The Securities and Exchange Commission (SEC) has amended Rule 15c2-11 (the amended Rule), which governs the publication of quotations in the over-the-counter (OTC) markets, i.e., quotes that are published away from a securities exchange. The OTC markets are the trading markets for the securities of these unlisted companies and include unlisted companies of different sizes, foreign and domestic, American depository receipts (ADRs) and with varying amounts of publicly available information. While the current rule requires broker-dealers initiating quotations to obtain and review issuer information, the primary focus of the amendments is to make issuer information publicly available to market participants. The amended Rule goes into effect 60 days after publication in the Federal Register. The amendment’s compliance date is nine months after the effective date.¹ Although market participants may think of Rule 15c2-11 as limited to stocks, it is not, in fact, so limited, and covers all securities other than municipal securities.

Like current Rule 15c2-11, the amended Rule requires broker-dealers to collect and review issuer information before initiating quotations in the OTC markets. Like current Rule 15c2-11, the amended Rule contains several exceptions, including an exception for exchange-listed securities and a “piggyback” exception, which permits a broker-dealer to quote securities that are already quoted by another dealer.

The amendments modify the information requirement and include a new requirement that issuer information be publicly available. The amended information requirements apply to both broker-dealers and qualified interdealer quotation systems (an alternative trading system that publishes quotations). The amended Rule permits broker-dealers to rely on a “publicly available determination” by a qualified interdealer quotation system in lieu of the broker-dealer itself complying with the issuer information requirements. The amended Rule changes the piggyback exception to require that issuer information be current and publicly available. The amended Rule also includes a new exception for actively traded securities and specifies that the publication of quotes provided by issuer insiders and affiliates is subject to issuer information being publicly available. Further, while the amended Rule, like the current rule, expressly excludes municipal bonds, it does not expressly exclude any other type of bond or fixed income product, whether exempted or non-exempted, convertible or non-convertible. Accordingly, any broker-dealer that uses a “quotation medium” to disseminate quotes for debt or convertible securities needs to consider how the rule could apply and the availability of any exemption.

Summary of Key Provisions of Amended Rule 

The amended Rule starts by prohibiting certain conduct.²

1. The amended Rule states that a broker-dealer may not publish or submit for publication a quote in a quotation medium unless the broker-dealer complies with one of two alternatives. To comply with the first alternative, the broker-dealer must obtain issuer information, determine that the issuer information is current and publicly available, and review the issuer information for material accuracy and reliability. To comply with the second alternative, the broker-dealer would rely on a “publicly available determination” made by a quotation medium that is a qualified interdealer quotation system (i.e., an alternative trading system (ATS) that publishes quotes), and the broker-dealer must publish or submit the quotation within three business days of the publicly available determination. In order for a qualified interdealer quotation system to issue a publicly available determination, the issuer information must be current and publicly available and in its records. In addition, the qualified interdealer quotation system must reasonably believe that the records are materially accurate and reliable. 

2. A qualified interdealer quotation system may not disseminate a quote it receives from a broker-dealer that is relying on the qualified interdealer quotation system’s publicly available determination unless the qualified interdealer quotation system has complied with the amended Rule related to issuer information. 

3. The qualified interdealer quotation system must have policies and procedures to determine that the requisite conditions are met (with respect to either issuer information being current and publicly available or the conditions of an exception being met) before it issues a publicly available determination. 

These basic prohibitions raise some definitional issues.³ As with many SEC rules, substantive requirements can turn on the definitions. The amended Rule prohibits broker-dealer quotes in any quotation medium. Quotation medium is defined in the amended Rule in the same manner as in the current rule, as “any ‘interdealer quotation system’ or any publication or electronic communication network 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.” 

The amended Rule also defines quotation consistently with the current rule, to mean “any bid or offer at a specified price with respect to a security, or 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 wishes to advertise its general interest in buying or selling a particular security.”  

These broad definitions of “quotation medium” and “quotation” potentially capture a significant range of activity. 

Another important definition is “qualified interdealer quotation system,” which is an interdealer quotation system that also is an ATS. “Interdealer quotation system” is also a defined term and means “any system of general circulation to brokers or dealers that regularly disseminates quotations of identified brokers or dealers.” Reading these two definitions together, a “qualified interdealer quotation system” is an ATS that disseminates quotes for OTC securities.

The last defined term worth noting is “publicly available.” The term is used in relation to the public availability of issuer information. “Publicly available” means available on EDGAR or on the website of a federal agency, a qualified interdealer quotation system, a registered national securities association (e.g., FINRA), a registered broker-dealer, an issuer, or through an electronic system generally available in the primary market of a foreign private issuer. In order to be “publicly available,” the issuer information must be available without any access restrictions, meaning accessible to the public without username, password or fee.  

Issuer Information

The nature of the issuer information that is required to be reviewed for material accuracy and reliability, and to be current and publicly available, turns on the nature of the issuer under federal securities laws related to issuer disclosures.  For example, the issuer information would be a Securities Act of 1933 (Securities Act) Section 10(a) prospectus within 90 days of effectiveness, a Securities Act Regulation A offering circular that was qualified less than 40 days prior to the quote date, an annual report filed with the SEC under Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) and other periodic and current reports, an annual report filed pursuant to Regulation Crowdfunding, an annual statement of an insurance company per Section 12(g)(2)(G)(i), or information published as required by a private foreign issuer exempt from registration under SEC Rule 12g3-2(b). 

If these listed sources of information are not available, the required issuer information is listed in what the SEC refers to as the “catch-all” provision. This catch-all provision specifies the collection of the following information: issuer name, address, state of incorporation, security identification information, par or stated amount, outstanding securities, and transfer agent information; issuer business description including its products, services and facilities; name and title of company insiders; issuer’s most recent balance sheet; and similar information for the past two years.⁵ In addition to the requirement that the documentation and information be publicly available, broker-dealers must make the documents and information required by the catch-all provision available upon the request of a person expressing an interest in a proposed transaction in the issuer’s security with the broker or dealer, such as by providing the requester with instructions regarding how to obtain such publicly available documents and information electronically. 

Further, the broker-dealer or qualified interdealer quotation system making broker-dealer quotes available must have certain supplemental records, including records of the identity of any person on whose behalf a quote is published, whether that person is the issuer or a company insider, other information about the transactions from such person, any trading suspensions pursuant to Section 12(k) of the Exchange Act, and other material information about the issuer.

Exceptions

The amended Rule contains a series of exceptions that permit quoting without regard for the requirements of the amended Rule, other than compliance with the conditions of the exemption. 

1. Exchange Exception. Permits quotes in securities admitted to trading on an exchange that are actually traded on the day of the quote or on the next business day. 

2. Unsolicited Customer Indication Exception. Permits quotes that represent a customer’s unsolicited indication of interest, subject to certain conditions, including that quotes containing both a priced bid and a priced offer must be identified as unsolicited customer interest and that quotes for company insiders and affiliates may not be published under this exception unless the issuer information is current and publicly available. A broker-dealer posting the quote may reasonably rely on a written representation received on the day of the quote and prior to submitting the quote that a person is not a company insider or affiliate. Alternatively, the broker-dealer may rely on a publicly available determination from a qualified interdealer quotation system or an exchange.

3. Piggyback Exception. The amended piggyback exception permits a broker-dealer to publish or submit a quote if there is an existing quote for the security, under certain conditions. The piggyback exception has been widely used by broker-dealers to quote in the OTC markets. The amended Rule materially changes this piggyback exception to require the public availability of current issuer information. The issuer information is considered current and publicly available for purposes of the piggyback exception if it meets the following criteria:⁶

The information that is publicly available and current must concern the issuer of the security, not any subsidiary of the issuer. Accordingly, for issuers that  are financial institutions holding companies, information about the financial institution’s subsidiary available on federal banking regulator websites may not  meet the public availability requirement.⁷ 

The additional conditions of the piggyback exception are as follows:

• The quotes are in an interdealer quotation system.
• The interdealer quotation system identifies unsolicited customer indications.
• The quotations being piggybacked off are not identified as unsolicited customer indications.
• The quotations being piggybacked off may be either a bid or an offer, but must be priced (i.e., one-sided priced quotes may be piggybacked off).
• No more than four business days in succession may have elapsed without a quote (which the SEC points out generally requires one quotation per week).
• The issuer was not subject to an SEC trading suspension pursuant to Section 12(k) of the Exchange Act within the prior 60 days.
• The issuer is not a shell company, unless the piggybacking quotation is published or submitted within 18 months following the initial quotation.

If the filing, public availability and current requirements are not met, i.e., if the issuer is delinquent, a broker-dealer may continue to publish or submit a quote for the issuer’s security for a limited, conditional grace period. The grace period conditions are as follows:  

• Within four business days of the delinquency, a qualified interdealer quotation system or registered national securities association (e.g., FINRA) makes a publicly available determination that the breach occurred. The SEC states that this requirement is important to notify market participants that the issuer is delinquent. Notice may be provided by various means, including by adding a fifth letter to a ticker symbol.
• The broker-dealer complies with all other requirements of the piggyback exception and related recordkeeping requirements.
• This exception terminates on the earlier of the date that issuer information becomes current and publicly available or the 14th calendar day following the publicly available determination.

4. Municipal Security Exception. The amended Rule, like the current rule, provides an exception for quotes in municipal securities. Note that there is no exception for other types of bonds, such as corporate bonds (convertible or non-convertible), foreign sovereign debt, US Treasury or agency securities, asset-backed securities, or bonds offered and sold pursuant to Rule 144A or Regulation S although the SEC does not appear to have analyzed the applicability of the amended Rule to the dissemination of quotes for bonds.

5. ADTV and Asset Test Exception. The amended Rule contains a new exception, not in the current rule, to permit quotes in securities if the security has a reported average daily trading value (ADTV) of at least $100,000 during the 60 calendar days immediately before the publication of the quotation and the issuer has at least $50 million in total assets and $10 million in shareholder equity as reflected in the issuer’s publicly available audited balance sheet. The requirement that the ADTV be reported means that it must be determinable from reliable, publicly available information, “i.e., volume reported to a self-regulatory organization or comparable entity, or an electronic information system that regularly provides information regarding securities in markets around the world.”   

6. Underwriting Exception. The amended Rule contains a new exception that permits quoting by the named underwriter in a registration statement for 90 days or in an offering statement for 40 days.

Recordkeeping

The amended Rule specifies recordkeeping requirements for broker-dealers and qualified interdealer quotation systems. The recordkeeping provisions require records to be retained for three years, the first two in an easily accessible place, and relate to information and documents required under other paragraphs of the amended Rule, including issuer information, supplemental information, publicly available determinations and information related to the availability of exceptions.

Exemptive Authority

The amended Rule provides the SEC, upon written application or upon its own motion, authority to exempt persons, securities or transactions from the amended Rule, to the extent the exemption is necessary or appropriate in the public interest and is consistent with the protection of investors. In particular, the SEC has stated that it will consider requests from market participants, including issuers, investors or broker-dealers, for exemptive relief from the amended Rule for OTC securities that are currently eligible for the piggyback exception yet may lose piggyback eligibility due to the amendments. 

Another area that might be appropriate for exemptive relief is the applicability of the amended Rule to bonds, if the available exceptions are not sufficient to permit the dissemination of OTC quotations for bonds or if compliance with the existing rules is overly burdensome relative to the benefits of applying the amended Rule to such dissemination. 

The SEC also raised the possibility of exemptive relief for “expert markets” that provide liquidity for professional investors, which may be a way to address the application of the amended Rule to quotations for bonds.

The SEC encourages requests for exemptive relief to be submitted expeditiously during the nine-month transition period of the amended Rule.