15C2-11 Final Rule
The economic baseline takes into account investor protection and the regulatory burden on members in the absence of the proposed rule change in light of the SEC`s amended rule. Among other things, the amended rule 15c2-11 allows a broker-dealer to rely on a qualified IDQS to perform the initial verification of information required by the rule. If a subscribed broker-dealer does not rely on the initial review of a qualified SIQQ, they must file a standard Form 211 with FINRA and wait to be notified that the form has been processed before making offers on the security. FINRA Rule SEA 15c2-11 and Rule 6432 generally govern the registration behaviour of broker-dealers who initiate the listing of equity securities on the OTC market.  The amendments amend the requirement to provide information and include a new requirement that information on transmitters be publicly available. The amended information requirements apply to both qualified inter-broker listing systems and inter-broker qualified quotation systems (an alternative trading system that publishes quotations). The amended rule allows broker-dealers to rely on a “publicly available disposition” through a qualified inter-national registration system, rather than on the broker-dealer itself that meets the issuer`s disclosure requirements. The amended rule amends the piggyback exception to require that issuer information be up-to-date and publicly available. The amended rule also includes a new exemption for actively traded securities and states that the publication of quotations by issuing investors and affiliates is conditional on the making available to the public of information about issuers. In addition, the amended rule, like the current rule, explicitly excludes municipal bonds, but does not explicitly exclude other types of bonds or fixed income products, whether exempt or not, convertible bonds or non-convertible bonds. Therefore, any broker-dealer who uses a “quote medium” to set aside the prices of debt bonds or convertible bonds must consider how the rule might apply and whether an exception is available. I have written about 15c2-11 several times, including HERE and HERE.
In the first blog, I discussed OTC Markets` comment to FINRA regarding Rule 6432 and how 15c2-11 works. FINRA Rule 6432 requires all broker-dealers to possess and retain certain information about an unlisted corporate security before resuming or initiating a listing of that security. In general, a non-exchange-traded security is listed on over-the-counter markets. Compliance with the rule is demonstrated by filing a Form 211 with FINRA. Unfortunately, this definition applied only to registrants; It did not apply to catch-all transmitters. In the proposed rule, the SEC introduced a slightly modified definition, which was adopted in the final rule. Some commentators felt that it would be “ambiguous and difficult to apply”, but the Commission insisted: despite these very fundamental changes in the OTC market, Rule 15c2-11 has never changed. The SEC has seen a number of problems with this. One of them was the burgeoning microcap fraud, or at least negligence. Of the stocks suspended by the agency`s Enforcement Division, almost all were overdue registrants, outright scams, or companies that had been promoted in pumping and spill operations.
All this was made possible in part by Article 15c2-11. Once a sponsoring market maker`s Form 211 for an issuer has been processed by FINRA and other market makers have been grafted onto it, it could literally trade quotes published forever, even if the company itself has long since ceased to exist. SEC Rule 15c2-11, last revised in 1991, provided that before listings could be initiated for an OTC issuer, the issuer would have to find a sponsoring market maker who would issue a Form 211 based on the “current information” provided by the Company and file it with the Financial Industry Regulatory Authority (“FINRA”). FINRA would process the form and the stock could then begin trading. For one month, it would be listed only by the sponsoring market maker; As a result, other market makers could rely on the “piggyback exception” and publish their own prices. FINRA is proposing to amend the member registration requirements under FINRA Rule 6432 (Compliance with the Disclosure Requirements of EES Rule 15c2-11). FINRA does not consider that the proposed rule change will result in a burden on competition that is not necessary or appropriate to further the objectives of the Act. On September 16, 2020, the U.S. Securities and Exchange Commission (SEC or Commission) adopted amendments to Rule 15c2-11 of the Securities Exchange Act of 1934 (final rule).1 Rule 15c2-11 (rule) governs the publication or filing of quotations by broker-dealers on a quotation medium other than a national stock exchange, i.e. the over-the-counter (OTC) market. Before a dealer-dealer can initiate or resume the listing of a security on a registration medium, he or she must review important basic information about the issuer of the security. The rule allows any qualified inter-reseller quotation system (IDQS) to also perform the required information verification.
The OTC market is mainly composed of new companies whose finances are often less transparent. In addition, the investment market consists to a large extent of retail investors. In this context, the rule aims to create additional investor protection by imposing a “custodian” function on broker-dealers or QDIs who wish to register over-the-counter securities. The final rules include a complete overhaul of the current regulatory structure and therefore require the development of a new infrastructure, compliance procedures and written supervisory procedures on OTC markets, new compliance procedures and written supervisory procedures for securities dealers in OTC markets, as well as similar changes within FINRA to adapt to and take into account the new system. I expect a period of chaos at first with quick execution adjustments to fix the issues. Third, FINRA proposes to define in new paragraph (g) of FINRA Rule 6432 a “qualified offer between professionals” consistent with the definition of the term in Rule 15c2-11(e)(6) of the SUA. Fourth, in order to facilitate the monitoring of members` compliance with Rule 15c2-11, FINRA proposes that members include in the standardized Form 211 and amend the names of all officers and directors of the issuer concerned.