SEC revises rules governing quotations for OTC securities

Last week, the Securities and Exchange Commission adopted amendments to Securities Exchange Act Rule 15c2-11.  The Rule prohibits a broker-dealer from publishing or submitting for publication a quotation for a covered over-the-counter (OTC) security in a quotation medium other than a national securities exchange unless it has obtained and reviewed specified information about the issuer.  The broker-dealer must have a reasonable basis to believe that the information is accurate in all material respects and that it was obtained from sources that are reliable.  It also must make the information reasonably available upon request to any person expressing an interest in a proposed transaction in the security with the broker-dealer. 

The amendments are designed to modernize the Rule, promote investor protection, and curb incidents of fraud and manipulation by (1) requiring the information to be current and publicly available before a broker-dealer begins quoting a security; (2) narrowing the ability to rely on certain exceptions to the Rule; and (3) adding new exceptions for quoting securities that are less susceptible to fraud and manipulation.  They also remove obsolete provisions, add new definitions and make technical amendments.

According to the SEC, OTC securities are owned primarily by retail investors and broker-dealers provide an important gatekeeper function in facilitating access to such securities.  The SEC considers Rule 15a-6 to be an important component of the regulatory structure for the OTC market.  Consequently, the Rule requires broker-dealers to review critical basic information about the issuer before initiating or resuming quotations for its securities in the OTC market. 

However, the Rule was adopted in 1971 and has not been amended substantively since 1991, nearly 30 years ago.  The amendments are intended to enhance investor protection by ensuring that broker-dealers do not publish quotations in the OTC market unless current information about the issuer and securities is publicly available.  The SEC points out that until now, the Rule contained certain exceptions that enabled a broker-dealer to maintain a quoted market for an OTC security in perpetuity without current and publicly available information about the issuer.  Now broker-dealers will be prohibited from publishing quotations if the requisite issuer information is not current and publicly available. 

The amendments limit broker-dealers’ reliance on certain exceptions to the Rule when issuer information is not current and publicly available, while providing new exceptions designed to reduce unnecessary burdens on broker-dealers when they quote certain securities that are less susceptible to fraud and manipulation.  The amendments facilitate transparency by:

• Requiring certain documents and information that a broker-dealer or qualified interdealer quotation system (IDQS) must obtain and review when quoting a market in an OTC security to be current and publicly available (the Information Review Requirement)
• Updating 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, by requiring that, depending on the issuer’s regulatory status, issuer information be current and publicly available, timely filed, or filed within 180 calendar days from a specified period
• Requiring that issuer information be current and publicly available in order for a broker-dealer to rely on the unsolicited quotation exception that allows them to publish quotations on behalf of company insiders and affiliates of the issuer.

The amendments also provide a greater degree of investor protection when broker-dealers rely on the piggyback exception by (i) requiring such broker-dealers to provide at least a one-way priced quotation; (ii) prohibiting reliance on the exception during the first 60 calendar days following termination of an SEC trading suspension; and (iii) providing a time-limited window of 18 months during which broker-dealers may quote the securities of shell companies.  At the same time, they also reduce unnecessary burdens on broker-dealers by allowing them to initiate quotations for a security if a qualified IDQS complies with the Information Review Requirement and makes a publicly available determination of such compliance.

There also are new exceptions that allow broker-dealers, without complying with the Information Review Requirement, to:

• Quote actively traded securities of certain 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, and
• Rely on certain publicly available determinations by a qualified IDQS or registered national securities association that the requirements of certain exceptions are met.

Finally, the amendments streamline and remove certain outdated provisions from the Rule.  The Rule’s adopting release also contains guidance intended to facilitate compliance with the Information Review Requirement, including basic principles and examples of red flags.

The amended Rule becomes effective 60 days following publication of adopting release in the Federal Register, with a compliance date nine months after the effective date.  The compliance date for the provisions requiring an issuer’s financial information for the last two fiscal years to be current and publicly available will be two years after the effective date.

If you have any questions regarding the rule change, please contact one of the authors or a member of the DLA Piper Financial Services team.