submitting or publishing 
quotations for a security, a broker-dealer or qualified IDQS must 
conduct an independent ``due diligence'' investigation regarding the 
issuer or its business operations and financial condition such as the 
investigation expected to be conducted by an underwriter. The 
Commission is not aware of any developments in the OTC market since the 
initial adoption of the Rule that warrant changing this standard from 
``accuracy'' to ``completeness.'' Moreover, the ``accuracy'' standard 
of review, specified in paragraphs (a)(1)(iii)(C) and (a)(2)(iii) of 
the amended Rule, is the same for a catch-all issuer as it is for all 
other categories of issuers (i.e., a prospectus issuer, a Reg. A 
issuer, a reporting issuer, and an exempt foreign private issuer),\555\ 
so the standard for compliance with the information review

[[Page 68174]]

requirement is the same notwithstanding whether a broker-dealer or 
qualified IDQS is reviewing the documents and information of an issuer 
that has an Exchange Act or Securities Act reporting obligation or has 
no such reporting obligation whatsoever.
---------------------------------------------------------------------------

    \553\ OTC Markets Group Letter 2; OTC Markets Group Letter 3; 
see also Canaccord Letter; Lucosky Brookman Letter; Robert E. 
Schermer, Jr.; Securities Law USA Letter; Sosnow & Associates 
Letter; Zuber Lawler Letter.
    \554\ 1991 Adopting Release at 19149.
    \555\ See Proposing Release at 58216.
---------------------------------------------------------------------------

    In addition, some commenters stated their views regarding 
alternatives to the requirement that paragraph (b) information be 
current and publicly available \556\ and exceptions to Rule 15c2-11 
that were not proposed.\557\ The Commission believes that the 
amendments that require paragraph (b) information to be current and 
publicly available, provide certain new exceptions, and modify 
exceptions that existed before the amendments were adopted are narrowly 
tailored to appropriately further the Commission's objectives of 
promoting investor protection while facilitating market efficiency. The 
Commission, however, will continue to monitor trading in this market to 
consider whether any further amendments to the Rule in this regard are 
warranted.
---------------------------------------------------------------------------

    \556\ Anbec Partners Letter; Tim Bergin; Brett Dorendorf; David 
J. Flood; Christian Gabis; Braxton Gann; Paul Lucot; Ariel Ozick 
(stating that companies should still be able to de-register but 
provide annual reporting at a lower standard); Dave Peirce; Michael 
E. Reiss; Mark Schepers; Dan Schum; John Sheehy; Symphony Financial 
Comment; Michael Tofias.
    \557\ E.g., Alluvial Letter; Anbec Partners Letter; Caldwell 
Sutter Capital Comment; Brandon Cline; Coral Capital Letter; FINRA 
Letter; GTS Letter; Coral Capital Letter; Jason Hirschman; Aharon 
Levy; Mitchell Partners Letter 2; Mitchell Partners Letter 3; Doug 
Mohn; Monroe Letter; OTC Markets Group Letter 2; OTC Markets Group 
Letter 3; Ariel Ozick; Professor Angel Letter; Peter Quagliano; 
Securities Law USA Letter; Zuber Lawler Letter; Michael Tofias; 
Total Clarity Comment; Joep vd Berg (Dec. 15, 2019); David W. 
Wright; Samuel J. Yake.
---------------------------------------------------------------------------

IV. Other Matters

    Pursuant to the Congressional Review Act,\558\ the Office of 
Information and Regulatory Affairs has designated these rules as a 
``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \558\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

    If any of the provisions of these final rules, or the application 
thereof to any person or circumstance, is held to be invalid, such 
invalidity shall not affect other provisions or application of such 
provisions to other persons or circumstances that can be given effect 
without the invalid provision or application.

V. Paperwork Reduction Act Analysis

A. Background

    Certain provisions of the amended Rule impose ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\559\
---------------------------------------------------------------------------

    \559\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The title for this collection of information is ``Publication or 
submission of quotations without specified information.'' In accordance 
with the PRA, the Commission submitted the collection of information 
for the proposed amendments to the Rule to the Office of Management and 
Budget (``OMB'') for review.\560\ An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless it displays a current valid control number. OMB has assigned 
control number 3235-0202 to this collection of information.
---------------------------------------------------------------------------

    \560\ See 44 U.S.C. 3507; 5 CFR 1320.11.
---------------------------------------------------------------------------

    The Commission published notice and solicited comments on the 
collection of information requirements for the proposed amendments in 
the Proposing Release.\561\ The Commission received one comment 
regarding the collection of information requirements, which focused on 
the Commission's estimates of burdens and costs associated with 
determining an issuer's status as a shell company.\562\ The Commission 
did not receive any other comments regarding its other estimates of 
burdens and costs that were included in the Proposing Release's PRA. In 
addition, the Commission's estimates of the collection of information 
for the amendments, as adopted, have been updated from the estimates 
included in the Proposing Release, as appropriate, with the updated 
estimates based on more recent data.
---------------------------------------------------------------------------

    \561\ See Proposing Release at 58249.
    \562\ Leonard Burningham Letters.
---------------------------------------------------------------------------

    The Rule is designed to prevent broker-dealers from publishing or 
submitting quotations for OTC securities that may facilitate a 
fraudulent or manipulative scheme. Subject to certain exceptions, the 
Rule prohibits broker-dealers from publishing or submitting a quotation 
for a security, or submitting a quotation for publication, in a 
quotation medium, unless they have reviewed specified information 
regarding the issuer. The Commission is adopting amendments designed to 
modernize the Rule, promote investor protection, and help prevent 
incidents of fraud and manipulation by, among other things, requiring 
information about the issuers of securities that are quoted in the OTC 
market to be current and publicly available; narrowing certain 
exceptions from the Rule's requirements, including the piggyback 
exception and unsolicited quotation exception; adding new exceptions 
for the quotations of securities that may be less susceptible to fraud 
and manipulation; removing obsolete provisions; adding new definitions; 
and making technical amendments.

B. Respondents Subject to the Rule

    Generally, the Rule applies to broker-dealers that participate in 
the quoted market for OTC securities. The amendments modify some of the 
existing information collection burdens on broker-dealers and create 
new record retention obligations on broker-dealers that rely on 
exceptions to the Rule. The Commission believes that approximately 34 
broker-dealers will be subject to the burdens associated with 
publishing or submitting a quotation without an exception,\563\ and 
approximately 80 broker-dealers will be subject to the burdens 
associated with documenting reliance on an exception in paragraph (f) 
of the amended Rule.\564\ Additionally, the Commission estimates that, 
at this time, one qualified IDQS \565\ and one registered national 
securities association \566\ will be subject to burdens associated with 
making publicly available determinations pursuant to paragraph (a)(3) 
of the amended Rule.\567\
---------------------------------------------------------------------------

    \563\ Thirty-four broker-dealers submitted Forms 211 to FINRA in 
2019. The Commission uses this number as a proxy for broker-dealers 
that comply with the information review requirement under paragraphs 
(a), (b), and (c) of the amended Rule.
    \564\ As of April 24, 2020, there are 80 broker-dealers that 
publish quotations on OTC Markets Group's systems. The Commission 
believes that this number reasonably estimates the number of broker-
dealers that would engage in activities that would subject them to 
the requirements discussed in the section ``Other Burden Hours'' 
below because they are the only broker-dealers that are publishing 
or submitting quotations for OTC securities.
    \565\ Based on the current structure of the market for quoted 
OTC securities, the Commission believes that only one qualified IDQS 
would engage in a review pursuant to paragraph (a)(2) or make 
publicly available determinations pursuant to paragraph (a)(3).
    \566\ As of May 14, 2020, one registered national securities 
association exists.
    \567\ In making this estimate, the Commission is mindful that a 
qualified IDQS or a registered national securities association may 
elect not to make publicly available determinations pursuant to 
paragraph (a)(3), or may elect to do so at a later date. The 
Commission also recognizes that, in the future, other market 
participants may become qualified IDQSs, or new national securities 
associations may be established, that make publicly available 
determinations pursuant to paragraph (a)(3).
---------------------------------------------------------------------------

    The amendments permit a qualified IDQS to comply with the 
information review requirement in certain circumstances.\568\ A 
qualified IDQS

[[Page 68175]]

must meet the definition of an alternative trading system under Rule 
300(a) of Regulation ATS and operate pursuant to the exemption from the 
definition of an ``exchange'' under Rule 3a1-1(a)(2) of the Exchange 
Act. As such, a qualified IDQS must be registered as a broker-
dealer.\569\ The amendments modify only the allocation of burden from 
existing paragraphs (a), (b), and (c) between qualified IDQSs and 
broker-dealers that are not qualified IDQSs, rather than create new and 
distinct burdens.\570\ Therefore, burdens of the amended Rule on 
qualified IDQSs have not been analyzed below in a manner that is 
distinct from those of broker-dealers. The analysis of burdens for 
qualified IDQSs and registered national securities associations are 
separated from those of broker-dealers in the section discussing the 
requirement in paragraph (a)(3) of the amended Rule that such entities 
must establish, maintain, and enforce reasonably designed written 
policies and procedures to make certain publicly available 
determinations.
---------------------------------------------------------------------------

    \568\ More specifically, under the amended Rule, a qualified 
IDQS that makes known to others the quotation of a broker-dealer 
that is published or submitted pursuant to paragraph (a)(1)(ii) of 
the amended Rule must first have complied with paragraphs (a), (b), 
and (c) of the amended Rule.
    \569\ See Rule 301(a) of Regulation ATS.
    \570\ See Amended Rule 15c2-11(a)(2).
---------------------------------------------------------------------------

    For the purposes of the analysis below, the Commission has made 
assumptions regarding how respondents would comply with the amended 
Rule.

C. Summary of Collections of Information

    The collections of information associated with the initial 
publication or submission of a quotation are intended to prevent 
broker-dealers from publishing or submitting quotations for OTC 
securities that may facilitate a fraudulent or manipulative scheme. In 
addition, information collections associated with recordkeeping and 
establishing, maintaining, and enforcing reasonably designed written 
policies and procedures under the amended Rule are intended to help 
ensure compliance with the Rule's exceptions.\571\
---------------------------------------------------------------------------

    \571\ The recordkeeping obligations under the amended Rule, 
including those relating to the creation of reasonable policies and 
procedures under paragraph (a)(3) of the amended Rule, are discussed 
in Part V.C.2.g below.
---------------------------------------------------------------------------

1. Burden Associated With the Initial Publication or Submission of a 
Quotation in a Quotation Medium
    Absent an exception, broker-dealers must comply with the 
information review requirement of the Rule before initiating the 
publication or submission of a quotation for an OTC security. The 
Commission believes that, as was the case with the former Rule, the 
information collections associated with the information review 
requirement and recordkeeping requirement under the amended Rule 
involve conducting a review of and maintaining the specified 
information.\572\
---------------------------------------------------------------------------

    \572\ As discussed in Part II.K above, the Commission is 
removing the disclosure requirement in paragraph (d)(1) of the 
former Rule. This disclosure requirement previously has been 
discussed as a component of the estimated burden associated with all 
types of issuers (regardless of their reporting obligations), and, 
as a result, is included in the existing burden estimates for the 
Rule.
---------------------------------------------------------------------------

    A broker-dealer that initiates or resumes a quotation in an OTC 
equity security is subject to FINRA Rule 6432, which requires the 
broker-dealer to demonstrate compliance with, among other things, Rule 
15c2-11 by filing a Form 211. Given the alignment of this FINRA 
requirement and the Rule, the Commission believes that the number of 
Forms 211 filed with FINRA in 2019 provides a reasonable baseline from 
which to estimate the burdens associated with the information review 
requirement under both the former Rule and the amended Rule. Based on 
information provided by FINRA, broker-dealers submitted a total of 384 
Forms 211 to initiate the publication or submission of quotations of 
OTC securities in 2019: 87 of these Forms 211 concerned securities of 
prospectus issuers, Reg. A issuers, and reporting issuers; 253 
concerned securities of exempt foreign private issuers; and 44 
concerned securities of catch-all issuers. The Commission estimates 
that it takes approximately three hours to review, record, and retain 
the information pertaining to prospectus issuers, Reg. A issuers, and 
reporting issuers, and seven hours to review, record, and retain the 
information pertaining to exempt foreign private issuers and catch-all 
issuers.\573\ Before taking into account any potential changes to 
burdens that could be imposed by the amendments, the estimated total 
annual burden of the information collection by the 34 broker-dealers 
that complied with the information review requirement for the 384 OTC 
securities referred to above would be 2,340 hours.\574\
---------------------------------------------------------------------------

    \573\ The Commission believes that these burden hour estimates 
reasonably measure the time required to comply with the information 
review requirement and recordkeeping requirement utilizing available 
technology. In addition, because the specified information regarding 
exempt foreign private issuers and catch-all issuers may not be as 
readily available as the specified information regarding prospectus, 
Reg. A, and reporting issuers, these burden hour estimates include 
four additional hours to review information about such issuers.
    \574\ (87 prospectus, Reg. A, and reporting issuers x 3 hours) + 
(253 exempt foreign private issuers x 7 hours) + (44 catch-all 
issuers x 7 hours review and recordkeeping) = (261 hours) + (1,771 
hours) + (308 hours) = 2,340 hours. The burden hours for compliance 
with the information review requirement does not include securities 
that are piggyback eligible on the compliance date. A broker-dealer 
or qualified IDQS would not be required to comply with the 
information review requirement because broker-dealers would be able 
to publish quotations based on the piggyback exception. Burden hours 
associated with documenting that information is current and publicly 
available for purposes of relying on an exception are discussed 
below in Part V.C.2.
---------------------------------------------------------------------------

    The information review requirement is set forth in paragraphs (a), 
(b), and (c) of the amended Rule. The amendments change the information 
review requirement by adding, among other things, the requirement that 
paragraph (b) information be current and publicly available before the 
initial publication or submission of a quotation for an OTC 
security.\575\ The Commission believes that these changes would not 
modify the burden hours for completion of the information review 
requirement that are estimated above. Additionally, it is not expected 
that these changes to the information review requirement would create 
any initial one-time burden as it is unlikely that a broker-dealer or 
qualified IDQS would need to modify its systems or training practices 
to comply with the information review requirement under the amended 
Rule.
---------------------------------------------------------------------------

    \575\ The Commission does not believe that the expansion of the 
types of market participants that comply with the information review 
requirement--to include not only broker-dealers publishing or 
submitting a quotation for an OTC security in a quotation medium but 
also a qualified IDQS that makes known to others that the qualified 
IDQS conducted the information review (paragraph (a)(2))--will 
impact the hourly burden attributable to completion of the 
information review requirement. The adopted modification to the Rule 
does not affect the information review burden itself, but rather 
spreads that burden among more entities. Similarly, the Commission 
does not believe that the modifications to the information specified 
in paragraph (b) or the supplemental information in paragraph (c) 
affects the information review requirement itself because such 
information is already gathered and maintained, or the modifications 
to the previously existing information required by former Rule 15c2-
1l are so minor that these changes are not expected to have an 
impact on the overall time burden related to the information review 
requirement.
    Modifications to the Rule, as well as several of the proposed 
changes to exceptions from the requirements of the Rule, do, 
however, affect the recordkeeping obligations of broker-dealers and 
qualified IDQSs. The impact of paragraph (a)(1)(ii) on the 
recordkeeping requirement in paragraph (d)(1)(i), as well as the 
recordkeeping requirements in paragraph (d)(2) for revised and new 
exceptions, is discussed in Part V.C.2 below.
---------------------------------------------------------------------------

(a) Amendments to the Piggyback Exception
    As discussed above, the amendments would modify the piggyback 
exception in various ways, and these amendments would, in turn, impact 
the burdens associated with the information review requirement.\576\ 
Paragraph (f)(3)(i)(A) of

[[Page 68176]]

the amended Rule limits broker-dealers' reliance on the piggyback 
exception to securities with a one-sided priced quotation in an 
IDQS.\577\ Broker-dealers would have to comply with the information 
review requirement before initially publishing or submitting quotations 
on securities that currently are quoted and that would lose piggyback 
eligibility as a result of this provision. According to estimates based 
on data from OTC Markets Group for 2019, 264 out of 9,864 piggyback 
eligible quoted OTC securities, would lose piggyback eligibility under 
this amendment because there was no publication of either a bid or an 
offer quotation for five or more business days in succession on one or 
more occasions during that year.\578\
---------------------------------------------------------------------------

    \576\ See supra Part II.D.
    \577\ As discussed in Part II.D.2 above, after considering the 
comments, and in conjunction with the other requirements to the 
piggyback exception and SRO rules that apply to the quotations of a 
broker-dealer as a regulated entity, the Commission determined to 
narrowly tailor this part of the piggyback exception to require a 
one-sided priced quotation rather than a two-sided priced quotation, 
as proposed.
    \578\ The amended Rule, unlike the proposed Rule, permits 
broker-dealers to rely on the piggyback exception based on at least 
a one-way (rather than a two-way) priced quotation, as long as there 
are no more than four business days in succession without a 
quotation. See, e.g., supra Part II.D.2; infra Part VI.C.1.b. This 
modification increases the size of the subset of piggyback eligible 
quoted OTC securities, as reflected in these estimates.
---------------------------------------------------------------------------

    Based on the lack of quotes by broker-dealers for these securities 
in 2019, it is unclear whether broker-dealers would conduct the 
required review for most of these securities that would no longer be 
eligible for the piggyback exception provided under paragraph 
(f)(3)(i)(A). Taking a conservative approach in assessing the burden 
that may arise under this amendment, the Commission estimates that 
broker-dealers would comply with the information review requirement 
once annually for each security that would lose piggyback 
eligibility.\579\ Therefore, it is estimated that broker-dealers would 
comply with the information review requirement 264 additional times 
annually. The Commission estimates that 88 (approximately 33%) would be 
securities of prospectus, Reg. A, or reporting issuers, 143 
(approximately 54%) would be securities of exempt foreign private 
issuers, and 33 (approximately 13%) would be securities of catch-all 
issuers, leading to an increase in the total annual burden of 1,496 
hours.\580\
---------------------------------------------------------------------------

    \579\ The Commission believes that this conservative approach is 
reasonable because it accounts for all securities that may lose 
piggyback eligibility under this amendment. While broker-dealers may 
not comply with the information review requirement for every 
security that loses piggyback eligibility, broker-dealers may comply 
with the requirement multiple times regarding the same issuer. 
Therefore, the Commission believes that this reasonably approximates 
the impact of the amendments industry-wide.
    \580\ The total annual burden is computed as follows: (88 
prospectus, Reg. A, or reporting issuers x 3 hours) + (143 exempt 
foreign private issuers x 7 hours) + (33 catch-all issuers x 7 hours 
review and recordkeeping) = (264 hours) + (1,001 hours) + (231 
hours) = 1,496 hours.
---------------------------------------------------------------------------

    The Commission is increasing the estimated overall burdens related 
to the information review requirement based on the provision in 
paragraph (f)(3)(i)(C) of the amended Rule, which would allow broker-
dealers to rely on the piggyback exception to publish quotations for 
the securities of (1) issuers for which documents and information are 
specified in paragraphs (b)(4) or (b)(5) if paragraph (b) information 
is current and publicly available, (2) issuers for which documents and 
information are specified in paragraphs (b)(3)(i), (b)(3)(iv), or 
(b)(3)(v) if paragraph (b) information is filed within 180 calendar 
days from a specified time frame, or (3) issuers for which documents 
and information are specified in paragraphs (b)(3)(ii) or (b)(3)(iii) 
if paragraph (b) information is timely filed. Paragraphs (a)(1)(i)(B) 
and (a)(2)(ii) of the amended Rule require that paragraph (b) 
information be current and publicly available as a component of the 
review requirement, and thus a broker-dealer or qualified IDQS would 
not be able to comply with the information review requirement under the 
amended Rule for securities that lose piggyback eligibility as a result 
of their issuers' paragraph (b) information not being current and 
publicly available.
    To the extent that paragraph (b) information becomes current and 
publicly available after the loss of the piggyback exception, a broker-
dealer or qualified IDQS would need to comply with the information 
review requirement in order to be able to publish or submit a quotation 
for such OTC security.
    There were 3,095 securities of issuers of quoted OTC securities in 
2019 without current and publicly available information.\581\ 946 of 
these issuers were issuers referenced in paragraph (f)(3)(i)(C)(1) that 
are delinquent in their filing obligations with the Commission.\582\ As 
is the case in the context of one-way priced quotations, it is unclear 
whether broker-dealers would conduct the required review for securities 
of issuers subject to the provision in paragraph (f)(3)(i)(C) that lose 
piggyback eligibility. Taking a conservative approach in assessing the 
burden that may arise under this amendment to the piggyback exception, 
the Commission estimates that broker-dealers would comply with the 
information review requirement once annually for each such security 
that would lose piggyback eligibility. Accordingly, this amendment 
would increase burdens by 17,789 hours.\583\
---------------------------------------------------------------------------

    \581\ This total consists of 969 securities of SEC reporting 
companies (including issuers that make filings pursuant to 
Regulation Crowdfunding)/Reg. A issuers/other reporting issuers, 85 
foreign private issuers, and 2,041 catch-all issuers.
    \582\ For purposes of the PRA analysis, the Commission assumes 
that each delinquent filer has not timely filed a quarterly, semi-
annual, or annual report, or filed a required report, within 180 
calendar days from the end of a reporting period.
    \583\ (969 securities of SEC reporting companies/Reg. A issuers/
other reporting issuers x 3 hours review and recordkeeping) + (85 
foreign private issuers x 7 hours review and recordkeeping) + (2,041 
catch-all issuers x 7 hours review and recordkeeping) = (2,907) + 
(595) + (14,287) = 17,789 hours.
---------------------------------------------------------------------------

    The Commission is revising the estimates of current burdens of the 
information review requirement based on the provision in paragraph 
(f)(3)(i)(B) of the amended Rule, which eliminates piggyback 
eligibility for quotations for securities of shell companies that are 
published or submitted 18 months following the publication or 
submission of the initial priced quotation for such issuer's security 
in an IDQS and for securities within 60 calendar days following a 
trading suspension under Section 12(k) of the Exchange Act. With 
respect to shell companies, as stated in the Economic Analysis, the 
Commission believes that approximately 460 securities of shell 
companies that are quoted in the OTC market would lose piggyback 
eligibility. The Commission also believes that there are approximately 
219 securities that were piggyback eligible within 60 calendar days 
following a trading suspension under Section 12(k) of the Exchange Act. 
As is the case in the context of one-way priced quotations, it is 
unclear whether broker-dealers would conduct the required review for 
securities of issuers subject to the provision in paragraph 
(f)(3)(i)(B) that lose piggyback eligibility. Taking a conservative 
approach in assessing the burden that may arise under this amendment to 
the piggyback exception, the Commission estimates that broker-dealers 
would comply with the information review requirement once annually for 
each such security that would lose piggyback eligibility. Accordingly, 
this amendment would increase burdens by 2,829 hours.\584\
---------------------------------------------------------------------------

    \584\ There were no securities of foreign issuers in either 
category below.
    For securities of shell companies: (306 securities of SEC 
reporting companies/Reg. A issuers/other reporting issuers x 3 hours 
review and recordkeeping) + (154 catch-all issuers x 7 hours review 
and recordkeeping) = (918) + (1,078) = 1,996 hours.
    For securities subject to trading suspensions: (175 securities 
of SEC reporting companies/Reg. A issuers/other reporting issuers x 
3 hours review and recordkeeping) + (44 catch-all issuers x 7 hours 
review and recordkeeping) = (525) + (308) = 833 hours.
    Grand total: (1,996) + (833) = 2,829 hours.

---------------------------------------------------------------------------

[[Page 68177]]

    In summary, the amendments to the piggyback exception would impact 
the burdens associated with the information review requirement in 
various ways. Paragraph (f)(3)(i)(A) of the amended Rule permits 
broker-dealers to piggyback on one-way priced quotations. The 
Commission estimates that this amendment would increase the annual 
burden by 1,496 hours. The provision in paragraph (f)(3)(i)(C) of the 
amended Rule permits broker-dealers to piggyback quotations of the 
securities of certain issuers only if paragraph (b) information is, 
depending on the regulatory status of the issuer, (1) current and 
publicly available, (2) timely filed, or (3) filed within 180 calendar 
days from a specified period. The Commission estimates that this 
amendment would increase the annual burden by 17,789 hours. The 
provision in paragraph (f)(3)(i)(B) of the amended Rule eliminates 
piggyback eligibility for quotations for securities of shell companies 
that are published or submitted 18 months following the publication or 
submission of the initial priced quotation for such issuer's security 
in an IDQS and for securities within 60 calendar days following a 
trading suspension under Section 12(k) of the Exchange Act. The 
Commission estimates that this amendment would increase the annual 
burden by 2,829 hours.
(b) Other Amendments
    Amendments to the Rule create a new exception that is intended to 
reduce burdens related to publishing or submitting quotations for OTC 
securities that are highly liquid and of an issuer that is well-
capitalized. Specifically, paragraph (f)(5) of the amended Rule 
provides an exception for securities with a worldwide ADTV value of at 
least $100,000 during the 60 calendar days immediately before the date 
of the publication of a quotation for such security, and of an issuer 
with $50 million in total assets and $10 million in shareholder's 
equity as reflected in the issuer's publicly available audited balance 
sheet issued within six months after the end of its most recent fiscal 
year. The amendment is estimated to reduce the burden of information 
collection by creating an exception from the information review 
requirement under the Rule for broker-dealers publishing or submitting 
quotations for OTC securities that are less susceptible to fraud or 
manipulation.
    The Commission estimates that approximately 180 of quoted OTC 
securities on an average day during calendar year 2019 would be 
eligible for the ADTV and asset test exception set forth in paragraph 
(f)(5) of the amended Rule.\585\ Approximately 35 percent (63) of these 
are securities of reporting issuers, approximately 63 percent (113) are 
securities of exempt foreign issuers, and approximately two percent (4) 
are securities of catch-all issuers.\586\ From this number of excepted 
securities (180) and the total number of quoted OTC securities 
(11,542), it can be estimated that the amendments would reduce the 
number of times broker-dealers conduct the required review by 
approximately 1.6 percent annually. Therefore, after rounding, the 
Commission estimates that the exceptions would reduce the number of 
times broker-dealers conduct the required review by six per year,\587\ 
twice with respect to securities of reporting issuers and four times 
with respect to securities of exempt foreign issuers and catch-all 
issuers,\588\ resulting in a total reduction of 34 burden hours per 
year.\589\
---------------------------------------------------------------------------

    \585\ See infra Part VI.C.1.c.
    \586\ See infra Part VI.C.1.c.
    \587\ 384 completions of the information review requirement x 
1.6% = 6.
    \588\ 6 x 35% for reporting issuers and 6 x 65% for exempt 
foreign issuers and catch-all issuers.
    \589\ [2 (regarding securities of reporting issuer) x 3 hours] + 
[4 (regarding securities of exempt foreign issuers and catch-all 
issuer) x 7 hours] = (6 hours) + (28 hours) = 34 hours.
---------------------------------------------------------------------------

    The Commission also believes, however, that amendments to other 
Rule exceptions--namely, those set forth in paragraphs (f)(2)(ii) and 
(f)(6) of the amended Rule--do not impact the burden of the information 
review requirement. More specifically, paragraph (f)(2)(ii) of the 
amended Rule, which provides an exception for a broker-dealer to 
publish or submit a quotation by or on behalf of certain company 
insiders and affiliates of the issuer in reliance on the unsolicited 
quotation exception only if paragraph (b) information is current and 
publicly available,\590\ limits the availability of the unsolicited 
quotation exception in certain circumstances. This amendment would not 
decrease the burden of the information review requirement, however, 
because under paragraph (f)(2) of the former Rule, broker-dealers were 
not required to conduct an information review before publishing or 
submitting a quotation that represented a customer's unsolicited 
indication of interest. Nor would this amendment increase the burden of 
the information review requirement: If the unsolicited quotation 
exception becomes unavailable due to this amendment, broker-dealers 
would not be able to comply with the information review requirement as 
an alternative to utilizing this exception because current and publicly 
available information is a condition of the information review 
requirement in paragraphs (a)(1)(ii) and (a)(2)(ii) of the amended 
Rule.\591\
---------------------------------------------------------------------------

    \590\ The burden related to a broker-dealer's determination of 
whether paragraph (b) is current and publicly available is discussed 
below.
    \591\ The unsolicited quotation exception, as adopted, adds the 
term ``affiliate'' to enhance the investor protections under the 
proposed amendments by capturing more fully the types of persons 
with the potential for a heightened incentive to manipulate the 
price of a security. The addition of the word ``affiliate'' has no 
impact on the burden of the information review requirement, for the 
reasons described above.
---------------------------------------------------------------------------

    Further, paragraph (f)(6) of the amended Rule provides an exception 
from the information review requirement for certain quotations of 
broker-dealers named as underwriters in the registration statement or 
offering statement of a security within the time frames specified in 
paragraphs (b)(1) or (b)(2) of the amended Rule, as applicable. The 
Commission believes that no broker-dealer would be required to comply 
with the information review requirement for quoted OTC securities that 
meet the requirements of the underwriter exception. While it is 
estimated that this amendment would result in a slight reduction in the 
number of times broker-dealers comply with the information review 
requirement annually, out of an abundance of caution given the lack of 
granular data, the Commission has not decreased the overall burden 
estimates associated with the information review requirement as a 
result of the underwritten offering exception provided in paragraph 
(f)(6) of the amended Rule.

[[Page 68178]]



            PRA Table 1--Summary of Estimated Burdens Associated With Initial Publication or Submission of a Quotation in a Quotation Medium
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             Number of
                                                                                                             times the     Annual burden
                                            Type of issuer            Type of burden      Initial burden     specified     per response   Total industry
                                                                                                \a\       information is      (hours)     burden (hours)
                                                                                                             reviewed
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Information Review                                            Information review requirement absent changes \b\
 Requirement Burdens.
                                      ------------------------------------------------------------------------------------------------------------------
                                       Prospectus, Reg. A, or    Recordkeeping and                     0              87               3             261
                                        reporting issuers.        Review.
                                       Exempt foreign private    Recordkeeping and                     0             253               7           1,771
                                        issuers.                  Review.
                                       Catch-all issuers.......  Recordkeeping and                     0              44               7             308
                                                                  Review.
                                      ------------------------------------------------------------------------------------------------------------------
Changes to Exceptions................                Limiting piggyback exception to at least a bid or offer quotation at a specified price
                                      ------------------------------------------------------------------------------------------------------------------
                                       Prospectus, Reg. A, or    Recordkeeping and                     0              88               3             264
                                        reporting issuers.        Review.
                                       Exempt foreign private    Recordkeeping and                     0             143               7           1,001
                                        issuers.                  Review.
                                       Catch-all issuers.......  Recordkeeping and                     0              33               7             231
                                                                  Review.
                                      ------------------------------------------------------------------------------------------------------------------
                                         Requiring publicly available paragraph (b) information within specified time frames for issuers' securities to
                                                                                    remain piggyback eligible
                                      ------------------------------------------------------------------------------------------------------------------
                                       Prospectus, Reg. A, or    Recordkeeping and                     0             969               3           2,907
                                        reporting issuers.        Review.
                                       Exempt foreign private    Recordkeeping and                     0              85               7             595
                                        issuers.                  Review.
                                       Catch-all issuers.......  Recordkeeping and                     0           2,041               7          14,287
                                                                  Review.
                                      ------------------------------------------------------------------------------------------------------------------
                                                              Eliminating piggyback eligibility for securities of shell companies
                                      ------------------------------------------------------------------------------------------------------------------
                                       Prospectus, Reg. A, or    Recordkeeping and                     0             306               3             918
                                        reporting issuers.        Review.
                                       Catch-all issuers.......  Recordkeeping and                     0             154               7           1,078
                                                                  Review.
                                      ------------------------------------------------------------------------------------------------------------------
                                                     Eliminating piggyback eligibility for securities subject to a trading suspension order
                                      ------------------------------------------------------------------------------------------------------------------
                                       Prospectus, Reg. A, or    Recordkeeping and                     0             175               3             525
                                        reporting issuers.        Review.
                                       Catch-all issuers.......  Recordkeeping and                     0              44               7             308
                                                                  Review.
                                      ------------------------------------------------------------------------------------------------------------------
                                                        Exception for securities that meet ADTV and asset test (decreases annual burden)
                                      ------------------------------------------------------------------------------------------------------------------
                                       Prospectus, Reg. A, or    Recordkeeping and                     0               2               3               6
                                        reporting issuers.        Review.
                                       Exempt foreign private    Recordkeeping and                     0               4               7              28
                                        issuers and catch-all     Review.
                                        issuers.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ As mentioned above, it is not expected that the changes to the information review requirement effected by the amendments would create any initial
  one-time burden as it is unlikely that broker-dealers would need to modify their systems or conduct training to comply with the information review
  requirement under the amended Rule.
\b\ Because the exception for securities that meet the ADTV and asset tests would decrease the annual burden from the 2019 baseline, the numbers in this
  section of the chart reflect the number of times the specified information was reviewed in 2019, multiplied by the hourly burden estimates for
  compliance with the information review requirement.

2. Other Burden Hours

    The amendments also create burdens relating to recordkeeping 
obligations under the amended Rule. The amendments update the 
recordkeeping requirements under the Rule to require broker-dealers, 
qualified IDQSs, and registered national securities associations to 
keep records that demonstrate that the requirements of a Rule exception 
are met.\592\ The types of documentation that a broker-dealer, 
qualified IDQS, or registered national securities association would 
need to maintain would vary based upon the exception. Certain 
exceptions, such as the unsolicited quotation exception,\593\ require 
that paragraph (b) information be current and publicly available. 
Additionally, the piggyback exception \594\ requires that paragraph (b) 
information be (1) filed within 180 calendar days from the end of a 
reporting period for issuers referenced in paragraph (f)(3)(i)(C)(1) of 
the amended Rule, (2) timely filed for issuers referenced in paragraph 
(f)(3)(i)(C)(2), or (3) current and publicly available for issuers 
referenced in paragraph (f)(3)(i)(C)(3). Notably, however, the 
amendments except from these recordkeeping requirements any paragraph 
(b) information that is available on EDGAR. The Commission believes 
that the requirement in these exceptions to have paragraph (b) 
information current and publicly available, timely filed, or filed 
within 180 calendar days from a specified period would create ongoing 
recordkeeping burdens for broker-dealers under paragraph (d)(2) of the 
amended Rule.
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    \592\ Amended Rule 15c2-11(d)(2).
    \593\ Amended Rule 15c2-11(f)(2).
    \594\ Amended Rule 15c2-11(f)(3).
---------------------------------------------------------------------------

    As shown in the Table 3 of the Economic Analysis, there are 9,895 
unique issuers of quoted OTC securities for which broker-dealers would 
be required to maintain records to establish that paragraph (b) 
information is, depending on the regulatory status of the issuer, 
current and publicly available, timely filed, or filed within 180 
calendar days from the specified period. Of these 9,895 issuers, 3,081 
are SEC/Reg. A/Bank Reporting Obligation issuers, 4,413 are exempt 
foreign private issuers, and 2,401 are catch-all issuers.\595\ It is 
estimated that it would take one minute to create documentation 
regarding the determination that paragraph (b)

[[Page 68179]]

information is current and publicly available, timely filed, or filed 
within 180 calendar days from the specified period, as applicable; and 
that broker-dealers, qualified IDQSs, and registered national 
securities associations would create such documentation no more 
frequently than quarterly for SEC/Reg. A/bank reporting obligation 
issuers and foreign private issuers,\596\ and annually for catch-all 
issuers.\597\ Accordingly, each broker-dealer would spend approximately 
540 hours on this task annually, leading to a total annual burden of 
44,280 hours dispersed between 80 broker-dealers, one qualified IDQS, 
and one registered national securities association.\598\ The Commission 
believes that broker-dealers, qualified IDQSs, and a registered 
national securities association would already have systems and 
personnel in place to create these records, so the initial burden of 
putting procedures in place to ensure compliance with the amendments 
would be one hour of internal cost per broker-dealer, qualified IDQS, 
and registered national securities association to reprogram systems and 
capture records pursuant to the recordkeeping requirement, leading to 
an initial burden of 82 hours for the industry. Adding these values 
together, it is estimated that the total industry-wide burden for this 
documentation requirement would be 44,362 hours for the first year, and 
44,280 hours annually going forward.
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    \595\ See infra Part VI.B, Table 3.
    \596\ The amended Rule defines ``current'' to mean, for the 
documents and information specified in paragraph (b)(3) of the 
amended Rule, the most recently required annual report or statement 
filed pursuant to Section 13 or 15(d) of the Exchange Act and any 
rule(s) thereunder, Regulation A, Regulation Crowdfunding, or 
section 12(g)(2)(g) of the Exchange Act, together with any 
subsequently required periodic reports or statements, filed pursuant 
to section 13 or 15(d) of the Act and any rule(s) thereunder, 
Regulation A, Regulation Crowdfunding, or Section 12(G)(2)(g) of the 
Exchange Act. Accordingly, the definition of ``current'' includes 
quarterly reports, as well as semi-annual reports, depending on the 
issuer's reporting obligations. Paragraph (b)(4) of the amended Rule 
provides a similar standard for exempt foreign private issuer 
information, and calls for the information the issuer has published 
pursuant to 12g3-2(b) since the first day of the issuer's most 
recently completed fiscal year. The Commission expects that 
respondents will preserve records to document compliance with this 
requirement on a quarterly basis to capture quarterly reporting for 
these issuers. For purposes of this PRA analysis, the Commission has 
adopted a more conservative approach of grouping Reg. A issuers, 
which have a semi-annual obligation, with issuers with quarterly 
reporting obligations.
    \597\ Paragraph (b)(5)(i) of the amended Rule requires that the 
catch-all issuer information be as of a date within twelve months 
before the publication or submission of the quotation, except for 
certain financial information: A balance sheet (as of a date less 
than 16 months before the publication or submission of a broker-
dealer's quotation) and profit and loss and retained earnings 
statements (for the 12 months preceding the date of the most recent 
balance sheet). See supra Part II.B.3.
    \598\ [(3081 SEC/Reg. A/Bank Reporting Obligation issuers x 1 
minute x 4 responses per year) + (4,413 exempt foreign private 
issuers x 1 minute x 4 responses per year) + (2,401 catch-all 
issuers x 1 minute x 1 response per year)]/60 = (12,324 + 17,652 + 
2,401)/60 = 540 hours.
---------------------------------------------------------------------------

    The amendments would also create ongoing recordkeeping burdens for 
broker-dealers relying on exceptions under paragraphs (f)(2), (f)(3), 
(f)(5), (f)(6), or relying on a qualified IDQS's publicly available 
determination that it has complied with the information review 
requirement of the amended Rule (pursuant to paragraph 
(a)(1)(ii)).\599\
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    \599\ As discussed in Part II.A.3 above, the amendments collapse 
the exception in proposed paragraph (f)(7) into an unlawful activity 
provision of the amended Rule, paragraph (a)(1)(ii).
---------------------------------------------------------------------------

(a) Unsolicited Quotation Exception--Rule 15c2-11(f)(2)
    Although there is current and publicly available information for 
many issuers of securities involving unsolicited customer order 
quotations, out of an abundance of caution, the Commission is basing 
its estimate of recordkeeping obligations under this exception on data 
regarding all unsolicited customer quotations, and assuming that the 
number would remain consistent on an annual basis. According to OTC 
Markets Group data, there were 5,782,286 quotations published in 
reliance on the unsolicited quotation exception in 2019. Therefore, it 
is estimated that there would be 5,782,286 quotations published in 
reliance on the unsolicited quotation exception annually that would 
require documentation and information to demonstrate that the quotation 
is not by or on behalf of a company insider or an affiliate of the 
issuer.
    Further, it is estimated that it would take a broker-dealer 
approximately one minute to create a record regarding such unsolicited 
customer quotation or, pursuant to paragraph (f)(2)(iii) of the amended 
Rule, to review and document the written representation of a customer's 
broker that the quotation is not on behalf of a company insider or an 
affiliate of the issuer. Accordingly, it is estimated that annually, 
broker-dealers would spend approximately 96,371 hours \600\ in the 
aggregate (after rounding) complying with this recordkeeping 
requirement. These 96,371 hours would be dispersed between 80 broker-
dealers, leading to an annual burden of approximately 1,205 hours per 
broker-dealer.\601\
---------------------------------------------------------------------------

    \600\ (5,782,286 quotations x 1 minute)/60 minutes = 96,371 
hours.
    \601\ 96,371 hours/80 broker-dealers = 1,205 hours.
---------------------------------------------------------------------------

    The Commission believes that broker-dealers would already have 
administrative systems and procedures, as well as personnel, in place 
to document and record the circumstances involved in unsolicited 
customer quotations, and that the initial burden of putting procedures 
in place to ensure compliance with this amendment would be three hours 
of internal burden per broker-dealer to reprogram systems and capture 
the requisite records relating to unsolicited quotations,\602\ leading 
to an initial burden of 240 hours for the industry.\603\ Adding these 
values together, it is estimated that the total industry-wide burden 
for this documentation requirement would be 96,611 hours for the first 
year, and 96,371 hours annually going forward.
---------------------------------------------------------------------------

    \602\ This three-hour burden estimate to reprogram systems and 
capture records regarding the unsolicited quotation exception is 
separate from the information review requirement discussed in Part 
V.C.1, and is analogous to the time burden estimates in the 2010 
amendments to Regulation SHO. See Amendments to Regulation SHO, 
Exchange Act Release No. 61595, at 183, 193 (Feb. 26, 2010), 75 FR 
11232, 11283, 11286 (May 10, 2010) (``Regulation SHO Release'') 
(describing ongoing internal compliance time for SROs and ``non-SRO 
trading centers'' to ensure that their existing written policies and 
procedures are up-to-date and remain in compliance with 2010 
amendments to Rule 201 of Regulation SHO).
    \603\ Supplemental Material .01 to FINRA Rule 6432 requires that 
broker-dealers initiating or resuming quotations in reliance on the 
exception provided by Rule 15c2-11(f)(2) (i.e., the unsolicited 
quotation exception) must be able to demonstrate eligibility for the 
exception by making a contemporaneous record of (1) the 
identification of each associated person who receives the 
unsolicited customer order or indication of interest directly from 
the customer, if applicable; (2) the identity of the customer; (3) 
the date and time the unsolicited customer order or indication of 
interest was received; and (4) the terms of the unsolicited customer 
order or indication of interest that is the subject of the quotation 
(e.g., security name and symbol, size, side of the market, duration 
(if specified) and, if priced, the price). Given this FINRA 
recordkeeping requirement, the Commission believes that broker-
dealers will already have systems in place to document information 
related to the unsolicited quotation exception.
---------------------------------------------------------------------------

(b) Piggyback Exception--Rule 15c2-11(f)(3)
    The piggyback exception requires that there be no more than four 
business days in succession without a bid or offer priced quotation. To 
comply with the recordkeeping requirement in paragraph (d)(2) of the 
amended Rule, broker-dealers relying on the piggyback exception, and 
each qualified IDQS or registered national securities association that 
makes publicly available determinations regarding the availability of 
the piggyback exception, must preserve documents and

[[Page 68180]]

information regarding this frequency of priced bid or offer quotation 
requirement. The Commission estimates that broker-dealers, qualified 
IDQSs, and registered national securities associations would make 
determinations regarding the frequency of quotation requirement once 
per trading day.
    Further, it is estimated that it would take a broker-dealer, a 
qualified IDQS, or a registered national securities association 
approximately one second to create a record regarding the frequency of 
a priced bid or offer quotation, pursuant to paragraph (f)(3)(i) of the 
amended Rule. The Commission believes that one second is an appropriate 
estimate regarding the time it will take to create such a record 
because the Commission believes that such a record will be created 
through an automated process that will require minimal direct human 
intervention, if any. Accordingly, it is estimated that, annually, 
broker-dealers, qualified IDQSs, and a registered national securities 
association would spend approximately 66,251 hours \604\ in the 
aggregate (after rounding) complying with this recordkeeping 
requirement. These 66,251 hours would be dispersed between 80 broker-
dealers, one qualified IDQS, and one registered national securities 
association leading to an annual burden of approximately 808 hours per 
entity.\605\ The Commission believes that broker-dealers, qualified 
IDQSs, and a registered national securities association already have 
administrative systems and procedures, as well as personnel, in place 
to create these records, so the initial burden of putting procedures in 
place to ensure compliance with the amendments would be three hours of 
internal burden per broker-dealer, qualified IDQS, and registered 
national securities association leading to an initial burden of 246 
hours for these market participants to reprogram systems and capture 
the record relating the frequency of a priced bid or offer 
quotation.\606\ Adding these values together, it is estimated that the 
total industry-wide burden for this documentation requirement would be 
66,497 hours for the first year, and 66,251 hours annually going 
forward.
---------------------------------------------------------------------------

    \604\ (80 broker-dealers + 1 qualified IDQS + 1 registered 
national securities association) x (1/3600 (one second)) x (252 
trading days per year) x (11,542 securities) = 66,251 hours.
    \605\ 66,251 hours/(80 broker-dealers + 1 qualified IDQS + 1 
registered national securities association) = 808 hours.
    \606\ This three-hour burden estimate to reprogram systems and 
capture records regarding the frequency of priced bid or offer 
quotations is separate from the information review requirement 
discussed in Part V.C.1, and is analogous to the time burden 
estimates in the 2010 amendments to Regulation SHO. See Regulation 
SHO Release at 11283, 11286 (describing ongoing internal compliance 
time for self-regulatory organizations and ``non-SRO trading 
centers'' to ensure that their existing written policies and 
procedures are up-to-date and remain in compliance with 2010 
amendments to Rule 201 of Regulation SHO).
---------------------------------------------------------------------------

    A provision in paragraph (f)(3)(i)(B) of the amended Rule 
eliminates piggyback eligibility for quotations for securities of shell 
companies that are published or submitted 18 months following the 
publication or submission of the initial priced quotation for such 
issuer's security in an IDQS. To comply with the recordkeeping 
requirement in paragraph (d)(2) of the amended Rule, each broker-dealer 
relying on the piggyback exception, and each qualified IDQS or 
registered national securities association that makes publicly 
available determinations regarding the availability of the piggyback 
exception, must preserve documents and information regarding its 
determination that the issuer of a security is not a shell company. The 
Commission estimates that broker-dealers, qualified IDQSs, and 
registered national securities associations would make determinations 
regarding shell companies based on how frequently information for that 
issuer is filed or made current and publicly available. For example, a 
broker-dealer, qualified IDQS, or registered national securities 
association may determine that a reporting issuer is a shell company 
when its annual or periodic reports are filed. Similarly, a broker-
dealer, qualified IDQS, or registered national securities association 
may determine that a catch-all issuer is a shell company on an annual 
basis.\607\
---------------------------------------------------------------------------

    \607\ As discussed in Part II.I above, paragraph (d)(2) of the 
amended Rule requires broker-dealers, qualified IDQSs, and 
registered national securities associations to preserve only 
documents and information ``that demonstrate that the requirements 
for an exception under paragraph (f)(2), (f)(3), (f)(5), (f)(6), or 
(f)(7)'' are met. Accordingly, the Commission believes that while it 
may be likely that broker-dealers document the availability of this 
exception quarterly, they may do so more or less often in practice.
---------------------------------------------------------------------------

    The Commission estimates that broker-dealers, qualified IDQSs, and 
registered national securities associations would each spend, on 
average, one minute making a determination and preserving documents and 
information that demonstrate that an issuer of the OTC security is not 
a shell company. As stated above, one commenter stated that the 
Commission significantly underestimated the amount of time it would 
take a broker-dealer to determine whether an issuer is a shell 
company.\608\ Recognizing that there may be wide disparities in the 
time it may take to determine whether an issuer is a shell company, the 
Commission continues to believe that this one minute average estimate 
is correct for the PRA analysis.
---------------------------------------------------------------------------

    \608\ See Leonard Burningham Letters.
---------------------------------------------------------------------------

    Broker-dealers currently rely on the piggyback exception to publish 
quotations for 9,895 individual issuers. The time it takes to determine 
whether an individual issuer is a shell company varies, however, 
depending on whether the issuer discloses its shell company status. In 
some instances, it may take less than one minute to assess whether a 
company is a shell company, while in other instances, it may take 
longer than one minute.\609\ As discussed above, a broker-dealer, 
qualified IDQS, or registered national securities association may rely 
on an issuer's self-identification as a shell company in its review of 
the issuer's documents and information, for example, as specified in 
paragraph (b)(5)(i)(H) of the amended Rule regarding a description of 
the issuer's business.\610\ In such instances, broker-dealers, 
qualified IDQSs, and registered national securities associations will 
not need to conduct a detailed analysis regarding whether an issuer is 
a shell company for purposes of the piggyback exception based on the 
issuer's representation that it is (or is not) a shell company. The 
Commission believes that broker-dealers will have access to such 
statements made by issuers regarding shell company status in 
circumstances in which the issuer has an obligation to disclose its 
shell company status under the Federal securities laws,\611\ or when 
the issuer opts to reduce burdens on broker-dealers by disclosing shell 
company status to facilitate broker-dealers maintaining a quoted market 
in the securities of the issuer. For the foregoing reasons the 
Commission believes that one minute is an appropriate average estimated 
length of time to review and create a record of whether an issuer is a 
shell company.
---------------------------------------------------------------------------

    \609\ This estimate is analogous to the estimate of de minimis 
amounts of time necessary to collect identifying information about 
customers in circumstances in which broker-dealers already obtain 
the specified information about their customers. See Joint Final 
Rule: Customer Identification Programs for Broker-Dealers, Exchange 
Act Release No. 47752 (Apr. 29, 2003), 68 FR 25113, 25127 n.160 
(noting that requiring identifying information about customers 
``should not impose a significant additional burden'').
    \610\ See Part II.J.2.
    \611\ See, e.g., Forms 10-K, 10-Q, 1-A, and C.
---------------------------------------------------------------------------

    As stated in the Economic Analysis, there are 9,895 issuers of 
quoted OTC securities.\612\ Accordingly, each broker-

[[Page 68181]]

dealer would spend approximately 540 hours \613\ on this task annually, 
leading to a total annual burden of 44,280 hours dispersed between 80 
broker-dealers, one qualified IDQS, and one registered national 
securities association. The Commission believes that broker-dealers 
already have administrative systems and procedures, as well as 
personnel, in place to create these records, and that the initial 
burden of putting procedures in place to ensure compliance with the 
amendments would be three hours of internal burden per broker-dealer, 
qualified IDQS, and registered national securities association leading 
to an initial burden of 246 hours for the industry to reprogram systems 
and capture the record relating to the determination an issuer's shell 
company status.\614\ Adding these values together, it is estimated that 
the total industry-wide burden for this documentation requirement would 
be 44,526 hours for the first year, and 44,280 hours annually going 
forward.
---------------------------------------------------------------------------

    \612\ Some broker-dealers may not provide quotations for all OTC 
securities. Taking a conservative approach, however, the Commission 
estimates that each broker-dealer would determine the shell status 
of each issuer of a quoted OTC security on a quarterly basis.
    \613\ [(3081 SEC/Reg. A/Bank Reporting Obligation issuers x 1 
minute x 4 responses per year) + (4,413 exempt foreign private 
issuers x 1 minute x 4 responses per year) + (2,401 catch-all 
issuers x 1 minute x 1 response per year)]/60 = (12,324 + 17,652 + 
2,401)/60 = 540 hours.
    \614\ This three-hour burden estimate to reprogram systems and 
capture records regarding the determination of shell company status 
is separate from the information review requirement discussed in 
Part V.C.1, and is analogous to the time burden estimates in the 
2010 amendments to Regulation SHO. See Regulation SHO Release at 
11283, 11286 (describing ongoing internal compliance time for self-
regulatory organizations and ``non-SRO trading centers'' to ensure 
that their existing written policies and procedures are up-to-date 
and remain in compliance with 2010 amendments to Rule 201 of 
Regulation SHO).
---------------------------------------------------------------------------

    The amended Rule also limits the ability of a broker-dealer to rely 
on the piggyback exception with respect to a security that is the 
subject of a trading suspension order issued by the Commission pursuant 
to section 12(k) of the Exchange Act until 60 calendar days after the 
expiration of such order. The Commission believes that a broker-dealer, 
qualified IDQS, or registered national securities association would 
only create records for securities that have been the subject of a 
trading suspension issued by the Commission pursuant to section 12(k). 
In 2019, the Commission issued a trading suspension for 213 securities. 
Further, it is estimated that it would take a broker-dealer, qualified 
IDQS, or registered national securities association approximately one 
minute to create a record regarding whether a security has been subject 
to a trading suspension. Accordingly, it is estimated that, annually, 
broker-dealers, qualified IDQSs, and registered national securities 
associations would spend approximately 291 hours \615\ in the aggregate 
(after rounding) complying with this recordkeeping requirement. These 
291 hours would be dispersed among 80 broker-dealers, one qualified 
IDQS, and one registered national securities association leading to an 
annual burden of approximately 4 hours (after rounding) per 
entity.\616\
---------------------------------------------------------------------------

    \615\ (80 broker-dealers + 1 qualified IDQS + 1 registered 
national securities association) x (1/60 hour) x (213 securities) = 
291 hours.
    \616\ 291 hours/(80 broker-dealers + 1 qualified IDQS + 1 
registered national securities association) = 4 hours.
---------------------------------------------------------------------------

    The Commission believes that broker-dealers, qualified IDQSs, and 
registered national securities associations already have administrative 
systems and procedures as well as personnel in place to create records 
regarding whether a security has been subject to a trading suspension, 
and that the initial burden of putting procedures in place to ensure 
compliance with the amendments would be three hours of internal burden 
per broker-dealer, qualified IDQS, and registered national securities 
association, leading to an initial burden of 246 hours for these market 
participants to reprogram systems and capture the record relating to 
the prohibition for reliance on the piggyback exception until 60 
calendar days after the expiration of a Commission trading suspension 
order issued pursuant to section 12(k) of the Exchange Act.\617\ Adding 
these values together, it is estimated that the total industry-wide 
burden for this documentation requirement would be 537 hours for the 
first year, and 291 hours annually going forward.
---------------------------------------------------------------------------

    \617\ This three-hour burden estimate to reprogram systems and 
capture records regarding trading suspensions is separate from the 
information review requirement discussed in Part V.C.1, and is 
analogous to the time burden estimates in the 2010 amendments to 
Regulation SHO. See Regulation SHO Release (describing ongoing 
internal compliance time for self-regulatory organizations and 
``non-SRO trading centers'' to ensure that their existing written 
policies and procedures are up-to-date and remain in compliance with 
2010 amendments to Rule 201 of Regulation SHO).
---------------------------------------------------------------------------

(c) ADTV and Asset Test Exception--Rule 15c2-11(f)(5)
    As stated in the Economic Analysis, it is estimated that there 
would be approximately 180 securities that would meet the amended Rule 
paragraph (f)(5) ADTV and asset tests. In addition to preserving 
documents and information that demonstrate paragraph (b) information is 
current and publicly available, as discussed above, the broker-dealer, 
qualified IDQS, or registered national securities association would 
need to preserve documents and information that demonstrate that the 
various requirements of the ADTV test and asset test have been met. It 
is estimated that it would take one minute to create documentation 
supporting the broker-dealer's reliance on the asset test prong of the 
exception and that broker-dealers would do this once annually per 
issuer.\618\ Accordingly, broker-dealers, qualified IDQSs, and 
registered national securities associations would spend approximately 3 
hours \619\ on this information collection annually, leading to an 
ongoing burden of approximately 246 hours dispersed between 80 broker-
dealers, one qualified IDQS, and one registered national securities 
association.
---------------------------------------------------------------------------

    \618\ As discussed in Part II.I above, paragraph (d)(2) of the 
amended Rule requires broker-dealers, qualified IDQSs, and 
registered national securities associations to preserve only 
documents and information ``that demonstrate that the requirements 
for an exception under paragraph (f)(2), (f)(3), (f)(5), (f)(6), or 
(f)(7) are met.'' Accordingly, the Commission believes that broker-
dealers would likely document the availability of this exception 
annually because the test is based on audited balance sheets issues 
within six months of the end of the most recent fiscal year.
    \619\ (180 securities x 1 minute)/60 minutes = 3 hours.
---------------------------------------------------------------------------

    Additionally, the Commission estimates that it would take one 
minute for a broker-dealer, qualified IDQS, or registered national 
securities association to preserve documents and information that 
demonstrate that the requirements of the ADTV test have been met and 
that each respondent would do this 252 times a year (i.e., each trading 
day). Accordingly, each respondent would spend approximately 756 hours 
\620\ on this information collection annually, leading to an ongoing 
burden of approximately 61,992 hours dispersed between 80 broker-
dealers, one qualified IDQS, and one registered national securities 
association. The Commission believes that broker-dealers, the qualified 
IDQS, and the registered national securities association would already 
have administrative systems and procedures, as well as personnel, in 
place to create these records, and that the initial burden of putting 
procedures in place to ensure compliance would be three hours of 
internal burden per broker-dealer, qualified IDQS, and registered 
national securities association, leading to an initial burden of 246 
hours for the industry to reprogram systems and capture the record 
regarding whether the requirements of the ADTV and asset

[[Page 68182]]

tests have been met.\621\ Adding these values together, it is estimated 
that, after rounding, the total industry-wide requirement would be 
62,238 hours for the first year, and 61,992 hours annually going 
forward.
---------------------------------------------------------------------------

    \620\ (252 trading days per year x 180 securities x 1 minute)/60 
minutes = 756 hours.
    \621\ This three-hour burden estimate to reprogram systems and 
capture records regarding ADTV and asset tests is separate from the 
information review requirement discussed in Part V.C.1, and is 
analogous to the time burden estimates in the 2010 amendments to 
Regulation SHO. See Regulation SHO Release at 11283, 11286 
(describing ongoing internal compliance time for self-regulatory 
organizations and ``non-SRO trading centers'' to ensure that their 
existing written policies and procedures are up-to-date and remain 
in compliance with 2010 amendments to Rule 201 of Regulation SHO).
---------------------------------------------------------------------------

(d) Underwritten Offering Exception--Rule 15c2-11(f)(6)
    Paragraph (f)(6) of the amended Rule excepts from the information 
review requirement quotations for a security by a broker-dealer that is 
named as underwriter in a security's registration statement referenced 
in paragraph (b)(1) or in an offering statement referenced in paragraph 
(b)(2) of the amended Rule, subject to the time limitations contained 
in those sections of the amended Rule. Registration statements and 
offering statements are filed in EDGAR. Because the provision in 
paragraph (d)(2)(ii) of the amended Rule does not require broker-
dealers to preserve paragraph (b) information that is available on 
EDGAR, the Commission is not estimating any initial or ongoing 
recordkeeping burden to be associated with this exception.
(e) Exchange-Traded Security Exception and Municipal Security 
Exception--Rule 15c2-11(f)(1), (f)(4)
    Amendments to the amended Rule provide exceptions for quotations 
for: (1) A security admitted to trading on a national securities 
exchange and which is traded on such an exchange on the same day as, or 
on the business day immediately preceding, the day of the quote 
(paragraph (f)(1)), and (2) a municipal security (paragraph (f)(4)). 
The Commission is not estimating any initial or ongoing burden with 
respect to these exceptions because the provision in paragraph (d)(2) 
of the amended Rule does not require broker-dealers, qualified IDQSs, 
or registered national securities association to preserve records under 
paragraph (d)(2) for the paragraph (f)(1) or paragraph (f)(4) 
exceptions.
(f) Broker-Dealer That Publishes a Qualified IDQS Review Quotation--
Rule 15c2-11(a)(1)(ii)
    Paragraph (a)(1)(ii) of the amended Rule allows broker-dealers to 
rely on a qualified IDQS's publicly available determination that it 
complied with the information review requirement. Paragraph (d)(1)(ii) 
of the amended Rule requires that broker-dealers maintain a record of 
the name of the qualified IDQS that made such publicly available 
determination. It is unclear for how many OTC securities qualified 
IDQSs might choose to comply with the information review requirement 
under the amended Rule.
    This provision, which collapses the proposed qualified IDQS review 
exception into an unlawful activity provision of the amended Rule, 
pertains to the application of the information review requirement with 
respect to certain securities that are less likely to be targeted for 
fraudulent activity (e.g., securities of large cap foreign issuers). 
The Commission conservatively estimates that qualified IDQSs would 
conduct the required review for five percent of this subset of quoted 
OTC securities \622\ and that each broker-dealer would document its 
reliance on a qualified IDQS's compliance with the information review 
requirement once per year per issuer.\623\ Assuming that the 
information required to document compliance with the information review 
requirement for this subset of OTC securities would be publicly 
available, the Commission estimates that each broker-dealer would spend 
approximately one minute creating each record. Accordingly, broker-
dealers would spend approximately 0.22 hours \624\ on this information 
collection annually leading to an ongoing burden of approximately 18 
hours (after rounding) \625\ dispersed between 80 broker-dealers. The 
Commission believes that broker-dealers would already have 
administrative systems and procedures, as well as personnel, in place 
to create these records, and that the initial burden of putting 
procedures in place to ensure compliance with the amendments would be 
three hours of internal burden per broker-dealer leading to an initial 
burden of 240 hours for the industry to reprogram systems and capture 
the record documenting its reliance the publicly available 
determination by a qualified IDQS that such qualified IDQS complied 
with the information review requirement.\626\ Adding these values 
together, it is estimated that the total industry-wide burden for this 
documentation requirement would be 258 hours for the first year, and 18 
hours annually going forward.
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    \622\ According to FINRA Form 211 data, broker-dealers complied 
with the information review requirement 384 times, five percent of 
which, after rounding, is 19 issuers. The Commission believes that, 
given the relatively large number of foreign issuers of quoted OTC 
securities, five percent is a reasonable estimate for the proportion 
of securities that would be reviewed by qualified IDQSs.
    \623\ As discussed in Part II.A.3 above, under the amended Rule, 
broker-dealers can only rely on this provision for a limited period 
of time. The Commission, therefore, estimates that the securities 
that are quoted under this provision would either become eligible 
for the piggyback exception or would not be eligible for quotations 
for the remainder of the year given the lack of interest in the 
market.
    \624\ 13 issuers x 1 minute = 13 minutes or 0.22 hours.
    \625\ 0.22 hours x 80 broker-dealers = 18 hours.
    \626\ This three-hour burden estimate to reprogram systems and 
capture records regarding publicly available determinations that a 
qualified IDQS complied with the information review requirement is 
separate from the information review requirement discussed in Part 
V.C.1, and is analogous to the time burden estimates in the 2010 
amendments to Regulation SHO. See Regulation SHO Release at 11283, 
11286 (describing ongoing internal compliance time for self-
regulatory organizations and ``non-SRO trading centers'' to ensure 
that their existing written policies and procedures are up-to-date 
and remain in compliance with 2010 amendments to Rule 201 of 
Regulation SHO).
---------------------------------------------------------------------------

(g) Policies and Procedures for a Qualified IDQS or Registered National 
Securities Association To Make a Publicly Available Determination--Rule 
15c2-11(a)(3)
    Under the amended Rule, a qualified IDQS or registered national 
securities association must establish, maintain, and enforce reasonably 
designed written policies and procedures to make certain publicly 
available determinations.\627\ The Commission estimates that it would 
take one qualified IDQS and one registered national securities 
association subject to the amended Rule approximately 18 hours of 
initial burden each to initially prepare these written policies and 
procedures, and an ongoing annual burden of 10 hours each to review and 
update policies and procedures. Given the sophistication of the 
qualified IDQS and the registered national securities association, the 
Commission estimates that this burden would be borne internally. 
Accordingly, the total industry-wide burden for this documentation 
requirement would be

[[Page 68183]]

36 hours for the first year, and 20 hours annually going forward.
---------------------------------------------------------------------------

    \627\ Amended Rule 15c2-11(a)(3). The amended Rule replaces the 
proposed requirement that a qualified IDQS or registered national 
securities association make a publicly available determination that 
it has reasonably designed written policies and procedures, with a 
requirement that such an entity establish, maintain, and enforce 
reasonably designed policies and procedures to make certain publicly 
available determinations--namely, whether issuer information is 
current and publicly available, and, in some instances, whether the 
requirements of an exception under the Rule are met. See supra Part 
II.A.4. The time burden under both the proposed requirement and the 
requirement under the amended Rule is the same--the time to 
initially prepare such written policies and procedures, and any 
ongoing annual burden to review and update such policies and 
procedures.
---------------------------------------------------------------------------

(h) Broker-Dealer Recordkeeping in Reliance on Publicly Available 
Determinations by a Qualified IDQS or Registered National Securities 
Association--Rule 15c2-11(d)(2)(ii)
    Paragraph (d)(2)(ii) of the amended Rule requires broker-dealers 
that rely on publicly available determinations described in paragraph 
(f)(2)(iii)(B) or (f)(3)(ii)(A) to preserve the name of the qualified 
IDQS or registered national securities association that made such a 
determination. Paragraph (d)(2)(ii) of the amended Rule also requires 
that broker-dealers that rely on publicly available determinations 
described in paragraph (f)(7) of the amended Rule preserve a record of 
the exception upon which the broker-dealer is relying and the name of 
the qualified IDQS or registered national securities association that 
determined that the requirements of that exception are met. The 
Commission estimates that broker-dealers would create documents as 
required by paragraph (d)(2)(ii) each trading day. The Commission 
estimates that each broker-dealer would spend approximately one second 
creating such a record. The Commission believes that one second is an 
appropriate estimate regarding the time it will take to create such a 
record because the Commission believes that such a record will be 
created through an automated process that will require minimal direct 
human intervention, if any. Accordingly, broker-dealers would spend 
approximately 808 hours \628\ on this information collection annually 
leading to an ongoing burden of approximately 64,635 hours \629\ 
dispersed between 80 broker-dealers. The Commission believes that 
broker-dealers would already have administrative systems and 
procedures, as well as personnel, in place to create these records, and 
that the initial burden of putting procedures in place to ensure 
compliance with the recordkeeping requirement under paragraph 
(d)(2)(ii) would be three hours of internal cost per broker-dealer 
leading to an initial burden of 240 hours for the industry to reprogram 
systems and capture the record documenting its reliance the publicly 
available determination by a qualified IDQS or registered national 
securities association.\630\ Adding these values together, it is 
estimated that the total industry-wide burden for this documentation 
requirement would be 64,875 hours for the first year, and 64,635 hours 
annually going forward.
---------------------------------------------------------------------------

    \628\ 64,635 hours/80 broker-dealers = 808 hours.
    \629\ (80 broker-dealers) x (1/3600 (one second)) x (252 trading 
days per year) x (11,542 securities) = 64,635 hours.
    \630\ This three-hour burden estimate to reprogram systems and 
capture records regarding publicly available determinations by a 
qualified IDQS or registered national securities association is 
separate from the information review requirement discussed in Part 
V.C.1, and is analogous to the time burden estimates in the 2010 
amendments to Regulation SHO. See Regulation SHO Release at 11283, 
11286 (describing ongoing internal compliance time for self-
regulatory organizations and ``non-SRO trading centers'' to ensure 
that their existing written policies and procedures are up-to-date 
and remain in compliance with 2010 amendments to Rule 201 of 
Regulation SHO).

                                 PRA Table 2--Summary of Estimated Other Burdens
----------------------------------------------------------------------------------------------------------------
                                                                     Number of     Total initial   Total annual
            Requirement                    Type of burden            entities        industry        industry
                                                                     impacted         burden          burden
----------------------------------------------------------------------------------------------------------------
Recordkeeping when relying on an    Recordkeeping...............              82              82          44,280
 exception under paragraph (f),
 that paragraph (b) information is
 current and publicly available.
Recordkeeping obligations under     Recordkeeping...............              80             240          96,371
 unsolicited quotation exception
 under paragraph (f)(2).
Recordkeeping obligations           Recordkeeping...............              82             246          66,251
 regarding frequency of a priced
 bid or offer quotation under
 paragraph (f)(3)(i)(A).
Recordkeeping obligations           Recordkeeping...............              82             246          44,280
 regarding determining shell
 status under the provision in
 paragraph (f)(3)(i)(B).
Recordkeeping obligations           Recordkeeping...............              82             246             291
 regarding trading suspensions
 under the provision in paragraph
 (f)(3)(i)(B).
Recordkeeping obligations for the   Recordkeeping...............              82             246             246
 exceptions under paragraph
 (f)(5)--Asset Test.
Recordkeeping obligations for the   Recordkeeping...............              82               0          61,992
 exceptions under paragraph
 (f)(5)--ADTV Test.
Recordkeeping obligations of        Recordkeeping...............              80             240              18
 qualified IDQS complying with
 information review requirement
 pursuant to paragraph (a)(2).
Recordkeeping obligations related   Recordkeeping...............               2              36              20
 to the creation of reasonable
 written policies and procedures
 under paragraph (a)(3).
Recordkeeping obligations of        Recordkeeping...............              80             240          64,635
 broker-dealers relying on
 publicly available determinations
 by qualified IDQSs or registered
 national securities associations
 pursuant to paragraph (d)(2)(ii).
----------------------------------------------------------------------------------------------------------------

3. Collection of Information Is Mandatory
    The information collections for the information review requirement 
and recordkeeping requirement are mandatory under the amendments to the 
Rule if a broker-dealer wishes to provide the initial publication or 
submission of a quotation for an OTC security. Additionally, the 
information collections involving documentation and information that 
demonstrate that the requirements for an exception have been met are 
mandatory under the amendments if a broker-dealer submits or publishes 
quotations that rely on an exception in paragraph (f) of the amended 
Rule.
4. Confidentiality
    The Commission would not typically receive confidential information 
as a result of this collection of information. To the extent that the 
Commission receives--through its examination and oversight program, 
through an investigation, or by some other means--records or 
disclosures from a qualified IDQS or registered broker-dealer that 
concern the information review requirement and that are not publicly 
available, such information would be kept confidential, subject to the 
provisions of applicable law. Likewise, to the extent that the 
Commission receives--through its examination and oversight program, or 
through an investigation, or by some other means--

[[Page 68184]]

records from a qualified IDQS, registered national securities 
association, or registered broker-dealer that are related to reliance 
on an exception contained in paragraph (f) of the amended Rule and that 
are not publicly available, such information would be kept 
confidential, subject to the provisions of applicable law.
5. Retention Period of Recordkeeping Requirement
    Under paragraph (d)(1) of the amended Rule, a broker-dealer 
publishing or submitting a quotation, or a qualified IDQS that makes 
known to others the quotation of a broker-dealer pursuant to paragraph 
(a)(2) of the amended Rule, must preserve the documents and information 
for a period of not less than three years, the first two years in an 
easily accessible place. Under paragraph (d)(2) of the amended Rule, a 
broker-dealer publishing or submitting a quotation, or a qualified 
IDQS, or a registered national securities association that makes a 
publicly available determination pursuant to paragraphs (f)(2)(iii)(B), 
(f)(3)(ii)(A), or (f)(7) of the amended Rule must preserve the 
documents and information for a period of not less than three years, 
the first two years in an easily accessible place.

VI. Economic Analysis

A. Background

    The amended Rule updates investor protection requirements in light 
of the substantial reductions in costs for information acquisition and 
dissemination due to modern technology. These changes are expected to 
better protect retail investors from incidents of fraud and 
manipulation in OTC securities, particularly the securities of issuers 
for which there is no or limited publicly available information. These 
amendments are also intended to reduce regulatory burdens on broker-
dealers for publication of quotations of certain OTC securities that 
may be less susceptible to potential fraud and manipulation, such as 
highly liquid securities of certain well-capitalized issuers and 
securities that were issued in offerings underwritten by the broker-
dealer publishing the quote.
    The Commission is mindful of the costs imposed by and the benefits 
obtained from the Commission's rules. Exchange Act Section 3(f) 
requires the Commission, when engaging in rulemaking that requires 
consideration or determination of whether an action is necessary or 
appropriate in the public interest, also to consider, in addition to 
the protection of investors, whether the action will promote 
efficiency, competition, and capital formation. Additionally, Exchange 
Act Section 23(a)(2) requires the Commission, when adopting rules under 
the Exchange Act, to consider the impact that any new rule will have on 
competition and not to adopt any rule that will impose a burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Exchange Act.
    The discussion below addresses the expected economic effects of 
these amendments, including the likely benefits and costs, as well as 
the likely effects of the amendments on efficiency, competition, and 
capital formation. The Commission has, where possible, quantified the 
economic effects that are expected to result from these amendments in 
the analysis below. However, the Commission is unable to quantify some 
of the potential effects discussed below.
    First, it is unclear to what extent current and publicly available 
paragraph (b) information would influence OTC investors' investment 
decisions and how these decisions might affect the welfare of these 
investors.\631\ In addition, the Commission is unable to estimate 
certain costs with precision because it lacks data on the degree of 
activity by and concentration in this market of individual broker-
dealers with respect to publishing quotes for OTC securities.\632\ 
Wherever possible, if more precise estimates were not feasible, the 
Commission has estimated a range or bound associated with the costs of 
the amendments. Lastly, the Commission is unable to quantify the extent 
to which the amendments to the Rule would impact entry of issuers into 
the quoted OTC market or the migration between securities in the quoted 
OTC market and the grey market, in which trades in OTC securities occur 
without broker-dealers publishing quotations in a quotation medium. 
Therefore, much of the discussion below is qualitative in nature, 
although the Commission describes, where possible, the direction of 
these effects.
---------------------------------------------------------------------------

    \631\ For example, the effect of investment decisions on the 
welfare of the investor depends on the individual's preference for 
risk and return. The Commission lacks data not only on the effect of 
disclosure on investment decisions, but also the preferences of OTC 
investors.
    \632\ For example, the Commission lacks data on the number and 
identities of broker-dealers that are publishing quotes for OTC 
securities in reliance on the piggyback exception or other 
exceptions to the Rule; much of the analysis in this release is done 
at the security- or issuer-level.
---------------------------------------------------------------------------

B. Baseline and Affected Parties

1. Affected Parties
    The final amendments to the Rule would affect broker-dealers that 
publish or submit quotations for OTC securities. Besides broker-dealers 
and qualified IDQSs, affected parties include issuers of quoted OTC 
securities and investors in these securities (either investors already 
holding a position in OTC securities or those seeking to acquire such a 
position).\633\ The Commission assesses the economic effects of the 
amendments relative to the baseline of existing requirements and 
practices in the OTC market. Registered broker-dealers participate in 
the market for quoted OTC securities by publishing priced and unpriced 
quotations representing customer interest in trading, executing 
customer orders, and acting as market makers.\634\ OTC Markets Group 
identifies 80 broker-dealers that are active on the OTC Link ATS in OTC 
securities.\635\ Thirty-four broker-dealers filed at least one FINRA 
Form 211 in order to initiate the publication or submission of 
quotations for an OTC security during the calendar year 2019.\636\
---------------------------------------------------------------------------

    \633\ The Commission does not have data to estimate the number 
of investors currently participating in the OTC securities market.
    \634\ In addition to the Rule, the regulatory baseline includes 
SRO rules governing the process of broker-dealers' publication of 
quotations for OTC securities. In particular, FINRA Rule 6432 
requires broker-dealers to file Form 211 when initiating or resuming 
quotations in OTC securities to ensure compliance with the 
information requirements of the Rule. See supra Part II.J.1.
    \635\ See Broker-Dealer Directory, OTC Mkts. Grp. Inc., https://www.otcmarkets.com/otc-link/broker-dealer-directory (last visited 
Apr. 24, 2020, 2:35 PM). The Commission expects that not all of the 
broker-dealers included in the directory are actively engaged in 
quoting OTC securities.
    \636\ The Commission received information on FINRA Form 211 
filings from FINRA. The total number of FINRA Form 211 filings for 
calendar year 2019 was 384 and each broker-dealer filed this form 
for approximately 11 OTC securities on average. The total number of 
FINRA Form 211 filings has been declining since 2013, the earliest 
year of data available to the Commission, when the total number of 
FINRA Form 211 filings was 830.
    One commenter stated that the count of unique broker-dealers 
filing FINRA Form 211 does not accurately represent the 
concentration of broker-dealers conducting the initial information 
review because the vast majority of securities that were approved 
for trading were foreign securities that were already listed on a 
foreign exchange. In addition, the commenter stated that only four 
broker-dealers conducted the initial information review for the 
remaining domestic issuers and since 2018, three of these broker-
dealers have ceased this activity. See Coral Capital Letter. Based 
on information provided by FINRA, 66 percent of FINRA FORM 211 
filings were for securities of foreign issuers, and that fraction 
has been relatively stable since 2013. Further, the commenter's 
analysis may not fully capture all FINRA Form 211 filing activity 
because according to data available to the Commission, 28 unique 
broker-dealers filed these forms for domestic issuers in 2018 and 13 
broker-dealers filed forms for catch-all issuers.
    Filing of FINRA Form 211 is associated with initiating or 
resuming quotations only. The Commission lacks data that would allow 
it to estimate the number of quotes that broker-dealers published 
pursuant to paragraph (a) or in reliance on the piggyback exception, 
national securities exchange, or municipal security exceptions to 
the Rule. Based on data from OTC Markets Group, broker-dealers 
published a total of approximately 3.8 billion quotations during 
calendar year 2019, of which 5,782,286 were published in reliance on 
the unsolicited quotation exception. See supra note 632 for a 
discussion of data limitations. Because broker-dealers could rely on 
the piggyback exception for the vast majority (90 percent) of quoted 
OTC securities on an average day during 2019, the Commission 
believes that it is reasonable to assume that the majority of quotes 
that broker-dealers published during 2019 relied on the piggyback 
exception. See Table 2 below, which describes average daily activity 
for securities that are quoted in the OTC market.

---------------------------------------------------------------------------

[[Page 68185]]

2. Baseline

(a) OTC Securities
    Securities that are quoted on the OTC market differ from those 
listed on national securities exchanges. In particular, the average OTC 
security issuer is smaller, and its securities trade less, on average. 
Table 1 below compares quoted OTC securities to those listed on the New 
York Stock Exchange (``NYSE'') or Nasdaq.\637\ On average, issuers of 
quoted OTC securities have a lower market capitalization than those 
with securities that are listed on a national securities exchange.\638\ 
Panel B of Table 1 shows that this difference is more pronounced when 
companies with securities listed on foreign exchanges, such as the 
Tokyo Stock Exchange or the TSX Venture Exchange, are excluded from the 
sample of quoted OTC securities. Further, Table 1 demonstrates that 
quoted OTC securities are characterized by significantly lower dollar 
trading volumes than listed stocks, even when comparing securities of 
similar size as measured by market capitalization.\639\
---------------------------------------------------------------------------

    \637\ See infra note 640 for a description of OTC securities 
data sources. All information for stocks listed on NYSE and Nasdaq 
comes from The Center for Research in Security Prices (CRSP). 
Statistics are computed by averaging market capitalization and 
trading volume for each security across all trading days during the 
calendar year 2019. The conclusions drawn from this analysis 
regarding how OTC securities compare to exchange-listed securities 
with respect to size and volume traded remain qualitatively 
unchanged if the Commission extends the analysis to include 
securities listed on additional smaller national exchanges.
    \638\ The Commission estimates that securities listed on NYSE 
and Nasdaq were valued at approximately $35.7 trillion in total 
during calendar year 2019, while quoted OTC securities were valued 
at approximately $32.3 trillion with 94.7 percent of the total 
market capitalization coming from companies that also have 
securities listed on public foreign exchanges.
    \639\ Total dollar volume is annualized by taking the average 
daily trading volume and multiplying it by the number of trading 
days in 2019. Panels C and E of Table 1 provide statistics for 
comparable samples of quoted OTC and exchange listed securities with 
a market capitalization between $50 million and $5 billion. Several 
academic studies document the differences in liquidity between OTC 
and listed stocks using older data. See Bjorn Eraker & Mark Ready, 
Do Investors Overpay for Stocks with Lottery-Like Payoffs? An 
Examination of the Returns of OTC Stocks, 115 J. Fin. Econ. 486-504 
(2015); Ang et al., supra note 3.
    Commenters generally agreed that the key difference between 
quoted OTC securities and those listed on national exchanges were 
size and trading volume. See, e.g., Mitchell Partners Letter 1.

                   Table 1--Comparison of Quoted OTC Securities and Listed Securities, CY 2019
----------------------------------------------------------------------------------------------------------------
                                                    Quoted OTC                            Exchange listed
                                 -------------------------------------------------------------------------------
                                                                     $50M-$5B                        $50M-$5B
                                        All          Unlisted       Market cap          All         Market cap
                                             (A)             (B)             (C)             (D)             (E)
----------------------------------------------------------------------------------------------------------------
Market Cap--median ($M).........           20.99            3.92          472.74          517.90          485.74
Market Cap--mean ($M)...........        3,601.17          393.19         1158.18        5,890.43          993.98
Volume--median ($M).............            0.29            0.15            0.84          760.02          693.19
Volume--mean ($M)...............          107.76           51.02           29.05       10,375.73        2,549.60
Number of Securities............          11,542           6,253           2,626           6,166           4,277
----------------------------------------------------------------------------------------------------------------

    Table 2 provides more detail on the characteristics of quoted OTC 
securities and their issuers for the 2019 calendar year.\640\ The 
Commission estimates that, on average, 9,998 quoted OTC securities had 
published quotations per day during the calendar year 2019.\641\ A 
majority of these had published either bid or offer quotations (93 
percent).\642\ The Commission identified that broker-dealers could rely 
on the piggyback exception to publish or submit quotations for 90 
percent of these quoted OTC securities.\643\ Many quoted OTC securities 
are illiquid. For example, the Commission estimates that, on average, 
only 44 percent of these quoted securities reported a positive daily 
trading volume, with two percent of quoted securities being 
``inactive,'' which the Commission defines as not having reported any 
trading volume within the last year.\644\ Conversely, only eight 
percent of quoted

[[Page 68186]]

securities had an ADTV value greater than $100,000.\645\
---------------------------------------------------------------------------

    \640\ The Commission uses three sources of data on OTC 
securities. OTC Markets Group's ``End-of-Day Pricing Service'' and 
``OTC Security Data File'' provide closing trade and quote data for 
the U.S. OTC equity market and include identifying information for 
securities and issuers, as well as securities' piggyback 
eligibility. The Commission also uses information from the weekly 
OTC Markets Group's ``OTC Company Data File.'' Company Data Files 
include information about issuer reporting, shell, and bankruptcy 
status, as well as the SEC Central Index Key (CIK) identifier and 
whether an issuer's financial statements are audited.
    All statistics in Table 1 represent characteristics of OTC 
securities and OTC issuers on a typical trading day and are computed 
by averaging across all trading days for the 2019 calendar year. The 
Commission identified 19,141 unique OTC securities for 16,059 unique 
companies from aggregated OTC Markets Group data for the calendar 
year 2019. Of these, 11,542 unique OTC securities had at least one 
published quotation and 9,895 unique companies had a security that 
was quoted at least once during the calendar year 2019. The 
Commission believes that OTC Markets Group data are reasonably 
representative of all OTC quoting and trading activity in the U.S.
    \641\ The number of securities quoted includes those with 
published priced and unpriced quotations. The Commission estimates 
that approximately seven percent of quoted OTC securities did not 
have priced quotations. The number of OTC securities quoted on an 
average day is lower than the total number of OTC securities with 
published quotations in 2019 because some securities did not have 
published quotations for every trading day in 2019.
    \642\ The Commission estimates the number of securities with 
quotations with either bid or offer prices from close of trading day 
data. This estimate is a lower bound as the Commission is not able 
to identify cases in which a security had a published priced 
quotation during the day but was no longer published at day close.
    \643\ See supra Part II.D. A security would qualify for the 
piggyback exception if it satisfies the frequency of quotation 
requirements pursuant to paragraph (f)(3) of the Rule. For such 
securities, a broker-dealer would not need to comply with the Rule's 
information review requirement before publishing a quotation on an 
IDQS.
    \644\ Broker-dealers trading in quoted OTC securities are 
required to report their trades to FINRA, which then disseminates 
this information to the market. OTC Markets Group receives trading 
data from FINRA's Trade Data Dissemination Service (TDDS) feed and 
incudes aggregated daily trading volume data for OTC securities in 
the ``End-of-Day Pricing Data File.''
    \645\ The Commission computes the ADTV on a given day by taking 
the average of reported dollar trading volume over the previous 60 
calendar days. The computed ADTV for each security is a lower bound 
estimate of its worldwide ADTV if some of the trading activity was 
not reported to FINRA. As such, it is possible that there were more 
securities than the Commission identifies that would satisfy the 
volume threshold. The Commission estimates that approximately eight 
percent of quoted securities had an ADTV value greater than $100,000 
and current and publicly available information.

           Table 2--Market for Quoted OTC Securities, CY 2019
------------------------------------------------------------------------
 
------------------------------------------------------------------------
                         Average Daily Activity
------------------------------------------------------------------------
Number of Securities...........................................    9,998
Priced Quotes with Either Bid or Offer.........................      93%
Piggyback Eligible.............................................      90%
Traded.........................................................      44%
Inactive.......................................................       2%
ADTV value >$100,000...........................................       8%
------------------------------------------------------------------------

    Some OTC securities are traded without having published 
quotation.\646\ Broker-dealers might not publicly quote these 
securities due to a lack of available issuer information necessary to 
satisfy the information review requirement or due to insufficient 
investor interest. The Commission estimates that 5,915 OTC securities 
were traded at some point during 2018 without having published 
quotations, with 553 securities of 538 issuers traded on average per 
day during 2018. Despite not having published quotations, some of these 
OTC securities were actively traded, with three percent having an ADTV 
value greater than $100,000.\647\
---------------------------------------------------------------------------

    \646\ On the OTC Markets Group platform, OTC securities trade 
without published quotations on the grey market and on the ``Expert 
Market.'' According to OTC Markets Group, the Expert Market is a 
``private market to serve broker-dealer pricing and best execution 
needs in securities that are restricted from public quoting or 
trading.'' OTC Markets Group notes that the restrictions on quoting 
or trading can be based on issuer requirements, security attributes, 
investor accreditation and/or suitability risks.
    \647\ Conditional on having been traded, the average (median) 
dollar trading volume on a given day during 2019 for a security 
trading on the grey market was $33,913 ($830) as compared to 
$293,608 ($4,000) for quoted OTC securities.
---------------------------------------------------------------------------

(b) Issuers of OTC Securities
    Table 3 below provides detail on issuers of quoted OTC 
securities.\648\ The Commission estimates that brokers participating in 
the OTC market published quotations for the securities of 9,895 issuers 
during the calendar year 2019.\649\ These issuers differed in 
regulatory status, which determines the information that needs to be 
provided to comply with securities regulations and the type of 
paragraph (b) information that would be required to be current and 
publicly available by the amendments. Thirty-one percent of issuers 
followed the Exchange Act, Regulation A, or the U.S. Bank reporting 
standards; 45 percent followed international reporting standards; and 
the remaining 24 percent followed an alternative reporting 
standard.\650\ Given that issuers of quoted OTC securities follow 
different reporting standards, current financials are available for 
some issuers but not others. The Commission estimates that current 
financials were publicly available for approximately 70 percent of 
issuers of quoted OTC securities.\651\ In particular, the Commission 
estimates that broker-dealers published quotations for a total of 3,008 
issuers of OTC securities with no current and publicly available 
information, although, as commenters stated, the Commission recognizes 
that some of these issuers may have published current financial 
information somewhere other than on the OTC Markets Group 
platform.\652\ Of these, 946 issuers had an obligation to disclose 
information under the Exchange Act, Regulation A, or the U.S. Bank 
reporting standards; 82 issuers had an obligation under an 
international reporting standard; and the remaining 1,980 issuers did 
not have a reporting or disclosure obligation. Although the majority of 
issuers of quoted OTC securities provided current financial information 
publicly, financial statements of these issuers are not always audited.
---------------------------------------------------------------------------

    \648\ See supra note 640 for information on data sources. 
Numbers in parenthesis represent percentages of the row totals.
    \649\ During the 2019 calendar year, 14 percent of issuers of 
quoted OTC securities had multiple (two or more) quoted OTC 
securities with published quotations.
    \650\ The Exchange Act reporting standard requires that issuers 
are in compliance with their SEC reporting requirements. The 
Regulation A reporting standard applies to companies subject to 
reporting obligations under Tier 2 of Regulation A under the 
Securities Act. These companies must file annual, semi-annual, and 
other interim reports on EDGAR. The U.S. Bank reporting standard 
applies to companies in the OTCQX U.S. Bank Tier on OTC Markets 
Group's system and may be satisfied by following the SEC reporting 
standards, Regulation A reporting standards, or reporting standards 
outlined in OTCQX Rules for U.S. Banks (https://www.otcmarkets.com/files/OTCQX_Rules_for_US_Banks.pdf). Foreign issuers that are exempt 
from registering a class of equity securities under Section 12(g) of 
the Exchange Act pursuant to Rule 12g3-2(b) follow international 
disclosure requirements. Lastly, the alternative reporting standard, 
which could apply to all remaining OTC security issuers and is based 
on the information required by former Rule 15c2-11(a)(5), has 
varying requirements for disclosure depending on the OTC Markets 
Group Tier in which quotations for the security are published.
    The Commission observed several instances in the data in which 
issuers of quoted OTC securities changed their reporting standard 
during 2019, for example, by switching from following an alternative 
reporting standard to the Exchange Act reporting standard. In these 
instances, for the computation of statistics in Table 3, the 
Commission attributed a reporting standard that the issuer followed 
for the majority of the days that its securities had published 
quotations during 2019.
    \651\ See supra note 640 for information on data sources. The 
Commission uses information on the IDQS and the OTC Markets Group 
tier classification to estimate the number of issuers with current 
and publicly available information. In particular, the Commission 
counts all issuers with securities quoted on OTC Bulletin Board 
(``OTCBB'') and specific tiers on OTC Markets Group's system: OTCQX, 
OTXQB, and OTC Pink: Current Information. This includes all quoted 
securities other than in the OTC Market OTC Pink: Limited 
Information and OTC Pink: No Information tiers. OTC Bulletin Board 
requires that quoted securities are current in their required 
filings with the SEC or other federal regulatory authority with 
proper jurisdiction. All OTC Markets Group tiers other than OTC 
Pink: Limited Information and OTC Pink: No Information require 
financial information to be at most six months old and available on 
www.otcmarkets.com or on the Commission's EDGAR system.
    The number the Commission computes here is a rough estimate as 
it is possible that some issuers of securities in the OTC Pink: 
Limited Information or OTC Pink: No Information tiers voluntarily 
release current and public information somewhere other than on the 
OTC Markets Group platform. In particular, some commenters stated 
that certain issuers of quoted OTC securities publish current 
financial information on their websites. See, e.g., Beacon 
Redevelopment Letter; Braxton Gann; Hamilton & Associates Letter; 
Dave Peirce; Peter Quagliano; Dan Schum.
    Of all the quoted securities that qualified for the piggyback 
exception in calendar year 2019, the Commission estimates that 69 
percent of them had publicly available current disclosures based on 
data from OTC Markets Group.
    \652\ See, e.g., Beacon Redevelopment Letter; Braxton Gann; 
Hamilton & Associates Letter; Dave Peirce; Peter Quagliano; Dan 
Schum.

---------------------------------------------------------------------------

[[Page 68187]]

The Commission estimates that 48 percent of issuers with publicly 
available financial statements with quoted OTC securities in 2019 
provided audited financial statements.\653\ Several commenters stated 
that certain issuers of quoted OTC securities provide current financial 
information to their shareholders, including in connection with 
disclosure requirements under the laws of the state in which the 
company is incorporated.\654\ Other commenters stated difficulties that 
investors may face when trying to access financial information for 
companies in which they hold shares, such as having to provide proof of 
ownership or having to sign a non-disclosure agreement.\655\ Commenters 
also argued that while certain issuers provide information to their 
shareholders, they are hesitant to do so more widely because they do 
not want to reveal information to their competitors.\656\ In summary, 
current information is either not readily available, especially for 
persons not holding these securities, or not available at all for a 
subset of OTC securities.
---------------------------------------------------------------------------

    \653\ OTC Markets Group classifies issuers that provide audited 
financial statements. In the analysis, the Commission assumes that 
all issuers that have been identified as providing audited financial 
statements provide audited balance sheets.
    Although current FINRA and Commission rules do not require the 
financial statements of non-SEC reporting OTC securities issuers to 
be audited, OTC Markets Group requires audited financials from OTC 
issuers with securities quoted in the OTCQX U.S.[supreg] and 
OTCQB[supreg] tiers. Issuers with securities quoted in the OTC Pink: 
Current Information tier must provide an Attorney Letter with 
Respect to Current Information if they do not file with the SEC and 
do not publish audited financial information.
    \654\ See, e.g., James Duade; Caldwell Sutter Capital Comment; 
Drinker Letter; Christian Gabis; Mitchell Partners Letter 1; Dan 
Schum; Michael Tofias.
    \655\ See, e.g., Tim Bergin; Richard Kogut; Jim Rivest.
    \656\ See, e.g., Drinker Letter; Peter Quagliano.
---------------------------------------------------------------------------

    Three percent of issuers with quoted OTC securities were shell 
companies, and broker-dealers were able to rely on the piggyback 
exception to publish or submit quotations for nearly all securities of 
shell companies (99 percent).\657\ Lastly, the Commission estimates 
that 1,030 (10 percent) of issuers with quoted OTC securities and 
current and publicly available information had total assets greater 
than $50 million and shareholder equity greater than $10 million on 
their most recent audited balance sheets.\658\
---------------------------------------------------------------------------

    \657\ See supra Part II.D.4 for a detailed discussion of shell 
companies. Even though broker-dealers had the ability to publish 
quotes for these securities relying on the piggyback exception, some 
quotes broker-dealers published for these securities may have relied 
on other exceptions to the Rule.
    In its comment letter, OTC Markets Group stated that, as of 
December, 2019, 339 issuers of OTC securities have self-reported in 
their public filings as shell companies, as defined by Rule 405 of 
Regulation C. OTC Markets Group has flagged an additional 534 
issuers as ``shell risk,'' based on the following annual financial 
metrics: (i) Revenue less than $100,000; (ii) total assets (less 
cash and cash equivalents) less than $100,000; (iii) gross profit or 
loss less than $100,000; and (iv) research and development costs 
under $50,000. See OTC Markets Group Letter 2.
    \658\ The Commission reviewed information on assets and 
shareholder equity of OTC issuers from a combination of three data 
sources: (1) S&P Global Market Intelligence Compustat North America 
and Compustat Global databases, (2) the OTC Markets Group website 
(https://www.otcmarkets.com), and (3) Bloomberg. For the analysis in 
the Proposing Release, the Commission also reviewed information from 
quarterly and annual filings in EDGAR. However, there is significant 
overlap in these datasets and data from annual and quarterly filings 
did not provide any additional information to what was already 
contained in the three datasets described above. The Commission used 
data on the most recent financial information available, as the 
Commission does not have access to historical financial data for 
many issuers. In some cases, the most recent financial data 
available is outdated. Specifically, for approximately 30 percent of 
OTC issuers, for which the Commission has data, the financial data 
are from calendar year 2018 or earlier. Of the 16,059 unique OTC 
issuers that appear in the data for calendar year 2019, the 
Commission is able to draw financial data for 2,791 (17 percent) of 
them from Compustat, 7,461 (46 percent) from Bloomberg, and 3,300 
(21 percent) from the OTC Markets Group website. The Commission is 
unable to collect financial information for 2,507 (16 percent) of 
OTC issuers because financial statement information for these 
issuers was absent in the three data sources the Commission 
reviewed.

                              Table 3--Issuers of Quoted OTC Securities, CY 2019 a
----------------------------------------------------------------------------------------------------------------
                                              SEC/Reg. A/Bank   International    No reporting/
                                                 reporting        reporting        disclosure         Total
                                               obligation \b\     obligation       obligation
----------------------------------------------------------------------------------------------------------------
                                          Public Information Available
----------------------------------------------------------------------------------------------------------------
                                                          (A)              (B)              (C)
----------------------------------------------------------------------------------------------------------------
Issuers.....................................    2,134 (30.99)    4,331 (62.90)       421 (6.11)            6,886
Securities..................................    2,531 (29.97)    5,470 (64.76)       445 (5.27)            8,446
Shell Company...............................      136 (80.95)            0 (0)       32 (19.05)              168
Audited Financials..........................    1,908 (58.17)    1,254 (38.23)       118 (3.60)            3,280
Assets >$50 mil & SE >$10mil................      571 (55.44)      448 (43.50)        11 (1.07)            1,030
----------------------------------------------------------------------------------------------------------------
                                         No Public Information Available
----------------------------------------------------------------------------------------------------------------
                                                          (D)              (E)              (F)
----------------------------------------------------------------------------------------------------------------
Issuers.....................................      946 (31.45)        82 (2.73)    1,980 (65.82)            3,008
Securities..................................      969 (31.31)        85 (2.75)    2,041 (65.95)            3,095
Shell Company...............................       96 (55.81)             0(0)       76 (44.19)              172
----------------------------------------------------------------------------------------------------------------
                                           Total (by Reporting Status)
----------------------------------------------------------------------------------------------------------------
Issuers.....................................    3,081 (31.14)    4,413 (44.60)    2,401 (24.26)            9,895
Securities..................................    3,501 (30.33)    5,555 (48.13)    2,486 (21.54)           11,542
----------------------------------------------------------------------------------------------------------------
\a\ See supra note 640 for information on data sources. The Commission observes that issuers of OTC securities
  that trade on the grey or expert markets differ from issuers of quoted OTC securities. The majority of these
  issuers followed the alternative reporting standard (63 percent) and a few (one percent) were identified as
  shell companies. In addition, three percent of these issuers had total assets greater than $50 million and
  shareholder equity greater than $10 million on their most recent audited balance sheets.
\b\ Estimates of issuers in this column include issuers that make filings pursuant to Regulation Crowdfunding.
  The Commission estimates that there were five such issuers that had quoted OTC securities, of which four (80
  percent) had publicly available financial information. These issuers were included in the economic analysis of
  the Proposing Release, but not discussed separately as they are in this note.


[[Page 68188]]

(c) Risk of Fraud and Manipulation
    The OTC market may be attractive to those seeking to engage in 
fraudulent practices, such as pump-and-dump schemes, due to a lack of 
publicly available current information about certain issuers of quoted 
OTC securities.\659\ Two academic studies have found that market 
manipulation and pump-and-dump cases are concentrated among issuers of 
OTC securities relative to exchange-listed securities.\660\ Another 
study has highlighted a higher incidence of cases involving delinquent 
filings and pump-and-dump schemes brought against issuers of OTC 
securities relative to cases brought against issuers of exchange-listed 
securities.\661\ A Commission staff analysis of 4,000 SEC litigation 
releases between 2003 and 2012 found that the majority of alleged 
violations involving issuers of OTC securities were primarily 
classified as reverse mergers of shell companies or as market 
manipulation.\662\ One commenter stated that the majority of the pump-
and-dump schemes that he has observed involved shell companies.\663\ In 
addition, the Commission estimates, from a sample of 323 Commission 
enforcement actions filed in fiscal years 2017 to 2019 involving 689 
OTC securities, that 250 enforcement actions (77 percent) were 
classified as involving delinquent filings and 11 enforcement actions 
(three percent) were classified as involving market manipulation.\664\ 
In contrast, the Commission estimates, from a sample of 109 Commission 
enforcement actions filed in fiscal years 2017 to 2019 involving listed 
securities, that four enforcement actions (four percent) was classified 
as involving delinquent filings and three enforcement actions (three 
percent) were classified as involving market manipulation.
---------------------------------------------------------------------------

    \659\ The Commission lacks data on the costs associated with 
fraudulent schemes involving OTC securities. One study found that 
pump-and-dump schemes result in sizable losses for market 
participants. See Hackethal et al., supra note 407 (finding an 
average loss of 30 percent per investor and a loss of at least 
[euro]1.2 million per tout aggregated across investors in a sample 
of 421 pump-and-dump schemes from 2002 to 2015 involving 6,569 
German investors).
    \660\ One study analyzed 142 stock manipulation cases, including 
pump-and-dump cases, in SEC litigation releases from 1990 to 2001 
and found that that 48 percent involved OTC securities, while 17 
percent involved securities listed on national exchanges. See 
Aggarwal & Wu, supra note 6. A more recent study looked at 150 pump-
and-dump manipulation cases between 2002 and 2015 and found that 86 
percent of those cases involved OTC securities. See Renault, supra 
note 6.
    \661\ This study looked at a broader sample of securities cases 
filed between January 2005 and June 2011 and identified 1,880 cases 
involving OTC securities and 1,157 cases involving securities listed 
on exchanges in the United States. The majority of OTC securities 
cases, 1,148 (61 percent), were related to delinquent filings, while 
151 (eight percent) were related to a pump-and-dump scheme, 159 
(eight percent) were related to financial fraud, 12 (one percent) 
were related to insider trading, and 212 (11 percent) were related 
to other fraudulent misrepresentation or disclosure. In contrast, 
only 26 (two percent) of listed securities cases involved delinquent 
filings, 43 (four percent) involved pump-and-dumps, 278 (24 percent) 
involved financial fraud, 399 (34 percent) involved insider trading, 
and 173 (15 percent) involved other fraudulent misrepresentation or 
disclosure. See Cumming & Johan, supra note 7.
    \662\ See Spotlight on Microcap Fraud (Feb. 22, 2019), https://www.sec.gov/spotlight/microcap-fraud.shtml.
    \663\ Morning Light Mountain Comment. It is difficult to draw 
conclusions about shell companies' involvement in fraudulent schemes 
from the commenter's statement without information on the sample of 
pump-and-dump schemes that the commenter has observed.
    \664\ One commenter stated that it is difficult to infer a 
causal relationship between delinquent or unavailable financial 
information about the OTC security issuer and fraud because the OTC 
market is complex. See GTS Letter.
---------------------------------------------------------------------------

    To highlight characteristics of securities and issuers in the OTC 
market that tend to involve risk of fraud and manipulation, the 
Commission examined quoted OTC securities that had been the subject of 
Commission-ordered trading suspensions and those that have been 
assigned a ``caveat emptor'' designation by OTC Markets Group during 
the 2019 calendar year.\665\ The Commission summarizes the findings 
below, in Table 4.\666\
---------------------------------------------------------------------------

    \665\ See Trading Suspensions (2019), https://www.sec.gov/litigation/suspensions.shtml; Annual Report, SEC, Div. Enforcement, 
5 (2018), https://www.sec.gov/files/enforcement-annual-report-2018.pdf; Addendum to Annual Report, SEC, Div. Enforcement, 2 
(2017), https://www.sec.gov/files/enforcement-annual-report-2017-addendum-061918.pdf; Select SEC and Market Data Fiscal 2016, 2 
(2016), https://www.sec.gov/files/2017-03/secstats2016.pdf. OTC 
Markets Group explains that a ``caveat emptor'' designation may be 
assigned to a security if OTC Markets Group becomes aware of a 
misleading or a manipulative promotion; a company is under 
investigation for fraudulent activity; there is a regulatory 
suspension on the security; the company fails to disclose a 
corporate action, such as a reverse merger; or there is another 
public interest concern associated with the security. See Caveat 
Emptor Policy, OTC Mkts. Grp. Inc., https://www.otcmarkets.com/learn/caveat-emptor (last visited Apr. 28, 2020).
    \666\ All statistics in Table 4 were estimated by analyzing 
security and issuer characteristics on the trading day before the 
start of a Commission-ordered trading suspension or an assignment of 
a ``caveat emptor'' designation by OTC Markets Group.
---------------------------------------------------------------------------



       Table 4--Quoted OTC Securities, Suspensions and OTC Markets Group ``Caveat Emptor'' Status, CY 2018
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
                                                                   SEC suspensions
                                                                  OTC markets group
                                                              ``caveat emptor'' status
----------------------------------------------------------------------------------------------------------------
Issue Characteristics:
    Number of Securities....................................             213                       241
    Quotes with Either Bid or Offer.........................             209     (98%)             230     (95%)
    Piggyback Eligible......................................             212    (100%)             238     (98%)
Issuer Characteristics:
    Number of Issuers.......................................             213                       236
    SEC/Reg. A/Bank Reporting Standard......................             169     (79%)             176     (75%)
    International Reporting Standard........................               0      (0%)               1      (0%)
    Alternative Reporting Standard (ARS)....................              44     (21%)              62     (26%)
    Public Information Available............................              13      (6%)              33     (14%)
    Audited Financials......................................             162     (76%)             173     (73%)
    Shell Company...........................................              20      (9%)              23     (10%)
----------------------------------------------------------------------------------------------------------------

    Overall, 213 quoted OTC securities were the subject of Commission-
ordered trading suspensions over the calendar year 2019.\667\ Relative 
to the characteristics of the overall quoted OTC security market, 
broker-dealers were more likely to be able to rely on the piggyback 
exception to publish or submit quotations for quoted OTC

[[Page 68189]]

securities subject to trading suspensions on the trading day 
immediately prior to the commencement of the trading suspension. 
Although issuers of suspended quoted OTC securities tended to be mostly 
reporting companies, they were less likely to have current public 
information available relative to the full sample of quoted OTC 
securities because many failed to file required reports.\668\ Several 
of these companies were identified as shell companies (nine percent).
---------------------------------------------------------------------------

    \667\ The results are qualitatively similar for the set of 1,369 
Commission-ordered trading suspensions in the past five calendar 
years, 2015-2019. In particular, the Commission estimates that 
almost all quoted OTC securities subject to Commission-ordered 
trading suspensions (1,364) were piggyback eligible, approximately 
seven percent had publicly available current financial information, 
and 10 percent were shell companies.
    \668\ Issuers typically become subject to Commission-ordered 
trading suspensions under circumstances where there is a lack of 
publicly available current, accurate, or adequate information about 
the company. This may happen, for example, when a company is not 
current in its filings of periodic reports. As a result, it is not 
surprising that many of these issuers were not quoted in OTCBB or 
OTC market tiers that require current and publicly available 
financial information.
---------------------------------------------------------------------------

    In addition, the Commission examined 241 instances in which quoted 
OTC securities were flagged with the ``caveat emptor'' designation by 
OTC Markets Group to inform investors to exercise additional care when 
considering whether to transact in these securities. Most of these 
companies had Commission-ordered trading suspensions.\669\ Similar to 
the sample of OTC issuers with suspended securities, issuers of these 
securities were less likely to have publicly available information.
---------------------------------------------------------------------------

    \669\ For 187 of the 241 ``caveat emptor'' securities, this 
designation was assigned at the start of the suspension. In the 
remaining 26 suspensions over the calendar year 2019, the security 
had already been designated with a ``caveat emptor'' status prior to 
2019. The remaining 54 instances of ``caveat emptor'' assignment 
were associated with fraud or public interest concerns other than 
trading suspensions.
---------------------------------------------------------------------------

    Increasing the availability of information about OTC issuers has 
the potential to counteract misinformation, which can proliferate 
through promotions and other channels. Several recent studies have 
examined the effects of stock promotions on investor trading in the OTC 
market.\670\ For example, one study has found large price and trading 
volume movements following spam email campaigns that conveyed optimism 
about a particular OTC security's price and were viewed by investors as 
containing credible information about the security.\671\ Others have 
documented that cases in which issuers have secretly hired stock 
promoters for campaigns to increase their stock price and liquidity 
often are accompanied by trading by company insiders.\672\ Based on 
publicly available website information reviewed by the Commission on 
OTC securities that were subjects of promotion campaigns, the 
Commission identified 288 OTC securities (two percent of all quoted OTC 
securities) that were featured in at least one promotion campaign 
during 2019.\673\ The vast majority of these OTC securities, 240 (83 
percent), were issued by companies that did not otherwise provide 
current and publicly available financial information.\674\
---------------------------------------------------------------------------

    \670\ See White, supra note 5.
    \671\ See Nelson et al., supra note 252 (``[T]rading volume more 
than doubles in the days immediately following the spam campaign, 
and the mean return is positive and significant. However, the median 
return is zero, with nearly as many firms experiencing negative 
returns as positive on the spam date . . . . [C]ombining optimistic 
target price projections with credible, but stale, information from 
old press releases increase the return and volume reaction to spam. 
Moreover, the larger the return implied by the target price, the 
larger the market reaction.'').
    \672\ See Nadia Massoud et al., Does It Help Firms to Secretly 
Pay for Stock Promoters?, 26 J. Fin. Stability 45-61 (2016) 
(sampling both OTC securities and exchange-listed securities).
    \673\ One commenter stated that sometimes it is not the absence 
of current information, but rather the abundance of false 
information that facilitates fraudulent behavior in the OTC market. 
See Caldwell Sutter Capital Comment. However, current financial 
information can serve to limit the effectiveness of misinformation 
in the OTC market.
    \674\ The Proposing Release included additional information from 
OTC Markets Group data that identified 241 OTC securities (two 
percent of all quoted OTC securities) that were involved in at least 
one promotion campaign during 2018 with 58 of these securities (24 
percent) issued by companies that did not provide current and 
publicly available information. The Commission did not receive 
updated promotion data from OTC markets for calendar year 2019.
---------------------------------------------------------------------------

(d) Investors
    One academic study has found that OTC stocks are owned primarily by 
retail investors rather than institutional investors.\675\ However, 
retail investors' access to OTC securities is not frictionless in all 
cases. For instance, several commenters stated that broker-dealers put 
up ``gates'' that restrict retail investors' access to OTC securities, 
such as signing agreements and disclaimers before allowing these 
investors to purchase OTC stocks. Studies have also found that, on 
average, quoted OTC securities earn lower returns than exchange-listed 
stocks.\676\ These investment decisions by individuals may be due to 
investors misestimating payoff probabilities for OTC stocks by 
overweighting extreme positive outcomes, particularly in cases where 
there is a lack of available information about the issuer.\677\ Some 
investors in OTC securities may be driven by a speculative motive.\678\ 
Demographic analysis of OTC investors suggests that they tend toward 
higher wealth and education.\679\ However, OTC security holding period 
returns are worse for investors residing in locations with populations 
that may be more vulnerable in that they are older, lower-income, and 
less educated.\680\ Overall, findings in these studies suggest that 
investors in the OTC market might benefit from additional information 
regarding company fundamentals.\681\ For example, some retail investors 
could more readily find, through online searches, information that 
refutes misinformation disseminated through promotions with publicly 
available paragraph (b) information. One commenter argued that OTC 
investors lose money in OTC securities because they are not educated on 
how to interpret the information that issuers provide and are thus 
susceptible to misinformation campaigns.\682\ Nevertheless, these 
investors could benefit from more efficient prices that are less 
susceptible to manipulation as a result of the trading activity of 
better-informed investors who acquire and are better equipped at 
interpreting this information.
---------------------------------------------------------------------------

    \675\ See Ang et al., supra note 3 (stating that retail 
investors are ``the primary owners of most OTC stocks, whereas 
institutional investors hold significant stakes in nearly all stocks 
on listed exchanges, including small stocks'').
    \676\ See White, supra note 5; see also Ang et al., supra note 
3; Eraker & Ready, supra note 639.
    \677\ See White, supra note 670.
    \678\ See Hackethal et al., supra note 407 (finding an average 
loss of 30 percent in a sample of 421 pump-and-dump schemes from 
2002 to 2015 involving 6,569 German investors). The study finds that 
``35% of the tout investors have been day-trading in penny stocks or 
are frequent traders with short investment horizons. These investors 
appear to be willing to take substantial risks and trade 
aggressively also in other stocks. These investor types are more 
likely to invest in touts, place larger bets and have better 
returns. Their participation in touts looks quite differently from 
more conservative traders, who trade infrequently and do not invest 
in penny stocks. This group could be the ones that were tricked into 
the schemes.'' Id.
    \679\ See White, supra note 5; see also John R. Nofsinger & 
Abhishek Varma, Pound Wise and Penny Foolish? OTC Stock Investor 
Behavior, 6 Rev. Behav. Fin. 2-25 (2014).
    \680\ See White, supra note 5 (``[M]edian holding period returns 
deteriorate for zip codes with greater percentages of elderly, less 
education and residence stability, and lower income and wealth. All 
of the return differences are economically and statistically 
significant.'').
    \681\ Some commenters stated that investors are aware of the 
risks associated with trading in OTC securities. See, e.g., David 
Aldridge; R. Berkvens; Dana Blanc; Caldwell Sutter Capital Comment; 
Frank Danna III; Ralf Erz; Philippe Goodwill; Richard Kogut; Aharon 
Levy; Tracy Michaels; Michael E. Reiss; Robert Ringelberg; Jim 
Rivest; David Sanders; Thomas Schiessling; Lucas H. Selvidge; 
Terravoir Venture Letter; Kevin Ward.
    \682\ Alexandra Elliott.
---------------------------------------------------------------------------

C. Discussion of Economic Effects

1. Effects of Rule 15c2-11 Amendments
    In this section, the Commission discusses the expected costs and 
benefits of the amendments to Rule 15c2-11. These amendments modify

[[Page 68190]]

rule requirements to account for the reduction in information 
acquisition costs, and generally seek to increase the availability of 
current company financial information within the quoted OTC market.
    The amendments would affect OTC investors, issuers, and 
intermediaries such as broker-dealers. The Commission anticipates the 
principal economic effects of the amendments to be as follows. First, 
the transparency requirements could enable investors to learn more 
about the fundamental value of certain companies in the OTC market, 
which may direct their funds toward higher-return investments. These 
benefits are directly linked to modern technology that enables 
relatively low cost access to and dissemination of company filings. In 
addition, other investors could benefit from more efficient prices that 
are less susceptible to manipulation as a result of the trading 
activity of better-informed investors who acquire this information. 
Second, the amendments may reduce the incidence of fraudulent schemes, 
such as pump-and-dump activity, as a result of heightened information 
requirements and restrictions on the piggyback exception being applied 
to securities without current and publicly available information. 
Finally, broker-dealers could bear additional costs from the 
information review requirement as well as filing FINRA Forms 211 more 
frequently (e.g., if paragraph (b) information is not publicly 
available) as a result of, among other things, limitations on relying 
on the piggyback exception.\683\ Costs borne by broker-dealers may be 
heterogeneous and depend on whether the broker-dealer specializes in 
retail or institutional orders, market making, or some combination of 
these services. To the extent that broker-dealers currently incur costs 
associated with disseminating paragraph (b)(5) information, such costs 
on broker-dealers may be mitigated to some extent. The requirement for 
paragraph (b)(5) information to be publicly available would reduce the 
broker-dealer's obligation to make paragraph (b) information available 
upon request to interested investors electronically.
---------------------------------------------------------------------------

    \683\ Several of these amendments would provide additional 
exceptions to the Rule (e.g., eliminating the requirement for 12 
business days of quotes within the previous 30 calendar days to 
establish piggyback eligibility). However, the Commission does not 
expect these amendments to have a significant impact on the costs 
and benefits of the Rule, as discussed below.
---------------------------------------------------------------------------

    In specific circumstances, other provisions of the amended Rule 
seek to relieve broker-dealers of costs related to the information 
review requirement and filing FINRA Form 211. For example, the 
exception for issuers with ADTV value greater than $100,000, total 
assets greater than $50 million, and shareholder equity greater than 
$10 million will relieve broker-dealers of the information review 
requirement for larger, more liquid issuers which are potentially less 
susceptible to fraud.\684\
---------------------------------------------------------------------------

    \684\ The Commission estimates that approximately 180 (two 
percent) of quoted OTC securities on an average day during calendar 
year 2019 would be eligible for the ADTV and assets exception.
---------------------------------------------------------------------------

    Broker-dealers and investors could also incur costs and benefits 
associated with possible migration in trading activity from certain 
issuers and markets to others (e.g., between quoted and grey markets). 
For example, commenters highlighted difficulties that broker-dealers 
and issuers of such OTC securities may face in resuming a quoted market 
once the securities have migrated to the grey market.\685\ On the other 
hand, to the extent that the Rule amendments lead to a net increase in 
the demand for OTC securities that continue to be quoted, broker-
dealers and issuers of these securities may accrue benefits. Some of 
these costs and benefits to broker-dealers may be passed on to 
investors in the form of higher or lower transaction costs and account 
fees. Further, as discussed in more detail below, OTC investors may 
incur costs associated with a decrease in liquidity and share value as 
a result of losing piggyback eligibility for OTC securities without 
current and publicly available information.
---------------------------------------------------------------------------

    \685\ In particular, commenters have highlighted the costs to 
issuers associated with providing current disclosures and to broker-
dealers associated with complying with the information review 
requirement to resume quoting. See, e.g., Coral Capital Letter; 
Tyler Black; Woessner & Associates Letter.
---------------------------------------------------------------------------

    The costs and benefits associated with the specific amended Rule 
provisions are discussed below.
(a) Making Paragraph (b) Information Current and Publicly Available
    The costs and benefits discussed below pertain to the general 
requirements for paragraph (b) information to be current and publicly 
available to publish or submit quotations for, or to maintain a quoted 
market in, quoted OTC securities. They also pertain to the new public 
information requirements for the unsolicited quotation exception. The 
Commission expects that investors would benefit from easier access to 
paragraph (b) information through public media, such as EDGAR or the 
website of a qualified IDQS, a registered national securities 
association, the issuer, or a registered broker-dealer that publishes 
paragraph (b) information related to quoted OTC securities.
    Presently, not all issuers of quoted OTC securities provide current 
and publicly available financial information.\686\ Some of these OTC 
issuers may choose to provide such information under the amended Rule 
in order to maintain the liquidity of their securities in the quoted 
market. The Commission further believes that the rule amendments should 
incentivize issuers to make information current and publicly available 
to allow broker-dealers to continuously quote their securities. This 
information could allow investors to better assess the quality of the 
issuer and help them to avoid lower-return investments, such as those 
involved in a fraudulent scheme. By enabling investors to compare 
information contained in promotion campaigns to that in current company 
information, the new requirement for paragraph (b) information to be 
publicly available may help investors avoid trading on false 
information. In general, the ease of accessing information on the 
internet should allow investors to migrate toward forming inferences 
about the value of OTC securities based upon paragraph (b) information 
and away from inferences based principally upon quoted prices. 
Investors could also use this information to make better-informed 
corporate voting decisions to the extent that OTC issuers put matters 
to a shareholder vote in annual or special meetings.\687\ Investors 
could also benefit from more efficient prices that are less susceptible 
to manipulation as a result of the trading activity of better-informed 
investors who acquire this information. The amended Rule provides 
flexibility with respect to the format of the paragraph (b) information 
issuers may opt to provide. Certain formats such as machine-readable 
content might facilitate processing of information by sophisticated or 
institutional investors and thereby promote arbitrage activity as well 
as price efficiency in OTC securities. However, issuers may opt to not 
submit information in this format as the final Rule maintains 
flexibility with respect

[[Page 68191]]

to information format.\688\ In addition, broker-dealers will be 
restricted from publishing quotations for securities without publicly 
available paragraph (b) information, which would likely push trading 
activity in these dark issuers' (i.e., issuers that do not make their 
information publicly available) securities into the grey market.\689\ 
The lack of a quoted market could curtail the trading activity of 
retail investors, making such securities less attractive to 
perpetrators of fraud. Therefore, these new requirements could deter 
fraudulent activity related to quoted OTC securities. Investors could 
benefit from decreased exposure to investment losses as a result of 
diminished frequency of fraudulent activity in the OTC market.
---------------------------------------------------------------------------

    \686\ Notably, there are no requirements to make financial 
disclosures publicly available for OTC securities quoted on the OTC 
Market OTC Pink: No Information tier. An analysis of quoted OTC 
securities during the calendar year 2019 has revealed that 
approximately 30 percent of issuers do not provide current and 
publicly available financial information. See supra Part VI.B.
    \687\ The Commission lacks data on the quantity and nature of 
matters put to a vote at annual or special meetings of issuers of 
quoted OTC securities not subject to Commission reporting 
obligations.
    \688\ In the Proposing Release, recognizing the value that 
machine-readable information can have to market participants, the 
Commission solicited commenters' views on whether at a later date 
the Commission might propose that paragraph (b) information should 
be published in this format. The Commission did not receive any 
comments directly supporting or opposing whether paragraph (b) 
information should be published in this format. One commenter 
supported requiring issuers to have their latest filings and 
investor information immediately downloadable from a centralized 
site or from issuer websites, and noted that the information could 
be provided in XML or XBRL format. See Lake Highlands Comment.
    \689\ Using data on daily dollar trading volume for quoted OTC 
securities during the 2019 calendar year, the Commission finds that 
quoting activity and trading activity are correlated. In particular, 
the Commission finds that OTC securities with published quotations 
were 4.9 times more likely to have reported a positive dollar 
trading volume on a given day in 2019 relative to securities trading 
on the grey or Expert markets. In addition, if they were traded, OTC 
securities with published quotations had, on average, 1.98 times 
greater daily dollar trading volume than securities trading on the 
grey market. See supra note 640 for a description of OTC securities 
data sources.
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    Higher quality issuers (i.e., issuers more likely to have 
productive investment opportunities) could benefit from increased 
access to capital to the extent that the change leads to a net increase 
in demand for higher quality issuers' OTC stocks.\690\ Previous 
academic studies have highlighted the relationship between the breadth 
and quality of firm disclosures and liquidity in the OTC market.\691\ 
Therefore, investors in these higher quality issuers could benefit from 
greater liquidity and an associated reduction in trading costs. 
According to studies, these more liquid securities should trade at 
higher prices based on lower costs associated with their resale.\692\
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    \690\ The potential increase in access to capital for issuers is 
based on the likelihood that market changes as a result of the 
amendments could result in the divestiture of OTC securities more 
susceptible to fraud and manipulation and increased investment in 
OTC securities less susceptible to fraud and manipulation. However, 
to the extent that investment decisions are driven by other factors, 
such as a personal interest in specific companies, there might be no 
increase in access to capital for issuers.
    \691\ See John (Xuefeng) Jiang et al., Private Intermediary 
Innovation and Market Liquidity: Evidence from the Pink Sheets 
Market, 33 Contemp. Acct. Res. 920-48 (2016) (finding that, 
following the introduction of Pink tiers in OTC Markets Group, each 
associated with different self-established eligibility requirements 
pertaining to disclosure, firms with higher levels of disclosure 
experienced an increase in liquidity, while firms that did not 
disclose information experienced a decrease in liquidity); see also 
Br[uuml]ggemann et al., supra note 72 (finding that market liquidity 
and the propensity of a security to experience a crash in returns, 
both used as proxies for the quality of a security in the analysis, 
decrease monotonically when moving across OTC tiers from those with 
high regulatory strictness and disclosure requirements to those with 
lower requirements); Ryan Davis et al., Information and Liquidity in 
the Modern Marketplace (Working Paper, Nov. 21, 2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2873853.
    \692\ See Ang et al., supra note 3.
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    Conversely, issuers may also incur costs associated with making 
paragraph (b) information publicly available before broker-dealers can 
publish or submit quotations for their securities. We focus our 
discussion below on the costs of providing current and publicly 
available information for non-transparent catch-all issuers as any 
issuers that make disclosures pursuant to reporting obligations other 
than those contained within the amended Rule would incur costs 
attributable to those obligations and not to Rule 15c2-11. These costs 
could include preparing and producing paragraph (b) information in 
document form and ensuring that the paragraph (b) information is 
publicly available.\693\ Some commenters stated that certain OTC 
security issuers that do not make financial information widely 
available make the information available to their current shareholders 
either on a periodic basis or upon request.\694\ In addition, certain 
issuers may prepare financial information to meet state-level public 
reporting requirements. These issuers would likely face minimal costs 
associated with the preparation of paragraph (b) information. One 
commenter stated that because issuers of OTC securities have to prepare 
financial reports for reasons such as tax reporting, there would not be 
a burden associated with publishing unaudited financial statements on 
their websites.\695\ Other commenters stated that a qualified IDQS may 
charge a fee for publication of an OTC issuer's financial information 
on its website.\696\ However, the costs associated with making current 
information publicly available are mitigated by the fact that these 
amendments would offer several possible alternatives for releasing 
paragraph (b) materials, including making this information available on 
an issuer's website.\697\ The availability of multiple acceptable 
locations will provide issuers or other publishers of paragraph (b) 
information with flexibility in meeting the public availability 
requirement. To facilitate investor access to information, the amended 
Rule requires broker-dealers to make catch-all issuer information 
available upon the request of a person expressing an interest in a 
proposed transaction in the issuer's security, such as by providing the 
requesting person with appropriate instructions regarding how to obtain 
publicly available information electronically. In this regard, if such 
information is located on different websites, broker-dealers may 
provide the website addresses at which investors can find the 
information that is required to be publicly available. The amended Rule 
also provides flexibility with respect to the format of the paragraph 
(b) information issuers may opt to post on these websites. Certain 
formats such as standard text might reduce direct costs of information 
production for issuers.
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    \693\ Issuers that presently make disclosures publicly 
available, either voluntarily or because of a reporting obligation, 
and have systems in place for the preparation of these disclosures, 
would not face additional costs as a result of this amendment. An 
analysis of quoted OTC securities during the calendar year 2019 has 
revealed that approximately 18 percent of all catch-all issuers 
provide current and publicly available financial information. This 
estimate represents a lower bound as it is possible that some catch-
all issuers provide current and publicly available information 
somewhere other than on the OTC Markets Group platform, such as the 
issuer's website. See supra Part VI.B.
    \694\ See supra notes 257 and 258.
    \695\ Michael Hess.
    \696\ See, e.g., Beacon Redevelopment Letter; Virtu Letter.
    \697\ Presumably, issuers, investors, qualified IDQSs, the 
registered national securities association, or broker-dealers would 
choose the most cost-effective method to disseminate paragraph (b) 
information.
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    Finally, there may also be indirect costs to OTC issuers of 
disclosing paragraph (b) information, such as costs of revealing 
sensitive financial information that might be exploited by competitor 
firms, as discussed by commenters.\698\ The Commission recognizes that 
compliance with this requirement, including with respect to the 
financial information for an issuer that does not have a statute- or 
rule-based reporting obligation, such as a catch-all issuer, may reveal 
confidential financial or business information to competitors. The 
Commission nevertheless believes that, on balance, requiring current 
and publicly available information can help to better facilitate 
informed investment decisions by both existing investors and potential

[[Page 68192]]

investors in addition to better protecting retail investors from 
incidents of fraud and manipulation in OTC securities.
---------------------------------------------------------------------------

    \698\ See, e.g., Drinker Letter; Peter Quagliano.
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    Alternatively, OTC issuers, including dark catch-all issuers and 
delinquent reporting issuers, may elect not to provide paragraph (b) 
information to the public. The securities of these dark OTC issuers may 
exit from the quoted market as a result. A number of commenters stated 
that the absence of published quotes may limit liquidity in OTC 
securities without current and publicly available information and lead 
to losses for existing investors in these securities.\699\ One 
commenter argued that this effect may be more pronounced among retail 
investors because institutional investors may be able to sell stakes in 
dark companies through block trades.\700\ On the other hand, one 
commenter observed that published quotes for OTC securities without 
current and publicly available information may not be representative of 
the underlying value of the security.\701\
---------------------------------------------------------------------------

    \699\ See supra notes 207 and 209.
    \700\ Richard Krejcarek.
    \701\ See Jim Rivest (describing purchasing OTC securities of 
dark issuers at bargain prices relative to the value).
---------------------------------------------------------------------------

    The Commission acknowledges that OTC investors may incur costs 
associated with a loss of liquidity and possible associated decrease in 
share value if OTC issuers elect not to provide current and publicly 
available paragraph (b) information. While these costs to investors may 
be significant, the Commission believes that deterring fraud and 
manipulation in OTC securities justifies the requirement for paragraph 
(b) information to be current and publicly available to maintain a 
quoted market in these securities. This loss in share value, if it 
occurred, could arise from an increase in the costs of resale 
associated with the OTC stock when migrating to the grey market. The 
Commission does not believe that the securities of issuers with 
operations and profitability (or the prospect of future profitability) 
will become ``worthless'' as a result of the amendments, as suggested 
by one commenter.\702\ Issuers with operations and profits, even 
without a quotation for their securities by a broker-dealer, would 
presumably continue to operate and generate profits for their 
shareholders; thus, OTC shares will continue to represent a claim on 
these profits and assets. For newer issuers with prospective future 
profits, OTC shares would similarly represent a claim on these 
prospective profits. Therefore, they should continue to have some 
positive value. The Commission recognizes, however, that the share 
value may be lower than it would have been for the same financials due 
to a perceived loss of liquidity when losing the quoted market.
---------------------------------------------------------------------------

    \702\ Andersen Letter.
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    The Commission is unable to reasonably predict the extent to which 
OTC securities issuers that do not presently provide current and 
publicly available information will choose to do so, or continue not 
to, as a result of final amendments.\703\ Further, to the extent that 
certain OTC security issuers may choose to remain dark, the Commission 
is unable to quantify the potential impact on liquidity and value.\704\ 
Prior academic research and the Commission's own analysis suggests that 
there is presently limited liquidity and price discovery in the market 
for OTC securities of dark issuers, even when broker-dealers are 
frequently publishing quotations for such securities.\705\ In addition, 
the potential costs associated with a loss in liquidity may be 
partially mitigated by the ability of broker-dealers to publish 
quotations on behalf of existing shareholders relying on other 
exceptions (e.g., the unsolicited quotation exception), provided the 
requirements of the exception are met, as all investors, other than 
company insiders and issuer affiliates, will continue to have access to 
the quoted market. Any potential loss of liquidity for certain dark 
companies also may be mitigated to the extent the Commission issues 
exemptions to permit broker-dealers, subject to certain conditions and 
in limited circumstances, to continue to publish or submit quotations 
for dark issuers in reliance on the piggyback exception. Lastly, the 
amendments do not restrict investors from trading OTC securities 
without quotations on the grey market, and so investors will continue 
to be able to trade OTC securities of dark issuers.\706\
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    \703\ For example, the Commission is unable to quantify the 
benefits of disclosure to an issuer in terms of enhanced liquidity 
and access to capital. This benefit net of the costs of disclosure 
should, in principle, inform whether an issuer elects to provide 
current and publicly available paragraph (b) information or not.
    \704\ Using data available to the Commission, it is impossible 
to reliably isolate the effect of the presence and characteristics 
of published quotations from other factors that may affect liquidity 
and value of a particular OTC security. While the Commission does 
observe instances in which cessation of published quotations and 
migration to the grey market for some OTC securities is followed by 
subsequent drops in price and share volume, a causal relationship is 
difficult to establish because of other confounding factors 
contributing to the migration to the grey market (i.e., Commission-
ordered trading suspensions, financial distress, negative news 
releases, etc.).
    \705\ See supra note 64 for a discussion of academic studies 
examining the relationship between transparency and liquidity in the 
OTC market.
    The Commission estimates that an average (median) quoted OTC 
security of a dark issuer reported a positive dollar trading volume 
for 70 (51) days during calendar year 2019, while an average 
(median) quoted OTC security of an issuer with current and publicly 
available information reported trading for 100 (71) days during the 
same period. Further, on an average trading day during 2019, trading 
in quoted OTC security of dark issuers accounted for approximately 
one percent of aggregate daily trading volume across all OTC 
securities. Among OTC securities of catch-all issuers only, trading 
in dark OTC securities accounted for 12 percent of aggregate daily 
trading.
    In addition, the Commission finds that bid-offer spreads for 
dark OTC securities are significantly higher than those of OTC 
securities with current and publicly available information. In 
particular, during the average trading day during 2019, the average 
(median) bid-offer spread for a dark OTC security was 63 (50) 
percent, which was approximately 3 (8) times higher than the bid-
offer spread for OTC security with current and publicly available 
information. Bid-offer spreads are computed as the absolute 
difference between best closing bid and closing offer prices, 
divided by the midpoint of the bid and offer prices. See supra note 
640 for a description of OTC securities data sources.
    Lastly, based on data provided to the Commission by OTC Markets 
Group on the total counts of quote updates for each OTC security for 
calendar year 2019, the Commission finds that the mean (median) OTC 
security of a dark issuer saw 70 (6) times fewer quotation updates 
as compared to an OTC security of an issuer with current and 
publicly available information. Among OTC securities of catch-all 
issuers only, the mean (median) number of quotation updates during 
2019 was 4 (3) times lower for OTC securities of dark issuers.
    \706\ See supra note 647 for a comparison of daily trading 
volumes between quoted and grey OTC securities. The Commission also 
finds that while a lower number of grey securities traded on an 
average trading day during the calendar year 2019 as compared to the 
number of quoted OTC securities of dark issuers (553 grey securities 
vs. 965 dark quoted OTC securities), the total daily dollar volume 
in the grey market was approximately 43 percent higher than the 
total dollar trading volume of dark OTC securities. Among OTC 
securities of catch-all issuers only, the total daily dollar volume 
in the grey market was approximately 47 percent higher than the 
total dollar trading volume of dark OTC securities.
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    Some commenters were concerned that the amendments would encourage 
issuers to remain dark \707\ and make minority shareholders vulnerable 
to management buyouts at unfair discount prices.\708\ The Commission 
acknowledges that existing shareholders, including minority 
shareholders, of companies that do not have current and publicly 
available paragraph (b) information could incur costs if broker-dealers 
cease publishing quotations for the securities of such companies and, 
for example, OTC company insiders are able to repurchase shares from 
outside investors at lower

[[Page 68193]]

stock prices. However, the Commission believes that such impact would 
affect a limited number of existing shareholders in the overall market, 
since the Commission expects a majority of issuers may not engage in 
such activity. In addition, broker-dealers would not be able to publish 
a quotation relying on the unsolicited quotation exception on behalf of 
insiders of dark OTC issuers, possibly limiting insiders' ability to 
engage in these transactions. Furthermore, the Commission believes this 
impact is justified by the benefits of deterring fraud and manipulation 
and incentivizing greater issuer transparency, and contributing to more 
efficient price formation. The requirement for current and publicly 
available issuer information for a broker-dealer to rely on the 
piggyback exception to maintain a quoted market could also benefit 
existing shareholders, including minority shareholders or non-company 
insiders, due to more efficient pricing of securities that are less 
susceptible to manipulation.
---------------------------------------------------------------------------

    \707\ See, e.g., Anbec Partners Letter; Tim Bergin; Lucas 
Elliott; Ralf Erz; Braxton Gann; James Gibson; Han Han; William E. 
Mitchell; Daniel Raider; Michael E. Reiss; Mark Schepers; Dan Schum; 
Michael Tofias; Raymond Webb.
    \708\ Caldwell Sutter Capital Comment; Professor Angel Letter.
---------------------------------------------------------------------------

    Lastly, one commenter stated that a lack of quotations may make 
certain OTC securities more susceptible to manipulation.\709\ However, 
the Commission believes that the lack of a quoted market will be more 
likely to curtail trading by retail investors, making such securities 
less attractive to perpetrators of fraud.
---------------------------------------------------------------------------

    \709\ See Brad Christensen.
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    The Commission estimates that the cost to a catch-all issuer in 
connection with preparing and publishing the information required by 
the amended Rule may be comparable to the cost of completing and filing 
a Form C-AR under Regulation Crowdfunding.\710\ The staff report on 
Regulation Crowdfunding cites survey data and estimates related costs 
to issuers to be, at most $12,804.\711\ The Commission estimates that 
3,008 issuers of quoted OTC securities in 2019 did not provide current 
and publicly available information subject to the requirements of 
paragraph (b)(5).\712\ These non-transparent OTC issuers could make the 
specified information current and publicly available pursuant to the 
amended Rule's requirements for catch-all issuers and become eligible 
for a quoted market.\713\ Therefore, the Commission estimates that the 
maximum annual monetized cost of producing and updating paragraph (b) 
information and making it publicly available annually to be $38,514,432 
across OTC issuers.\714\ This cost may be mitigated by a number of 
factors, including whether some of the cost associated with ensuring 
that the paragraph (b) information is publicly available may be borne 
by broker-dealers intending to quote the security of this issuer.\715\ 
In addition, this estimate likely overstates the costs of preparing 
information as certain dark OTC issuers currently make financial 
information available to their current shareholders either on a 
periodic basis or upon request. Other OTC issuers on OTC Market's Pink 
Limited Information and Pink No Information tiers prepare financial 
information to meet state-level public reporting requirements. Both 
sets of issuers would likely face minimal costs associated with the 
preparation of paragraph (b) information.
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    \710\ Costs associated with preparing and publishing the 
information required by the amended Rule may depend on issuer 
characteristics (e.g., age, size, state of incorporation, etc.) and 
catch-all issuers of quoted OTC securities may differ from those 
subject to Regulation Crowdfunding. The Commission recognizes that 
the methodology above may underestimate or overestimate the costs of 
preparing and publishing the information for certain catch-all 
issuers.
    \711\ See SEC Staff, Report to the Commission: Regulation 
Crowdfunding (June 18, 2019), available at https://www.sec.gov/files/regulation-crowdfunding-2019_0.pdf. This report cites survey 
data and estimates costs to issuers undertaking a crowdfunding 
offering, including accounting costs of $3289, legal costs of $3297, 
and certain disclosure costs of $6218. Some of these costs may 
include costs unrelated to Form C-AR (such as legal review of 
promotional materials). Therefore, the cost cited above serves as an 
upper bound for the cost of completing and filing Form C-AR.
    \712\ See supra Part VI.B for an analysis of quoted OTC 
securities issuers for which there was no public information in 
2019.
    The number of issuer estimates here represents an upper bound on 
the number of issuers impacted by this amendment to the Rule for two 
reasons. First, certain issuers may be making current information 
publicly available (e.g., via the issuer's website or the website of 
a state of federal agency), but the issuer's security may still be 
quoted on the Pink Limited Information or Pink No Information tiers 
on the OTC Markets Platform. See supra note 651. Second, because OTC 
Markets Group's alternative reporting standard for catch-all issuers 
requires more frequent updating of financial information than this 
amendment to the Rule, some of the 1,980 catch-all issuers with OTC 
securities that are quoted on the Pink Limited Information or Pink 
No Information tiers may actually meet the amended Rule's 
requirement for current and publicly available information. In 
particular, using data from financial statements of quoted OTC 
securities, the Commission estimates that 222 dark catch-all issuers 
of quoted OTC securities (approximately seven percent of 3,008 dark 
issuers) had publicly available financial information dated within 
12 months of their OTC securities being quoted. See supra note 658 
for information on the data used.
    \713\ Any delinquent issuers that provide information pursuant 
to reporting obligations other than those contained within the 
amended Rule would incur costs attributable to those obligations and 
not to Rule 15c2-11.
    \714\ $12,804 x 3,008 issuers = $38,514,432. In the Commission's 
estimate of the maximum total cost to issuers of providing paragraph 
(b) information publicly, the Commission has assumed that all 
issuers of quoted OTC securities that do not currently provide 
information publicly will choose to do so consistent with the rule 
provisions. In addition, the Commission has assumed that these 
issuers will update this information annually to maintain 
eligibility for quotes in their securities to be initiated or 
submitted within an IDQS. It may be the case that some of these 
issuers will choose not to provide current and publicly available 
paragraph (b) information and quoting in their securities will 
cease. In these cases, costs associated with providing paragraph (b) 
information for these issuers will be null.
    \715\ For example, it is unclear the extent to which specific 
OTC issuers without current and publicly available paragraph (b) 
information may already be producing financial information 
internally or even have operations producing income and other 
accounting items. In these cases, the Commission expects the cost 
for these issuers would be less than the Commission's estimate.
---------------------------------------------------------------------------

    Broker-dealers will also incur costs related to determining and 
documenting whether or not OTC issuers have current and publicly 
available paragraph (b) information. The Commission believes that 
broker-dealers could set up information systems to assess whether these 
conditions apply to OTC securities such that there would be a one-time 
cost plus an ongoing cost for each security. The Commission believes 
that the hours in all of the following compliance cost estimates will 
be borne by internal staff at a rate of $70 per hour.\716\ Consistent 
with the PRA section,\717\ the Commission estimates that it would take 
a broker-dealer, IDQS, or national securities association one hour to 
establish a system to determine whether issuers have current and 
publicly available paragraph (b) information as well as to create 
associated documentation, for an aggregate cost of $5,740.\718\ 
Consistent with the PRA section,\719\ the Commission also estimates 
that it would take a broker-dealer, IDQS, or national securities 
association at most one minute per each OTC issuer to determine and 
document whether the issuer has current and publicly available 
paragraph (b) information; and that broker-dealers, qualified IDQSs, 
and registered national securities associations would create

[[Page 68194]]

such documentation no more frequently than quarterly for issuers with 
reporting obligations under the federal securities laws, Regulation A 
or bank reporting obligations, foreign private issuers,\720\ and 
annually for catch-all issuers.\721\ Therefore, the total cost per year 
of this determination and documentation would be $37,773 per year.\722\ 
However, the costs on individual broker-dealers may be substantially 
mitigated by permitting broker-dealers to rely on publicly available 
determinations by qualified IDQSs and national securities associations 
that an issuer has current and publicly available paragraph (b) 
information.
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    \716\ The $70 per hour figure for a compliance clerk is based on 
SIFMA's ``Office Salaries in the Securities Industry 2013,'' and has 
been modified by Commission staff to account for an 1,800-hour work 
year and inflation, and multiplied by 2.93 to account for bonuses, 
firm size, employee benefits and overhead.
    \717\ See supra Part V.C.2. The one hour burden in the PRA 
section includes the establishment of systems to both determine and 
document that paragraph (b) information is current and publicly 
available.
    \718\ (80 broker-dealers + 1 IDQS + 1 national securities 
association) x 1 hour x $70 = $5,740. These costs are an upper bound 
of the total costs on broker-dealers because the actual number of 
broker-dealers quoting OTC securities may be a subset of the 80 
broker-dealers identified by OTC Markets Group.
    \719\ See supra Part V.C.2. The one minute burden in the PRA 
section includes the time required to both determine and document 
that paragraph (b) information is current and publicly available.
    \720\ For purposes of paragraph (b)(3) of the amended Rule, the 
reporting issuer information considered timely filed and made 
publicly available would be the issuer's most recent annual report, 
together with any periodic or current reports filed thereafter by 
the issuer. Paragraph (b)(4) of the amended Rule provides a similar 
standard for foreign private issuer information, and calls for the 
information the issuer has published pursuant to 12g3-2(b) since the 
first day of the issuer's most recently completed fiscal year. The 
Commission expects that respondents will preserve records to 
document compliance with this requirement on a quarterly basis to 
capture quarterly reporting for these issuers. For purposes of this 
Economic Analysis, the Commission has adopted a more conservative 
approach of grouping Reg. A issuers, which have a semi-annual 
obligation, with issuers with quarterly reporting obligations.
    \721\ Paragraph (b)(5) of the amended Rule requires that the 
catch-all issuer information be ``current'' and publicly available 
annually, except for certain financial information: A balance sheet 
(as of a date less than 16 months before the publication or 
submission of a broker-dealer's quotation) and profit and loss and 
retained earnings statements (for the 12 months preceding the date 
of the most recent balance sheet). See supra Part II.B.3.
    \722\ (3081 SEC/Reg. A/Bank Reporting Obligation issuers x 1 
minute x 4 responses per year) + (4,413 exempt foreign private 
issuers x 1 minute x 4 responses per year) + (2,401 catch-all 
issuers x 1 minute x 1 response per year)]/60 x $70 = $37,773.
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    Broker-dealers may also incur costs or accrue benefits from changes 
in the liquidity of quoted OTC securities as a result of changes in 
demand associated with new current and publicly available information 
within quoted markets. For example, there may be changes in trading 
volume which alter the number of transactions from which broker-dealers 
earn fees. As discussed below, there may be migration from the quoted 
market to the grey market for OTC issuers avoiding these requirements. 
Therefore, the proportion of rents earned by broker-dealers from the 
grey market for OTC securities may increase relative to the quoted 
market. The net effect of these changes on the profits of trading 
intermediaries is unclear. Some of these costs and benefits to broker-
dealers may be passed on to investors in the form of higher or lower 
transaction costs and account fees. The Commission anticipates that 
costs and benefits would be passed on more readily as competition 
increases among broker-dealers for OTC transactions.
(b) Amendments to Rule 15c2-11 Exceptions
    The following amendments to the piggyback exception would serve to 
limit the circumstances under which the exception would apply relative 
to the baseline: The requirement for paragraph (b) information to be, 
depending on the regulatory status of the issuer, filed within 180 
calendar days from a specified period, timely filed, or current and 
publicly available for broker-dealers to continue to rely on the 
piggyback exception; the requirement that reliance on the piggyback 
exception be based upon priced quotations with either bid or offer 
prices; and the elimination of piggyback eligibility for quotations for 
securities of shell companies that are published or submitted 18 months 
following the publication or submission of the initial priced quotation 
for such issuer's security in an IDQS or for securities within 60 
calendar days of a trading suspension. Such amendments generally would 
serve to draw quotation and trading activity away from less liquid and 
less transparent quoted OTC securities. Hence, these amendments to the 
piggyback exception are designed to provide narrowly tailored updates 
to prevent fraud and manipulation, while otherwise maintaining 
liquidity in OTC market.
    Currently, broker-dealers may rely on the piggyback exception to 
publish or submit quotations for the vast majority of quoted OTC 
securities, but many issuers of these securities do not provide current 
and publicly available financial information.\723\ The requirement that 
an issuer's paragraph (b) information be, depending on the regulatory 
status of the issuer, filed within 180 calendar days from a specified 
period, timely filed, or current and publicly available, would 
encourage the production and publication of such information so that 
broker-dealers could continue to publish quotations in reliance on the 
piggyback exception. The Commission discusses in detail the expected 
benefits and costs associated with providing current information 
publicly for investors, issuers of quoted OTC securities, and broker-
dealers.\724\ In general, the ease of accessing information on the 
internet should allow investors to migrate toward forming inferences 
about the value of OTC securities based upon paragraph (b) information 
and away from inferences based principally upon the prices of 
piggybacked quotes.
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    \723\ See supra note 686. The Commission estimates that during 
the calendar year 2019, issuers of 3,014 quoted OTC securities for 
which broker-dealers could rely on the piggyback exception when 
publishing quotations, did not have current and publicly available 
information.
    \724\ See supra Part V.C.1.a.
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    Generally, these amendments could benefit investors by drawing 
their trading activity away from less liquid and less transparent 
quoted OTC securities that could attract fraudulent activity, thereby 
potentially deterring fraudulent activity. For example, the inability 
of broker-dealers to rely on the piggyback exception where there is no 
current and publicly available information about the issuer could draw 
trading activity away from these securities. Currently, many 
publications of quotations for quoted OTC securities associated with 
completely dark issuers are eligible for broker-dealers to rely on the 
piggyback exception. Potential fraudsters could incur costs in 
providing paragraph (b) information to perpetrate fraud in these dark 
issuers. Alternatively, quotations for OTC securities would not be 
easily accessible to retail investors if the issuer does not provide 
current and publicly available information, which could cause 
fraudsters to have more difficulty in driving up the price for an OTC 
security. In addition, higher quality issuers in the OTC market could 
benefit from greater access to capital to the extent that the change 
leads to a net increase in demand for higher quality OTC stocks and a 
net decrease in demand for less liquid quoted OTC securities that could 
attract fraudulent activity.\725\ However, to the extent that 
investment decisions are driven by other factors, such as a personal 
interest in specific companies, there might be no increase in access to 
capital for certain issuers.
---------------------------------------------------------------------------

    \725\ See supra note 690.
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    These amendments could also cause broker-dealers to incur 
additional costs. In particular, broker-dealers may need to comply with 
the information review requirement as well as file FINRA Forms 211 to 
resume a quoted market in securities that lose piggyback eligibility as 
a result of the amendments. The Commission estimates that it will take 
broker-dealers four hours to complete the information review and file 
Form 211 for prospectus issuers, Reg. A issuers, and reporting issuers 
and eight hours to do so for exempt foreign private issuers or catch-
all issuers whenever a broker-dealer initiates the publication or 
submission of a quotation for an OTC security.\726\ These costs are

[[Page 68195]]

mitigated by the fact that information can be readily accessed through 
the internet. Therefore, broker-dealers will bear a monetized cost of 
$280 for prospectus issuers, Reg. A issuers, crowdfunding issuers, and 
reporting issuers, $560 for exempt foreign private issuers and catch-
all issuers whenever a broker-dealer initiates the publication or 
submission of a quotation in an OTC security.\727\ The Commission 
estimates that 3,489 securities would lose piggyback eligibility as a 
result of the changes to the piggyback exception.\728\ Therefore, the 
aggregate monetized cost on broker-dealers would be $1,612,240 assuming 
that 1,220 securities were from prospectus, Reg. A, crowdfunding, or 
reporting issuers, 216 were from exempt foreign private issuers, and 
2,053 were from catch-all issuers.\729\ However, these costs of 
individual broker-dealers may be mitigated by allowing a qualified IDQS 
to satisfy the information review requirement under the Rule, as these 
amendments permit.\730\
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    \726\ The Commission estimates that it would take one hour for a 
broker-dealer to complete and file FINRA Form 211. The estimate 
above represents an average number of hours per security across the 
set of all securities for which broker-dealers comply with the 
information review requirement and file a Form 211 to resume a 
quoted market. The Commission recognizes that broker-dealers may 
spend more time than the average to comply with the information 
review requirement for certain securities, such as those that raise 
multiple red flags.
    \727\ 4 hours x $70 per hour = $280 for prospectus, Reg. A, and 
reporting issuers; 8 hours x $70 per hour = $560 for exempt foreign 
private issuers and for catch-all issuers.
    \728\ The Commission estimates that during 2019, broker-dealers 
could publish quotations relying on the piggyback exception for 
9,864 quoted OTC securities. The Commission estimates the total 
number of securities that would lose piggyback eligibility under 
these amendments by considering the number of securities that were 
piggyback eligible, but also would meet at least one of the 
following conditions: (1) The issuer of the quoted OTC security did 
not provide public information (3,059 securities); (2) the issuer of 
the quoted OTC security was a shell company and the initial priced 
quotation for its security was more than 18 months ago (460 
securities); (3) the security did not have either a priced bid or 
offer quotations for four or more consecutive days (264 securities); 
and (4) the security was piggyback eligible after having been 
suspended (219 securities).
    Of the 3,489 securities that would lose piggyback eligibility 
under these amendments, 1,220 were securities of prospectus issuers, 
Reg. A issuers, and reporting issuers, 216 were securities of exempt 
foreign private issuers, and 2,053 were securities of catch-all 
issuers.
    The estimated number securities that would lose piggyback 
eligibility (as a result of their issuers' paragraph (b) information 
not being current and publicly available) represents an upper bound. 
See supra note 651.
    \729\ 1,220 x $280 + 216 x $560 + 2,053 x $560 = $1,612,240. To 
the extent that broker-dealers may maintain the ability to rely on 
the piggyback exception by starting to publish either bid or offer 
quotations for securities that are presently piggyback eligible with 
only unpriced quotations, fewer securities may lose piggyback 
eligibility under these amendments than the estimates the Commission 
presents. As noted in the PRA section, broker-dealers may also 
withdraw from quoting in securities such as shell companies and 
suspended securities. Therefore, the Commission expects the costs 
for broker-dealers computed here to be an upper bound.
    \730\ One commenter stated that there is uncertainty around the 
costs that broker-dealers may incur for the services provided by a 
qualified IDQS and the extent to which the costs for such services 
may be passed down to issuers and investors. See Virtu Letter. The 
Commission acknowledges that there may be uncertainty in the costs 
broker-dealers incur for the services provided by a qualified IDQS 
as a result of these amendments. These costs are included in the 
upper bound estimates above, which aggregates the cost of 
information review for OTC securities losing piggyback eligibility 
irrespective of whether this review is conducted by a broker-dealer 
or qualified IDQS.
---------------------------------------------------------------------------

    Broker-dealers will also incur costs related to determining and 
documenting whether or not these conditions apply to the issuer (i.e., 
whether the issuer is a shell company within the Rule definition). The 
Commission believes that broker-dealers could set up information 
systems to assess whether these conditions apply to OTC securities such 
that there would be a one-time cost plus an ongoing cost for each 
security. Several comments stated that it may be difficult for broker-
dealers to determine whether an OTC securities issuer is a shell 
company.\731\ However, costs associated with determinations of whether 
conditions of the Rule apply to OTC securities may be mitigated by 
permitting broker-dealers to rely on publicly available determinations 
by qualified IDQSs and national securities associations that an 
exception to the Rule applies. Consistent with the PRA section,\732\ 
the Commission estimates that it would take a broker-dealer, IDQS, or 
national securities association a total of nine hours to establish a 
system to determine whether or not the piggyback exception applies to a 
particular security as well as to create associated documentation, for 
an aggregate cost of $51,660.\733\ Consistent with the PRA 
section,\734\ the Commission estimates that it would take a broker-
dealer, IDQS, or national securities association at most one minute per 
each OTC security per quarter to determine and document whether the 
issuer is a shell company in order to rely upon the piggyback 
exception. Therefore, the maximum aggregate ongoing cost of this 
determination and documentation would be $3,097,400 per year.\735\ In 
addition, the Commission estimates that it would take one second for a 
broker-dealer, qualified IDQS, or registered national securities 
association to create a record regarding the frequency of a priced bid 
or offer quotation when the piggyback exception applies and that each 
respondent would do this 252 times a year (i.e., each trading day). 
Therefore, the maximum aggregate ongoing cost of this determination and 
documentation would be $4,637,576 per year.\736\ The Commission 
believes that a broker-dealer, qualified IDQS, or registered national 
securities association needs to create records for securities that have 
been the subject of a trading suspension in order to fulfill the 
amended requirements of the piggyback exception. In 2019, the 
Commission issued a trading suspension for 213 securities. Consistent 
with the PRA section,\737\ it is estimated that it would take a broker-
dealer, qualified IDQS, or registered national securities association 
approximately one minute to create a record regarding whether a 
security has been subject to a trading suspension.\738\ Therefore, the 
maximum aggregate ongoing cost of this determination and documentation 
would be $20,377 per year.\739\
---------------------------------------------------------------------------

    \731\ See, e.g., Coral Capital Letter; OTC Markets Letter 1; STA 
Letter; Virtu Letter. See supra Part II.D.4.
    \732\ See supra Part V.C.2.b. The nine hour burden in the PRA 
section includes the establishment of systems to both determine and 
document that the piggyback exception applies to a particular OTC 
security. In the PRA section, the documentation of trading 
suspensions, determination and documentation of shell company 
status, as well as documentation of the frequency of bid and offer 
prices are each attributed three hours of this systems cost.
    \733\ (80 broker-dealers + 1 IDQS + 1 national securities 
association) x 3 hours x $70 = $17,220. These costs are an upper 
bound of the total costs on broker-dealers because the actual number 
of broker-dealers quoting OTC securities may be a subset of the 80 
broker-dealers identified by OTC Markets Group.
    \734\ See supra Part V.C.2.b. The one minute burden in the PRA 
section includes the time required to both determine and document 
that an OTC issuer is a shell company.
    \735\ (80 broker-dealers + 1 IDQS + 1 national securities 
association) x [(3081 SEC/Reg. A/Bank Reporting Obligation issuers x 
1 minute x 4 responses per year) + (4413 exempt foreign private 
issuers x 1 minute x 4 responses per year) + (2401 catch-all issuers 
x 1 minute x 1 response per year)] x 1/60 hours x $70 = $3,097,400.
    \736\ (80 broker-dealers + 1 IDQS + 1 national securities 
association) x (11,542 OTC issuers) x 1/3600 hours x 252 trading 
days per year x $70 = $4,637,576.
    \737\ See supra Part V.C.2.b.
    \738\ See supra Part V.C.2.b.
    \739\ (80 broker-dealers + 1 IDQS + 1 registered national 
securities association) x (213 trading suspensions) x 1/60 hours x 
$70 = $20,377.
---------------------------------------------------------------------------

    Alternatively, broker-dealers could withdraw from publishing or 
submitting quotations for certain OTC securities as a result of the 
requirements related to paragraph (b) information, including the 
requirements to review and retain this information, as suggested by 
commenters.\740\ This withdrawal may

[[Page 68196]]

impose costs on investors by reducing liquidity for OTC securities they 
might want to purchase or already owned before the withdrawal of 
liquidity. In addition, such withdrawal might impose costs of raising 
capital for OTC issuers. Broker-dealers, again, could incur costs and 
benefits associated with possible migration in trading activity from 
certain issuers to others as well as from the quoted to non-quoted 
market. Some of these costs and benefits to broker-dealers, again, may 
be passed on to investors.
---------------------------------------------------------------------------

    \740\ See, e.g., Coral Capital Letter. The Commission is unable 
to quantify the extent of any such withdrawal by broker-dealers as a 
result of information review requirements. For example, the 
Commission lacks data on profits earned from market making activity 
in OTC stocks which would inform this decision. Furthermore, the 
Commission is unable to quantify the effect of any such withdrawal 
on liquidity in the OTC market. For example, the Commission lacks 
data on the number and identities of broker-dealers are that are 
publishing quotes for OTC securities in reliance on the piggyback or 
other exceptions to the Rule. As such, it cannot estimate the degree 
of activity and concentration in this market by individual broker-
dealers with respect to piggybacking quotes. See supra Part VI.A.
---------------------------------------------------------------------------

    The amended requirement that reliance on the piggyback exception be 
conditioned on quotations with at least a bid or offer quotation at a 
specified price also could impose costs on broker-dealers and issuers 
of quoted OTC securities by possibly limiting the formation of an 
active quoted market for OTC securities for which broker-dealers 
initially publish unpriced quotes. The Commission estimates that, out 
of 345 quoted OTC securities for which broker-dealers could start 
relying on the piggyback exception to publish or submit quotations 
during the calendar year 2019, 34 (10 percent) had unpriced quotes only 
for the entire first 30-days of being quoted.\741\ At the same time, 
however, if the requirement were to encourage broker-dealers to shift 
away from publishing unpriced quotations to publishing priced 
quotations for some quoted OTC securities, the amended requirement may 
expedite the development of a priced market and facilitate price 
discovery and liquidity in these securities.
---------------------------------------------------------------------------

    \741\ Of the 34 quoted OTC securities that became piggyback 
eligible based on unpriced quotations, 22 (65 percent) had a 
published priced quote within the first 60 days after becoming 
piggyback eligible.
---------------------------------------------------------------------------

    In contrast, eliminating from the piggyback exception the 
requirement for 12 days of quotations within the previous 30 calendar 
days has the potential to widen the circumstances under which broker-
dealers may rely on the piggyback exception relative to the baseline. 
This amendment could make publishing quotations and trading easier in 
less liquid securities. Therefore, this amendment could, in principle, 
mitigate both the benefits and costs of the amendments described above. 
However, the Commission expects that eliminating the 12-day 
publication-of-quotations requirement would have an insignificant 
effect on the OTC market as it should only impact a small fraction of 
quoting activity. In particular, of all quoted OTC securities in the 
calendar year 2019, the Commission estimates that only 16 of more than 
10,000 securities had fewer than 12 days of published quotations within 
the 30 previous calendar days, with no more than four business days in 
succession without a priced quotation.
    Eliminating the 30-day requirement before OTC securities become 
eligible for the piggyback exception can increase price competition 
between broker-dealers. In particular, all broker-dealers would be able 
to rely on the piggyback exception to begin quoting an OTC security 
during the 30-day period after the initial quote under the amended 
Rule. This increased competition could decrease the cost of bid-offer 
spreads for OTC investors during this 30-day period. However, this 
increased competition may deter broker-dealers from conducting the 
initial information review and filing of FINRA Form 211. Therefore, the 
net effect on the liquidity of OTC securities and the trading costs of 
OTC investors is unclear.
    These amendments also include changes to the exception for 
unsolicited customer quotations. In particular, the amendments limit 
reliance on the unsolicited quotation exception on behalf of company 
insiders and affiliates of the issuer when paragraph (b) information is 
not current and publicly available. These amendments could increase 
costs for broker-dealers because they may need to verify whether 
paragraph (b) information is current and publicly available. Broker-
dealers could also be required to document and record the circumstances 
involved in an unsolicited customer quotation. Two commenters stated 
that it may be difficult for broker-dealers to determine whether 
quotations are submitted on behalf of company insiders or affiliates, 
especially in cases when market makers receive order flow from retail 
broker-dealers.\742\ However, this cost may be mitigated by the 
possibility under these amendments that the quoting broker-dealer may 
rely upon a written representation from a customer's broker that such 
customer is not a company insider.
---------------------------------------------------------------------------

    \742\ See, e.g., Canaccord Letter; OTC Markets Letter 3.
---------------------------------------------------------------------------

    Consistent with the PRA section,\743\ the Commission estimates that 
it would take a broker-dealer, IDQS, or national securities association 
at most three hours to establish a system to document and record the 
circumstances of an unsolicited customer quotation, for an aggregate 
cost of $17,220.\744\ Consistent with the PRA section,\745\ the 
Commission also estimates that it would take a broker-dealer one minute 
to document and record these circumstances for each customer order 
arising from a distinct customer and circumstance. There were 5,782,286 
quotations published in reliance on the unsolicited quotation exception 
in 2019 based on OTC Markets Group data. Therefore, it is estimated 
that annually, broker-dealers would spend at most $6,746,000 \746\ in 
the aggregate complying with this requirement. Broker-dealers could 
withdraw from quoting for unsolicited customer orders as result of 
these costs, which could impose costs on OTC investors and issuers as 
discussed previously.
---------------------------------------------------------------------------

    \743\ See supra Part V.C.2.a.
    \744\ (80 broker-dealers + 1 IDQS + 1 national securities 
association) x 3 hours x $70 = $17,220. These costs are an upper 
bound of the total costs on broker-dealers because the actual number 
of broker-dealers quoting OTC securities may be a subset of the 80 
broker-dealers identified by OTC Markets Group.
    \745\ See supra Part V.C.2.a.
    \746\ (5,782,286 quotations x 1 minute)/60 minutes x $70 = 
$6,746,000. This estimate reflects an upper bound as not all of 
these quotations necessarily represent distinct customers under 
distinct circumstances, such that not all of these quotations would 
require a separate document and record.
---------------------------------------------------------------------------

    The costs incurred by broker-dealers related to the unsolicited 
quotation exception could be passed on to OTC investors. For example, 
OTC investors may be required to provide documentation supporting the 
fact that they are not a prohibited person within this exception. The 
magnitude of this potential cost to OTC investors could vary 
significantly depending on the manner in which the supporting 
documentation is or is not acquired by broker-dealers. However, the 
Commission believes that this cost could be minimal because there are 
means to provide documentation such as through attestations which would 
require minimal resources on the part of the investor. In addition, OTC 
investors seeking to transact using unsolicited orders may incur costs 
related to reduced liquidity if broker-dealers withdraw from quoting 
unsolicited customer orders as a result of costs. This reduced 
liquidity would pertain to certain OTC securities for which the issuer 
elects not to make paragraph (b)

[[Page 68197]]

information current and publicly available.
    There could also be benefits to OTC investors from the requirement 
for broker-dealers to obtain and review paragraph (b) information when 
the unsolicited quotation exception does not apply. For example, the 
review of paragraph (b) information in order to provide a quotation for 
an unsolicited customer quotation of a company insider or issuer 
affiliate could deter fraud by alerting broker-dealers to potential 
sales by company insiders or issuer affiliates related to fraud. In 
addition, as discussed above in relation to the new limitations on the 
piggyback exception, the costs and benefits to investors, issuers and 
broker-dealers would be qualitatively similar. OTC investors could 
benefit if quotations and trading activity migrate away from fraudulent 
investments. Higher quality issuers in the OTC market could also 
benefit from greater access to capital. Broker-dealers could also incur 
costs and benefits associated with possible migration in trading 
activity if unsolicited customer orders move from quoted to non-quoted 
markets. These costs and benefits could be passed on to OTC investors. 
Finally, there would be benefits and costs associated with the 
requirements pertaining to current and publicly available paragraph (b) 
information, as the unsolicited quotation exception for a company 
insider or issuer affiliate would be contingent on this information 
being current and publicly available.
(c) New Exceptions to Rule 15c2-11 To Reduce Burdens
    The amended Rule introduces three new exceptions to except 
publications of quotations for certain OTC securities from the 
provisions of Rule 15c2-11, primarily the requirement for broker-
dealers to obtain and review paragraph (b) information. The first of 
the three new exceptions would apply to securities with (1) a $100,000 
ADTV value and where (2) the issuer of such security has $50 million 
total assets value and $10 million shareholders' equity on the issuer's 
publicly available audited balance sheet issued within six months after 
the end of the most recent fiscal year. This exception would apply only 
to securities for which paragraph (b) information is current and 
publicly available. This exception is meant to target more visible 
quoted OTC securities for which current and reliable information about 
the issuer is publicly available to investors, specifically for larger 
issuers, and for more liquid securities. Larger companies with greater 
trading activity may be less vulnerable to fraud for a number of 
reasons. For example, there may be a greater likelihood of arbitrage or 
information-based trading with higher trading activity, which can drive 
prices toward fundamental values. Larger issuers may also attract this 
type of trading activity through their visibility. In addition, 
companies with higher shareholder equity may be more expensive to 
acquire, making them less vulnerable to being purchased for the 
purposes of perpetrating a fraudulent scheme. The analysis in the 
baseline revealed no issuers that had financial information publicly 
available to investors and that had been the subject of Commission-
ordered trading suspensions or assigned a ``caveat emptor'' designation 
by OTC Markets Group in calendar year 2019 would have met both the ADTV 
and assets test prongs of the ADTV and asset test exception.\747\ 
Therefore, the Commission expects that many other quoted OTC securities 
that would qualify for these exceptions would be less susceptible to 
misinformation campaigns and share price run-ups as a result of buying 
pressure.
---------------------------------------------------------------------------

    \747\ The Commission finds that in 2019, seven suspended 
securities and nine ``caveat emptor'' securities had an ADTV value 
in excess of $100,000. However, issuers of these securities would 
not have satisfied the thresholds for assets and shareholder equity 
required to qualify for the exemption under these amendments. 
Similarly, three issuers of suspended securities and three issuers 
of securities with the ``caveat emptor'' designation that would have 
met the assets and the shareholder thresholds but would not have had 
sufficient trading volume to meet the liquidity threshold.
    Because delinquent filings may be the reason for the trading 
suspension, the Commission is aware that the Commission's analysis 
using data on total assets and shareholder equity of issuers with 
suspended OTC securities may rely on information which is outdated 
and no longer representative of issuer fundamentals.
---------------------------------------------------------------------------

    The main economic effect of the ADTV and assets test exception 
should be to relieve broker-dealers from the information review 
requirement and filing a FINRA Form 211 to publish quotations in a 
quotation medium. As before, the Commission estimates that broker-
dealers will incur relief from a monetized cost of $280 for prospectus 
issuers, Reg. A issuers, crowdfunding, and reporting issuers, $560 for 
exempt foreign private and catch-all issuers whenever a broker-dealer 
publishes or submits a quotation for issuers satisfying these 
requirements. Consistent with the PRA section,\748\ the Commission 
estimates that two reporting issuers and four exempt foreign private or 
catch-all issuers per year would satisfy these requirement so that the 
total cost savings would be $2,800.\749\ Broker-dealers would also need 
to incur the costs of determining and creating documentation supporting 
the broker-dealer's reliance on the ADTV and asset test. Consistent 
with the PRA section,\750\ the Commission estimates that it would take 
one minute to create documentation supporting the broker-dealer's 
reliance on the asset test prong of the exception and that broker-
dealers would do this at most once annually per issuer.\751\ In 
addition, the Commission estimates that it would take one minute for a 
broker-dealer, qualified IDQS, or registered national securities 
association to preserve documents and information that demonstrate that 
the requirements of the ADTV test have been met and that each 
respondent would do this 252 times a year (i.e., each trading 
day).\752\ Therefore, the total cost of determination and documentation 
related to the ADTV and asset test would be $4,356,660 each year.\753\ 
Broker-dealers would also need to incur costs to establish systems to 
verify and document that OTC issuers

[[Page 68198]]

satisfy these ADTV and size thresholds. Consistent with the PRA 
section,\754\ the Commission estimates that it would take a broker-
dealer, IDQS, or national securities association three hours to 
establish a system to determine whether or not the ADTV and assets test 
exception applies to a particular security as well as to create 
associated documentation, for an aggregate cost of $17,220.\755\
---------------------------------------------------------------------------

    \748\ See supra Part V.C.2.c.
    \749\ (2 reporting issuers x $280) + (4 foreign private or 
catch-all issuers x $560) = $2,800.
    The Commission estimates that approximately 180 (two percent) of 
quoted OTC securities on an average day during calendar year 2019 
would be eligible for the ADTV and assets exception. Of these 
securities, approximately 35 percent were of reporting issuers, 63 
percent were of exempt foreign private issuers and the remaining two 
percent were of catch-all issuers. Applying these proportions to the 
384 OTC securities for which broker-dealers were required to conduct 
an information review for the initiation or the resumption of 
quotations, yields securities of two reporting issuers and four 
exempt foreign private or catch-all issuers.
    There could be additional relief as a result of the ADTV and 
assets exception for broker-dealers quoting securities that end up 
losing piggyback eligibility under the paragraph (f)(3) exception. 
The Commission estimates that out of the 3,489 securities that would 
lose piggyback eligibility under these amendments five securities of 
prospectus issuers, Reg. A issuers, crowdfunding, and reporting 
issuers and one security of an exempt foreign private issuer would 
have satisfied the ADTV value and assets thresholds. The ability of 
broker-dealers to rely on the paragraph (f)(5) exception for 
securities for which they could no longer rely on the paragraph 
(f)(3) exception could lead to an additional relief of five x $240 + 
1 x $480 = $1,680.
    \750\ See supra Part V.C.2.c.
    \751\ The one minute burden in the PRA section for the ADTV 
prong of the exception includes the time required to both determine 
and document that the threshold applies to a particular OTC issuer.
    \752\ See supra Part V.C.2.c. The one minute burden in the PRA 
section for the asset prong of the exception includes the time 
required to both determine and document that the threshold applies 
to a particular OTC issuer.
    \753\ (252 days x 180 securities x 1 minute)/60 minutes x $70 + 
(180 securities x 1 minute)/60 minutes x $70 = $53,130. (80 broker-
dealers + 1 IDQS + 1 national securities association) x $53,130 = 
$4,356,660. The Commission estimates that approximately 180 (two 
percent) of quoted OTC securities on an average day during calendar 
year 2019 would be eligible for the ADTV and assets exception.
    \754\ See supra Part V.C.2.c. The three hour burden in the PRA 
section includes the establishment of systems to both determine and 
document that the ADTV and assets test applies to a particular OTC 
security.
    \755\ (80 broker-dealers + 1 IDQS + 1 national securities 
association) x 3 hours x $70 = $17,220. These costs are an upper 
bound of the total costs on broker-dealers because the actual number 
of broker-dealers quoting OTC securities may be a subset of the 80 
broker-dealers identified by OTC Markets Group.
---------------------------------------------------------------------------

    Some of these benefits and costs may be passed on to OTC investors. 
Certain issuers or securities that would meet the Rule's ADTV and asset 
test exception but that currently trade in the grey market may benefit 
from a broker-dealer establishing a quoted market without incurring 
costs associated with complying with the Rule's provisions. This 
migration may result in a benefit to investors to the extent that it 
may establish a new quoted market that facilitates price discovery and 
liquidity for higher quality securities previously traded in the grey 
market.
    The second of the three new exceptions would apply to quotations 
following a registered or Regulation A offering, where the broker-
dealer was named as an underwriter in the registration statement or 
offering circular and publishes or submits quotations for the same 
class of security in an IDQS within certain specified time frames. This 
exception is targeted towards those OTC securities that were recently 
offered in a transaction in which a regulated entity may have conducted 
a due diligence review. Because of the liability attached to 
underwriting activity, an underwriter typically conducts a due 
diligence review to mitigate potential liability associated with 
underwriting an offering of securities. Depending on its breadth and 
quality, this review may permit an underwriter to assert a defense to 
liability under Section 11 or Section 12(a)(2) of the Securities Act. 
As a result, underwriters of registered and Regulation A offerings are 
incentivized to confirm that the information provided to investors in 
the prospectus for a registered offering and offering circular for a 
Regulation A offering is materially accurate and obtained from a 
reliable source. Thus, excepting publications or submissions of 
quotations by underwriters from the Rule's provisions is expected to 
reduce the burden of complying with the Rule for such broker-dealers 
without sacrificing investor protection. The Commission does not 
currently have data that allow it to estimate the propensity with which 
broker-dealers are underwriting offerings for the same securities for 
which they are publishing quotations and thus quantify the effect of 
this exception on broker-dealers.
    In addition, the Commission is adopting an exception for 
publications or submissions of quotations respecting securities where a 
qualified IDQS complies with the Rule's provisions. Broker-dealers 
could rely on a publicly available determination by a qualified IDQS 
that paragraph (b) information is current and publicly available for a 
given security, as well as whether a broker-dealer may rely on certain 
exceptions to the Rule. This exception is expected to reduce the burden 
on some broker-dealers with respect to publishing or submitting 
quotations for certain OTC securities. In particular, the Commission 
expects the main economic effect of this exception to be mitigating 
costs broker-dealers are expected to incur associated with determining 
certain characteristics about an issuer (e.g., whether the security 
satisfies the criteria for the ADTV and asset test exception).
    Lastly, the Commission is also adopting an exception for 
publications or submissions of quotations by broker-dealers that rely 
on publicly available determinations by a qualified IDQS or a 
registered national securities association that paragraph (b) 
information is current and publicly available, as well as whether a 
broker-dealer may rely on certain exceptions to the Rule. The 
Commission expects the main economic effect of this exception to be 
mitigating costs broker-dealers are expected to incur associated with 
determining certain characteristics about an issuer (e.g., whether the 
issuer is a shell company within the definition, or whether the 
security jointly satisfies the ADTV and assets tests). The quantified 
costs above for these determinations provide an upper bound for 
aggregate costs irrespective of whether they are made by a broker-
dealer, qualified IDQS, or registered National Securities Association.
    Under the amended Rule, a qualified IDQS or registered national 
securities association must also establish, maintain, and enforce 
reasonably designed written policies and procedures to make certain 
publicly available determinations.\756\ Consistent with the PRA 
section,\757\ the Commission estimates that it would take one qualified 
IDQS and one registered national securities association subject to the 
amended Rule approximately 9 hours each to initially prepare these 
written policies and procedures, and 5 hours each on an ongoing annual 
basis to review and update policies and procedures, resulting in an 
aggregate cost of $1,260 initially \758\ and $700 annually \759\ 
thereafter.
---------------------------------------------------------------------------

    \756\ Amended Rule 15c2-11(a)(3).
    \757\ See supra Part V.C.2.f.
    \758\ (1 IDQS + 1 national securities association) x 9 hours x 
$70 = $,1260.
    \759\ (1 IDQS + 1 national securities association) x 5 hours x 
$70 = $700.
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2. Efficiency, Competition, and Capital Formation
    In this section, the Commission discusses the impact that these 
amendments to Rule 15c2-11 may have on efficiency, competition, and 
capital formation. As discussed above, these amendments generally would 
increase transparency by requiring public availability of paragraph (b) 
information that is current to enable broker-dealers to publish or 
submit quotations for OTC securities. As a result, these amendments may 
cause capital to migrate from opaque to more transparent companies. A 
transfer of capital could occur as a result of OTC issuers without 
current and publicly available information either exiting the OTC 
market altogether because broker-dealers could no longer publish 
quotations for the securities of such issuer or migrating from the 
quoted OTC market to the grey market. Less liquid OTC securities could 
also migrate away from the quoted OTC market as a result of these 
restrictions on the piggyback exception pertaining to (1) shell 
companies, (2) recently suspended securities, and (3) securities 
without a sufficient prior history of either bid or offer prices. One 
academic study finds that valuations decrease when firms migrate from 
more liquid markets to less liquid markets, possibly as a result of 
decreased access to capital.\760\ Therefore, investors may reallocate 
capital away from OTC issuers of these less liquid securities as these 
issuers exit the quoted OTC market. The loss of a quoted market and the 
information embedded in prices may affect an issuer's ability to raise 
capital through stock issuances or through other channels of finance, 
such as debt. These amendments could decrease investors' exposure to 
fraudulent activity involving non-transparent securities.

[[Page 68199]]

Capital formation could improve as investors' funds are diverted away 
from fraudulent OTC securities, which would migrate away from the 
quoted OTC market, and investors move toward the investments that 
remain.
---------------------------------------------------------------------------

    \760\ See Angel et al., supra note 243.
---------------------------------------------------------------------------

    In addition, the transparency of the market for quoted OTC 
securities should generally improve, particularly for previously dark 
issuers where paragraph (b) information is made current and publicly 
available for broker-dealers to continue to publish quotations. Capital 
formation could improve as investors allocate funds toward more 
productive investments based on enhanced availability of paragraph (b) 
information in the quoted market for OTC securities. In particular, 
investors may be able to better discern the value of an OTC security 
from the financial and qualitative data contained in paragraph (b) 
information. As a result of these effects, these amendments could 
generally enhance the efficiency of capital allocation, i.e., the 
degree to which funds are diverted away from low value investments and 
toward high value investments. Previous academic studies have 
documented a relationship between greater quality of a firm's 
disclosures and a decreased cost of capital for the firm.\761\ Other 
studies find a relationship between increased quality and frequency of 
accounting disclosures and the productivity of corporate 
investment.\762\ As discussed previously, certain OTC issuers may 
withdraw from quoted markets as a result of the amended requirements 
pertaining to current and publicly available paragraph (b) information 
and, as a result, lose access to capital. Indeed, some commenters were 
concerned that these information requirements would encourage issuers 
to remain dark and that access to capital would diminish for these 
firms as a result.\763\ The Commission acknowledges that issuers could 
opt to remain dark for various reasons including the cost of providing 
current and publicly available information or the strategic value of 
withholding information from competitor firms. The resulting migration 
to the grey market could, in principle, adversely impact capital 
formation for these firms. However, issuers with productive investment 
opportunities should be more likely to elect to provide current and 
publicly available paragraph (b) information as they would realize more 
value from access to capital by providing this information. Therefore, 
remaining non-transparent issuers may be less likely to have productive 
investment opportunities than those that opt to provide current and 
publicly available information.
---------------------------------------------------------------------------

    \761\ See supra note 693; Luzi Hail & Christian Leuz, 
International Differences in the Cost of Equity Capital: Do Legal 
Institutions and Securities Regulation Matter?, 44 J. Acct. Res. 
485-531 (2006) (finding that stock markets with greater disclosure 
requirements have lower costs of capital in cross-country 
comparisons).
    \762\ See, e.g., Sugata Roychowdhury et al., The Effects of 
Financial Reporting and Disclosure on Corporate Investment: A 
Review, 68 J. Acct. & Econ. 1-27 (2019), available at https://www.sciencedirect.com/science/article/pii/S0165410119300412.
    \763\ Paul Lucot Letter; Michael Tofias; Anbec Partners; Michael 
A. Zgayb; Laura Coffman; Caldwell Sutter Capital; Coral Capital 
Comment.
---------------------------------------------------------------------------

    The efficiency of prices (i.e., the degree to which prices reflect 
the fundamental value of the security) could also improve in the OTC 
market as a result of greater transparency. In particular, prices could 
become less susceptible to manipulation as a result of the trading 
activity of informed investors who would have access to paragraph (b) 
information. These investors could buy underpriced securities and sell 
overpriced securities, pushing mispriced securities toward fundamental 
values.
    The heightened transparency that would arise from these amendments 
could increase competition among both broker-dealers and issuers of 
quoted OTC securities. For example, broker-dealers could access 
paragraph (b) information at a low cost and establish more competitive 
prices. Before these amendments, broker-dealers could have had 
differential access to paragraph (b) information in the quoted OTC 
market and potentially benefited from non-competitive pricing as a 
result. As mentioned previously, some broker-dealers may withdraw from 
quoting certain OTC securities (e.g., those of shell companies that are 
published or submitted 18 months following the publication or 
submission of the initial priced quotation for such issuer's security 
in an IDQS) as a result of the costs of initiating and resuming 
quotations associated with these amendments. As a result, there may be 
diminished price competition in these types of securities.
    Eliminating the 30-day requirement before OTC securities become 
eligible for the piggyback exception can increase price competition 
between broker-dealers. In particular, all broker-dealers can begin 
quoting an OTC security during the 30-day period after the initial 
quote based upon the piggyback exception under the amended Rule. 
However, this increased competition may deter broker-dealers from 
conducting the initial information review and filing of FINRA Form 211. 
Fewer OTC securities may remain in the grey market where there may be 
diminished price competition relative to the quoted market.
    Issuers of quoted OTC securities may also need to price seasoned 
equity offerings more competitively because investors would have 
improved access to information and might be able to more easily compare 
the financials of OTC issuers when allocating their investment dollars. 
This information could again enable OTC investors to divert funds more 
easily from higher to lower cost issues. As a result, OTC issuers would 
have less ability to price their issues high relative to the 
fundamental value of the securities being offered.

D. Reasonable Alternatives

    In this section, reasonable alternatives to these amendments to 
Rule 15c2-11 are discussed.
1. Eliminating the Piggyback Exception
    The 1999 Reproposing Release proposed to eliminate the piggyback 
exception from Rule 15c2-11. This amendment would have required all 
broker-dealers to complete the information review requirement and file 
FINRA Form 211 before publishing or submitting a quotation in a 
quotation medium. One commenter also suggested this alternative.\764\ 
Relative to the baseline (i.e., the existing provisions of Rule 15c2-
11), this alternative would have increased the costs of broker-dealers 
that complied with the Rule's review, document collection, and 
recordkeeping provisions before publishing or submitting a quotation 
for an OTC security. These costs could be passed on to OTC investors. 
Alternatively, some broker-dealers could withdraw from publishing 
quotations in the OTC market as a result of the information review 
requirement, which could lead to the disappearance of a quoted market 
for some OTC securities and a migration of these securities to the grey 
market. Both possible effects could benefit investors by imposing costs 
on potential fraudsters in the OTC market.
---------------------------------------------------------------------------

    \764\ Better Markets Letter.
---------------------------------------------------------------------------

    First, review of paragraph (b) information could help broker-
dealers increase price efficiency, while deterring fraudsters. Second, 
broker-dealers' withdrawal from publishing quotations for OTC 
securities could benefit investors by inhibiting fraudulent and 
manipulative schemes. Higher quality OTC issuers could also benefit 
from increased access to capital.
    However, broker-dealers might also withdraw from publishing 
quotations

[[Page 68200]]

for securities of higher quality issuers at the same time. Therefore, 
eliminating the piggyback exception could increase capital raising 
costs for OTC issuers. This withdrawal may also impose costs on 
investors by reducing the liquidity of OTC securities. The net effect 
of this alternative on OTC investors and issuers is unclear.
    The Commission believes that the amended Rule more appropriately 
meets the Commission's policy goals because the alternative places the 
additional burdens upon broker-dealers and OTC issuers relative to 
these amendments. In particular, broker-dealers would incur additional 
costs associated with review of paragraph (b) information and filing 
FINRA Form 211 for all OTC securities they wish to quote. In addition, 
this alternative could raise the costs for OTC issuers and investors 
relative to these amendments.
2. Maintaining the Piggyback Exception for the Securities of Non-
Transparent Issuers
    A number of commenters suggested that the amended Rule include a 
greater set of OTC securities within the piggyback exception than the 
amended Rule permits. For example, commenters raised concerns about 
potential negative impacts on persons who are invested in OTC 
securities of well-established, non-reporting issuers that do not make 
their information current and publicly available.\765\ Therefore, one 
alternative to the amended Rule would be to maintain piggyback 
eligibility for well-established non-disclosing issuers, which could 
include non-penny stocks or existing OTC securities vis-[agrave]-vis a 
grandfather exception. Some commenters supported grandfathering 
presently quoted OTC securities without current and publicly available 
information.\766\
---------------------------------------------------------------------------

    \765\ See, e.g., Don C. Whitaker; Jim Rivest; Lawrence 
Goldstein.
    \766\ See, e.g., Alluvial Letter; Anbec Partners Letter; Ariel 
Ozick; Michael Tofias; Mitchell Partners Letter 3.
---------------------------------------------------------------------------

    Eliminating transparency requirements related to the piggyback 
exception for certain OTC securities may cause more OTC issuers to 
remain non-transparent relative to the amended Rule. These additional 
issuers would incur lower costs of providing current and publicly 
available paragraph (b) information as a result. In addition, OTC 
investors may incur costs from less informed investment and voting 
decisions as well as less efficient pricing.
    Such an alternative would increase the number of OTC securities 
included within the piggyback exception relative to the amended Rule. 
Consequently, this alternative would be anticipated to decrease broker-
dealer costs related to information review and filing FINRA Form 211 
relative to the amended Rule. Some of these costs savings could be 
passed on to OTC investors. Fewer broker-dealers may withdraw from 
quoting OTC securities, which could increase liquidity for OTC 
investors and access to capital for OTC issuers. This alternative may 
also increase investors' exposure to fraud and manipulation in non-
transparent securities or that may be the targeted for these 
activities. Indeed, risk of fraud and manipulation may be more 
pronounced in OTC securities without current and publicly available 
information, as discussed previously.\767\
---------------------------------------------------------------------------

    \767\ See supra Part VI.B.2.c.
---------------------------------------------------------------------------

    This alternative could also diminish possible costs associated with 
the ability of OTC firm insiders to manipulate the stock's price 
downward when seeking to repurchase shares by keeping their firm dark 
and causing migration to the grey market. However, the amended Rule 
provides a grace period of up to 15 calendar days for the piggyback 
exception to continue once a qualified IDQS or registered national 
securities association makes a publicly available determination that 
the requisite information is no longer current and/or publicly 
available. This grace period should allow existing investors in an OTC 
issuer to exit positions before such a potential manipulation could 
occur.
3. Eliminating or Maintaining the Piggyback Exception for Shell 
Companies
    The proposed Rule presented an alternative to these amendments 
whereby the piggyback exception would be eliminated entirely for shell 
companies. Therefore, one possible alternative to the amended Rule 
would be to eliminate the piggyback exception for shell companies or 
maintain it under a stricter set of conditions (e.g., permitting its 
use for less than 18 months from the initial priced quotation in an 
IDQS). Alternatively, some commenters suggested that the piggyback 
exception should include shell companies since they can be used for 
non-fraudulent purposes.\768\ Therefore, an additional alternative to 
the amended Rule would be to maintain the piggyback exception under a 
looser set of conditions (e.g., permitting its use for more than 18 
months from the initial priced quotation in an IDQS).
---------------------------------------------------------------------------

    \768\ Philippe Goodwill Letter; Tom Amenda; Coral Capital 
Letter.
---------------------------------------------------------------------------

    Relative to these amendments, the first alternative of maintaining 
the piggyback exception for shell companies under a stricter set of 
conditions could increase the costs of broker-dealers that comply with 
the Rule's review, document collection, and recordkeeping provisions 
before publishing or submitting a quotation for an OTC security. These 
costs could be passed on to OTC investors. Alternatively, some broker-
dealers could withdraw from publishing quotations for shell companies 
under these conditions in the OTC market as a result of the information 
review requirement, which could lead to the disappearance of a quoted 
market for their securities and their migration to the grey market. 
Both possible effects could benefit investors by imposing costs on 
potential fraudsters in the OTC market.
    First, review of paragraph (b) information could help broker-
dealers increase price efficiency, while deterring fraudsters. Second, 
broker-dealers' withdrawal from publishing quotations for OTC 
securities could benefit investors by inhibiting fraudulent and 
manipulative schemes. As discussed previously, pump-and-dump schemes 
are often targeted toward shell companies.\769\ Higher quality OTC 
issuers could also benefit from increased access to capital.
---------------------------------------------------------------------------

    \769\ See supra Part VI.B.2.c.
---------------------------------------------------------------------------

    However, broker-dealers might withdraw from publishing quotations 
for securities of shell companies seeking to execute a reverse merger 
with an operating company seeking capital on the public markets. 
Therefore, eliminating the piggyback exception could increase capital 
raising costs for issuers, although it may benefit investors by 
limiting the potential for fraud arising from shell companies in the 
context of reverse mergers.\770\ This withdrawal may also impose costs 
on investors by reducing the liquidity of OTC securities of shell 
companies. The net effect of this alternative on OTC investors and 
issuers is unclear.
---------------------------------------------------------------------------

    \770\ See supra note 345 and accompanying text.
---------------------------------------------------------------------------

    The second alternative of maintaining the piggyback exception for 
shell companies under a looser set of conditions could have the 
opposite effects listed above relative to the amended Rule. In 
particular, broker-dealers could benefit from diminished costs 
associated with information review and filing FINRA Form 211. Fewer 
broker-dealers may withdraw from quoting the OTC securities of shell 
companies and maintain liquidity in these securities as a result. 
Investors and issuers may benefit as result relative to

[[Page 68201]]

these amendments. However, investors may incur costs from additional 
fraud utilizing shell companies as a result of looser restrictions on 
the piggyback exception.
    As discussed previously, the Commission believes that the amended 
Rule appropriately balances the promotion of investor protection and 
the facilitation of capital formation by allowing broker-dealers to 
maintain a quoted market for the securities of shell company issuers, 
which could become public companies as a result of engaging in a 
reverse merger, but providing this piggyback exception for a limited 
period of 18 months.
4. Alternative Thresholds for Exceptions
    The 1999 Reproposing Release proposed to except publications of 
quotations from the provisions of Rule 15c2-11 for OTC securities with 
at least: (1) $100,000 ADTV value, (2) $50 million total assets value 
and $10 million shareholders' equity on the issuer's audited balance 
sheet or (3) $50 bid price. These exceptions were less restrictive than 
the ones in the current amendments as the exception would apply if an 
OTC security could conform to only one of these three conditions. 
Therefore, one possible alternative would be to establish thresholds 
which conform to these conditions from the 1999 Reproposing Release.
    Relative to the baseline, the main economic effect of this 
alternative would be to relieve broker-dealers from complying with the 
Rule's provisions and filing FINRA Form 211 to publish quotations in a 
quotation medium. Some of these benefits may be passed on to OTC 
investors. Certain issuers or securities that would qualify for these 
exceptions but currently trade in the grey market may benefit from a 
broker-dealer establishing a quoted market without incurring costs 
associated with complying with the Rule's provisions. This migration 
may result in a benefit to investors to the extent that it may 
establish a new quoted market that facilitates price discovery and 
liquidity for quality securities previously trading in the grey market.
    Relative to these amendments, however, this alternative may be more 
likely to except securities that may be targeted for fraudulent 
activity from the Rule's review and document collection provisions. For 
example, there were seven suspended OTC securities in 2019 with ADTV 
value in excess of $100,000 and three issuers of suspended OTC 
securities that exceeded the thresholds for $50 million in total assets 
and $10 million in shareholders' equity. Therefore, though trading 
suspensions are not necessarily indicative of fraud, investors may face 
greater exposure to fraud and manipulation under this alternative. In 
addition, companies may be able to circumvent thresholds based on stock 
price. For example, an OTC issuer could, in principle, conduct reverse 
share splits in order to achieve a share price that exceeds a given 
threshold. As a result, the Commission believes the amended Rule is 
better than the alternative. However, investors in higher quality OTC 
issuers could benefit in that a greater number would qualify for the 
quoted market relative to these amendments. In addition, broker-dealers 
would benefit from even greater relief from the Rule's provisions and 
from filing FINRA Form 211.
    The proposed Rule provided an exception from the information review 
requirement for OTC securities with at least: (1) $100,000 ADTV value 
and (2) $50 million total assets value and $10 million unaffiliated 
shareholders' equity on the issuer's audited balance sheet. These 
previously proposed thresholds would potentially compel broker-dealers 
to conduct the specified information review for more OTC securities 
relative to the amended Rule as issuers with more than $10 million 
shareholders' equity (but less than $10 million unaffiliated equity) 
could be included in the requirement. As a result, the previous 
proposal would potentially increase broker-dealers' costs associated 
with information review, filing of FINRA Form 211, and their possible 
withdrawal from quoting activity relative to the amended Rule. These 
additional costs could be passed on to OTC investors. In addition, OTC 
issuers could incur additional costs associated with raising capital, 
and OTC investors could incur costs associated with diminished 
liquidity.
    However, OTC investors may benefit from decreased exposure to fraud 
and manipulation relative to the amended Rule. In particular, the 
amended Rule may exempt OTC securities with small public float but 
total shareholder equity exceeding $10 million. Such securities may be 
prone to manipulation if they are controlled by insiders complicit with 
a fraudulent scheme. Nonetheless, the Commission believes that the 
thresholds of the amended Rule will still confine the exception to OTC 
securities not prone to fraudulent or manipulative activity. In 
particular, the Commission has found that zero issuers in 2019 that 
simultaneously met the $50 million total assets, $10 million 
shareholders' equity, and $100,000 ADTV value thresholds were subject 
to trading suspensions or caveat emptor status.
    As pointed out by commenters, it can be difficult to accurately 
determine unaffiliated shareholder ownership.\771\ As a result, broker-
dealers could bear costs associated with this determination relative to 
the amended Rule. Alternatively, broker-dealers may forgo such a 
determination, in which case they may instead assess the amount of an 
issuer's total shareholder equity. In this case, the costs and benefits 
associated with the thresholds of the proposed Rule would be equivalent 
to those of the amended Rule.
---------------------------------------------------------------------------

    \771\ OTC Markets Group Letter 2; SIFMA Letter; Professor Angel 
Letter.
---------------------------------------------------------------------------

    One commenter also recommended replacing the previously proposed 
threshold for shareholder equity with a threshold of $150 million 
market capitalization. Similar to the amended Rule, this alternative 
would decrease broker-dealers' costs of complying with the Rule's 
provisions and filing FINRA Form 211 to publish quotations in a 
quotation medium relative to the baseline. Some of these benefits may 
be passed on to OTC investors. Certain issuers or securities that would 
qualify for these exceptions but currently trade in the grey market may 
benefit from a broker-dealer establishing a quoted market without 
incurring costs associated with complying with the Rule's provisions. 
This migration may result in a benefit to investors to the extent that 
it may establish a new quoted market that facilitates price discovery 
and liquidity for quality securities previously trading in the grey 
market.
    Relative to the amended Rule, this alternative could possibly allow 
for more issuers that could be vulnerable to pump-and-dump schemes to 
be admitted within the exception, thus increasing investor exposure to 
fraud. Unlike shareholders' equity, which is based on book value, 
market capitalization can fluctuate with market share price and can be 
susceptible to volatility, especially in a fraudulent or manipulative 
scheme, such as a pump-and-dump scheme. Indeed, the Commission 
estimates that that approximately three percent of issuers with OTC 
securities that were the subject of Commission-ordered trading 
suspensions over the calendar year 2019 had a market capitalization in 
excess of $150 million.
5. Quotations With Both Bid and Offer Prices for the Piggyback 
Exception
    The proposed Rule conditioned the piggyback exception on both bid 
and offer prices for the prior 30 calendar days with no gap in quoting 
of more

[[Page 68202]]

than four days. After considering feedback from commenters,\772\ the 
amended Rule instead conditions the piggyback exception on quotations 
with either bid or offer quotation at a specified price with no more 
than four consecutive business days in succession without a quotation. 
One alternative would be to condition the exception on quotations with 
both a bid and offer price. Relative to the amended Rule, this 
alternative would allow fewer securities to become eligible for the 
piggyback exception. As such, broker-dealers would incur higher costs 
associated with the Rule's review, document collection, and record-
keeping provisions (as well as filing with FINRA a Form 211) before 
publishing or submitting a quotation for an OTC security relative to 
the amended Rule. The Commission has estimated that 629 OTC securities 
for which broker-dealers could publish quotations relying on the 
piggyback exception during 2019 had quotations with either a bid or 
offer price--but not both--for four days one or more times in a year. 
Of these securities, 308 were of prospectus, Reg. A, crowdfunding, and 
reporting issuers, 81 were of exempt foreign private issuers, and 240 
were of catch-all issuers. Therefore, the Commission estimates that the 
additional dollar cost to broker-dealers from this alternative would be 
$266,000.\773\
---------------------------------------------------------------------------

    \772\ See supra Part II.D.2.
    \773\ (308 x $280) + (81 x $560) + (240 x $560) = $266,000.
---------------------------------------------------------------------------

    OTC investors in higher quality issuers could suffer from lower 
liquidity if this cost results in fewer securities remaining in the 
quoted market. However, this alternative may also cause less liquid 
securities to lose eligibility for piggyback quotations relative to the 
amended Rule. As a result, OTC investors may benefit from this 
alternative if these securities are more prone to fraud than securities 
with both bid and offer prices.
    Nonetheless, the Commission believes that the amended Rule more 
appropriately meets the Commission's policy goals of reducing burdens 
on broker-dealers while retaining OTC securities in the quoted markets 
with a legitimate, independent market interest. One commenter stated 
that a priced bid is a valid price discovery mechanism and that 
existing self-regulatory organization rules require broker-dealers to 
trade at their publicly quoted prices (i.e., FINRA Rule 5220).\774\ 
This commenter also stated that the development of liquidity begins 
with, and frequently depends on, the ability of a broker-dealer to 
publish a one-sided priced bid.\775\
---------------------------------------------------------------------------

    \774\ OTC Markets Group Letter 2.
    \775\ Id.
---------------------------------------------------------------------------

    Eliminating the 30-day requirement before OTC securities can become 
eligible for the piggyback exception can increase price competition 
between broker-dealers. In particular, broker-dealers can begin quoting 
in these securities during the initial 30-day period based on the 
piggyback exception under the amended Rule. This increased competition 
could decrease the cost of bid-offer spreads for OTC investors during 
this 30-day period. However, this increased competition may deter 
broker-dealers from conducting the initial information review and 
filing of FINRA Form 211. Therefore, the net effect on the liquidity of 
OTC securities and the trading costs of OTC investors is unclear.
6. Alternative Required Frequency of Current and Publicly Available 
Information
    The Commission has sought to align the amended Rule with existing 
regulatory requirements for publicly available information, as well as 
with private market solutions that have developed since the Commission 
last proposed to amend the Rule. Notwithstanding this, an alternative 
to these amendments would be to define paragraph (b) information as 
``current'' for issuers based on a different lengths of time (e.g., six 
months instead of twelve months for catch-all issuers) for the purposes 
of the initiation and resumption of quotes or reliance upon the 
piggyback exception. For example, the proposed Rule would have 
conditioned broker-dealer quotations on the paragraph (b) information 
of catch-all issuers being publicly available and current within six 
months of the broker-dealer's quotation (unless the unsolicited 
customer exception applied).
    Increasing the frequency of publicly available information required 
to qualify as ``current'' relative to the amended Rule could benefit 
investors by improving the relevance of information used for investment 
and voting decisions relative to the information available under the 
existing Rule. Investors could also benefit from decreased exposure to 
loss from fraud as additional current and publicly available 
information that is more frequently provided could push trading 
activity in less transparent securities out of the OTC market or to the 
grey market. Higher quality OTC issuers could benefit from increased 
access to capital to the extent that more frequent information 
requirements lead to a net increase in demand for higher quality OTC 
stocks.
    Although the amended Rule does not require any issuer to make 
paragraph (b) information current and publicly available, a broker-
dealer could not publish a quotation in the absence of such 
information. OTC issuers would face increased costs of providing 
current and publicly available information if the amended Rule required 
such information to be provided more frequently. In particular, OTC 
issuers with no reporting obligations or minimal reporting obligations 
have to make current information publicly available more frequently 
under such an alternative. In order for a broker-dealer to continue to 
publish quotations, some OTC issuers might find they have to prepare 
current information and make it publicly available more frequently than 
their current annual or semi-annual reporting obligations as an issuer 
under the federal securities laws, such as reporting requirements under 
the Securities Act or exchange listing requirements under the Exchange 
Act. OTC issuers may find that they must prepare current information 
and make it available more often than they are required to do so under 
state law, as well. Broker-dealers, qualified IDQSs, and national 
securities associations may also be required to review paragraph (b) 
information more frequently under this alternative in order to 
initially publish or submit, or maintain, quotes in the OTC market. 
Some OTC issuers may opt not to provide information with a greater 
required frequency relative to the amended Rule. Similarly, more 
broker-dealers may withdraw from quoted OTC markets as a result of more 
frequent information review. Both effects could adversely affect OTC 
investors' liquidity and increase their trading costs. The Commission 
believes the amended Rule is better than the alternative because the 
additional benefits from more frequently available information are 
likely to be relatively minor, while the costs for issuers, broker-
dealers, and other market participants could increase in proportion to 
the required frequency of making current information publicly 
available.
    Decreasing the frequency of publishing current and publicly 
available information to relative to the amended Rule (e.g., requiring 
current and publicly available information every two years instead of 
twelve months for catch-all issuers) could have effects opposite to 
those discussed relating to increased frequency of making current 
information publicly

[[Page 68203]]

available. For example, decreasing the frequency of making current 
information publicly available could provide relief, relative to the 
requirements of the amended Rule, from the costs to OTC issuers of 
preparing and disseminating such information. The Commission is not 
pursuing such an alternative because a significant decrease in the 
frequency in the availability of current and publicly available 
paragraph (b) information could make the information less relevant for 
decision making and investor protection purposes, driving down their 
potential benefit to investors.

VII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \776\ requires federal 
agencies, in promulgating rules, to consider the impact of those rules 
on ``small entities,'' \777\ a term that includes ``small businesses.'' 
\778\ Section 603(a) \779\ of the Administrative Procedure Act,\780\ as 
amended by the RFA, generally requires the Commission to undertake a 
regulatory flexibility analysis of all proposed rules, or proposed rule 
amendments, unless the Commission certifies that the amendments, if 
adopted, would not have a significant impact on a substantial number of 
small entities.\781\
---------------------------------------------------------------------------

    \776\ 5 U.S.C. 601 et seq.
    \777\ 5 U.S.C. 605(b).
    \778\ Although Section 601(b) of the RFA defines the term 
``small business,'' the statute permits agencies to formulate their 
own definitions. The Commission has adopted definitions for the term 
small business for the purposes of Commission rulemaking in 
accordance with the RFA. Those definitions, as relevant to this 
proposed rulemaking, are set forth in Exchange Act Rule 0-10 (``Rule 
0-10''). Rule 0-10 also provides that the Commission may, if 
warranted by the circumstances, use a different definition for 
particular rulemakings.
    \779\ 5 U.S.C. 603(a).
    \780\ 5 U.S.C. 551 et seq.
    \781\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    A broker-dealer is a small entity if it has total capital (net 
worth plus subordinated liabilities) of less than $500,000 on the date 
in the prior fiscal year as of which its audited financial statements 
were prepared pursuant to Sec.  240.17a-5(d), or, if not required to 
file such statements, has total capital of less than $500,000 on the 
last day of the preceding fiscal year (or in the time that it has been 
in business, if shorter); and is not affiliated with any person (other 
than a natural person) that is not a small business or small 
organization.\782\ In the Proposing Release, the Commission certified, 
pursuant to Section 605(b) of the RFA, that the proposed amendments to 
Rule 15c2-11 would not have a significant economic impact on a 
substantial number of small entities.\783\ The Commission did not 
receive any comments on the certification as it related to the entities 
impacted by the Rule.\784\
---------------------------------------------------------------------------

    \782\ Rule 0-10(c).
    \783\ See Proposing Release at 58262.
    \784\ The Commission received one comment that mentioned the 
Regulatory Flexibility Act in relation to other market participants. 
See Virtu Letter, at 8. The costs and benefits of the amended Rule 
with respect to other market participants are considered in the 
Economic Analysis section. See supra Part VI.
---------------------------------------------------------------------------

    As discussed in the PRA and Economic Analysis sections above, the 
Commission believes that the proposed amendments will impact the 80 
broker-dealers that publish or submit quotations on OTC Markets Group's 
systems.\785\ Based on the Commission's analysis of existing 
information relating to broker-dealers that would be subject to the 
amended Rule, the Commission does not believe that any of the 80 
broker-dealers impacted by the Rule are small entities under the above 
definition because they either have at least $500,000 in total capital 
or are affiliated with a person (other than a natural person) that is 
not a small business or small organization as defined in Rule 0-10. 
Based on experience with broker-dealers that participate in the market 
for OTC securities, the Commission believes that it is unlikely that in 
the future a small entity may become impacted by the amendments since 
firms that enter the market are likely to have at least $500,000 in 
total capital or be affiliated with a person that is not a small 
business or small organization under Rule 0-10.
---------------------------------------------------------------------------

    \785\ See supra Parts V.B, VI.B.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission certifies that the 
amendments to Exchange Act Rule 15c2-11 will not have a significant 
economic impact on a substantial number of small entities for purposes 
of the RFA.

VIII. Statutory Authority

    The rule amendments are being adopted pursuant to sections 3, 
10(b), 15(c), 15(h), 17(a), 23(a), and 36 of the Securities Exchange 
Act of 1934, 15 U.S.C. 78c, 78j(b), 78o(c), 78o(g), 78q(a), 78w(a), and 
78mm.

List of Subjects in 17 CFR Parts 230 and 240

    Administrative practice and procedure, Reporting and recordkeeping 
requirements, Securities.

    For the reasons set out in the preamble, the Commission is amending 
title 17, chapter II of the Code of the Federal Regulations as follows.

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The general authority for part 230 continues to read as follows:

    Authority:  15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *


Sec.  230.144  [Amended]

0
2. Section 230.144, paragraph (c)(2), is amended by removing the text 
``(a)(5)(i) to (xiv), inclusive, and paragraph (a)(5)(xvi)'' and adding 
``(b)(5)(i)(A) to (N), inclusive, and paragraph (b)(5)(i)(P)'' in its 
place.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
3. The authority citation for part 240 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
    Section 240.15c2-11 also issued under 15 U.S.C. 78j(b), 78o(c), 
78q(a), and 78w(a).
* * * * *

0
4. Section 240.15c2-11 is revised to read as follows:


Sec.  [thinsp]240.15c2-11  Publication or submission of quotations 
without specified information.

    (a) Unlawful activity. As a means reasonably designed to prevent 
fraudulent, deceptive, or manipulative acts or practices, it shall be 
unlawful for:
    (1) Brokers or dealers. A broker or dealer to publish any quotation 
for a security or, directly or indirectly, to submit any such quotation 
for publication, in any quotation medium, unless:
    (i)(A) Such broker or dealer has in its records the documents and 
information specified in paragraph (b) of this section;
    (B) Such documents and information specified in paragraph (b) of 
this section

[[Page 68204]]

(excluding paragraphs (b)(5)(i)(N) through (P) of this section) are 
current and publicly available; and
    (C) Based upon a review of the documents and information specified 
in paragraph (b) of this section, together with any other documents and 
information required by paragraph (c) of this section, such broker or 
dealer has a reasonable basis under the circumstances for believing 
that:
    (1) The documents and information specified in paragraph (b) of 
this section are accurate in all material respects; and
    (2) The sources of the documents and information specified in 
paragraph (b) of this section are reliable; or
    (ii)(A) The quotation medium is a qualified interdealer quotation 
system that made a publicly available determination that it has 
performed the activities described in paragraph (a)(2)(i) through (iii) 
of this section; and
    (B) Such quotation is published or submitted for publication within 
three business days after such qualified interdealer quotation system 
makes such publicly available determination.
    (2) Qualified interdealer quotation systems. A qualified 
interdealer quotation system to make known to others the quotation of a 
broker or dealer that is published or submitted for publication 
pursuant to paragraph (a)(1)(ii) of this section, unless:
    (i) Such qualified interdealer quotation system has in its records 
the documents and information specified in paragraph (b) of this 
section (excluding paragraphs (b)(5)(i)(N) through (P) of this section 
except where the qualified interdealer quotation system has knowledge 
or possession of this information);
    (ii) Such documents and information specified in paragraph (b) of 
this section (excluding paragraphs (b)(5)(i)(N) through (P) of this 
section) are current and publicly available;
    (iii) Based upon a review of the documents and information 
specified in paragraph (b) of this section (excluding paragraphs 
(b)(5)(i)(N) through (P) of this section, except where the qualified 
interdealer quotation system has knowledge or possession of this 
information), together with any other documents and information 
required by paragraph (c) of this section, such qualified interdealer 
quotation system has a reasonable basis under the circumstances for 
believing that:
    (A) The documents and information specified in paragraph (b) of 
this section are accurate in all material respects; and
    (B) The sources of the documents and information specified in 
paragraph (b) of this section are reliable; and
    (iv) The qualified interdealer quotation system makes a publicly 
available determination that it has performed the activities described 
in paragraphs (a)(2)(i) through (iii) of this section; or
    (3) Qualified interdealer quotation systems or registered national 
securities Associations. A qualified interdealer quotation system or 
registered national securities association to make a publicly available 
determination described in paragraph (f)(2)(iii)(B), (f)(3)(ii)(A), or 
(f)(7) of this section, unless such qualified interdealer quotation 
system or registered national securities association establishes, 
maintains, and enforces reasonably designed written policies and 
procedures to determine whether:
    (i) The documents and information specified in paragraph (b) of 
this section are current and publicly available; and
    (ii) The requirements of an exception under paragraph (f) of this 
section are met, if it makes a publicly available determination 
described in paragraph (f)(7) of this section.
    (b) Specified information. (1) A copy of the prospectus specified 
by section 10(a) of the Securities Act of 1933 for an issuer that has 
filed a registration statement under the Securities Act of 1933, other 
than a registration statement on Form F-6, that became effective less 
than 90 calendar days prior to the day on which such broker or dealer 
publishes or submits the quotation to the quotation medium; Provided, 
That such registration statement has not thereafter been the subject of 
a stop order that is still in effect when the quotation is published or 
submitted; or
    (2) A copy of the offering circular provided for under Regulation A 
(Sec. Sec.  [thinsp]230.251 through 230.263 of this chapter) for an 
issuer that has filed an offering statement under Regulation A that was 
qualified less than 40 calendar days prior to the day on which such 
broker or dealer publishes or submits the quotation to the quotation 
medium; Provided, That the Regulation A exemption, with respect to such 
issuer, has not thereafter become subject to a suspension order that is 
still in effect when the quotation is published or submitted; or
    (3) A current copy of:
    (i) An annual report filed pursuant to section 13 or 15(d) of the 
Act, together with any periodic and current reports that have been 
filed thereafter under the Act by the issuer, except for current 
reports filed during the three business days prior to the publication 
or submission of the quotation; Provided, however, That, until such 
issuer has filed its first such annual report, the broker, dealer, or 
qualified interdealer quotation system has in its records a copy of the 
registration statement filed by the issuer under the Securities Act of 
1933, other than a registration statement on Form F-6, that became 
effective within the prior 16 months, or a copy of any registration 
statement filed by the issuer under section 12 of the Act that became 
effective within the prior 16 months, together with any periodic and 
current reports filed thereafter under section 13 or 15(d) of the Act;
    (ii) An annual report filed pursuant to Regulation A, together with 
any periodic and current reports filed thereafter under Regulation A by 
the issuer, except for current reports filed during the three business 
days prior to the publication or submission of the quotation; Provided, 
however, That, until such issuer has filed its first such annual 
report, the broker, dealer, or qualified interdealer quotation system 
has in its records a copy of the offering statement filed by the issuer 
under Regulation A, that was qualified within the prior 16 months, 
together with any periodic and current reports filed thereafter under 
Regulation A;
    (iii) An annual report filed pursuant to Regulation Crowdfunding 
(Sec. Sec.  [thinsp]227.100 through 227.503 of this chapter); Provided, 
however, that, until such issuer has filed its first such annual 
report, the broker, dealer, or qualified interdealer quotation system 
has in its records a copy of the Form C filed by the issuer under 
Regulation Crowdfunding within the prior 16 months, together with any 
Form C/A and Form C/U filed thereafter under Regulation Crowdfunding;
    (iv) An annual statement referred to in section 12(g)(2)(G)(i) of 
the Act (in the case of an issuer required to file reports pursuant to 
section 13 or 15(d) of the Act), together with any periodic and current 
reports filed thereafter under the Act by the issuer, except for 
current reports filed during the three business days prior to the 
publication or submission of the quotation; Provided, however, that, 
until such issuer has filed its first such annual statement, the 
broker, dealer, or qualified interdealer quotation system has in its 
records a copy of the registration statement filed by the issuer under 
the Securities Act of 1933, other than a registration statement on Form 
F-6, that became effective within the prior 16 months, or a copy of any 
registration statement filed by the issuer under section 12 of the Act, 
that became effective within the prior 16 months, together with any 
periodic and current reports filed thereafter under section 13 or 15(d) 
of the Act; or

[[Page 68205]]

    (v) An annual statement referred to in section 12(g)(2)(G)(i) of 
the Act (in the case of an issuer of a security that falls within the 
provisions of section 12(g)(2)(G) of the Act); or
    (4) A copy of the information that, since the first day of its most 
recently completed fiscal year, the issuer has published as required to 
establish the exemption from registration under section 12(g) of the 
Act pursuant to Sec.  [thinsp]240.12g3-2(b) of this chapter, which the 
broker or dealer must make available upon the request of a person 
expressing an interest in a proposed transaction in the issuer's 
security with the broker or dealer, such as by providing the requesting 
person with appropriate instructions regarding how to obtain the 
information electronically; or
    (5)(i) The following information, which must be (excluding 
paragraphs (b)(5)(i)(N) through (P) of this section) as of a date 
within 12 months prior to the publication or submission of the 
quotation, unless otherwise specified:
    (A) The name of the issuer and any predecessors during the past 
five years;
    (B) The address(es) of the issuer's principal executive office and 
of its principal place of business;
    (C) The state of incorporation or registration of the issuer and of 
each of its predecessors (if any) during the past five years;
    (D) The title, class, and ticker symbol (if assigned) of the 
security;
    (E) The par or stated value of the security;
    (F) The number of shares or total amount of the securities 
outstanding as of the end of the issuer's most recent fiscal year;
    (G) The name and address of the transfer agent;
    (H) A description of the issuer's business;
    (I) A description of products or services offered by the issuer;
    (J) A description and extent of the issuer's facilities;
    (K) The name and title of all company insiders;
    (L) The issuer's most recent balance sheet (as of a date less than 
16 months before the publication or submission of the quotation) and 
profit and loss and retained earnings statements (for the 12 months 
preceding the date of the most recent balance sheet);
    (M) Similar financial information for such part of the two 
preceding fiscal years as the issuer or its predecessors has been in 
existence;
    (N) Whether the broker or dealer or any associated person of the 
broker or dealer is affiliated, directly or indirectly, with the 
issuer;
    (O) Whether the quotation is being published or submitted on behalf 
of any other broker or dealer and, if so, the name of such broker or 
dealer; and
    (P) Whether the quotation is being submitted or published, directly 
or indirectly, by or on behalf of the issuer or a company insider and, 
if so, the name of such person and the basis for any exemption under 
the federal securities laws for any sales of such securities on behalf 
of such person.
    (ii) The broker or dealer must make the documents and information 
specified in paragraph (b)(5)(i) of this section available upon the 
request of a person expressing an interest in a proposed transaction in 
the issuer's security with the broker or dealer, such as by providing 
the requesting person with appropriate instructions regarding how to 
obtain such publicly available documents and information 
electronically. If such information is made available to others upon 
request pursuant to this paragraph, such delivery, unless otherwise 
represented, shall not constitute a representation by such broker or 
dealer that such information is accurate but shall constitute a 
representation by such broker or dealer that the information is current 
in relation to the day the quotation is submitted, the broker or dealer 
has a reasonable basis under the circumstances for believing the 
information is accurate in all material respects, and the information 
was obtained from sources that the broker or dealer has a reasonable 
basis under the circumstances for believing are reliable. The documents 
and information specified in paragraph (b)(5) of this section must be 
reviewed where paragraphs (b)(1) through (4) of this section do not 
apply to such issuer. For purposes of compliance with paragraph 
(a)(1)(i)(B) or (a)(2)(ii) of this section, the documents and 
information specified in paragraph (b)(5) of this section must be 
reviewed for an issuer for which the documents and information 
specified in paragraph (b)(1), (2), (3), or (4) of this section 
regarding such issuer are not current.
    (c) Supplemental information. With respect to any security the 
quotation of which is within the provisions of this section, the broker 
or dealer submitting or publishing such quotation, or any qualified 
interdealer quotation system that makes known to others the quotation 
of a broker or dealer pursuant to paragraph (a)(2) of this section, 
shall have in its records the following documents and information:
    (1) Records related to the submission or publication of such 
quotation, including the identity of the person or persons for whom the 
quotation is being published or submitted, whether such person or 
persons is the issuer or a company insider, and any information 
regarding the transactions provided to the broker, dealer, or qualified 
interdealer quotation system by such person or persons;
    (2) A copy of any trading suspension order issued by the Commission 
pursuant to section 12(k) of the Act regarding any securities of the 
issuer or its predecessor (if any) during the 12 months preceding the 
date of the publication or submission of the quotation or a copy of the 
public release issued by the Commission announcing such trading 
suspension order; and
    (3) A copy or a written record of any other material information 
(including adverse information) regarding the issuer that comes to the 
knowledge or possession of the broker, dealer, or qualified interdealer 
quotation system before the publication or submission of the quotation.
    (d) Recordkeeping. (1)(i) The following persons shall preserve for 
a period of not less than three years, the first two years in an easily 
accessible place, the documents and information required under 
paragraphs (a), (b), and (c) of this section, except for the documents 
and information that are available on the Commission's Electronic Data 
Gathering, Analysis and Retrieval System (EDGAR):
    (A) Any broker or dealer that publishes or submits a quotation 
pursuant to paragraph (a)(1) of this section for a security; or
    (B) Any qualified interdealer quotation system that makes known to 
others the quotation of a broker or dealer pursuant to paragraph (a)(2) 
of this section for a security;
    (ii) Any broker or dealer that publishes or submits a quotation 
pursuant to paragraph (a)(1)(ii) of this section shall preserve for a 
period of not less than three years, the first two years in an easily 
accessible place, the name of the qualified interdealer quotation 
system that made a publicly available determination that it has 
performed the activities described in paragraph (a)(2)(i) through (iii) 
of this section.
    (2) The following persons shall preserve for a period of not less 
than three years, the first two years in an easily accessible place, 
the documents and information that demonstrate that the requirements 
for an exception under paragraph (f)(2), (3), (5), (6), or (7) of this 
section are met, except for the documents and information that are 
available on EDGAR:
    (i) Any qualified interdealer quotation system or registered 
national securities association that makes a publicly available 
determination described in

[[Page 68206]]

paragraph (f)(2)(iii)(B), (f)(3)(ii)(A), or (f)(7) of this section; and
    (ii) Any broker or dealer that publishes or submits a quotation 
pursuant to paragraph (f) of this section; Provided, however, That any 
broker or dealer that relies on a publicly available determination 
described in paragraph (f)(2)(iii)(B) or (f)(3)(ii)(A) of this section 
shall preserve only a record of the name of the qualified interdealer 
quotation system or registered national securities association that 
determined whether the documents and information specified in paragraph 
(b) of this section are current and publicly available in addition to 
the documents and information that demonstrate that the other 
requirements of the exception provided in paragraph (f)(2) or (3), 
respectively, are met; and that any broker or dealer that relies on a 
publicly available determination described in paragraph (f)(7) of this 
section shall preserve only a record of the exception provided in 
paragraph (f)(1), (f)(3)(i), or (f)(4) or (5) for which the publicly 
available determination is made and the name of the qualified 
interdealer quotation system or registered national securities 
association that determined that the requirements of that exception are 
met.
    (e) Definitions. For purposes of this section:
    (1) Company insider shall mean any officer or director of the 
issuer, or person that performs a similar function, or any person who 
is, directly or indirectly, the beneficial owner of more than 10 
percent of the outstanding units or shares of any class of any equity 
security of the issuer.
    (2) Current shall mean, for the documents and information specified 
in:
    (i) Paragraph (b)(1), (2), (4), or (5) of this section, filed, 
published, or are as of a date in accordance with the time frames 
specified in the applicable paragraph for such documents and 
information; or
    (ii) Paragraph (b)(3) of this section, the most recently required 
annual report or statement filed pursuant to section 13 or 15(d) of the 
Act and any rule(s) thereunder, Regulation A, Regulation Crowdfunding, 
or section 12(G)(2)(g) of the Act, together with any subsequently 
required periodic reports or statements, filed pursuant to section 13 
or 15(d) of the Act and any rule(s) thereunder, Regulation A, 
Regulation Crowdfunding, or section 12(G)(2)(g) of the Act.
    (3) Interdealer quotation system shall mean any system of general 
circulation to brokers or dealers that regularly disseminates 
quotations of identified brokers or dealers.
    (4) Issuer, in the case of quotations for American Depositary 
Receipts, shall mean the issuer of the deposited shares represented by 
such American Depositary Receipts.
    (5) Publicly available shall mean available on EDGAR; on the 
website of a state or federal agency, a qualified interdealer quotation 
system, a registered national securities association, an issuer, or a 
registered broker or dealer; or through an electronic information 
delivery system that is generally available to the public in the 
primary trading market of a foreign private issuer as defined in Sec.  
240.3b-4 of this chapter; Provided, however, that publicly available 
shall mean where access is not restricted by user name, password, fees, 
or other restraints.
    (6) Qualified interdealer quotation system shall mean any 
interdealer quotation system that meets the definition of an 
``alternative trading system'' under Sec.  242.300(a) of this chapter 
and operates pursuant to the exemption from the definition of an 
``exchange'' under Sec.  240.3a1-1(a)(2) of this chapter.
    (7) Quotation, except as otherwise specified in this section, shall 
mean 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 wishes to advertise its general interest in buying or 
selling a particular security.
    (8) Quotation medium shall mean any ``interdealer quotation 
system'' or any publication or electronic communications network 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.
    (9) Shell company shall mean any issuer, other than a business 
combination related shell company, as defined in Sec.  230.405 of this 
chapter, or an asset-backed issuer as defined in Item 1101(b) of 
Regulation AB (Sec.  229.1101(b) of this chapter), that has:
    (i) No or nominal operations; and
    (ii) Either:
    (A) No or nominal assets;
    (B) Assets consisting solely of cash and cash equivalents; or
    (C) Assets consisting of any amount of cash and cash equivalents 
and nominal other assets.
    (f) Exceptions. Except as provided in paragraph (d)(2) of this 
section, the provisions of this section shall not apply to:
    (1) The publication or submission of a quotation for a security 
that is admitted to trading on a national securities exchange and that 
is traded on such an exchange on the same day as, or on the business 
day next preceding, the day the quotation is published or submitted.
    (2)(i) The publication or submission by a broker or dealer, solely 
on behalf of a customer (other than a person acting as or for a 
dealer), of a quotation that represents the customer's unsolicited 
indication of interest;
    (ii) Provided, however, that this paragraph (f)(2) shall not apply 
to a quotation:
    (A) Consisting of both a bid and an offer, each of which is at a 
specified price, unless the quotation medium specifically identifies 
the quotation as representing such an unsolicited customer interest; or
    (B) Published or submitted, directly or indirectly on behalf of a 
company insider or affiliate as defined in Sec.  230.144(a)(1) of this 
chapter, unless the documents and information specified in paragraph 
(b) of this section are current and publicly available.
    (iii) For purposes of paragraph (f)(2)(ii)(B) of this section, a 
broker or dealer that publishes or submits quotations may rely on 
either a:
    (A) Written representation from the customer's broker that such 
customer is not a company insider or an affiliate if:
    (1) Such representation is received prior to, and on the same day 
that, the quotation representing the customer's unsolicited indication 
of interest is published or submitted; and
    (2) The broker or dealer has a reasonable basis under the 
circumstances for believing that the customer's broker is a reliable 
source; or
    (B) Publicly available determination by a qualified interdealer 
quotation system or registered national securities association that the 
documents and information specified in paragraph (b) of this section 
are current and publicly available.
    (3)(i)(A) The publication or submission, in an interdealer 
quotation system that specifically identifies as such unsolicited 
customer indications of interest of the kind described in paragraph 
(f)(2) of this section, of a quotation for a security that has been the 
subject of a bid or offer quotation (exclusive of any identified 
customer interests) in such a system at a specified price, with no more 
than four business days in succession without such a quotation;
    (B) Provided, however, that this paragraph (f)(3) shall not apply 
to a quotation that is published or submitted

[[Page 68207]]

by a broker or dealer for the security of an issuer that:
    (1) Was the subject of a trading suspension order issued by the 
Commission pursuant to section 12(k) of the Act until 60 calendar days 
after the expiration of such order;
    (2) Such broker or dealer, or any qualified interdealer quotation 
system or registered national securities association, has a reasonable 
basis under the circumstances for believing is a shell company, unless 
such quotation is published or submitted within the 18 months following 
the initial quotation for such issuer's security that is the subject of 
a bid or offer quotation in an interdealer quotation system at a 
specified price;
    (C) Provided further, that this paragraph (f)(3) shall apply to the 
publication or submission of a quotation for a security of an issuer 
only if the documents and information regarding such issuer that are 
specified in:
    (1) Paragraph (b)(3)(i), (iv), or (v) of this section are filed 
within 180 calendar days from the end of the issuer's most recent 
fiscal year or any quarterly reporting period that is covered by a 
report required by section 13 or 15(d) of the Act, as applicable;
    (2) Paragraph (b)(3)(ii) or (iii) of this section are timely filed;
    (3) Paragraph (b)(4) or (b)(5)(i) (excluding paragraphs 
(b)(5)(i)(N) through (P)) are current and publicly available; or
    (4) Paragraph (b)(3)(i), (ii), (iii), (iv), or (v) are filed within 
15 calendar days starting on the date on which a publicly available 
determination is made pursuant to paragraph (f)(3)(ii)(A) of this 
section; or
    (ii) If the documents and information specified in paragraph (b) of 
this section (excluding paragraphs (b)(5)(i)(N) through (P)) regarding 
an issuer are no longer current and publicly available, timely filed, 
or filed within 180 calendar days, as specified in paragraph 
(f)(3)(i)(C) of this section, a broker or dealer may continue to 
publish or submit a quotation for such issuer's security in an 
interdealer quotation system during the time frame specified in in 
paragraph (f)(3)(ii)(C) if:
    (A) Within the first four business days that such documents and 
information are no longer current and publicly available, timely filed, 
or filed within 180 calendar days, as applicable, a qualified 
interdealer quotation system or registered national securities 
association makes a publicly available determination that:
    (1) Such documents and information are no longer current and 
publicly available, timely filed, or filed within 180 calendar days, as 
specified in paragraph (f)(3)(i)(C) of this section; and
    (2) The exception provided in paragraph (f)(3)(ii) of this section 
is available only during the 15 calendar days starting on the date on 
which the publicly available determination described in paragraph 
(f)(3)(ii)(A)(1) of this section is made; and
    (B) The broker or dealer complies with the requirements of 
paragraphs (d)(2) and (f)(3)(i) of this section, except for the 
requirement that the documents and information specified in paragraph 
(b) (excluding paragraphs (b)(5)(i)(N) through (P)) regarding such 
issuer be current and publicly available, timely filed, or filed within 
180 calendar days, as applicable;
    (C) Provided, however, that the provisions of this paragraph 
(f)(3)(ii) shall apply only during the shorter of the period beginning 
with the date on which a qualified interdealer quotation system or 
registered national securities association makes a publicly available 
determination identified in paragraph (f)(3)(ii)(A) and ending on:
    (1) The date on which the documents and information specified in 
paragraph (b) of this section (excluding paragraphs (b)(5)(i)(N) 
through (P)) regarding such issuer become current and publicly 
available or filed; or
    (2) The fourteenth calendar day following the date on which such 
publicly available determination was made.
    (4) The publication or submission of a quotation for a municipal 
security.
    (5) The publication or submission of a quotation for:
    (i) A security with a worldwide average daily trading volume value 
of at least $100,000 reported during the 60 calendar days immediately 
before the publication of the quotation of such security; and
    (ii) The issuer of such security has at least $50 million in total 
assets and $10 million in shareholders' equity as reflected in the 
issuer's publicly available audited balance sheet issued within six 
months after the end of its most recent fiscal year.
    (6) The publication or submission of a quotation for a security by 
a broker or dealer that is named as an underwriter in a registration 
statement for an offering of that class of security referenced in 
paragraph (b)(1) of this section or in an offering statement for an 
offering of that class of security referenced in paragraph (b)(2) of 
this section; Provided, however, that this paragraph (f)(6) shall apply 
only to the publication or submission of a quotation for such security 
within the time frames specified in paragraph (b)(1) or (2) of this 
section.
    (7) The publication or submission of a quotation by a broker or 
dealer that relies on a publicly available determination by a qualified 
interdealer quotation system or registered national securities 
association that the requirements of an exception provided in paragraph 
(f)(1), (f)(3)(i), or (f)(4) or (5) of this section are met; Provided, 
however, that any qualified interdealer quotation system or registered 
national securities association that makes a publicly available 
determination that the requirements of the exception provided in 
paragraph (f)(3)(i) of this section are met must subsequently make a 
publicly available determination under paragraph (f)(3)(ii)(A) of this 
section, as applicable.
    (g) Exemptive authority. Upon written application or upon its own 
motion, the Commission may, conditionally or unconditionally, exempt by 
order any person, security, or transaction, or any class or classes of 
persons, securities, or transactions, from any provision or provisions 
of this section, to the extent that such exemption is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.

    By the Commission.

    Dated: September 16, 2020.
Vanessa A. Countryman,
 Secretary.
[FR Doc. 2020-20980 Filed 10-26-20; 8:45 am]
BILLING CODE 8011-01-P