Over the past several years, The Securities and Exchange Commission (“SEC”) has brought hundreds of enforcement actions over violations of federal securities involving over-the-counter (OTC) securities, resulting in tens of millions in harm to retail investors. In an effort to increase retail investor protections and preserve the integrity of the OTC securities markets, the SEC has announced that it has voted to amend Exchange Act Rule 15c2-11.
The amendments are aimed to modernize the rules governing broker dealer quotations for OTC securities, increase investors’ access to information, and limit false or misleading statements by fraudsters.
Last significantly updated in 1991 prior to the widespread use of the Internet, The Exchange Act Rule 15c2-11 was created in 1971 to govern all securities that are not listed in one of the SEC’s national stock exchanges. The proposed updates recognize the ease at which information is now available to broker dealers and call for increased disclosures from broker dealers who quote OTC securities, requiring that they review information about an issuer and ensure that the information is both current and publicly available before publishing quotations.
OTC securities offer an opportunity for investors to buy and sell highly capitalized foreign securities, foreign companies, and domestic securities with future growth potential; however, many of the companies are less liquid, have lower capitalization and are less transparent than exchange-listed securities. By requiring additional information to be accessible to retail investors, the amended rule will offer investors transparency and an opportunity to better evaluate issuers and risks, allowing for better-informed investment decisions.
Limitations and Elimination of Certain Exceptions
The amendments limit eligibility for some of the exceptions where the issuer’s information is no longer public or current. The piggyback exception has historically allowed broker-dealers to publish quotations for OTC securities based on continuous and frequent quotations, but the amendments will now require that the issuer information be current and publicly available. The exception will be limited to bid and ask quotations that are published at specified prices.
Further, the amended rule will altogether eliminate the exception during the first 60 calendar days following the termination of an SEC trading suspension and for securities of all “shell companies.”
The updated rule will also require that broker dealers document with supporting evidence each time they believe to have qualified for an exception.
In addition to eliminating and limiting some of the previous exceptions, the amendment proposes the addition of some new exceptions for broker-dealers quoting OTC securities deemed less susceptible to fraud.
Designed to promote capital formation for issuers that publish current information to their investors, the new exceptions allow broker-dealers to publish quotations from well capitalized issuers with actively-traded securities.
The exceptions also allow broker-dealers to publish quotations where a regulated third-party qualified interdealer quotation system (IDQS) or registered national securities association has conducted the review or that the requirements of certain exceptions have been met.
Finally, an exception can be made to publish a quotation in the instance that a broker-dealer was named as an underwriter in the security’s registration statement or offering circular.
The proposed amendments are currently open for public comment.
For broker dealers who market OTC securities, Core Compliance and Legal Services, Inc and its team of experts can help modify written supervisory procedures in preparation for any changes that may occur. Contact our team of experts today.