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Statement on the Adoption of Amendments to Exchange Act Rule 15c2-11

Sept. 16, 2020

Today, the Commission finalized a comprehensive overhaul of our rule specifying the requirements a broker-dealer must satisfy before it initiates or resumes the quotation of a security in a market other than a national securities exchange. These over-the-counter (OTC) securities can provide investors with unique and attractive investment opportunities in a part of the market often overlooked by large investment firms. Investors who enjoy looking for hidden value in the financial markets find this market particularly attractive, in part precisely because the lack of attention from larger market participants may make it easier for an individual investor to identify and invest in the shares of an undervalued issuer. Our comment file for this rulemaking is filled with letters from these investors explaining the value they have been able to find in this market.

The absence of reliable information about many issuers in this marketplace creates a climate in which retail investors are susceptible to pump-and-dumps and other schemes. Many OTC issuers are subject to no, or only minimal, disclosure requirements. In addition, these issuers may have relatively few assets and low market capitalization. Anybody familiar with the Commission’s enforcement docket will know that these features of issuers in this market can make it much easier for fraudsters to disseminate false information about an issuer, manipulate share prices, and deprive retail investors, who account for the majority of funds invested in OTC securities, of their hard-earned money.

Through our enforcement actions, we take on fraudsters one at a time. Today’s rule amendments to Exchange Act Rule 15c2-11 are a more comprehensive solution, so I support them. Increasing access to information about the companies in this marketplace will make it more difficult for fraudsters to prey on retail investors. Issuer disclosure lies at the center of the Commission’s regulatory framework, and by promoting disclosure the Commission can empower investors to make up their own minds about the merit of any given investment. The amendments are designed to enhance the transparency of the market for OTC securities by, among other things, setting a baseline of information that must be made publicly available before a broker-dealer initiates or resumes a quote or before a qualified interdealer quotation system (qualified IDQS) makes such quotes known to others. The amendments also modify the piggyback exception, which historically has allowed OTC securities to be quoted by any broker-dealer merely because a single broker-dealer has continued to quote them, even when the issuer has not made public even the most basic information about itself—such as its financial statements—for years or even decades.

For many issuers—particularly those who want to do the right thing by their investors—these changes should provide an incentive to keep their financial and other information current, which should in turn enhance transparency and promote liquidity in this market. As the market becomes more transparent, fraudsters may find the securities of issuers that continue to be quoted over-the-counter to be less attractive vehicles for defrauding retail investors.

With these benefits, however, come considerable costs. Commenters really underscored that point for me. As one commenter on the proposal stated:

I urge the SEC to reconsider the nature and scope of these changes on the grounds that the changes, as written and proposed, would have a devastating impact on holders of many legitimate non-reporting over-the counter securities, resulting in extraordinary destruction of investors’ capital. The SEC’s goals in the proposed rule changes are well intentioned but will result in a considerable amount of harm to investors in small but reputable companies in the US.[1]

In trying to help investors, we actually may end up hurting some investors. Some issuers that have been profitable investments may not wish to do right by their investors and may see these amendments as providing an opportunity to force minority investors to divest their shares at a discount. Others may find, whether due to the size or nature of their business (or their business structure), that making certain information publicly available is either too expensive, competitively damaging (if their competitors are private companies, for example), or just not practicable. Even without these rule amendments, broker-dealers are wary about participating in these markets for fear of enforcement actions. Broker-dealers or qualified IDQSs may find that the amendments impose costs that make it unattractive to jump through the necessary regulatory hoops to quote the shares of a small issuer that might actually offer retail investors significant value. Investors, issuers, and others who commented on the proposed rule persuasively described these potential negative consequences of the rule, and they have informed my thinking about the rule and many of my conversations with my colleagues and the Commission staff.

The final rule makes several changes from the proposal that I hope will address some of the commenters’ concerns. The final rule makes additional accommodation for shell companies, allowing issuers to be eligible for piggybacking for up to eighteen months as they transition from shell-company status. This change should mitigate the effect of the rule on the market for shell companies that can provide a useful vehicle for companies seeking to access our capital markets. The final rule, recognizing that a one-sided quotation can in fact contribute to price discovery, also expands the piggybacking exception from the proposal to permit reliance on the exception on the basis of a one-sided price quotation.

For “catch-all” issuers—which include issuers that generally are not subject to statute- or rule-based disclosure and reporting requirements under the federal securities laws—the final rule modifies and simplifies the requirements relating to the frequency of financial disclosures from the proposing release. The amendments permit broker-dealers to publish a quotation if a publicly available balance sheet is dated within sixteen months of the published quotation, as in the proposal, and profit and loss and retained earnings statements are for the twelve months preceding the date of that balance sheet, rather than within six months of the quotation if the balance sheet is older than six months. This change should make it easier to obtain current, publicly available information relating to the securities of an issuer that, for example, complies with state requirements to prepare annual financial statements, but that may have chosen not to be a reporting company precisely because it has determined that a more frequent reporting requirement would be too burdensome. The release also delays for two years the requirement that financial statements for the two preceding fiscal years be publicly available for catch-all issuers. This change from the proposal helps guard against the retroactive application of the rule; an issuer’s securities will not lose their quoted market due to a broker-dealer’s or qualified IDQS’s inability to obtain historical records that predated these amendments.

Finally, and in my view most importantly, the Commission takes two steps to avert some of the harm about which commenters warned us. First, the release makes clear the Commission’s willingness to consider exemptive relief to allow the continued quotation of securities of specific issuers that may not routinely publish financial statements. Second, the release opens the door for the creation of an expert market that would allow quotation in at least some so-called grey market securities in a manner that would be accessible by sophisticated or professional investors. As I have made clear elsewhere, I do not like creating separate classes of investors. That said, an expert market is better than no market at all. Such a market could provide a venue where a broker-dealer could maintain a quoted market in the securities of an issuer that may not routinely make publicly available the full range of information required under the amended rule if that issuer, for example, has a track record of generating value for investors and has not previously been implicated in the types of fraudulent schemes these amendments are designed to deter.

I encourage broker-dealers, investors, IDQSs, and issuers, as appropriate, to begin engaging with our staff, starting this week if possible. The Commission has established a nine-month transition period, which should provide sufficient time to avoid unnecessary disruption in the quoted market for OTC securities that might otherwise fall into the grey market under these rules. These nine months, however, will pass quickly, so please engage with our staff and with us early and often.

In closing, I would like to thank the staff for their extensive, patient, and responsive engagement with our office on the many complex issues raised by this rulemaking. There were many in divisions and offices across the Commission who devoted countless hours to thinking about these issues and drafting and reviewing the release, but I would like in particular to thank Mark Wolfe, John Guidroz, and Laura Gold in the Division of Trading and Markets and Olga Itenberg in the Division of Economic and Risk Analysis for their willingness to talk through the release and work to address my many concerns.

[1] Letter from Peter Quagliano, available at

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