Tuesday, September 29. 2020
SEC Announces Revisions to Increase Retail Investor Protections and Modernize Quotations for Over-the-Counter Securities
Securities that trade on the OTC market are largely owned by retail investors. Since broker-dealers perform an important gatekeeping role and play a major part in the ease of access to OTC securities, Rule 15c2-11 mandates that they review important, basic issuer information before initiating or continuing quotes for the issuer’s protection in the OTC market. Before the amendments, the rule had exceptions that permitted broker-dealers to maintain a quoted market for an issuer’s security in perpetuity. This could continue in the absence of current and publicly available information about the issuer and even when the issuer no longer exists. Given how easily information is shared on the current marketplace, the new changes generally prohibit broker-dealers from publishing quotations for an issuer’s security when issuer information is not current and publicly available. Among other improvements, these revisions will streamline and enhance the efficiency OTC market and remove outdated provisions from Rule 15c2-11.
The rule, which had not been significantly amended in almost thirty years, has been revised to 1) increase transparency by requiring that information about the issuer and its security be current and publicly available before a broker-dealer can begin quoting said security, 2) limit broker-dealers’ capacity to rely on the rule’s exceptions when issuer information is not up to date and/or publicly available, and 3) provide exceptions to limit burdens on broker-dealers who are quoting particular OTC securities that may be less susceptible to fraud and manipulation.
The amendments facilitate transparency of OTC issuer information by:
- updating the “piggyback” exception that allows broker-dealers to rely on the quotations of another broker-dealer that originally complied with the required information review and requiring that issuer information, depending on the issuer’s regulatory status, be up-to-date and available to the public, timely filed, or filed within 180 calendar days from a specified period
- requiring to be up-to-date and available to the public certain specified documents and data regarding OTC issuers that a broker-dealer or qualified IDQS must obtain and review for the broker-dealer to commence a quoted market in an OTC issuer’s security (“information review requirement”)
- mandating that issuer information be current and publicly available for a broker-dealer to rely on the unsolicited quotation exception to publish quotations for company insiders and affiliates of the issuer
These changes will increase investor protections when broker-dealers rely on the piggyback exception through:
- prohibiting reliance on the exception during the first 60 calendar days following the termination of an SEC trading suspension under Section 12(k) of the Exchange Act
- providing an 18-month window during which broker-dealers may quote the securities of “shell companies”
- requiring at least a one-way priced quotation
Furthermore, the modifications will decrease unnecessary burdens on broker-dealers by:
- permitting broker-dealers to initiate a quoted market for a security if a qualified IDQS complies with the information review requirement and makes a publicly available determination of such compliance
- providing new exceptions, without undermining Rule 15c2-11’s important investor protections, for broker-dealers to:
- quote actively traded securities of well-capitalized issuers
- quote securities issued in an underwritten offering if the broker-dealer is named as an underwriter in the registration statement or offering statement for the underwritten offering, and the broker-dealer that is the named underwriter quotes the security
- rely on certain third-party, publicly available determinations that the requirements of certain exceptions are met
The rule amendments ensure that investors can access current and publicly available issuer data. With such information, they are better able to make informed choices about how to allocate their capital.
The amendments to the rule become effective 60 days following publication in the Federal Register. The rule’s general compliance date is nine months after the effective date. The compliance date for the provisions to require an issuer’s financial information for the last two fiscal years to be up-to-date and available to the public is two years after the effective date.