The changes will have implications for the growing secondary market for non-listed securities.

By Stephen P. Wink, Naim Culhaci, and Deric Behar

On September 16, 2020, the US Securities and Exchange Commission (SEC) adopted amendments to Rule 15c2-11 (the amended Rule) of the Securities Exchange Act of 1934 (Exchange Act). Rule 15c2-11 sets forth requirements regarding the publication or submission by broker-dealers of quotations for over-the-counter (OTC) equity securities. Subject to limited exceptions, the Rule requires broker-dealers to obtain and review for reliability and accuracy certain basic information, including financial information, for each issuer before publishing or submitting a quotation for OTC securities. With respect to issuers subject to existing public reporting requirements, broker-dealers are required to obtain and review the issuer’s existing public disclosures. For issuers that are not subject to such requirements (“catch-all issuers”), broker-dealers are required to specifically obtain, review, and make available to investors specified types of information. With these amendments, the SEC seeks to modernize the Rule (which was last amended nearly 30 years ago) in line with the increased availability of information in today’s world and to generally provide greater transparency about OTC securities issuers to the investing public.

The amended Rule expands upon the requirements of the current Rule in the following ways:

  • Current and Publicly Available Information Required. The amended Rule requires that the information obtained and reviewed from all issuers (including catch-all issuers) be “publicly-available and current.”
  • Increased Information for Catch-All Issuers. The amended Rule expands the list of information required for catch-all issuers under the current Rule to include, among other things, the identity of company insiders.
  • Specific Information for Regulation Crowdfunding Issuances. While the current Rule does not specifically address Regulation Crowdfunding (Reg CF) and thus treats Reg CF issuers as catch-all issuers, the amended Rule specifically requires review of the Reg CF issuer’s most recent annual report (or if no annual report is available yet, the offering statement and any related amendments for the relevant security, as well as disclosures made during the offering about the status of meeting the target offering amount).
  • “Piggyback” Exception Diminished. Under the current Rule, the piggyback exception allows broker-dealers to publish quotations for a frequently traded security in reliance on the quotations of another broker-dealer that initially performed the information review required by the Rule. The amended Rule severely limits this exception by, among other things, requiring that any issuer in relation to which the exception is relied upon have current and publicly available information.

In addition, the amended Rule creates new exceptions to lessen the burden for broker-dealers in situations that may be less prone to fraud and manipulation:

  • Exception for Well-Capitalized Issuers. The amended Rule provides an exception for broker-dealers to quote actively traded and highly liquid OTC securities of well-capitalized issuers (having at least US$50 million in total assets and US$10 million in unaffiliated shareholders’ equity).
  • Exception for Underwritten Offerings. The amended Rule provides an exception for broker-dealers to quote securities issued in an underwritten offering if the broker-dealer publishing the quotation is named as an underwriter in the registration or offering statement for the underwritten security.
  • Exception for Reliance on Certain Third-Party Determinations. The amended Rule provides an exception for broker-dealers to rely on certain third-party publicly available determinations (e.g., a qualified interdealer quotation system (IDQS) may make a publicly available determination that issuer information is current and publicly available, and broker-dealers may rely upon such determinations to submit or publish an OTC quotation).

The amended Rule will be especially significant for the rapidly expanding number of broker-dealers that offer trading platforms for non-listed securities, such as securities originally offered under Reg A, Reg CF and 506(c), as these broker-dealers will need to ensure that they are meeting the amended Rule’s requirements with respect to each issuer on their platform to the extent broker-dealers post quotes.

The amendments to Rule 15c2-11 will take effect 60 days after publication in the Federal Register, with a general compliance date nine months after the effective date. An OTC market issuer’s obligation to make current financial information publicly available is afforded additional time, with a compliance date of two years after the amended Rule’s effective date.