Questions in Request for Comments on Changes to Rule 15c2-11
A couple of weeks ago, we published an article announcing the Securities and Exchange Commission (SEC) had officially published proposed changes to
15c2-11 News & Information
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. Last week we published our Initial Statement on Proposed Changes to Rule 15c2-11. We believe that while submitted with the best of intentions, the proposed changes to Rule 15c2-11 will do significant harm to the US Over the Counter (OTC) Market. As a result we are urging everyone to take this opportunity to submit comments to the SEC regarding these proposed changes. Those who are wishing to submit comments to the SEC regarding the proposed rule changes have until December 30th, 2019 to do so.
We have published below the questions contained within the SEC’s Request for Comment on the proposed changes to Rule 15c2-11. We have done so in order to aid interested parties in drafting their comments to the SEC.
Proposed Amendments to Information Review Requirement
Require Current & Publicly Available Information
Q1. Should the proposed Rule allow other entities besides a broker/dealer or qualified IDQS to comply with the information review requirement ? Why or why not ?
Q2. Should proposed paragraph (b) information meet the definition of “publicly available” if, for example, access to such information requires payment of a fee or registration and provision of customer data to be allowed access to such information? Are there any other potential barriers to accessibility that the Commission should address? If so, what are they and how should the Commission address them in this rulemaking?
General
Q3. Should the requirement to obtain current reports filed by a reporting issuer be less than, or more than, the three days as proposed in proposed paragraph (b)(3)? Why or why not? What would be the appropriate number of days for a broker-dealer or qualified IDQS to obtain current reports in advance of publishing or submitting a quotation or submitting paragraph (b)(3) information to a registered national securities association? Should the requirement to obtain current reports include reports furnished to, rather than solely filed with, the Commission?
Q4. Are there any advantages or disadvantages regarding the various permitted means of making proposed paragraph (b) information publicly available? If so, what are they? Are there other means of making proposed paragraph (b) information publicly available and easily accessible by investors, particularly retail investors, or should any of the proposed means be modified or eliminated? What are the potential costs to issuers, particularly small businesses, of requiring that information, including proposed paragraph (b)(5) information that is current, be made publicly available in a way that would be easily accessible to investors, particularly retail investors?
Q5. Are there any data privacy concerns the Commission should address with regard to issuers’ proposed paragraph (b) information being made publicly available by someone other than the issuer? Please give examples of any concerns and how the Commission might address them in this rulemaking.
Q6. Are there any circumstances where proposed paragraph (b) information is unnecessary for an investor to be able to make an informed investment decision? What are they?
Q7. Do commenters agree that the Commission should remove references to Section 12(g)(2)(B) of the Exchange Act in proposed paragraph (b)(3)? Why or why not? Do commenters agree that the Commission should remove references to Section 12(g)(2)(B) of the Exchange Act in proposed paragraph (b)(3)? Why or why not?
Q8. A person may violate the antifraud provisions of the securities laws by knowingly or recklessly disseminating, publishing, or republishing false or misleading information. This may include publicly available information (such as proposed paragraph (b) information), if the person knew, or was reckless in not knowing, that the information was materially false or misleading and nevertheless used that information to establish or maintain a quoted market for a security. Are there other alternatives, or additional or different approaches, that the Commission should adopt as a means reasonably designed to prevent persons from knowingly or recklessly using false information published or provided by another person to establish a quoted market for an OTC security? Commenters are invited to comment regarding any additional actions the Commission could take to further preserve the integrity of the OTC market.
Q9. Should proposed paragraph (b)(5) also require the ticker symbol of the security being quoted?
Q10. Currently, paragraph (a)(5)(ii) requires the address of the issuer’s principal executive offices. Should proposed subparagraph (b)(5)(ii) also require the address of the issuer’s principal place of business if that address differs from the address of the issuer’s principal executive offices?
Q11. Should proposed subparagraph (b)(5)(xi) require additional information to help accurately identify individuals listed in proposed subparagraph (b)(5)(xi), such as job title? Why or why not?
Q12. Should changes be made to proposed subparagraph (b)(5)(xi) to include additional parties or persons, such as affiliates of the issuer, or promoters? For example, should proposed subparagraph (b)(5)(xi) include the word “affiliate” as defined in Securities Act Rule 144(a)(1)? Please explain. Conversely, are there persons included in proposed subparagraph (b)(5)(xi) that commenters believe should not be included? Please explain. Should the proposed Rule include a definition of beneficial owner? If so, how should the proposed Rule define beneficial owner? Should the definition of beneficial owner be defined by total voting power? If the proposed Rule used total voting power to define beneficial ownership, should the proposed Rule calculate total voting power to include all securities for which the person, directly or indirectly, has or shares voting power, which includes the power to vote or to direct the voting of such securities, and any shares or units of which the person has the right to acquire voting power within 60 days, including through the exercise of any option, warrant or right, the conversion of a security, or other arrangement, or, if securities are held by a member of the family, through corporations or partnerships, or otherwise in a manner that would allow a person to direct or control the voting of the securities (or share in such direction or control as, for example, a co-trustee)? Should the method of determining the amount of beneficial ownership set forth in Exchange Act Rule 13d-3 be incorporated into subparagraph (b)(5)(xi)? Please explain.
Q13. In addition to the information that is proposed to be required under proposed paragraph (b)(5), is there other information relating to an issuer or the trading of an issuer’s security in the OTC market that could help investors to make better-informed investment decisions and, therefore, should be required to be made publicly available under proposed paragraph (b)(5)? If so, please describe this information and how it could be useful to investors.
Q14. Are there any concerns with the proposal to require that the information specified in proposed paragraph (b)(5)(xi) be publicly available, in particular, the name of any officer as well as any person who is, directly or indirectly, the beneficial owner of more than 10 percent of the outstanding units or shares of any class of any equity security of the issuer? Please explain. If yes, how should those concerns be resolved? Should proposed paragraph (b)(5)(xi) require a higher, or lower, percentage of beneficial ownership of the outstanding units or shares of any class of any equity security of the issuer? If so, what percentage of beneficial ownership should proposed paragraph (b)(5)(xi) use and why?
Q15. Is it useful to continue to require that the broker-dealer initiating the publication or submission of a quotation make the information it obtains and reviews reasonably available to an investor upon request even if such information must also be made publicly available, as proposed? Should this existing requirement be modified to require that any broker-dealer quoting the security must, upon request, instruct an investor as to how to access such information?
Q16. Are the time frames in proposed subparagraph (b)(5)(xii) regarding when the balance sheet, profit and loss statement, and retained earnings statement would be current for purposes of this section clear? If not, how should the proposed Rule be modified to clarify the time frames for the balance sheet, profit and loss statement, and retained earnings statement? Please explain. How do broker-dealers calculate the dates for which the issuer’s balance sheet, profit and loss statement, and retained earnings statement are reasonably current under existing paragraph (g)(1)? Is it difficult for broker-dealers to determine what information they need to review under existing paragraph (g)(1)? If so, please explain. Would the proposed Rule make it more difficult for broker-dealers to determine what information they need to review under proposed subparagraph (b)(5)(xii)? Please explain.
Q17. Are there ways to reduce the administrative burdens associated with the proposed Rule? In particular, are there changes to proposed paragraph (b)(5)(xii) that would ease compliance with the proposed Rule without minimizing investor protection? If so, please explain.
Q18. Are there more streamlined requirements that could be used in the proposed Rule? In particular, could the financial statement requirements in proposed paragraph (b)(5)(xii) be simplified while remaining consistent with the Rule’s objective? Should the timing requirements associated with the financial statements included in proposed paragraph (b)(5)(xii) be simplified (e.g., all financial statements must be “as of” a date within 12 calendar months before the publication or submission of a broker-dealer’s quotation)? If so, please explain.
Q19. How, and to what extent, would these proposed amendments affect liquidity, transparency, and capital formation, particularly for small issuers?
Supplemental Information for IDQS
Q20. Proposed paragraph (c) would require that a broker-dealer submitting or publishing a quotation or any qualified IDQS that makes known to others the quotation of a broker-dealer pursuant to proposed paragraph (a)(2) have in its records documents and information concerning company insiders, trading suspensions, and any other material information regarding the issuer that comes to the knowledge or possession of the broker-dealer or qualified IDQS before the initial publication or submission of a quotation. Are there other documents and information that the broker-dealer or qualified IDQS should be required to have in its records? Please explain.
Q21. Currently, paragraph (b)(3) of the Rule requires that a broker-dealer submitting or publishing a quotation have in its records documents and information regarding material information (including adverse information) regarding the issuer which comes to the broker dealer’s knowledge or possession before the initial publication or submission of the quotation. We seek comment concerning the type of such information that most often falls within this existing paragraph and frequency of such occurrences.
Q22. Should proposed paragraph (c) require that a broker-dealer or qualified IDQS, affirmatively seek additional information about the issuer? Please explain. Should proposed paragraph (c)(3) use the terms “actual knowledge” or “physical possession” instead of the terms “knowledge or possession”? Please explain.
Proposed Amendments to the Piggyback Exception
Current and Publicly Available Information for Catch-all issuers
Q23. Certain issuers choose not to have reporting obligations for business purposes. The proposal, however, would require proposed paragraph (b)(5) information from a catch-all issuer, excluding subparagraphs (b)(5)(xiv) through (xvi), to be current and made publicly available within six months before the date of publication or submission of the broker-dealers’ quotation in order for broker-dealers to rely on the piggyback exception to publish or submit quotations for the security of a catch-all issuer. Is six months the appropriate time frame within which a market participant must have published proposed paragraph (b)(5) information, excluding subparagraphs (b)(5)(xiv) through (xvi)? If so, why? If six months is too short or too long of a time frame, what should the time frame be and why? What are the potential costs and benefits to small issuers of this requirement? For reporting issuers that are delinquent in their reporting obligations (and are treated as catch-all issuers), should the piggyback exception require a shorter time frame, such as four months, for current information? Are there alternative methods that could be used that would protect investors while minimizing costs to issuers and broker-dealer
Q24. Would the six month time frame place an undue burden on small issuers? Would the six month time frame discourage small issuers from raising capital in the public markets? What are the potential costs and benefits to small issuers of this six month time frame? What alternative methods could be used to encourage quoted public markets for securities of start-ups while also distinguishing them from entities that are potential vehicles for fraudulent activity?
Q25. Are there alternatives to limiting reliance on the piggyback exception to publish or submit quotations for securities of catch-all issuers when information is no longer made publicly available or current that would benefit investors of quoted OTC securities? If so, what are they?
Q26. Should the piggyback exception not apply to publications or submissions of quotations for securities of issuers that have declared bankruptcy, filed for corporate dissolution, or otherwise taken steps to wind down their business? Why or why not?
Q27. Should the piggyback exception not apply to publications or submissions of quotations for securities of issuers that have undergone a re-organization, any major mergers and acquisitions, reverse mergers, or other significant restructuring that affects their business or management? Why or why not?
Q28. As proposed, a reporting issuer that is not current in its filing obligations would become subject to proposed paragraph (b)(5), and broker-dealers could continue to quote the issuer’s security if the proposed paragraph (b)(5) information were current and made publicly available within six months of the date of the publication or submission of the quotation. Should broker-dealers be prohibited from relying on the piggyback exception to publish or submit quotations for the securities of delinquent reporting companies? Why or why not? Are there any circumstances that would make it difficult for a broker-dealer that relies on the piggyback exception to know the issuer’s regulatory status and identify which provision of proposed paragraph (b) applies? Please explain.
Two Way Priced Quotations
Q29. How, and to what extent, would these proposed amendments affect liquidity, transparency, and capital formation, particularly for small issuers?
Q30. Do unpriced quotations provide any market signals that would warrant the continued reliance on the piggyback exception based on unpriced quotations? If so, what are they?
Q31. Should broker-dealers be permitted to rely on the piggyback exception if only a priced bid or a priced ask (i.e., only a one-sided quotation) is published? Why or why not?
Shell Companies
Q32. Should broker-dealers be prohibited from relying on the piggyback exception to publish or submit quotations for securities of shell companies? Why or why not?
Q33. Are there specific types of shell companies that participate in reverse mergers and act as the surviving company such that broker-dealers should be able to rely on the piggyback exception to publish or submit quotations for securities of these shell companies? If so, how should the Commission define such shell companies?
Q34. How, and to what extent, would these proposed amendments affect liquidity, transparency, and capital formation, particularly for small issuers?
Q35. Please describe alternative approaches, as well as their costs and benefits, to address the problems that may arise in the context of Rule 15c2-11 concerning mergers and acquisitions between shell companies and private operating companies.
Q36. Is the proposed definition of “shell company” appropriate? Please explain why or why not. Should a definition of “shell company” that is different from the one that is being proposed today be used? If so, please explain and provide examples.
Frequency Requirements for the Piggyback Exception
Q37. Commenters are requested to provide views on whether maintaining the frequency requirements of 30 days and no more than four business days in succession without a quotation, as proposed, is necessary or effective to curtail fraud where the piggyback exception has been implicated. What are the costs and benefits of having these frequency requirements?
Q38. Should the 12-day requirement in the existing piggyback exception be retained? Please explain why or why not. What are the costs and benefits of continuing to require at least 12 days of quotations within the previous 30 calendar days?
Q39. Please discuss whether and how the elimination of the 12-day requirement could impact the integrity of the OTC market. In particular, please discuss whether the elimination of the 12-day requirement could contribute to a quoting environment that is more susceptible to fraudulent and manipulative schemes.
Q40. Are there alternative frequency requirements that would be more effective to achieve the objectives of the proposed Rule? Please explain.
Q41. We understand that quotations are often automated and can occur on a daily basis. Are there situations in which quotations that are published or submitted in reliance on the piggyback exception are not published or submitted on each trading day within the previous 30 calendar days? Please discuss.
Q42. Prior to the creation of electronic markets for OTC securities, a broker-dealer that complied with the information review requirement to initiate the publication or submission of quotations for a security, in essence, was the sole publisher of quotations for that security for 30 calendar days of publication, unless another broker-dealer also complied with the information review requirement for that security. The Commission understands that the process of initiating quotations before becoming eligible to rely on the piggyback exception has had the practical effect of incentivizing one broker-dealer to undertake the costs associated with initiating quotations for a security. Once reliance on the piggyback exception is established, other brokerdealers ride on the coattails of the broker-dealer that initiated quotations to comply with the Rule’s provisions.108 Such costs and effort should be greatly reduced with today’s technological improvements that have streamlined the ability to obtain information about a company and publish quotations. In light of these considerations, should the 30-day requirement also be removed? What are the costs or benefits, if any, of removing the 30-day requirement while maintaining the no more than four business days in succession without a quotation requirement?
Q43. How, and to what extent, would the elimination of these frequency requirements help to facilitate or impede liquidity, transparency, and capital formation, particularly for small issuers?
General Request for Comment Regarding the Piggyback Exception
Q44. Please discuss any concerns with the proposed paragraph (f)(3) proviso “that this paragraph (f)(3) shall apply to a publication or submission of a quotation concerning a security of an issuer included in paragraph (b)(5) of this section only where the information required by paragraph (b)(5) (excluding paragraphs (b)(5)(xiv) through (xvi)) is current and has been made publicly available within six months before the date of publication or submission of such quotation” (emphasis added). In particular, please discuss whether there is a concern that investors may not have sufficient notice of a potential loss of a quoted market for a particular security where the piggyback exception becomes unavailable due to proposed paragraph (b)(5) information no longer being current and publicly available (e.g., the information is not updated by the conclusion of the six-month period). Please discuss any ways to address the provision of such notice or any other concerns.
Q45. Should proposed paragraph (f)(3) permit a grace period during which a security could continue to be quoted in reliance on proposed paragraph (f)(3) for a certain number of days following the expiration of such six-month period? What is the appropriate length of such a grace period? For example, is 15 days an appropriate grace period, or should such period be longer or shorter? Please explain. If the piggyback exception were to permit such a grace period, should proposed paragraph (f)(3) also include in the proviso, for example, that “proposed paragraph (f)(3) shall not apply to the publication or submission of a quotation concerning a security of an issuer included in proposed paragraph (b)(5) unless such quotation for such security is published or submitted in an IDQS that specifically identifies quotations concerning any security of an issuer for which proposed paragraph (b)(5) has not been made publicly available within six months before the date of publication or submission of such quotation”? Should such notice be in the form of a special “tag” on the quotation, similar to how unsolicited indications of interest are designated? Alternatively, should a notice be continuously and prominently posted on the IDQS’s website throughout the grace period? Please explain.
Q46. Alternatively, instead of a grace period, should proposed paragraph (f)(3) include in the proviso that “proposed paragraph (f)(3) shall not apply to the publication or submission of a quotation concerning a security of an issuer included in proposed paragraph (b)(5) unless such quotation for such security is published or submitted in an interdealer quotation system that specifically identifies that such proposed paragraph (b)(5) information must be made current and publicly available within 30 calendar days for this paragraph (f)(3) to continue to apply”? Please explain.
Q47. To promote consistency in the operation of the proposed Rule and the expiration of piggyback eligibility, should proposed paragraph (f)(3) also include in the proviso that “proposed paragraph (f)(3) shall apply to the publication or submission of a quotation concerning a security of an issuer included in proposed paragraph (b)(5) until the end of the calendar month in which the proposed paragraph (b)(5) information ceases to be current and publicly available”? Please explain.
Q48. Please discuss the advantages or disadvantages of any of the above-discussed provisos to investors, issuers of OTC quoted securities, and other market participants. What, if any, impact would specifically identifying these types of quotations have on liquidity? Please explain. What would be the costs and benefits of including any of the above-discussed provisos? Please explain. Are any of these provisos workable? Are there suggestions to revise the proviso to improve workability; for example, should a broker-dealer be required to provide notice to the IDQS that the proposed paragraph (b)(5) information has not been made publicly available and piggyback eligibility is about to expire? Please explain.
Q49. Is there a certain price threshold below which the piggyback exception should not apply? Why or why not? Commenters are requested to please provide any data they might have. If so, how should such a price threshold be measured? For example, should the threshold amount apply to the 30-day weighted average price of the security if the security is priced below a certain amount for more than 12 months?
Q50. It is the Commission’s understanding that broker-dealers tend to rely on the exception to the Rule provided in existing subparagraph (f)(3)(i) and that broker-dealers tend not to rely on the exception in existing subparagraphs (f)(3)(ii) and (f)(3)(iii). Should existing subparagraph (f)(3)(ii), which allows broker-dealers to rely on the piggyback exception to publish or submit quotations in an IDQS that does not identify unsolicited customer indications of interest, be eliminated from the Rule? Why or why not? How, and to what extent, would such elimination affect liquidity, and capital formation, particularly for small issuers? Should proposed subparagraphs (f)(3)(i) and (f)(3)(ii) be combined? Why or why not? Should existing subparagraph (f)(3)(iii), which allows market makers to piggyback off of their own quotations, be eliminated from the Rule? Why or why not? How, and to what extent, would such elimination affect liquidity and capital formation, particularly for small issuers? How would investors be affected? How, and to what extent, do market participants rely on these exceptions? Do market participants anticipate relying on them given the other amendments the Commission is proposing today? Why or why not?
Proposed Amendments to the Unsolicited Quotation Exception
Company Insiders
Q51. How frequently do broker-dealers rely on the unsolicited quotation exception? Commenters are requested to please provide data to support their answer if possible.
Q52. Please discuss whether, and to what extent, the proposed amendments to the unsolicited quotation exception, if adopted, would impact liquidity, capital formation, investor protection, and the integrity of the OTC market or other markets.
Q53. Please discuss whether, and to what extent, the proposed amendments to the unsolicited quotation exception, if adopted, would impact company insiders. Please discuss ways to mitigate any undue impact on company insiders while preventing misuse of the exception to facilitate fraudulent and manipulative schemes.
Q54. Should the Rule retain the unsolicited quotation exception in its existing form? Please explain why or why not.
Q55. Is there an alternative way to modify the exception that would help to prevent misuse of the exception to facilitate fraudulent and manipulative schemes? If so, please describe specific modifications to the exception and any resulting benefits and costs.
Q56. Please discuss any advantages and disadvantages of rescinding the unsolicited order exception.
Q57. The proposed amendments would make the unsolicited quotation exception unavailable for publications of quotations by or on behalf of certain persons—the chief executive officer, members of the board of directors, officers or any person, directly or indirectly, the beneficial owner of more than 10 percent of the outstanding units or shares of any class of equity security of the issuer—unless proposed paragraph (b) information is current and publicly available. Are there additional persons that should be included in this list (e.g., an affiliate of the issuer) with respect to the unsolicited quotation exception? If yes, should such terms be defined? Are there existing definitions in other rules or regulations that could be used in this context? Why would the use of such other definitions be appropriate? Should the limitation of the unsolicited quotation exception for quotations of beneficial owners be a higher, or lower, percentage of beneficial ownership of the outstanding units or shares of any class of any equity security of the issuer? If so, what percentage of beneficial ownership should the unsolicited quotation exception use and why? Please explain.
Q58. Please describe how a broker-dealer would determine that a quotation is made by or on behalf of the chief executive officer, members of the board of directors, officers or any person, directly or indirectly, the beneficial owner of more than 10 percent of the outstanding units or shares of any class of equity security of the issuer.
Q59. Should beneficial ownership of an issuer’s convertible bonds be included in the calculation of the percentage of ownership for purposes of determining whether a person is a company insider for purposes of the proposed unsolicited quotation exception? Please explain.
Q60. How would market participants generally calculate ADTV value for the purposes of this exception? What data sources would they use, and what is the reliability and availability of these data sources? Please be specific. Is ADTV value an appropriate measure to use in the context of measuring a security’s susceptibility to fraudulent or manipulative practices? Why or why not?
Asset Test
Q61. Should proposed paragraph (f)(5) include an additional requirement that the security that is the subject of the publication or submission of a quotation meet a certain minimum bid price? Why or why not? For such a requirement, what would be the appropriate minimum bid price?
Q62. Should the proposed exception’s ADTV test prong, contained in proposed subparagraph (f)(5)(i), also include the ADTV value of convertible securities where the underlying security satisfies the proposed ADTV threshold? If so, commenters should explain their rationale. Should the proposed exception’s ADTV test prong, contained in proposed subparagraph (f)(5)(i), exclude trading volume outside the U.S.? Please explain.
Q63. Should the dollar value of the ADTV test prong of the proposed exception be higher than $100,000 (e.g., $500,000 or $1 million), or should it be a lower amount (e.g.,$50,000)? Commenters should specify what the dollar value should be and provide any relevant data or analysis to support their response. If the proposed exception’s ADTV test prong were adopted, should it be adjusted for inflation going forward? If yes, how often? Please explain.
Q64. Should the proposed ADTV test measuring period be longer than 60 calendar days (e.g., six months) or shorter (e.g., 30 days)? Should the length of the measuring period depend on the amount of the value of ADTV threshold (i.e., should a higher dollar value of ADTV threshold be allowed but require a shorter measuring period)? Would a shorter measuring period (e.g., 30 days) be less effective in measuring a security’s susceptibility to fraudulent or manipulative practices? Why or why not?
Q65. To meet the proposed exception, a broker-dealer would need to determine the value of a security’s worldwide ADTV by doing a daily calculation over a 60-calendar-day measuring period. Should this calculation be less frequent? For example, should the proposed exception be modified to require a calculation done once a month? Would this alternative ADTV measuring standard be significantly less burdensome? Would this alternative ADTV measuring standard be as effective as a daily calculation over a longer period in determining which securities are less likely to be the subject of a Commission-ordered trading suspension or involved in manipulative conduct in the OTC market? Please explain.
Q66. Because a broker-dealer generally would be able to determine the value of a security’s worldwide ADTV from information that is publicly available and that the broker dealer has a reasonable basis for believing is reliable, as discussed above, should the proposed exception in paragraph (f)(5) be modified so as not to include the proviso that would limit the availability of the exception to those quoted OTC securities where proposed paragraph (b) information is current and publicly available? Would including the proviso render the exception less effective in focusing the proposed Rule on the more thinly traded microcap securities that are more likely to be involved in manipulative conduct in the OTC market? Why or why not?
Q67. Rule 101 of Regulation M includes an exception from the trading prohibitions in Regulation M for “actively-traded” securities (i.e., securities with a value of ADTV of $1 million or more, using a two-full calendar month measuring period, if the issuer has a public float value of at least $150 million). As an alternative, should the Commission propose an ADTV prong of the exception in proposed subparagraph (f)(5)(i) to parallel the $1 million ADTV threshold of Regulation M’s actively-traded securities exception? Please explain.
Q68. If a quoted OTC security ceases to meet the requirements of either of the proposed ADTV test or the assets test, and if a broker-dealer may not rely on the piggyback exception, should the proposed exception continue for a period of time, such as 10 business days, to allow for a broker-dealer to review the required issuer information?
Q69. Should the threshold amount for the unaffiliated shareholders’ equity test be higher than $10 million (e.g., $20 million)? If so, please explain. Are there circumstances under which it may be appropriate to permit a lower threshold amount? If so, please explain.
Q70. Should the exception in proposed subparagraph (f)(5)(ii) be modified to include a public float value test, similar to that contained in Regulation M, instead of the combined asset test proposed? If so, should the public float value use Regulation M’s $25 million threshold (for “actively-traded” securities) or some higher or lower amount? Would public float information be easy or difficult to obtain for broker-dealers trying to rely on this proposed exception?
Q71. Should the unaffiliated shareholders’ equity test accommodate equity that is owned by shareholders that are affiliated with the issuer? Please explain why or why not. Would including equity that is owned by shareholders that are affiliated with the issuer increase the likelihood of the exception being misused or applied in cases where there may be a greater potential for fraudulent and manipulative conduct? In making the proposed unaffiliated shareholders’ equity calculation, how difficult or burdensome would it be to identify equity that is owned by shareholders that are affiliated with the issuer? Please explain.
Q72. Would a balance sheet, particularly a balance sheet for a catch-all issuer, contain sufficient information to permit broker-dealers to make the proposed unaffiliated shareholders’ equity calculation?
Q73. Should the use of balance sheets of an exempt foreign private issuer be limited to balance sheets prepared in accordance with U.S. generally accepted accounting principles (“GAAP”)?
Q74. Should the exception in proposed subparagraph (f)(5)(ii) be available to securities that may satisfy the ADTV test, but where the issuer of the security is a domestic issuer, that is not a prospectus issuer, Reg. A issuer, or a reporting issuer and there are no publicly available U.S. GAAP financials (i.e., for purposes of meeting the proposed assets test in proposed subparagraph (f)(5)(ii))? Please explain why or why not.
Q75. The Commission acknowledges that an exception conditioned on certain value thresholds could induce arbitrage for accounting purposes. Should the use of balance sheets of an exempt foreign private issuer that are not prepared in accordance with U.S. GAAP be limited to balance sheets prepared in accordance with the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB” or “IFRS-IASB”)? Is there a way to ensure that a broker-dealer does not “cherry pick” from accounting standards to take only the most beneficial figures from what is available so that the broker-dealer can rely on an exception conditioned on an asset test?
Q76. In evaluating foreign currency balance sheets, should the Commission modify the proposed assets prong of the exception in proposed subparagraph (f)(5)(ii) to specify whether the equity balance is to be measured using today’s current exchange rates or the rates in effect at the balance sheet date? Please explain why or why not. Commenters are requested to please also explain in their response whether it is more appropriate to use rates based on balance sheet date, or date of quotation publication.
Q77. For 20-F issuers filing IFRS-IASB or balance sheets under another standard that are reconciled to U.S. GAAP, should the proposed asset test in proposed subparagraph (f)(5)(ii) be modified to specify whether the home country numbers or the reconciled numbers may be used for purposes of determining eligibility under the proposed exception? Please explain. If not, why not?
Q78. Alternatively, for those issuers not using IFRS-IASB but that have to reconcile to U.S. GAAP, should the asset test in proposed subparagraph (f)(5)(ii) be modified to require such issuers to use the reconciled number for purposes of determining eligibility under the proposed exception? Please explain why or why not.
Q79. With respect to issuers that are not prospectus issuers or reporting issuers, for purposes of determining whether such issuers would meet the requirements of the proposed assets and the unaffiliated shareholders’ equity prongs in proposed subparagraph (f)(5)(ii) of the exception, should the Commission specify that the audit of the balance sheet may be performed in accordance with either the auditing standards applicable to such issuers (e.g., the standards of the American Institute of Certified Public Accountants (“AICPA”) for domestic issuers or applicable home country standards, which may be the standards of the International Auditing and Assurance Standards Board for a foreign issuer) or the standards of the Public Company Accounting Oversight Board? Please explain why or why not.
Q80. With respect to issuers that are not prospectus issuers or reporting issuers, should the independence requirements of Rule 2-01 of Regulation S-X apply to the exception in proposed subparagraph (f)(5)(ii)? For example, if a certain issuer is currently only required to obtain an audit that is subject to the audit and independence standards of the American Institute of Certified Public Accountants, should “independent” for purposes of this proposed exception also be determined by the AICPA’s independence standards (i.e., not Rule 2-01)? Please explain why or why not. Commenters should include in their response whether the proposed exception should explicitly require the auditor’s report, in particular, to be publicly available.
Q81. Should reliance on the exception be limited to those quoted OTC securities that satisfy the requirements of just one instead of both prongs of the proposed exception? Please explain why or why not. Are there alternative tests that should be considered? If so, please explain.
Q82. Should the exception be unavailable for securities of reporting issuers that are delinquent in their reporting obligations?
Underwritten Offerings
Q83. Are the liability standards and professional obligations of underwriters in registered and Regulation A offerings a sufficient basis for providing the proposed exception? Please explain.
Q84. An underwriter in a Regulation A offering is subject to a different liability standard than an underwriter in an offering registered under the Securities Act (i.e., Section 12(a)(2) applies for a Regulation A offering, while Section 11 imposes strict liability in a registered offering). In view of the different liability standards, the Commission seeks comment on whether it is appropriate to provide this exception in connection with securities issued in Regulation A offerings.
Q85. Should underwritten shelf offerings also be included in the exception for publications or submissions of quotations for securities issued in underwritten offerings, even though it is possible that the shelf takedown could occur up to three years after the effectiveness of the shelf registration statement? Please explain why underwritten shelf registration statements should be included in the exception or excluded from the exception.
Q86. Are there other categories of issuers or potentially other categories of securities, not otherwise discussed in this release, that are unlikely to be involved in fraud in the OTC market for which publications or submissions of quotations of their securities also should be excepted from the Rule’s provisions? Please explain.
Q87. Are there publications or submissions of quotations for other securities (e.g., debt securities, non-participatory preferred stock, or investment grade asset-backed securities) that have characteristics similar to those of the securities set forth above that should also be excepted from the Rule’s provisions? If so, please explain.
Qualified IDQS Complies with the Information Review Requirement
Q88. How, and to what extent, would the proposed exception appropriately protect investors? Please explain.
Q89. How, and to what extent, would the limitation of the proposed exception regarding shell companies appropriately (or unduly) limit the application of the exception? Should broker-dealers also be permitted under the exception to rely on qualified IDQSs to comply with the Rule’s requirements when publishing or submitting quotations for securities of shell companies? Please explain.
Q90. Should broker-dealers also be permitted under the exception to rely on qualified IDQSs to comply with the Rule’s requirements when publishing or submitting quotations for securities of blank check companies? If so, what would be an appropriate definition for “blank check company” in this circumstance? Please explain.
Q91. The Commission seeks specific comment on whether the 30-calendar-day restriction in proposed subparagraph (f)(7)(ii) is appropriate or, if not, how it should be modified. The Commission seeks specific comment on whether the three-business-day window is appropriate or, if not, how should it be modified.
Q92. Should broker-dealers be able to rely upon any entities other than qualified IDQSs to perform the Rule’s information review requirement? Please explain.
Q93. Should the proposed exception under proposed paragraph (f)(7) limit broker dealers to only publishing or submitting quotations in the qualified IDQS that makes the publicly available determination that the requirements of an exception are met? Please explain. Would having only regulated entities that meet the definition of a “qualified IDQS” create an unfair competitive disadvantage in the OTC market? Why or why not?
Q94. Should the Commission place additional limitations on the proposed exception’s availability, such as prohibiting application of the proposed exception to quotations for a security that is a penny stock? If so, please explain why such limitation would be appropriate.
Q95. Please discuss potential benefits or disadvantages to investors or other market participants if a qualified IDQS undertakes to perform the information review requirement. Please discuss whether and how any such benefits or disadvantages change if one qualified IDQS undertakes such action or if multiple qualified IDQSs undertake such action. Would having a regulated third party conduct the required review increase the number of OTC securities that could be quoted in the OTC market? In what way, if any, would this benefit investors, particularly retail investors? Please explain.
Proposed New Exception for Relying on Determinations by a Qualified IDQS or a Registered National Securities Association
Q96. Should a broker-dealer’s reliance be limited to a determination by a registered national securities association and not a qualified IDQS? Why or why not? Should a broker dealer’s reliance be limited to a determination by a qualified IDQS and not a registered national securities association? Why or why not?
Q97. Are there concerns that would discourage a qualified IDQS from undertaking to comply with the proposed Rule’s information review requirement? Please explain. If so, please describe how such concerns could be addressed.
Q98. Should proposed paragraph (f)(8) be expanded to allow broker-dealers to rely on publicly available determinations by entities other than qualified IDQSs or registered national securities associations? If so, what entities should be added to proposed paragraph (f)(8) and why?
Q99. How, and to what extent, do the proposed Rule’s requirements that a qualified IDQS make a publicly available determination that it has reasonably designed written supervisory procedures, in conjunction with the Commission’s oversight of the qualified IDQS as an ATS, appropriately mitigate the conflicts of interest that might arise based on a qualified IDQS’s profit motives? If not, how should the Commission address such conflicts of interests?
Q100. How, and to what extent, would the exception in proposed paragraph (f)(8) impact liquidity for quoted OTC securities?
Q101. Should certain exceptions enumerated in proposed paragraph (f)(8) be removed from the paragraph? If so, which ones and why? Should certain exceptions not enumerated in proposed paragraph (f)(8) be added to the paragraph? If so, which ones and why?
Q102. What, if any, impact would the recordkeeping requirement have on liquidity in the secondary market for quoted OTC securities?
Q103. Is the preservation of records required by proposed paragraph (d) for a period of three years appropriate? If not, how long should the period be under proposed paragraph (d) to preserve records under proposed paragraph (a), (b), and (c) and why? Should proposed paragraph (d)(1) contain requirements specifying when the record preservation period begins for the records required to be preserved in proposed paragraph (d)? What are broker-dealers’ current practices for deciding when to begin preserving the records required to be preserved under the existing rule? Would these practices need to be modified to comply with proposed paragraph (d)(1)? Is a recordkeeping requirement necessary, or will broker-dealers maintain the records of their own accord or pursuant to other regulatory recordkeeping obligations?
Q104. Are the preservation requirements regarding proposed paragraph (b) information and proposed paragraph (c) supplemental information under proposed paragraph (d)(1) unduly burdensome on broker-dealers or qualified IDQSs or overly costly? If so, in what ways could the proposed Rule reduce these burdens and costs? What are the costs to a broker-dealer to preserve proposed paragraph (b) information?
Q105. In addition to printing or electronically saving proposed paragraph (b) information and proposed paragraph (c) supplemental information, are there other ways that a broker-dealer or qualified IDQS would be able to document its review of proposed paragraph (b) information and proposed paragraph (c) supplemental information, including whether such proposed paragraph (b) information is current and publicly available? If so, what methods or means could a broker-dealer or qualified IDQS implement to document compliance with the information review requirement under proposed paragraph (a)? Should a broker-dealer, qualified IDQS, or registered national securities association be able to preserve a memorandum or other document contemporaneous to the review showing that it performed a review, rather than the documents it reviewed (so long as there is not otherwise a requirement, such as a Commission or SRO rule, that the entity make and keep such documents)?
Proposed Amendments to the Record Keeping Requirement
Recordkeeping Requirement for Relying on an Exception
Q106. Should a broker-dealer or qualified IDQS be able to document its review of proposed paragraph (b) information that is publicly available on the website of an issuer, broker dealer, registered national securities association, or qualified IDQS by recording the website where the broker-dealer or qualified IDQS obtained such information? If so, how would a broker-dealer know that such information would continue to be publicly available for the required recordkeeping retention period, even after the date at which the broker-dealer or qualified IDQS complied with the review under proposed paragraph (a)?
Q107. Should broker-dealers publishing or submitting quotations in reliance on proposed paragraphs (f)(7) and (f)(8) be required to document information in addition to the proposed required documentation (i.e. documenting the exception that the broker-dealer is relying upon and the name of the qualified IDQS or registered national securities association that made a determination that the conditions of the exception have been met)? If so, what additional documentation and information should a broker-dealer preserve to demonstrate its reliance on a determination pursuant to proposed paragraphs (f)(7) and (f)(8)?
Q108. Should proposed paragraph (d)(2) contain requirements enumerating the frequency of recordkeeping or any other specific measures? Should broker-dealers specifically be required to preserve documents and information pursuant to proposed paragraph (d)(2) on a quotation by quotation basis for purposes of the unsolicited quotation exception? Why or why not? If not, is there another alternative approach that could be used? Please identify any alternative approach and explain why it is preferable. For example, would the proposed recordkeeping requirement in proposed paragraph (d)(2) and the requirements of FINRA Rule 6432 be sufficient to help prevent misuse of the exception?147 Please explain.
Q109. Are there certain exceptions under proposed paragraph (f) that should be included in the proviso and not be subject to the recordkeeping requirement in proposed paragraph (d)(2)? If so, which ones and why? Are there certain requirements concerning exceptions under proposed paragraph (f) that should be added to the proviso under proposed paragraph (d)(2)? If so, what additional requirements should be considered and what are the characteristics of such requirements that would warrant its inclusion in the proviso?
Q110. Taken together, would the proposed changes described above regarding proposed paragraph (f) go far enough to mitigate the potential for fraud and other abuses, including the potential for broker-dealers’ use of the piggyback exception to facilitate fraud and other abuses (whether intentional or inadvertent)? Are there other changes that the Commission should make to address the risk of fraud and abuse? For instance, should the piggyback exception be eliminated entirely? Please explain why or why not. How would elimination of the piggyback exception affect small issuers?
Proposed Amendments to the Rule’s Definitions
Qualified Interdealer Quotation System
Q111. Are the proposed definitions accurate? Please explain. What alternative definitions might be more effective in light of the purpose of the Rule
Q112. Company insiders are described in proposed subparagraphs (b)(5)(xi), (c)(1), and (f)(2)(ii). Should we add a definition for “company insiders” that would include such persons or different persons? Please explain. Should any other terms be defined? If so, are there existing definitions in other rules or regulations that could be used in this context? Why would the use of such other definitions be appropriate?
Q113. Should non-ATS IDQSs be permitted to conduct the review under the proposed amendments, or should the review be limited to qualified IDQSs as proposed? Why or why not? Commenters are requested to please include any data and analysis that they have to support their response.
Q114 Are there concerns with not proposing a definition of “nominal” in context of the proposed definition of “shell company”? Please explain any concerns and provide examples.
Proposed Amendments to the Furnishing Requirement and Annual, Quarterly, and Current Reports of Reporting Issuers
Proposed Amendment to Remove Furnishing Requirement for Catch-all Issuer Information
Q115. Rule 15c2-11(d)(1) requires that a broker-dealer publishing or submitting a quotation for a security of a catch-all issuer furnish to an IDQS, at least three business days before the quotation is published or submitted, the required information regarding the security and the issuer. Should this requirement be retained? Why, or why not?
Q116. Should the Commission retain Rule 15c2-11(d)(2)(ii)? Why, or why not?
Proposed Amendment to Commission Exemptions from Rule 15c2-11
Q117. Should the existing requirement that, before granting an exemption, the Commission find that the quotation will not “constitut[e] a fraudulent, manipulative, or deceptive practice comprehended within the purpose of this section” be retained? Why or why not?
Proposed Amendment to Remove Preliminary Note
Q118. Should the Preliminary Note be retained in its current form, in the form of guidance as proposed, or in a different form?
Technical Amendments to Rule Test
Q119. Are there other technical amendments that would be appropriate? Please explain. Are there additional technical edits that the Commission should make to improve the effectiveness and clarity of the proposed Rule? For example, should the requirement regarding information about an issuer’s address be modified to require the issuer’s “physical” address to differentiate it from a post office box or other possible mailing or alternative addresses that issuers may have, such as addresses of branch offices, prior or obsolete addresses, or other nonphysical addresses such as a service of process address?
Q120. Is there language in the proposed Rule that should be revised to improve the effectiveness and clarity of the Rule? In particular, we seek commenters’ input regarding whether there is language in proposed paragraph (b) that should be revised. If so, how? For example, proposed paragraphs (b)(4) and (b)(5) would keep the existing requirement that information be made available upon the request of “a person expressing an interest about a proposed transaction in the issuer’s security.” Is there alternative language that would be more clear or effective in light of the purpose of the Rule? For example, should the language be replaced with “a person seeking information about the issuer’s security” or “a person inquiring about an issuer’s security”? Please explain. Is it clear what type of information that a broker dealer must provide to any person expressing an interest in the security of an exempt foreign private issuer or catch-all issuer where it is required to provide “appropriate” instructions? If not, what alternative standard would be clear and effective, if any? Please explain.
Conforming Rule Change and General Request for Comment
General Request for Comment
Q121. Are there additional or different ways to amend the Rule that would help reduce fraud and manipulation in the OTC market? Please explain.
Q122. Should the Rule be limited to only equity securities? Please explain.
Q123. How might the proposal positively or negatively impact investor protection, the maintenance of a fair, orderly, and efficient OTC market, and capital formation?
Q124. Should each exception to the Rule require that a broker-dealer establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent violations of the Rule by the broker-dealer? Please explain why or why not.
Q125. We seek commenters’ views about the potential for changes to Rule 15c2-11 to help investors track quoted OTC issuers through corporate events such as reverse mergers and reorganizations. For example, should Rule 15c2-11’s publicly available information requirement for a quoted OTC security issuer’s name and its predecessor (if any) also require the public availability of such issuer’s unique entity identifiers (if any)? What would the costs and benefits associated with such a requirement be? Please discuss whether such a requirement should be limited to certain types of issuers, e.g., catch-all issuers? Please quantify answers, to the extent possible.
Q126. Are further substantive changes needed to ensure this guidance reflects the current state of technology and industry practice? Should the substance of this guidance be incorporated into the rule text and, if so, are there any changes that should be made?
Information Review Requirement
Q127. Are changes to this guidance needed to address the specific responsibilities with respect to the information review requirement of a qualified IDQS that makes known to others the quotation of a broker-dealer?
Q128. In 1999, the Commission re-proposed amendments to Rule 15c2-11.175 In response to comments that the Commission received regarding the 1998 Proposing Release expressing concerns about broker-dealers’ review obligations, the Commission also included an Appendix in the 1999 Reproposing Release (“1999 Appendix”) that provided guidance to broker-dealers on the scope of the review required by the Rule and provided examples of red flags that broker-dealers should look for when reviewing issuer information.176 The 1999 Appendix, which was not adopted by the Commission, would have confirmed and supplemented earlier guidance on Rule 15c2-11 issues.177 Should the Commission incorporate the 1999 Appendix as part of guidance included in any adopting release? If so, should the guidance from the 1999 Appendix be modified, updated or expanded? Are there additional examples of red flags that should be discussed in any such modified, updated or expanded guidance? Are there red flags that should be removed from the guidance? What current topics or issues would commenters like to see addressed in an updated or expanded version of the guidance on Rule 15c2-11? Should the Commission provide guidance on the proposed amendments to the Rule and if so, for which amendments to the Rule would guidance be most helpful?
Information Repositories
Q129. Would access to proposed paragraph (b) information on an issuer’s website provide sufficient access and notice to investors? What if the issuer does not maintain the information on its website for the requisite recordkeeping period?
Q130. Would investors and other market participants benefit from having access to proposed paragraph (b) information solely through a centralized location, such as an information repository?
Q131. Have any entities that currently publish proposed paragraph (b) information engaged in any actions that would warrant Commission intervention? If so, what activities has the entity engaged in and what would the appropriate regulatory action be?
Q132. The Commission is committed to ensuring that all investors and market participants can access the information necessary to make informed financial decisions. One way that the Commission lowers the burden of accessing and analyzing issuer data is through the use of structured data. Machine-readable disclosures provide easily accessible financial statement information that investors and other market participants can use to compare and analyze issuers, whether they elect to analyze condensed data sets themselves or analyze data downstream through a data aggregator service. Regarding actions that the Commission might propose at a later date, the Commission is interested in commenters’ views on whether or not the financial information required by proposed subparagraph (b)(5)(xii) regarding an issuer’s balance sheet, profit and loss statement, and retained earnings statement should be published in a machine readable format? Is there other proposed paragraph (b) information that should be machine-readable, if the Commission were to propose to require that proposed paragraph (b) information be machine-readable at a later date? How burdensome and costly would it be for a broker-dealer, qualified IDQS, or an issuer to provide such information in a machine-readable format? What are the additional burdens or costs associated with providing such information in a machine-readable format? For example, would there be additional costs with respect to complying with documentation and recordkeeping requirements, specifically those included in the proposed amendments to the Rule, as a result of information being machine-readable? How significant are those potential costs relative to the potential benefits in facilitating an analysis of an issuer’s financial data by investors or other market participants? Please quantify your answers, to the extent feasible.
Short Selling
Q133. At least one commenter to the SEC Investor Advisory Committee has suggested that amending Regulation SHO to extend the time period required to close out fails to deliver would enhance liquidity in the OTC market.184 Would extending the Regulation SHO close-out period for certain market participants enhance price discovery that could result from short selling without also increasing the potential for abusive short selling in this market?185 Please provide any data to show that amending Regulation SHO would enhance short selling in the OTC market versus other possible reasons that may affect short selling in quoted OTC securities, such as margin or capital rules or Regulation T. What types of market participants should be provided such an extension of time (e.g., market makers)? Would such an extension increase the potential for manipulative “naked” short selling? Would such an extension increase the incidence of fails to deliver in quoted OTC securities? How could the Commission provide such an extension without increasing the potential for abuses or increased fails to deliver? For example, should an extension only be provided for certain types of market makers and not others? What criteria or standards should apply to eligible market makers to reduce the potential for increased manipulation from an extension of the Regulation SHO close-out period? How would amending rules to increase short selling in the OTC market protect retail investors?
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, www.dtc.coralcapital.com 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.