On Sept. 16, 2020, the SEC adopted amendments to Exchange Act Rule 15c2-11 directing broker-dealers not to publish security quotations in the absence of issuer’s current information, subject to certain exceptions. The amended rule enhances the efficiency of the OTC market and facilitates capital formation for issuers. Exchange Act Rule 15c2-11 is an essential component of the over-the-counter market (OTC) that requires market makers to review and file to FINRA necessary issuer information before publishing quotations.
Before the announcement of amendments, broker-dealers published the issuer’s securities quotation despite the absence of the issuer’s information or even its existence. Securities that trade on the OTC market are primarily owned by “retail investors” who, in the absence of updated publicly available issuer’s information, were susceptible to microcap fraud
“Retail Investors” here refer to non-professional individuals who purchase securities for their accounts. They invest small amounts and, according to critics, do not have the knowledge, discipline, or expertise to research their investments
SEC Chairman Jay Clayton pointed out: “The technological advancements that have taken place since the rule was last amended enable us to require that information in the OTC market be more timely, enabling investors to make better-informed investment decisions, and reducing fraud in these markets where retail presence is significant and, unfortunately, pump-and-dump and other frauds are too common.”
- Transparency of OTC issuer:
- The broker-dealer or qualified IDQS must obtain and review the issuer’s information and documents before enabling quotation;
- Updated “piggyback” exception: Requires initially compliant broker-dealer to ensure that the issuer’s information is current and publicly available, timely filed, or filed within 180 calendar days from a specified period;
- The issuer’s report must be current and publicly available for a broker-dealer to rely on the unsolicited quotation exception to publish quotations on behalf of the issuer’s company insiders and affiliates.
- When brokers rely on the piggyback exception, the following applies:
- The piggyback exception requires at least a one-way priced quotation;
- Prohibiting exception for first 60 calendar days following the termination of a Commission trading suspension under Section 12(k) of the Exchange Act;
- Broker-dealers can quote the securities of “shell companies” only for 18 months.
- Reducing unnecessary burdens on broker-dealers
- The broker-dealers can initiate a quotation if a qualified IDQS complies with the information review requirement
- Additional exceptions include:
- Permission to quote securities of well-capitalized issuers
- Permission to quote securities where the broker-dealer is as an underwriter
- Can rely on third-party publicly available determinations when specific exceptions are satisfied
Andy Kryzyk, SVP of corporate services at OTC Markets, commented on the rule stating,”The Rule recognizes OTC Markets Group’s disclosure standards and the current, public disclosure provided by companies on our OTCQX and OTCQB markets and in our Pink Current market designation. Under the Rule, the securities on these markets can continue to be the subject of public broker-dealer quotations. The Rule also restricts public quoting in companies that do not provide current public information and under certain other circumstances.”
Additionally, pursuant to discussions with OTC Markets, Colonial has found that these two requirements will apply to issuers listed on OTC Markets:
The Rule will become effective 60 days following publication of the amendments in the Federal Register. The Rule will have a general compliance date that is nine months after the effective date as well as a compliance date that is two years after the effective dateregarding provisions to require an issuer’s financial information for the last two fiscal years to be current and publicly available.
Get Prepared, Get in Compliance
Colonial Stock Transfer can provide SEC reporting and EDGAR filing services to help catch issuers up on their filings at discounted catch-up filing rates. We also provide consultation services regarding 15c2-11 submissions. Contact us to learn more.