2. Issuers in bankruptcy
a. Reporting issuers
A few commenters urged us to permit broker-dealers to continue to quote the securities of reporting issuers that had filed for reorganization under federal bankruptcy law because it would provide liquidity for these securities.
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They noted that it was often burdensome for small companies that had filed for reorganization under Chapter 11 of the Bankruptcy Code
55
to produce audited financial statements to comply with Exchange Act reporting requirements.
Commenters suggested that broker-dealers could satisfy the Rule's requirements by reviewing bankruptcy court filings made by an issuer in Chapter 11 reorganization when current Exchange Act reports were unavailable. One commenter also suggested that the Commission permit delinquent reporting companies that experience a 51% ownership change as a result of a confirmed plan of reorganization to begin reporting from the effective date of the reorganization plan with a filing with the Commission, attaching the court-approved disclosure statement together with a certified audited balance sheet as of the effective date.
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The reproposal will require a broker-dealer publishing quotations for a reporting issuer's securities to obtain the issuer's Exchange Act reports, even if the reporting issuer has filed for Chapter 11 reorganization. Thus, if a reporting issuer that has filed for Chapter 11 reorganization becomes delinquent in its reporting obligations, a broker-dealer will not be able to publish priced quotations covered by the Rule. For example, a broker-dealer could not continue to publish priced quotations as of the annual review date for a covered security of a reporting debtor that has become delinquent in its reporting obligations.
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The bankruptcy court filings for an issuer undergoing reorganization under Chapter 11 are not adequate to satisfy the Rule's requirements. These Rule 2015 bankruptcy reports ordinarily contain only data about issuer receipts and disbursements and not the type of issuer financial information contemplated by Rule 15c2-11.
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In some cases, our Division of Corporation Finance may grant issuers in bankruptcy no-action relief with respect to Exchange Act filing requirements.
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These no-action positions, however, are predicated on little or no trading occurring in the debtor's securities. The Rule 2015 bankruptcy reports that the Division of Corporation Finance accepts under its no-action position do not satisfy Rule 15c2-11 because this financial report usually contains only information about issuer receipts and disbursements. Where a reporting issuer receives this type of no-action position, a broker-dealer would not be able to obtain the issuer information required by the Rule until the debtor's reorganization plan becomes effective, and the debtor files a Form 8-K, which instead of attaching the Rule 2015 bankruptcy reports, now includes the issuer's audited balance sheet. Under Rule 15c2-11, broker-dealers could review this 8-K, which contains an issuer's audited balance sheet, and then publish priced quotations. From then on, the issuer must file its Exchange Act periodic reports for all periods that begin after the plan becomes effective.
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The publication of quotations by a broker-dealer indicates that a market exists for the issuer's securities. It would be inconsistent with the premise of the no-action position (
i.e.
, that there is no trading in the issuer's securities) if a broker-dealer were able to stimulate trading by publishing quotations without having the issuer's Exchange Act reports.
Q25. Are there circumstances in which a broker-dealer should be permitted to publish priced quotations for the securities of delinquent reporting issuers in bankruptcy? Please describe these circumstances. Should the Rule prohibit broker-dealers from publishing unpriced quotes for the securities of these issuers?
b. Non-reporting issuers emerging from bankruptcy
The Proposing Release contained amendments to permit broker-dealers that quote the securities of non-reporting companies emerging from bankruptcy to review the bankruptcy court-approved disclosure statement and issuer financial information required by the Rule from the date that the bankruptcy court confirms the reorganization plan.
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The commenters who addressed this issue supported the proposal to limit a broker-dealer's review to the post-reorganization information.
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The amendments are unchanged from the original proposal.
3. Non-reporting foreign private issuers
In the case of a foreign private issuer that relies on an exemption from registration under Section 12(g)
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of the Exchange Act by complying with Exchange Act Rule 12g3-2(b), Rule 15c2-11 specifies that a broker-dealer must review the information submitted to the Commission under Rule 12g3-2(b).
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To qualify for the registration exemption, the issuer must furnish to the Commission information that the issuer has made or is required to make public under the law of the country in which the foreign private issuer is domiciled or incorporated; has filed or is required to file with a stock exchange on which the securities are traded and which the exchange has made public; or has distributed or is required to distribute to its securityholders. For foreign private issuers that do not furnish the Commission with information under Rule 12g3-2(b), the Rule currently requires broker-dealers to obtain and review the same kind of information, including financial information, as required for non-reporting domestic issuers.
We note that Rule 12g3-2(b) contains no specific requirements governing the categories of information the issuer must furnish to the Commission under the exemption. As a result, there is no assurance that broker-dealers publishing quotes will obtain the same type of information for each foreign private issuer that claims the Rule 12g3-2(b) exemption as they must for other non-reporting foreign private issuers. This can be problematic since a number of issuers claiming the Rule 12g3-2(b) exemption are foreign microcap companies that can potentially be subject to the same kinds of abusive practices as their U.S. counterparts.
Therefore, we are proposing to change Rule 15c2-11 requirements with respect to quotations for the securities of foreign issuers complying with Rule 12g3-2(b). Broker-dealers publishing quotations for the securities of Rule 12g3-2(b) issuers will have to obtain and review the information specified in paragraph (c)(6) of the reproposed Rule.
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However, as described in more detail below, we propose to revise the financial statements that must be reviewed for non-reporting foreign private issuers to recognize the foreign status of these issuers.
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By eliminating the provision for Rule 12g3-2(b) issuers, all non-reporting foreign private issuers will be treated similarly under Rule 15c2-11.
Commenters were divided on whether we should amend the provisions of the Rule governing the review of information for non-reporting foreign private issuers.
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Because the reproposal excludes the securities of many larger foreign issuers from Rule 15c2-11 and also distinguishes between U.S. and foreign accounting standards for those foreign issuers that continue to be covered, many of the reasons for permitting broker-dealers to rely on Rule 12g3-2(b) information have been addressed.
Q26. Should broker-dealers be required to obtain and review the same type of issuer information with respect to non-reporting foreign private issuers providing information under Rule 12g3-2(b) as they must for other non-reporting foreign issuers? Are there reasons to retain a special provision in Rule 15c2-11 for foreign issuers furnishing information under Rule 12g3-2(b)?
Q27. What is the experience of broker-dealers under the Rule when the foreign issuer has not furnished information to the Commission under Rule 12g3-2(b)? How difficult or easy will it be for broker-dealers to obtain the paragraph (c)(6) information for a non-reporting foreign private issuer?
4. Other non-reporting issuers
The amendments parallel the Proposing Release in their treatment of non-reporting issuers (
i.e.
, those non-reporting issuers that are not financial institutions covered by paragraph (c)(4)), except for the new exclusions discussed in Part III.A. above and the revisions to the required financial information for non-reporting issuers. As in the Proposing Release, the Rule will require broker-dealers to review more information than currently required about the issuer's outstanding securities; the issuer's insiders, including their disciplinary history; and certain significant events involving the issuer, among other items. This information will provide a broker-dealer that is considering whether to publish quotations for such an issuer greater understanding of the issuer's operations and a better indication of whether potential or actual fraud or manipulation may be present.
Several commenters supported the requirement for a broker-dealer to review the disciplinary information about the insiders of non-reporting issuers. One commenter believed that if broker-dealers are allowed to publish quotations without obtaining this disciplinary information, it would create a loophole for issuers to avoid disclosing information that would be of utmost importance and would thereby defeat the goal of the Commission.
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While no commenters directly opposed the requirement to obtain disciplinary information, several commenters objected to the enhanced information requirements in general as too difficult and burdensome, especially when issuers are unwilling to volunteer information.
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Q28. Should the Rule require the disciplinary history information for the insiders of all issuers of covered OTC securities, and not just insiders of non-reporting issuers, on the basis that microcap fraud can involve issuers whose insiders have histories of prior misconduct?
We are proposing to amend the financial information that a broker-dealer must review when publishing quotations of both domestic and foreign non-reporting issuers. The reproposal lists the financial statements required for a domestic issuer, which must be prepared in accordance with U.S. GAAP, and sets forth when these financial statements will be presumed "current" under the Rule. Absent contrary information, a domestic issuer's balance sheet will be considered current if it is as of a date that is less than 15 months before the quotation is published, rather than less than16 months as now specified in the Rule.
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This revision comports with existing Exchange Act requirements regarding when a domestic reporting issuer's financial statements are considered current. The reproposal also will require broker-dealers to review the specified financial information for such part of the two preceding fiscal years (in the case of the balance sheet, the preceding fiscal year) that the issuer (or any predecessor) has been in existence.
The reproposal also will revise the requirements with respect to the financial statements that broker-dealers must review when publishing a quotation for a non-reporting foreign private issuer's security. The reproposal lists the financial statements that the broker-dealer must review, which must be prepared in accordance with a comprehensive body of accounting principles, and sets forth when these financial statements will be considered current under the Rule. For a non-reporting foreign private issuer, its balance sheet will be presumed current if it is as of a date less than 18 months before the quotation is published.
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Also, if the balance sheet is as of a date more than 9 months before the quotation is published, the broker-dealer must obtain more current financial information only to the extent that the issuer has prepared it. The broker-dealer must obtain the specified financial information for the two preceding fiscal years (one year with respect to the balance sheet) that the issuer has been in existence.
Q29. Are the financial statement requirements, including the presumption regarding when the information is considered current, clear and capable of being complied with by broker-dealers publishing quotations? Should there be longer time periods for the presumption regarding when the financial statements for a non-reporting foreign private issuer are considered current? If so, what time periods would be appropriate?
Q30. Are there any information requirements for non-reporting issuers that should be added or removed from reproposed paragraph (c)(6)?
D. Information available upon request
We believe that some microcap frauds could be prevented if there were greater investor access to information about those securities and their issuers. Accordingly, we are reproposing, with some revisions, the requirement that a broker-dealer publishing quotations for any covered OTC security make the information promptly available upon request. In response to the Proposing Release, several commenters suggested that we restrict the types of persons and entities to which a broker-dealer must provide the information.
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The amendments require a broker-dealer to provide information upon request to any current customer, prospective customer, information repository, or other broker-dealer.
A few commenters asserted that broker-dealers should not be required to provide information that already is generally available to the public from other sources (
e.g.
, information for reporting companies that is available on EDGAR).
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We are addressing these concerns in the amendments by requiring broker-dealers to provide the required information that is not accessible through EDGAR, any other federal or state electronic information system, or an information repository. Further, most commenters responding to this issue were concerned about the cost of providing information to others upon request.
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We believe that the cost of requiring broker-dealers to make the information available (including to other broker-dealers) upon request is minimal.
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The amendments retain in substantial form the clause that providing information to others does not constitute a representation by the broker-dealer that the information is accurate. Rather, providing the information to others constitutes a representation that the information is current in relation to the date the information was reviewed, and that the broker-dealer has a reasonable basis for believing that the information was accurate as of the date recorded and was obtained from reliable sources.
Q31. Should we require broker-dealers to make the information available to anyone who requests it, particularly if broker-dealers are permitted to charge reasonable fees? Should broker-dealers be required to provide information to fewer classes of persons?
E. Information repository
The amendments, as in the Proposing Release, eliminate the piggyback provision of the Rule. The elimination of the piggyback provision and the potential for increased costs of compliance suggest the desirability of having a data base of information about the non-reporting issuers of covered OTC securities.
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Such a data base also would enhance the availability of information about little-known issuers to investors, other professionals, and regulators. The consensus among the commenters who specifically addressed this issue was that the creation of a repository would foster access to information about issuers that do not participate in the public disclosure system.
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For these reasons, we encourage the development of one or more repositories of Rule 15c2-11 information, but we note that the existence of a repository will not be necessary for broker-dealers to comply with the Rule.
The amendments establish that the Commission may, upon written application, designate an entity as an information repository.
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In determining whether to grant or deny such a designation, the Commission will consider whether an entity:
-
Collects information about a substantial segment of issuers of securities subject to the Rule;
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Maintains current and accurate information about such issuers;
-
Has effective acquisition, retrieval, and dissemination systems;
-
Places no inappropriate limits on the issuers from or about which it will accept or request information;
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Provides access to the documents deposited with it to anyone willing and able to pay the applicable fees; and
-
Charges reasonable fees.
In general, the Commission will consider whether an entity wishing to act as an information repository is so organized and has the capacity to be able reasonably to obtain and provide to others current information required by the Rule. An information repository will be required to notify the Commission of any material changes in the facts and circumstances of their application for designation as an information repository. In the event that an information repository no longer satisfies these attributes, we may withdraw such designation.
Some commenters suggested that the Commission assume the task of serving as the Rule 15c2-11 information repository.
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Because the issuers that would be the focus of any information repository generally would not be required to file periodic reports with the Commission, this is not a function that we can assume at this time. The NASD has also advised us preliminarily that it is unable to undertake the responsibility of serving as an information repository at the present time. Therefore, we encourage private sector initiatives for the creation of one or more Rule 15c2-11 information repositories.
Q32. Are there other criteria that should be used to determine the information repository designation?
F. Definitions
Reproposed paragraph (j) of the Rule sets forth the definitions applicable to all provisions of the Rule. Most of the definitions are unchanged from the Proposing Release, but a few definitions are revised to respond to commenters' suggestions or to add clarity to the amendments.
Quotation Medium
. The current definition of "interdealer quotation system" will be incorporated into the definition of "quotation medium" in paragraph (j)(12).
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This definition of quotation medium is quite inclusive: it covers any publication, alternative trading system (ATS), or other device that is used by brokers or dealers to make known to others their interest in transactions in any security, including offers to buy or sell at a stated price or otherwise, or invitations of offers to buy or sell.
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A few ATSs expressed concern about whether they would have to comply with the Rule's information review requirements with regard to any covered OTC security that is traded on their systems by broker-dealer subscribers to such ATSs.
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ATSs are included in the definition of "quotation medium" if they display subscriber orders to any person other than ATS employees. The Rule's information review requirements, however, apply only to the broker-dealers that submit quotations for publication by the ATS, and not to the ATS functioning as the quotation medium for them. The Rule will apply to an ATS only if, as a registered broker-dealer, it displays its own orders in the ATS.
An issue has also been raised about whether Rule 15c2-11 applies to broker-dealers submitting orders through an ATS. We understand that some broker-dealers have taken the position that compliance with Rule 15c2-11 is not necessary when they submit an order through an ATS.
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They have viewed such an order for the security as not constituting a quotation within the meaning of Rule 15c2-11. These orders may represent transactions for the broker-dealer's own account. The Rule's definition of quotation makes clear that the Rule covers any indication of interest by a broker or dealer in receiving bids or offers from others for a security, or any indication by a broker or dealer that it wishes to advertise its general interest in buying or selling a particular security. Thus, broker-dealers are subject to the Rule when they place any indication of interest in any quotation medium, including an ATS, that they wish to receive bids
or
offers in a covered OTC security, unless they can rely on one of the Rule's exceptions.
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Also, we are clarifying the Rule's application to broker-dealers that publish quotations in multiple quotation mediums or move their quotations from one quotation medium to another. If the broker-dealer complies with the Rule's provisions, based upon a review of information, it may publish quotations in one or more quotation mediums.
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Net tangible assets
. We are proposing to add a definition to the Rule to assist broker-dealers in assessing whether or not a security can meet the proposed exception to the Rule for securities of issuers with net tangible assets exceeding $10 million. Net tangible assets means total assets less intangible assets and liabilities and this determination must be based on the issuer's current financial statements, which must be audited.
G. Preservation of documents and information
To facilitate compliance with the Rule's recordkeeping requirements, we believe that it is appropriate to codify the Rule's record preservation requirements in Rule 17a-4,
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rather than in Rule 15c2-11. Rule 17a-4 obligates broker-dealers to preserve documents and information that they must compile pursuant to Commission rules for the time period and in the manner specified in the various provisions of Rule 17a-4. As in the Proposing Release, Rule 17a-4 would be amended to add the information specified in reproposed paragraphs (c), (d), and (e) of Rule 15c2-11 to the other information that broker-dealers are already required to preserve under Rule 17a-4.
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With regard to issuer information that is accessible to broker-dealers through our EDGAR system, any other federal or state electronic information system,
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or an information repository, the amendments provide different requirements. If broker-dealers obtain and review the information contained on such systems, they will not need to preserve such information separately, as long as they document the review and the information is accessible on such system for the same period of time that the broker-dealers are obligated to preserve such information pursuant to Rule 17a-4.
H. Transition and exemptive authority provisions
We are reproposing the transition provision covering quotations by broker-dealers that were initiated prior to the effective date of the proposed amendments and, with a slight modification, the provision giving the Commission the authority to grant exemptions from the Rule.
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These proposed provisions were viewed as adequate by the few commenters who discussed them.
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I. Information submitted to the NASD
Rule 15c2-11 currently requires any broker-dealer covered by the Rule to submit the information required under paragraph (a)(5) (
i.e.
, for non-reporting issuers) to the interdealer quotation system, in the form prescribed by the system, at least three business days before submitting a quotation for publication. We intend to amend this obligation by requiring broker-dealers to submit the information that they must review only to the NASD, in accordance with the NASD's rules.
The amendments are substantially the same as originally proposed, except for one change. Under the Proposing Release, a broker-dealer would be in compliance with the requirement to obtain current reports filed by a reporting issuer, if the broker-dealer obtained all current reports filed with the Commission by an issuer as of a date up to three business days before the earlier of the date the broker-dealer submitted the quotations to the quotation medium and the date the broker-dealer submitted information to the NASD. To reduce the chance that a broker-dealer would overlook a recently filed report containing material issuer information, we are proposing to eliminate the reference to the date the information was submitted to the NASD. This means that a broker-dealer would be required to obtain current reports filed by a reporting issuer after the broker-dealer had submitted information to the NASD, if such reports were filed more than three business days in advance of the publication of the quotation.
IV. General Request For Comments
We solicit comment on all aspects of the amendments to Rule 15c2-11, as well as on any other matter that might have an impact on the reproposal discussed above. In particular, we seek comment on the whether the reproposal will help focus the Rule on those securities and quotations most likely to be involved in microcap fraud. Commenters are requested to address whether there are other ways to amend the Rule that would help reduce fraud and manipulation in the OTC market. Commenters also are invited to address whether the Rule's text is sufficiently clear and understandable, or whether it can be simplified without sacrificing its purposes. We also request commenters to provide us with their views regarding whether the original proposal, or aspects of it, are preferable to the reproposal.
We encourage commenters to focus on the various provisions of the reproposal and bring to our attention any compliance or other specific issues that they may encounter if the reproposal is adopted. Commenters are urged to provide us with their views as expeditiously as possible so that we can complete our review of Rule 15c2-11.
V. Effects on Efficiency, Competition, and Capital Formation
Section 23(a)(2) of the Exchange Act requires the Commission, in adopting rules under the Exchange Act, to consider the anti-competitive effects of any rules it adopts thereunder, and to not adopt any rule that would impose a burden on competition not necessary or appropriate in the public interest.
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Furthermore, Section 3(f) of the Exchange Act
92
requires the Commission, when engaged in rulemaking, to consider or determine whether an action is necessary or appropriate in the public interest, and whether the action will promote efficiency, competition, and capital formation.
We preliminarily believe that the reproposal would not have any anti-competitive effects that are not necessary or appropriate in the public interest. By applying the Rule to the first broker-dealer publishing any quotations for a security in a quotation medium and to other broker-dealers publishing priced quotations thereafter, the availability of information about issuers of covered OTC securities should be increased. This should help improve the level of competition among broker-dealers publishing priced quotations and enhance the extent of information about OTC issuers that is available to the investing public. Moreover, by excluding unpriced quotations from the Rule, anti-competitive burdens will be reduced because broker-dealers that cannot, or do not want to, obtain the specified information can still advertise their interest in buying or selling a particular OTC security in a quotation medium. Finally, the reproposal should have a beneficial impact on capital formation because microcap fraud ultimately increases the costs of raising capital for legitimate smaller issuers. Investors may be less willing to commit their resources if they are concerned about fraudulent activities in OTC securities.
We request comments on the benefits, as well as the adverse consequences, that may result with respect to efficiency, competition and capital formation, if the reproposal is adopted.
VI. Costs and Benefits of the Amendments
We request commenters to evaluate the costs and benefits associated with the amendments to Rule 15c2-11. We have identified certain costs and benefits relating to the reproposal, which are discussed below, and encourage commenters to discuss any additional costs or benefits. In particular, we request comments on the potential costs for any necessary modifications to information gathering, management, and reporting systems or procedures that would be necessary to implement the amendments, as well as any potential benefits resulting from the reproposal for issuers, investors, broker-dealers, securities industry professionals, regulators or others. Commenters should provide analysis and data to support their views on the costs and benefits associated with the amendments.
A. Benefits
Incidents of microcap fraud frequently involve issuers for which public information is limited.
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Without information, it is difficult for investors, securities professionals, and others to evaluate the risks presented by these securities. Consequently, many investors fall prey to persons who make false representations and unrealistic predictions about these securities. The publication of quotations by broker-dealers can facilitate the fraudulent promotion of microcap securities.
In our view, the reproposal generally would improve the quality of the markets for securities subject to Rule 15c2-11 and would help protect investors from fraudulent schemes involving these securities. The reproposal is focused on the OTC-quoted securities of smaller issuers. Absent the amendments, we believe that some broker-dealers would submit quotations without regard to basic information about relatively unknown issuers. In our view, when broker-dealers must review specified issuer information before publishing priced quotations, they are less likely to become unwitting participants in unlawful schemes of unscrupulous broker-dealers or promoters. Market makers in the securities of legitimate microcap issuers, as well as the issuers themselves, also would benefit from improving the integrity of this market sector. One benefit of the reproposal is that the scope of the Rule will be revised so that broker-dealers will not have to obtain information about those securities that satisfy any one the proposed alternative tests.
We also believe that the amendments will serve an important surveillance function. Currently, only the first broker-dealer quoting a security in a quotation medium must gather, review, and preserve the information. The amendments will require the first broker-dealer initiating any quotation and all broker-dealers initiating priced quotations thereafter to satisfy the Rule's information review requirements. Moreover, under NASD Rule 6740,
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broker-dealers demonstrate their compliance with that rule by filing the Rule 15c2-11 information with the NASD. Recently, the review of Forms 211 filed with the NASD has resulted in a number of Commission trading suspensions and other enforcement actions.
The amendments require broker-dealers publishing quotes in compliance with the Rule to provide the information upon request to any customer, prospective customer, other broker-dealers, or information repository unless the information is available through a government sponsored database. This amendment will help make information about non-reporting issuers more widely available to the public.
We also believe that the amendments will ease significantly the Rule's recordkeeping requirement because broker-dealers will not have to retain information that is available on the Commission's EDGAR system or on the information systems of other federal or state authorities. Access to EDGAR and similar government-sponsored information systems is free on the Internet. Given that approximately 60% of securities on the OTC Bulletin Board and Pink Sheets are issued by reporting companies, whose reports are included on EDGAR, a significant recordkeeping cost savings to broker-dealers should result.
We do not have the data to quantify the value of the benefits described above. We seek comments on the value of these benefits and on any benefits, not already identified, that may result from the adoption of the amendments.
B. Costs
We anticipate that the elimination of the piggyback provision will create the most significant costs that the industry will incur. Currently, only those broker-dealers that publish quotations during the first 30 days of the security's trading are required to obtain and review the specified information before they initiate quotations. As reproposed, the Rule will continue to require the first broker-dealer, before initiating a priced or unpriced quotation for a covered OTC security in a quotation medium, to review the specified information. Thereafter, the reproposed Rule will impose the review requirement only on broker-dealers publishing priced quotations, including in connection with the annual review requirement. Of course, if the Commission suspends trading under Exchange Act Section 12(k) for any of the issuer's securities, the Rule's requirements are triggered.
The first broker-dealer, before initiating any quotation for a covered OTC security, is currently required to incur the cost of having to gather and review the issuer information. As a result of the amendments, that broker-dealer will incur the cost to update that information annually if it continues to publish priced quotations. Thereafter, any broker-dealer publishing priced quotations for a covered OTC security will incur costs when it first publishes a priced quotation and when it conducts the required annual review. To the extent a broker-dealer does not already have the required information, it will incur costs for the collection and review of this information. Moreover, a broker-dealer also will incur costs associated with creating the records required by the Rule and retaining the Rule's required information for the specified period of time under the amendment to Rule 17a-4.
We estimate that approximately 60% of the issuers of OTC stocks are reporting issuers, while the remaining 40% are non-reporting issuers. Based on this assumption, broker-dealers publishing priced quotations for the OTC securities of reporting issuers should be able to obtain the prescribed information required by the reproposed Rule from the Commission's EDGAR system and therefore should incur minimal costs to comply with the Rule. We believe that it will take a broker-dealer a maximum of 4 hours to collect, review, record, retain, and supply to the NASD the information pertaining to a reporting issuer, and a maximum of 8 hours to collect, review, record, retain, and supply to the NASD the information pertaining to a non-reporting issuer.
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We estimate that it will cost a broker-dealer an average cost of $40 per hour (based on a blended compensation rate for clerical and supervisory compliance staff) to obtain and review the necessary information required by the Rule.
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We recently approved changes to NASD Rules 6539 and 6540 to limit the quotations on the OTC Bulletin Board to securities of issuers that are current in their reports filed with us or other regulatory authority, and to prohibit NASD members from quoting a security on the OTC Bulletin Board unless the issuer has made current filings with us.
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While these NASD Rule changes may result in more issuers choosing to become reporting issuers in order to continue to qualify for quotation on the OTC Bulletin Board, we are at this time unable to adequately quantify the cost impact or burden that the reproposal imposes in relation to these rule changes. However, we believe that, generally, any increase in the number of reporting issuers subject to the Rule will cause a reduction in the number of the burden hours and associated costs. We are of the view that because reporting issuer information is readily available from the Commission's EDGAR system and, because we estimate that broker-dealers only have to spend 4 hours reviewing reporting issuer information, instead of the estimated 8 hours to review non-reporting issuer information, the reduced time spent reviewing issuer information will result in lower costs to broker-dealers.
However, broker-dealers publishing priced quotations for the OTC securities of non-reporting issuers are likely to incur greater costs in complying with the Rule. For purposes of the Paperwork Reduction Act, we estimate the total burden hours for all broker-dealers to be 143,278 hours and the total cost to be $5,731,120. Some broker-dealers may not want to expend the time or the cost to obtain the non-reporting issuer information and may therefore choose not to publish priced quotes. On the other hand, the costs broker-dealers incur in obtaining and reviewing information about non-reporting issuers may be reduced if one or more on-line information repositories of this information are established. We seek comments on the reasonableness of these estimates for annual hourly and dollar costs to broker-dealers. We also seek comments on the extent to which these cost estimates will be affected by the new NASD rule to limit the OTC Bulletin Board to the securities of issuers current in their periodic filings.
Although Rule 15c2-11 does not regulate issuers, there may be some indirect costs imposed on issuers, particularly non-reporting issuers, because they may be contacted by broker-dealers to provide the information specified in the Rule. Non-reporting issuers would incur the cost of having to collect and provide the requested information to each requesting broker-dealer. However, we are assuming that non-reporting issuers maintain their financial information in compliance with prevailing accounting standards and, in most instances, would have available updated financial information prepared in accordance with generally accepted accounting principles (GAAP). The NASD has informed us that financial statements submitted with the Form 211 generally are prepared in accordance with GAAP, and many are audited.
Regarding start-up, operating, and maintenance costs, we believe that broker-dealers that collect, review, and retain the information currently required by the Rule, would incur only marginal start-up, operating, and maintenance costs (
i.e.
, to expand systems already in place) to comply with the Rule as reproposed. Further, some broker-dealers already may be collecting the required information for other purposes. However, we believe that some broker-dealers may not have adequate systems in place to retain issuer information and would, therefore, incur start-up, operating, and maintenance costs in order to comply with the requirements of the amendments.
We estimate that about 100 broker-dealers in the aggregate will incur start-up, operating, and maintenance costs of $100,000 ($1,000 x 100) associated with reporting issuer information, and $400,000 ($4,000 x 100) associated with non-reporting issuer information. Total start-up, operating and maintenance cost burden for broker-dealers is estimated to be $500,000 ($100,000 + $400,000) or an average of $5,000 for each broker-dealer.
We assume that non-reporting issuers, because they generally maintain their financial information in compliance with prevailing accounting standards, will not incur any start-up costs to prepare the required information in response to broker-dealers' requests. We also believe that reporting issuers of covered OTC securities will not incur start-up costs as a result of the amendments since such issuers already provide the required information to the Commission under the federal securities laws. Therefore, we believe issuers will not incur start-up costs as a consequence of the adoption of the Rule amendments, as reproposed.
Finally, the Rule, as modified by the amendments, could affect the liquidity of some securities. If broker-dealers are unable to obtain the required issuer information, they would have to refrain from publishing priced quotations in that security. This could make it somewhat more difficult for investors to determine what prices other market participants are willing to bid or offer for the security, although they could call a broker-dealer publishing a name-only quotation to obtain a priced quotation. Thus, while investors are still able to obtain price information, the cost of obtaining this information may increase. However, under the reproposal, after the first quotation for a security is published, broker-dealers could publish unpriced quotes without complying with the Rule's provisions. In addition, broker-dealers could rely on the exception that permits them to publish quotes representing unsolicited customer orders.
Any effect on liquidity must be weighed against the benefit of reducing instances of fraud or manipulation. Greater investor access to information should result in more informed investor decisions and potentially could result in additional trading, and thus liquidity, for covered OTC securities. We have modified the proposals to permit broker-dealers to publish unpriced quotations for OTC securities without reviewing the specified information (other than the first broker-dealer to quote the security). This revision responds to the views of those commenters that expressed concerns about the Rule's impact on liquidity.
VII. Initial Regulatory Flexibility Act
We have prepared an Initial Regulatory Flexibility Analysis (IRFA)
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regarding the amendments to Rule 15c2-11 and the reproposed companion amendment to Rule 17a-4 under the Exchange Act. The following summarizes the IRFA.
As discussed in the IRFA, the amendments specifythe information that a broker-dealer must gather and review before publishing quotations for covered OTC securities. The reproposed Rule is intended to prevent broker-dealers from publishing quotations for covered OTC securities in a quotation medium without obtaining, reviewing, and retaining current information about the issuer. The reproposed Rule applies primarily to priced quotations.
The amendments to the Rule would affect all broker-dealers, including a number of small broker-dealers, seeking to publish quotations for covered OTC securities.
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The number of small broker-dealers that publish quotations for covered OTC securities in quotation mediums is not known at this time. However, we recently estimated that about 13% of all registered broker-dealers would be characterized as small.
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We estimate that, at any given time, there are approximately 400 broker-dealers, including small broker-dealers, that submit quotations for covered OTC securities. Therefore, based on this estimate, we believe that approximately 52 small broker-dealers (400 x 13%) would be affected by the amendments. In fact, it is possible that few, if any, broker-dealers publishing quotations for covered OTC securities would be classified as a small business, because as market makers they typically require more than $500,000 in capital to support their market making activities. In the Proposing Release, we solicited but did not receive any comments on the number of small broker-dealers that would be affected by the amendments. We are again soliciting comments on the number of small broker-dealers that would be affected by the amendments.
The amendments would indirectly have an impact on those small issuers that may be requested to provide the information required by the Rule to broker-dealers publishing quotations in those issuers' securities. Based on Exchange Act Rule 0-10(a), a small issuer is one that on the last day of its most recent fiscal year had total assets of $5,000,000 or less. In the Proposing Release, we solicited but did not receive any comments on the total number of issuers of covered OTC securities; the number (or percentages) of these issuers that are small issuers; and the total number (or percentage) of small issuers of covered OTC securities that are reporting and non-reporting issuers, respectively. We are again seeking comments on these issues.
The IRFA notes that the availability of the Commission's EDGAR system and similar systems sponsored by federal or state authorities should assist broker-dealers in collecting and reviewing the reports required by the Rule. In addition, the prevalent use of computers and the Internet, on which access to EDGAR is free, should also reduce the recordkeeping and compliance costs for all broker-dealers by automating the information collection and retention process.
The IRFA recognizes that the amendments indirectly affect certain issuers, particularly non-reporting issuers. The amendments would require the first broker-dealer to publish any quotation for a covered security to review the Rule's information. Thereafter, other broker-dealers must review information about the issuer when they first publish or resume publishing a priced quotation for a covered security, and all broker-dealers publishing priced quotations must conduct an annual review. We are not aware of any information repository, electronically accessible or otherwise, now in existence that covers all of the information about non-reporting issuers that broker-dealers must gather to comply with the Rule. Consequently, non-reporting issuers must collect and provide the required information to each requesting broker-dealer. We assume that non-reporting issuers maintain their financial information in compliance with generally accepted accounting standards and that the costs incurred by non-reporting issuers to prepare the necessary information in response to broker-dealers' requests would be minimal.
The IRFA discusses the kinds of possible alternative proposals that we have considered. These include, among others, creating differing compliance or reporting requirements or timetables that take into account the resources available to small entities, and whether such entities could be exempted from the reproposed rule, or any part thereof. Therefore,having considered the foregoing alternativesin the context of the amendments, we do not believe they would accomplish the stated objectives of the proposal.
We encourage the submission of written comments regarding any aspect of the IRFA. In particular, we seek comments on: (i) the number of small entities that would be affected by the amendments, including the number of small broker-dealers and issuers; (ii) the number of small entities that are issuers of covered OTC securities; and (iii) the number of small entities that are reporting and non-reporting issuers of covered securities, respectively. Comments should also specify the costs of compliance with the amendments, and suggest alternatives that would meet the objectives of the amendments in a more effective manner, while imposing costs equal to or less than the amendments. In describing the nature of any impact that the amendments would have, empirical data supporting these views should be provided.
For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, we are also requesting information regarding the potential impact of the proposed amendments on the economy on an annual basis. In particular, comments should address whether the proposed changes, if adopted, would have a $100,000,000 annual effect on the economy, cause a major increase in costs or prices, or have a significant adverse effect on competition, investment, or innovations. Commenters should provide empirical data to support their views.
Comments should be submitted in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Comments may also be submitted electronically at the following E-mail address: rule-comments@sec.gov. All comment letters should refer to File No. S7-5-99; this file number should be included on the subject line if E-mail is used. Comment letters will be available for public inspection and copying the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Electronically submitted comment letters will also be posted on the Commission's Internet website (http://www.sec.gov).
A copy of the Initial Regulatory Flexibility Analysis may be obtained by contacting Chester A. McPherson, Office of Risk Management and Control, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at (202) 942-0772.
VIII. Paperwork Reduction Act
Certain provisions of the amendments contain "collection of information" requirements within the meaning of the Paperwork Reduction Act of 1995 (PRA).
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The title for the collection of information is: "Publication or submission of quotations without specifiedinformation."Accordingly, the collection of information requirements contained in the Rule and the initial proposal were submitted to the Office of Management and Budget (OMB) for review,in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11, and were approved by OMB. The Rule has been assigned OMB Control No. 3235-0202.
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A. Collection of information under the amendments
As reproposed, the Rule would require the first broker-dealer, before initiating a priced or unpriced quotation for a covered OTC security in a quotation medium, to gather and review the issuer information, and to review updated information annually if it continues to publish priced quotations. This review requirement would also be imposed on any other broker-dealer publishing a priced quotation for a covered OTC security. Broker-dealers submitting priced quotations for the security would be required to collect, review, and retain the Rule's specified information annually. Broker-dealers would also have to record the sources of their information, the date their review occurred, and the person responsible for the review. Also, the proposals would require broker-dealers publishing quotations for a covered OTC security to collect, review, and retain more information than is required currently.
Under Rule 15c2-11, the information that is collected pursuant to the Rule must be submitted to the NASD at least three business days before any quotation is published.
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Finally, the amendments would require broker-dealers to provide the information specified to any customer, prospective customer, other broker-dealer or information repository that requests it.
B. Proposed use of information
Broker-dealers must collectand review the information required under theamendments if theypublish the first quotation for a covered OTC security or if they publish priced quotations. Moreover, the Rule requires that broker-dealers have a reasonable basis for believing that the information about the issuer and related persons is accurate and from reliable sources. This information collection protects investors by deterring fraudulent or manipulative quotationsfor thinly-traded securities whose issuers are relatively unknown. Because information about these issuers is not widely disseminated and often is not current, fraudulent and manipulative schemes are easier to perpetrate. Moreover, this collection of information helps broker-dealers guard against becoming unwitting participants in fraudulent or manipulative schemes. The Rule 15c2-11 information gathering requirements also serve an important surveillance function for both the Commission and the NASD. Recently, the Commission has used the Rule 15c2-11 information to suspend trading in the issuers' securities pursuant to Section 12(k) of the Exchange Act where publicly available information about the issuer raised questions about the accuracy and adequacy of the issuers' disclosures.
C. Respondents
The amendments would apply to those broker-dealers thatpublish quotations for a covered OTC security in a quotation medium as of specified quotation events. The amendments also indirectly affect issuers that are asked by broker-dealers to provide this information. Most of the Rule 15c2-11 information that would be required for issuers that publicly file periodic reports with the Commission (reporting issuers) is available electronically on EDGAR or through the Internet. Thus, the reproposal is likely to have a greater paperwork burden when broker-dealers publish quotations for the securities of issuers that do not participate in the Commission's public reporting program, (
i.e.
, non-reporting issuers) or do not file reports with other federal or state regulatory authorities.
D. Total annual reporting and recordkeeping burden
The amendments would require broker-dealers to collect, review, retain, and record certain issuer and supplemental information when they are the first broker-dealer to quote the security; when they first publish priced quotationsfor a covered OTC security; and if they are publishing priced quotations as of the annual review requirement. The discussion below estimates the collection of information burden one year after the anticipated date of effectiveness of the amendments when broker-dealers that publish quotes for covered OTC securities qualifying for the reproposed transition provision must fully comply with the Rule's information requirements. The discussion below also provides estimates for the same period for issuers that may be contacted to provide the information. In particular, the following analysis measures the cost to broker-dealers of: (1) collecting, reviewing, recording, and retaining the required issuer information and supplying it to the NASD; (2) responding to requests for issuer information from customers, prospective customers, other broker-dealers and information repositories; and (3) starting-up or maintaining systems for the collection and retention of issuer information. The analysis below also addresses the indirect cost to issuers who must furnish information to requesting broker-dealers.
1. Burden-hours for broker-dealers
Based on information provided by the NASD and NQB, we estimate that as of December 31, 1998, there were approximately 6,625 covered OTC securities quoted in the OTC Bulletin Board and 3,225 quoted in the Pink Sheets for a total of 9,850 covered OTC securities.
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We also believe that approximately 10% (985) of these securities would not be subject to the Rule, based on the exceptions that are included in this reproposing Release and that approximately 8,865 securities would be subject to the Rule. According to NASD estimates, we also believe that approximately 1,400 new applications from broker-dealers to initiate or resume publication of covered equity securities in the OTC Bulletin Board and/or the Pink Sheets or other quotation mediums were approved by the NASD for the 1998 calendar year. We have estimated that 60% of the covered OTC securities were issued by reporting issuers, while the other 40% were issued by non-reporting issuers. We also estimate that broker-dealers publish priced quotations for approximately 90% of the covered OTC securities quoted in the OTC Bulletin Board and publish priced quotes for about 10% of the covered OTC securities quoted in the Pink Sheets. According to NASD and NQB estimates, we believe that, on average, there are approximately 4.3 broker-dealers publishing priced quotations for each covered OTC security, and that at any given time there are no more than 400 broker-dealers that submit priced quotations for covered OTC securities. Finally, the reproposed Rule's transition provision would not subject the broker-dealers quoting the securities of the estimated 8,865 potentially covered securities currently quoted in the OTC Bulletin Board and/or the Pink Sheets until the annual review requirement is triggered. Therefore, only those new applications that are submitted after the reproposal becomes effective would be subject to the initial review requirement.
Because the amendments would require the first broker-dealer publishing a quotation, priced or unpriced, for a particular security to collect issuer information, we believe that during the first year after the amendments are effective, broker-dealers that are publishing the first quotations (whether priced or unpriced) for covered OTC securities in the aggregate would have to conduct approximately 1,260 initial reviews of issuer information.
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We believe that it will take a broker-dealer about 4 hours to collect, review, record, retain, and supply to the NASD the information pertaining to a reporting issuer, and about 8 hours to collect, review, record, retain, and supply to the NASD the information pertaining to a non-reporting issuer.
We therefore estimate that after the reproposal has become effective, the broker-dealers who are the first to publish the first quote for a covered OTC security of a reporting issuer (priced or unpriced) will require 3,024 hours (1,260 x 60% x 4) to collect, review, record, retain, and supply to the NASD the information required by the Rule as reproposed. We estimate that after the reproposal has become effective the broker-dealers who are the first to publish the first quote for a covered OTC security of a non-reporting issuer (priced or unpriced) will require 4,032 hours (1,260 x 40% x 8) to collect, review, record, retain, and supply to the NASD the information required by the Rule as reproposed. We therefore estimate the total annual burden hours for the first broker-dealers to be 7,056 hours (3,024 + 4,032).
The Rule also would require an annual review for broker-dealers publishing priced quotations for covered OTC securities. We have estimated that each issuer is quoted by about 4.3 broker-dealers. We are assuming that of the universe of approximately 8,865 potentially affected covered OTC securities, broker-dealers would publish priced quotations for approximately 90% of the OTC Bulletin Board securities or 5,366 securities ((6,625 x 90%) x 90%) and for 10% of the Pink Sheet securities or 290 securities (3,225 x 90%) x 10%).
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Therefore, we estimate that priced quotations will be published for approximately 5,656 (5,366 + 290) covered OTC securities. Given that about 60% of OTC stocks are issued by reporting issuers and the other 40% by non-reporting issuers, and that it would take a broker-dealer 4 and 8 hours, respectively, to meet the requirements of the reproposed Rule for these issuers, we estimate the burden hours as follows: for reporting issuers we estimate approximately 58,377 hours (3,394 x 4.3 x 4), and for non-reporting issuers we estimate approximately 77,847 hours (2,263 x 4.3 x 8). Therefore, we estimate the total annual paperwork burden hours for all broker-dealers to be 143,280 hours (7,056 + 58,377 + 77,847).
2. Burden-hours for issuers
Regarding the burden on issuers to provide broker-dealers with the required information, we believe that the 5,319 issuers of covered OTC securities (based on our estimate that 60% of the 8,865 potentially covered OTC securities are reporting issuers) will not bear any additional hourly burdens under the amendments because these issuers already report the required information to the Commission through mandated periodic filings. Further, reporting issuer information is widely available to broker-dealers through a variety of media. However, non-reporting issuer information is not widely available. Consequently, these issuers must provide the information required by the amendments to requesting broker-dealers before quotations in their securities can be published. We believe that the 3,546 issuers of non-reporting covered OTC securities (based on an estimate that 40% of the 8,865 potentially covered OTC securities are non-reporting ) will spend an average of 9 hours each to collect, prepare, and supply the information required by the proposals to the first broker-dealer that requests this information. Thereafter, we estimate that it will take an average of 1 hour for an issuer to provide the same information to the remaining 3.3 broker-dealers that request the information. Accordingly, we estimate the 3,546 non-reporting issuers annually will incur 31,914 hours (3,546 x 9 x 1) to comply with the first broker-dealer's request for information, and 11,702 hours (3,546 x 1 x 3.3) to comply with the subsequent 3.3 broker-dealer requests for an annual total of 43,616 burden hours (31,914 + 11,702). On average, therefore, each non-reporting issuer would spend approximately 12.3 burden hours (43,616/3,546) per year to comply with these requests.
3. Total burden-hour costs to broker-dealers and issuers
We estimate the collection of information will require approximately 186,896 burden hours annually (143,280 + 43,616) from approximately 3,946 respondents (400 broker-dealers and 3,546 issuers).
4. Capital cost to broker-dealers and issuers
We believe that broker-dealers that now collect, review, and retain the information required by the current Rule will not incur any significant start-up costs to expand systems already in place. Further, broker-dealers that are collecting the information required by the proposals for other purposes also will not incur significant start-up costs. However, we believe some broker-dealers may not have adequate systems in place to retain issuer information and will incur start-up costs in order to comply with the requirements of the amendments. We assume that of the 400 broker-dealers that provide quotations for covered OTC securities, about 100 broker-dealers will incur additional start-up costs, while the remaining 300 broker-dealers will only incur incremental costs. Because the information for reporting issuers will be generally available on EDGAR and such availability satisfies the recordkeeping requirements of the proposals, we are assuming that the start-up costs associated with retaining information on reporting issuers will average $1,000 per broker-dealer, whereas the same costs will be $4,000 per broker-dealer for non-reporting issuer information. We estimate that broker-dealers in the aggregate will incur start-up, operating, and maintenance costs of $100,000 ($1,000 x 100) associated with reporting issuer information, and $400,000 ($4,000 x 100) associated with non-reporting issuer information. Total start-up, operating and maintenance cost burden for broker-dealers is estimated to be $500,000 ($100,000 + $400,000) or an average of $5,000 for each broker-dealer.
We assume that non-reporting issuers, because they maintain their financial information in compliance with prevailing accounting standards, will not incur any start-up costs to prepare the required information in response to broker-dealers' requests. We also believe that reporting issuers of covered OTC securities will not incur start-up costs as a result of the amendments since such issuers already provide the required information to the Commission under the federal securities laws. Therefore, we believe issuers will not incur start-up costs as a consequence of the adoption of the Rule amendments, as reproposed.
E. General information about the collection of information
The collection of information under the amendmentsis mandatory and would be required at periodic intervals: by the first broker-dealer to publish any quote for a covered OTC security, by broker-dealers publishing priced quotes thereafter, and by broker-dealers publishing priced quotes at the time of the annual review requirement. Broker-dealers wouldbe required to retain the information they collect for a period of not less than three years.Information collected under the Rule would not be kept confidential. Any agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number
F. Request for comments
Pursuant to 44 U.S.C. § 3506(c)(2)(B), we aresoliciting comments to:
(i) evaluate whether the reproposed collection of information is necessary for the proposed performance of the functions of the agency, including whether the information willhave practical utility;
(ii) evaluate the accuracy of our estimatesof the burden of the reproposed collection of information;
(iii) enhance the quality, utility, and clarity of the information to be collected; and
(iv) minimize the burden of collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.We seek data about quotations for covered OTC securities in OTC quotation mediums other than the OTC Bulletin Board and the Pink Sheets. We seek comments on our estimate of the number of issuers affected by the reproposed Rule and on the time estimates made for broker-dealers and issuers to comply with the information collection requirements.
Persons desiring to submit comments on the collection of information requirements should direct them to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs,Room 10102, New Executive Office Building,Washington, D.C. 20503, and should also send a copy of their comments to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and refer to File No. S7-5-99. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication of this release in the
Federal Register
, so a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of this publication.
IX. Statutory Basis and Text of Proposed Amendments and Rule
The rule amendments are being proposed pursuant to Sections 3, 10(b), 15(c), 15(g), 17(a), and 23(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78c, 78j(b), 78o(c), 78o(g), 78q(a), and 78w(a).
LIST OF SUBJECTS IN 17 CFR PART 240
Broker-dealers, Fraud, Reporting and recordkeeping requirements, Securities.
Text of Reproposed Rule
In accordance with the foregoing, Title 17, chapter II, part 240 of the Code of Federal Regulations is proposed to be amended as follows:
PART 240 - GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934
1. The authority citation for part 240 continues to read, in part, as follows:
Authority:
15 U.S.C. §§ 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 78k-1, 78
l
, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78
ll
(d), 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
2. Section 240.15c2-11 and the section heading are revised to read as follows:
§240.15c2-11 Publication or submission of quotations without current information.
Preliminary Note
: As a means reasonably designed to prevent fraudulent, deceptive, or manipulative acts or practices, this section prevents a broker or dealer from publishing a quotation for a security or, directly or indirectly, submitting a quotation for a security for publication in a quotation medium, unless the broker or dealer complies with the provisions of this section or relies on an exception contained in paragraph (h) of this section. As used in this section, the term "you" refers to a broker or dealer.
(a)
When a broker or dealer must comply with this section
. You must comply with paragraph (b) of this section when you publish:
(1) The first quotation for a security;
(2) The first quotation following the termination of a Commission trading suspension ordered pursuant to section 12(k) of the Act (15 U.S.C. 78
l
(k)) in any security of the issuer of the suspended security;
(3) Your first quotation at a specified price for the same security after another broker or dealer publishes the first quotation for a security as described in paragraph (a)(1) or (a)(2) of this section;
(4) A quotation at a specified price for a security after a period of five or more consecutive business days when you did not publish any quotations at a specified price for that security;
(5) Your first quotation at a specified price for a security after the date that is four months after the end of the issuer's fiscal year, unless the issuer is a foreign private issuer; or
(6) Your first quotation at a specified price for a security of a foreign private issuer after the date that is seven months after the end of the issuer's fiscal year.
(b)
The steps a broker or dealer must take to comply with this section
. For each security in which you publish any of the quotations listed in paragraph (a) of this section, you must:
(1) Review the issuer information described in paragraph (c) of this section and the supplemental information described in paragraph (d) of this section;
(2) Determine that you have a reasonable basis under the circumstances for believing that the issuer information described in paragraph (c) of this section, when considered in conjunction with the supplemental information described in paragraph (d) of this section, is accurate in all material respects and was obtained from reliable sources;
(3) Make a record of:
(i) The issuer information described in paragraph (c) of this section, the supplemental information described in paragraph (d) of this section, and the sources from which you obtained the information. You will be considered to have obtained the issuer information described in paragraphs (c) or (d)(1) of this section if you obtained it through the EDGAR system, any other federal or state electronic information system, or an electronic information system operated by an information repository, and you have the means to access the information for the period required under § 240.17a-4(b)(11);
(ii) Any significant relationship information described in paragraph (e) of this section;
(iii) The date that you reviewed the information described in paragraphs (c), (d), and (e) of this section; and
(iv) The person responsible for your complia
