Initial Statement on Proposed Changes to Rule 15c2-11

Coral’s Initial Statement on Proposed Changes to Rule 15c2-11

15c2-11 News & Informaiton

15c2-11 News & Information

A couple of weeks ago, we published an article announcing the Securities and Exchange Commission (SEC) had officially published proposed changes changes to Rule 15c2-11.  Officially tiled “Publication or Submission of Quotation Without Specified Information.”  A version of the proposed changes to Rule 15c2-11 as published in the Federal Register can be found here: Federal Register Version.  Those who are wishing to submit comments to the SEC regarding the proposed rule changes have until December 30th, 2019 to do so.

Please find below our initial draft of our Initial Statement to the request for comments on the proposed changes to Rule 15c2-11. Additionally, it should be noted that our Initial Statement may change somewhat in its final form when submitted to the SEC.

Our Initial Statement

In general, we believe that the proposed changes to Rule 15c2-11 contained within Release # 34-87115 (the “Release”); File # S7-14-19 are too broad and expansive.  This is a significant rewriting of Rule 15c2-11, which to our understanding has been many years in the works.  However, we have concerns that extensive nature of the changes proposed to Rule 15c2-11 and the limited amount time to respond, actually reduce the number of comments and hurts their overall quality.  Release 34-87115 is 228 pages in length.  It is one thing for a very large broker/dealer with a significant legal staff to provide comments to a proposed rule change such as this, or a large law firm with hundreds of attorneys to provide comments within a sixty (60) day time frame.  However those firms do not provide services to participants (issuers and shareholders) in OTC securities.  The firms that typically provide services to participants in OTC securities are typically smaller broker/dealers, law firms, and other forms of advisors.  It is extremely difficult and burdensome for small firms to review a release of this length and provide comments within a sixty (60) day deadline.  What happens is many participants miss the announcement and are unaware that the proposed rule changes have been published; and due to the size of the Release they are either intimidated by its size and do not read, or simply do not have time to comment on all areas of the Release.  This is a disservice to our securities markets, and the capital formation process of the US economy.

Additionally,  we believe that the proposed changes do not adequately address other regulatory and market based reforms that already impact the market[1], or have the potential to impact the market[2] with a significantly lower regulatory burden.

We believe that it would be in the best interest of all parties if the Commission abandoned the changes to Rule 15c2-11 as proposed in Release # 37-87115.  We believe that it is in the best interested of all involved if the proposed changes contained within Release # 34-87115 were split into several smaller releases and proposed changes[3].  This would allow the various proposals contained within Release # 37-87115 to receive the proper attention and discussion that they deserve.  We believe that this would be a much more efficient and effective manner of achieving meaningful market reform, while reducing the possibility of negative unintended consequences that could prove very damaging to the market and take many years to correct.

Overview of the Proposed Changes

We believe that one of the principal attractions and benefits of the US securities markets is their liquidity and the availability of current and relevant information concerning the securities that are traded on these various markets. It is important to understand that the various securities exchange and markets serve a variety of functions including price discovery and as a mechanism for the dissemination of information concerning the securities traded on these exchanges and markets.

We believe that it is very important to understand that the participants in the securities markets[4] are widely varied and not all the same.  In broad terms the participants in the markets include the following:

  • Broker/dealers: This includes broker/dealers of all sizes from the largest to the smallest
  • Market Makers: This is further subdivided into retail and wholesale market makers.
  • Investment Banks: Broker/dealers that raise money for, and advise Issuers of Securities
  • Issuers of securities: The companies that issue securities to be traded in the securities markets.
  • Individual shareholders: Shareholders who are not institutional shareholders.
  • Institutional shareholders: Shareholders that manage money for other investors.

It is important to note that there are a variety of other service providers and that allow for a securities market to function.  This may include various information dissemination services, quotation, and trade execution services.

It is important to note that not every member of the above list market participant categories are created equal or have the same objectives and goals.

The Individual Shareholder category is easily further subdivided into categories of short and long term investors, as well as speculators others who are only interested in various trading opportunities.  It is unwise to assume that these subcategories of Individual Shareholders all have the same level of knowledge, education, or risk tolerance.  Furthermore the variety of investment objectives contained within even a single subcategory is most likely highly varied.

It should also be noted that the Market Maker category includes market makers who service retail investors (“retail market makers”), and those who service only broker/dealers (“wholesale market makers”).  These two (2) different types of securities firms serve vastly different types of customers[5].  It is unrealistic to expect a wholesale market maker to conduct a full information review pursuant to Rule 15c2-11 prior to entering the market for a particular security.  It is also unrealistic to expect wholesale market makers to continually monitor all the issues they trade to determine if they are current in the information disclosure requirements.  The proposed changes to Rule 15c2-11 would dramatically reduce the number of wholesale market makers in OTC securities.

We do not believe that the proposed changes to Rule 15c2-11 adequately acknowledge the differences among the various participants in the securities markets.  It is our belief, that while well intended, the proposed changes to Rule 15c2-11 will effectively end the Over the Counter (OTC) market for domestic securities, in the process destroying market liquidity, and dramatically reduce the number of broker/dealers that make markets in OTC securities.

The Commission states in the Release that one of its stated goals is to combat and reduce the number of Pump & Dump frauds being perpetrated on the OTC market.  The approach being taken is very heavy handed, and will unfairly punish scores of legitimate companies with no evidence that it will stop any pump & dump fraud we are familiar with.  We believe that the proposed changes to Rule 15c2-11 completely fail to address the issues related to selling of massive amounts of securities into the market through toxic financings[6].  We are not convinced that the proposed changes will have a meaningful impact on combatting the problem of securities being promoted and then large numbers of shares being dumped into the market.  However we do believe that recent changes at the clearing firm level, and in other areas of market regulation are in the process of, and have already had a noticeable impact on these activities.

In the Release, the Commission enters into a discussion of the number of broker/dealers that make markets in OTC securities.  While it states that the number of broker/dealers that filed 15c2-11 disclosure documents in the last year was 39, we believe that this number is misleading.  The vast majority of these firms file 15c2-11 application for the initiation of trading in foreign securities.  In 2017, we conducted an extensive review of the additions to the OTC market through the information supplied on the FINRA OTC Daily list[7].  Approximately 90% of the securities approved for trading were foreign securities that were already listed on a foreign exchange.  That left approximately 10% of the issuers approved for trading on the OTC market being domestic issuers, as defined as those companies that were incorporated in the United States.  However it did not exclude those companies that were incorporated in the US, but whose operations were outside the United States,  It was very easy to identify the broker/dealers that were primarily responsible for filing 15c2-11 application on the securities of domestic issuers.

Our research indicated that there were four (4) broker/dealers that filed 15c2-11 applications for the majority of these domestic issuers.  Since then, three of these broker/dealers have ceased filing 15c2-11 applications.  There is effectively one (1) broker/dealer left in the United States that is willing to file a 15c2-11 application for a domestic issuer.  We are of the opinion that market is structurally broken for a domestic company to have a 15c2-11 filed on its behalf by a broker/dealer.  It has evolved into an extremely onerous and high risk process for a broker/dealer, for which it has very limited prospects from which it can profit.  Broker/dealers are not allowed to charge a fee for filing a 15c2-11 on behalf of an issuer; and the broker/dealer has enormous regulatory risk for the information disclosed and the market making process.   It worth noting that the number of broker/dealers registered with FINRA is down dramatically since 2007, and the number of firms making markets has declined severely since then.

We believe that the process for submission of a 15c2-11 should be reformed to allow an easier path for domestic issuers to become publicly traded.  We believe that free market competition is the best path for achieving this goal.  This would include allowing broker/dealers to charge a fee for filing a 15c2-11.


[1]              Recent AML enforcement action brought by the SEC against several major clearing firms have virtually eliminated the ability of small and medium sized investors/shareholders to deposit shares of stock under $5.00/share in price into their brokerage accounts.  Additionally it is now extremely difficult for investors to deposit certificates of OTC companies that they may have held for decades even if they purchased those shares in an open market transaction through a broker/dealer and simply took possession of their shares in certificate form.

[2]              It is our opinion that many of the improvements to the OTC market that the SEC is seeking could be accomplished through changes in the way that OTC Markets displays information on companies that utilize its disclosure service.

[3]             We believe that the proposed changes to Rule 15c2-11 should be separated into their various individual segments, and prioritized for release.  The 1st proposed rule change should be released for comments and voted upon.  If approved, then there should be a reasonable period of time, not less than two (2) years to determine the effectiveness of the changes before the next set of proposed changes are submitted for comments.

[4]              For purposes of discussion going forward “securities markets” shall be deemed to refer to both the Over the Counter (OTC) Market as well as the various US securities exchanges.

[5]              A discussion of the various types of customers and their objectives, as well as the various functions/services provided to the markets by the different type of market makers could fill several books.

[6]              For more information on the issues related to Toxic Financings, please see:


Please Check Back with US

Coral Capital Partners will be submitting comments on the proposed changes to Rule 15c2-11 within the next couple of weeks. We will post our comments on line for everyone to review. Additionally, we will be publishing additional blog posts supporting our positions in the comments we submit to the SEC.  Again, please take some time to review the proposed rule changes to 15c2-11, as well as the comments that have already been submitted, and submit your own comments to the SEC.  We view this as a very important issue not to be taken lightly.

If you have any questions about the above blog post, please feel free to visit our web site, and check out what we have to offer.  Feel free to contact us if you have any questions.  We can be reached at 404-816-9220 and are always willing to speak with you.

About Coral Capital Partners

Coral Capital Partners is an independent consulting and advisory firm focused on companies and participants in the lower and middle markets. We partner with our clients to provide cost effective solutions to real world issues and situations. Our experienced team brings a diverse set of skills that allows us to service a wide variety of needs. Our area of services and expertise focuses on bringing services and solutions to our clients that are normally only available to much larger firms. Coral Capital Partners, Inc. provides services to Investment Banks, Private Equity Funds, investors, and both privately held and publicly traded companies, as well as various stakeholders in those organizations. This has included international public companies with operations on three (3) continents to smaller privately held domestic companies. Our experience in the areas of corporate advisory, due diligence reviews, and regulatory compliance allows for a cost effective and efficient solution to the issues at hand. Please feel free to contact our offices to see how we may be of assistance.