Rule 15c2-11 Amendments

2024-05-05

On September 16, 2020, the Securities Exchange Commission (SEC) adopted an amendment to Rule 15c2-11 (the “Rule”) for the first time in thirty years. This amendment becomes effective 60 days after its publication. Rule 15c2-11 governs the publication and submission of quotations by brokers on non-national securities exchanges, or over-the-counter markets. This Rule was designed to prevent (1) fraudulent and manipulative trading schemes, and (2) brokers and dealers from furnishing quotations for securities without information from the issuer to support them.

The amendments created substantive changes to the Rule and its function. They modernize the Rule by providing greater transparency to investors, limiting broker-dealers’ reliance on some of the Rule’s exceptions, and providing additional exceptions to reduce the burden on broker-dealers for securities that are less susceptible to fraud and manipulation. Most notably, the amendments (1) revised the piggybacking exception, (2) reduced the regulatory burdens for certain OTC securities, and (3) provided further guidance regarding Rule 15c2-11.

Refined Piggybacking Exception 

The original piggybacking exception provided that, if an OTC Market has been quoted during the last 30 days and the security was quoted for at least 12 of those 30 days without more than 4-day break, a broker-dealer may “piggyback” off of prior information. According to the amendment, only a quotation for the security in the four preceding business days is required. It also requires that issuer information meet at least one of the following:

  • It is current and publicly available;
  • It is timely filed to meet reporting requirements under federal securities laws; or
  • It was filed within 180 calendar days from a specified date.

Should an issuer miss a deadline, the amendments provide a conditional grace period of up to 15 calendar days. 

The amendments also provide greater investor protection under the piggybacking exception by:

  • Requiring at least a one-way price quotation (either bid or ask).
  • Prohibiting reliance on the piggybacking exception during the first 60 calendar days following the termination of an SEC-issued trading suspension.
  • Providing a limited window of 18 months in which broker-dealers may quote securities of “shell companies.”   

Reduced Regulatory Burdens & New Exceptions

To reduce some of the burden on broker-dealers that this rule change creates, they may rely on either FINRA’s or OTC Markets’ publicly announced determination that the piggybacking requirements have been met. However, broker-dealers must create and maintain their own policies and procedures to determine and monitor whether documents and information are filed in the required timeline. The Rule amendments also reduce unnecessary burdens on broker-dealers by allowing them to rely on qualified interdealer quotation systems (IDQS) that comply with the amended Rule’s information review requirements for quotations. 

The amendment also provides new exceptions 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; and
  • Rely on certain third-party publicly available determinations that the requirements of certain exceptions are met.

General Guidance

As part of the amendment, the SEC published new guidance for those who wish to take advantage of Rule 15c2-11. First, the guidance provides a list of red flags that the SEC looks for, including: 

  • Trading suspensions
  • A concentration of ownership among the majority of outstanding, freely tradeable stock
  • Large reverse stock splits
  • Companies with large assets and minimal revenue without any explanation
  • Shell company acquisitions or other material business developments
  • A significant writeup of assets upon a company obtaining a patent or trademark
  • A significant proportion of assets consisting substantially of shares in other OTC companies
  • Shares of stock acquired when the stock has no market value
  • Unusual auditing issues
  • Significant writeup of assets in a business combination of entities under common control
  • Extraordinary items in notes to financial statements
  • A broker-dealer or qualified IDQS who receives substantially similar offering documents from different issuers with certain characteristics
  • Extraordinary gains in annual operations, year-over-year
  • Failure to file an annual report
  • Disciplinary actions against a company’s officers, directors, general partners, promoters, auditors, or control persons
  • Significant events involving an issuer or its predecessor, or any of its majority owned subsidiaries
  • A request to publish both bid and offer quotes on behalf of a customer for the same stock
  • An Issuer or promoter offering to pay a “due diligence” fee
  • Regulation S transactions of domestic companies
  • Form S-8 stock
  • “Hot industry” OTC microcap stocks
  • Unusual activity in brokerage accounts of company affiliates
  • Companies that frequently change their name or line of business

Second, the amendment’s guidance provides that, so long as no red flags are present, a broker-dealer may rely on information provided by another broker-dealer, a company, or a company’s agent, rather than performing their own due diligence. Previously, broker-dealers were required to perform in-depth due diligence, which would be followed up with another in-depth review when they submitted their applications. Under the amended Rule, broker-dealers will not need to invest the time and money in performing due diligence so long as they have a reliable source for their information. Where a red flag presents itself during the review process, reviewers will dig deeper until they are either able to resolve the red flag or choose not to publish the quotation. 

Navigating The Amendments

The Rule 15c2-11 amendments create substantive changes to many of the Rule’s functions, the details of which are complex. Generally, companies must comply with the amendments within nine months of the effective date, but specific provisions require compliance within two years. If you have questions regarding the details of the amendment or its effect on your company, or if you would like help navigating the process of offering shares on the OTC Markets, reach out to our office today.