OTC market securities are primarily owned by retail investors. Broker-dealers play an essential role in facilitating investor access to OTC securities for this reason, and they also serve an important gatekeeper function under Rule 15c2-11 as the rule requires that broker-dealers review basic information about an issuer before quoting OTC securities to investors. However, some of the rule’s exceptions allow broker-dealers to continue to publish quotations when there is no current information about the issuer available to the public or broker-dealer. These exceptions may allow market participants to take advantage of particular situations to the detriment of retail investors.

To curtail this, the SEC is proposing to limit eligibility for some of the exceptions where an issuer’s information becomes unavailable to the public or is no longer current. New exceptions would also be added for broker-dealers quoting OTC securities that are less susceptible to fraud or manipulation. Both of these changes benefit and protect retail investors by providing them with current information during the investment decision process through the publication and submission of quotations by a broker-dealer in a quotation medium for securities that are not listed on a national securities exchange. Prior to submitting or publishing a quotation, a broker-dealer must review certain information about the issuer.

Specifically, the proposed changes:

Facilitate the availability of current issuer information

• Mandate the documents and information that the rule requires broker-dealers to obtain and review to be current and publicly available
• Amend the piggyback exception to require that issuer information be current and publicly available. This exception is currently based on continuous and frequent quotations and allows broker-dealers to publish quotations for a security in reliance on the quotations that initially performed the information review
• Require that certain information be current and publicly available for a broker-dealer to rely on the unsolicited quotation exception to publish quotations by or on behalf of company insiders.

Limit certain exceptions to provide greater protections to investors

• Limit the piggyback exception only to bid and ask quotations that are published at specified prices
• Eliminate the piggyback exception during the first sixty calendar days after the termination of a SEC trading suspension under Section 12(k) of the Exchange Act
• Eliminate the piggyback exception for securities of “shell companies”

Reduce burdens for broker-dealers with proposed new exceptions where there is less concern of fraud/manipulation

The new exceptions will apply to:

• Well-capitalized issuers whose securities are actively traded
• Broker-dealers publishing the quotation if those broker-dealers were named as underwriters in the securities’ registration statements or offering circular
• Regulated third party companies that comply with the rule’s required review and make known to others the quotation of a broker-dealer relying on the exception
• Situations in reliance on publicly available determinations by regulated third parties that the requirements of certain exceptions have been met

Other proposed amendments serve to streamline and modernize the rule. The SEC seeks public comment on the new guidance in addition to the concept release that addresses information repositories and a possible regulatory structure for such entities. The public comment period will be open for 60 days after publication in the Federal Register. The proposed rule changes can be read here. You can submit comments using the form available on the SEC’s website or by e-mailing rule-comments@sec.gov with the reference number (S7-14-19) in the subject line. You can also use the Federal Rulemaking Portal to submit comments or send your comments by mail to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. Again, please remember to include reference number S7-14-19.

Sources:

SEC Proposes Amendments to Enhance Retail Investor Protections (www.sec.gov)
Publication or Submission of Quotations Without Specified Information (www.sec.gov)