quotation.\606\ Adding these values together, it is estimated that the
total industry-wide burden for this documentation requirement would be
66,497 hours for the first year, and 66,251 hours annually going
forward.
---------------------------------------------------------------------------

    \604\ (80 broker-dealers + 1 qualified IDQS + 1 registered
national securities association) x (1/3600 (one second)) x (252
trading days per year) x (11,542 securities) = 66,251 hours.
    \605\ 66,251 hours/(80 broker-dealers + 1 qualified IDQS + 1
registered national securities association) = 808 hours.
    \606\ This three-hour burden estimate to reprogram systems and
capture records regarding the frequency of priced bid or offer
quotations is separate from the information review requirement
discussed in Part V.C.1, and is analogous to the time burden
estimates in the 2010 amendments to Regulation SHO. See Regulation
SHO Release at 11283, 11286 (describing ongoing internal compliance
time for self-regulatory organizations and ``non-SRO trading
centers'' to ensure that their existing written policies and
procedures are up-to-date and remain in compliance with 2010
amendments to Rule 201 of Regulation SHO).
---------------------------------------------------------------------------

    A provision in paragraph (f)(3)(i)(B) of the amended Rule
eliminates piggyback eligibility for quotations for securities of shell
companies that are published or submitted 18 months following the
publication or submission of the initial priced quotation for such
issuer's security in an IDQS. To comply with the recordkeeping
requirement in paragraph (d)(2) of the amended Rule, each broker-dealer
relying on the piggyback exception, and each qualified IDQS or
registered national securities association that makes publicly
available determinations regarding the availability of the piggyback
exception, must preserve documents and information regarding its
determination that the issuer of a security is not a shell company. The
Commission estimates that broker-dealers, qualified IDQSs, and
registered national securities associations would make determinations
regarding shell companies based on how frequently information for that
issuer is filed or made current and publicly available. For example, a
broker-dealer, qualified IDQS, or registered national securities
association may determine that a reporting issuer is a shell company
when its annual or periodic reports are filed. Similarly, a broker-
dealer, qualified IDQS, or registered national securities association
may determine that a catch-all issuer is a shell company on an annual
basis.\607\
---------------------------------------------------------------------------

    \607\ As discussed in Part II.I above, paragraph (d)(2) of the
amended Rule requires broker-dealers, qualified IDQSs, and
registered national securities associations to preserve only
documents and information ``that demonstrate that the requirements
for an exception under paragraph (f)(2), (f)(3), (f)(5), (f)(6), or
(f)(7)'' are met. Accordingly, the Commission believes that while it
may be likely that broker-dealers document the availability of this
exception quarterly, they may do so more or less often in practice.
---------------------------------------------------------------------------

    The Commission estimates that broker-dealers, qualified IDQSs, and
registered national securities associations would each spend, on
average, one minute making a determination and preserving documents and
information that demonstrate that an issuer of the OTC security is not
a shell company. As stated above, one commenter stated that the
Commission significantly underestimated the amount of time it would
take a broker-dealer to determine whether an issuer is a shell
company.\608\ Recognizing that there may be wide disparities in the
time it may take to determine whether an issuer is a shell company, the
Commission continues to believe that this one minute average estimate
is correct for the PRA analysis.
---------------------------------------------------------------------------

    \608\ See Leonard Burningham Letters.
---------------------------------------------------------------------------

    Broker-dealers currently rely on the piggyback exception to publish
quotations for 9,895 individual issuers. The time it takes to determine
whether an individual issuer is a shell company varies, however,
depending on whether the issuer discloses its shell company status. In
some instances, it may take less than one minute to assess whether a
company is a shell company, while in other instances, it may take
longer than one minute.\609\ As discussed above, a broker-dealer,
qualified IDQS, or registered national securities association may rely
on an issuer's self-identification as a shell company in its review of
the issuer's documents and information, for example, as specified in
paragraph (b)(5)(i)(H) of the amended Rule regarding a description of
the issuer's business.\610\ In such instances, broker-dealers,
qualified IDQSs, and registered national securities associations will
not need to conduct a detailed analysis regarding whether an issuer is
a shell company for purposes of the piggyback exception based on the
issuer's representation that it is (or is not) a shell company. The
Commission believes that broker-dealers will have access to such
statements made by issuers regarding shell company status in
circumstances in which the issuer has an obligation to disclose its
shell company status under the Federal securities laws,\611\ or when
the issuer opts to reduce burdens on broker-dealers by disclosing shell
company status to facilitate broker-dealers maintaining a quoted market
in the securities of the issuer. For the foregoing reasons the
Commission believes that one minute is an appropriate average estimated
length of time to review and create a record of whether an issuer is a
shell company.
---------------------------------------------------------------------------

    \609\ This estimate is analogous to the estimate of de minimis
amounts of time necessary to collect identifying information about
customers in circumstances in which broker-dealers already obtain
the specified information about their customers. See Joint Final
Rule: Customer Identification Programs for Broker-Dealers, Exchange
Act Release No. 47752 (Apr. 29, 2003), 68 FR 25113, 25127 n.160
(noting that requiring identifying information about customers
``should not impose a significant additional burden'').
    \610\ See Part II.J.2.
    \611\ See, e.g., Forms 10-K, 10-Q, 1-A, and C.
---------------------------------------------------------------------------

    As stated in the Economic Analysis, there are 9,895 issuers of
quoted OTC securities.\612\ Accordingly, each broker-

dealer would spend approximately 540 hours \613\ on this task annually,
leading to a total annual burden of 44,280 hours dispersed between 80
broker-dealers, one qualified IDQS, and one registered national
securities association. The Commission believes that broker-dealers
already have administrative systems and procedures, as well as
personnel, in place to create these records, and that the initial
burden of putting procedures in place to ensure compliance with the
amendments would be three hours of internal burden per broker-dealer,
qualified IDQS, and registered national securities association leading
to an initial burden of 246 hours for the industry to reprogram systems
and capture the record relating to the determination an issuer's shell
company status.\614\ Adding these values together, it is estimated that
the total industry-wide burden for this documentation requirement would
be 44,526 hours for the first year, and 44,280 hours annually going
forward.
---------------------------------------------------------------------------

    \612\ Some broker-dealers may not provide quotations for all OTC
securities. Taking a conservative approach, however, the Commission
estimates that each broker-dealer would determine the shell status
of each issuer of a quoted OTC security on a quarterly basis.
    \613\ [(3081 SEC/Reg. A/Bank Reporting Obligation issuers x 1
minute x 4 responses per year) + (4,413 exempt foreign private
issuers x 1 minute x 4 responses per year) + (2,401 catch-all
issuers x 1 minute x 1 response per year)]/60 = (12,324 + 17,652 +
2,401)/60 = 540 hours.
    \614\ This three-hour burden estimate to reprogram systems and
capture records regarding the determination of shell company status
is separate from the information review requirement discussed in
Part V.C.1, and is analogous to the time burden estimates in the
2010 amendments to Regulation SHO. See Regulation SHO Release at
11283, 11286 (describing ongoing internal compliance time for self-
regulatory organizations and ``non-SRO trading centers'' to ensure
that their existing written policies and procedures are up-to-date
and remain in compliance with 2010 amendments to Rule 201 of
Regulation SHO).
---------------------------------------------------------------------------

    The amended Rule also limits the ability of a broker-dealer to rely
on the piggyback exception with respect to a security that is the
subject of a trading suspension order issued by the Commission pursuant
to section 12(k) of the Exchange Act until 60 calendar days after the
expiration of such order. The Commission believes that a broker-dealer,
qualified IDQS, or registered national securities association would
only create records for securities that have been the subject of a
trading suspension issued by the Commission pursuant to section 12(k).
In 2019, the Commission issued a trading suspension for 213 securities.
Further, it is estimated that it would take a broker-dealer, qualified
IDQS, or registered national securities association approximately one
minute to create a record regarding whether a security has been subject
to a trading suspension. Accordingly, it is estimated that, annually,
broker-dealers, qualified IDQSs, and registered national securities
associations would spend approximately 291 hours \615\ in the aggregate
(after rounding) complying with this recordkeeping requirement. These
291 hours would be dispersed among 80 broker-dealers, one qualified
IDQS, and one registered national securities association leading to an
annual burden of approximately 4 hours (after rounding) per
entity.\616\
---------------------------------------------------------------------------

    \615\ (80 broker-dealers + 1 qualified IDQS + 1 registered
national securities association) x (1/60 hour) x (213 securities) =
291 hours.
    \616\ 291 hours/(80 broker-dealers + 1 qualified IDQS + 1
registered national securities association) = 4 hours.
---------------------------------------------------------------------------

    The Commission believes that broker-dealers, qualified IDQSs, and
registered national securities associations already have administrative
systems and procedures as well as personnel in place to create records
regarding whether a security has been subject to a trading suspension,
and that the initial burden of putting procedures in place to ensure
compliance with the amendments would be three hours of internal burden
per broker-dealer, qualified IDQS, and registered national securities
association, leading to an initial burden of 246 hours for these market
participants to reprogram systems and capture the record relating to
the prohibition for reliance on the piggyback exception until 60
calendar days after the expiration of a Commission trading suspension
order issued pursuant to section 12(k) of the Exchange Act.\617\ Adding
these values together, it is estimated that the total industry-wide
burden for this documentation requirement would be 537 hours for the
first year, and 291 hours annually going forward.
---------------------------------------------------------------------------

    \617\ This three-hour burden estimate to reprogram systems and
capture records regarding trading suspensions is separate from the
information review requirement discussed in Part V.C.1, and is
analogous to the time burden estimates in the 2010 amendments to
Regulation SHO. See Regulation SHO Release (describing ongoing
internal compliance time for self-regulatory organizations and
``non-SRO trading centers'' to ensure that their existing written
policies and procedures are up-to-date and remain in compliance with
2010 amendments to Rule 201 of Regulation SHO).
---------------------------------------------------------------------------

(c) ADTV and Asset Test Exception--Rule 15c2-11(f)(5)
    As stated in the Economic Analysis, it is estimated that there
would be approximately 180 securities that would meet the amended Rule
paragraph (f)(5) ADTV and asset tests. In addition to preserving
documents and information that demonstrate paragraph (b) information is
current and publicly available, as discussed above, the broker-dealer,
qualified IDQS, or registered national securities association would
need to preserve documents and information that demonstrate that the
various requirements of the ADTV test and asset test have been met. It
is estimated that it would take one minute to create documentation
supporting the broker-dealer's reliance on the asset test prong of the
exception and that broker-dealers would do this once annually per
issuer.\618\ Accordingly, broker-dealers, qualified IDQSs, and
registered national securities associations would spend approximately 3
hours \619\ on this information collection annually, leading to an
ongoing burden of approximately 246 hours dispersed between 80 broker-
dealers, one qualified IDQS, and one registered national securities
association.
---------------------------------------------------------------------------

    \618\ As discussed in Part II.I above, paragraph (d)(2) of the
amended Rule requires broker-dealers, qualified IDQSs, and
registered national securities associations to preserve only
documents and information ``that demonstrate that the requirements
for an exception under paragraph (f)(2), (f)(3), (f)(5), (f)(6), or
(f)(7) are met.'' Accordingly, the Commission believes that broker-
dealers would likely document the availability of this exception
annually because the test is based on audited balance sheets issues
within six months of the end of the most recent fiscal year.
    \619\ (180 securities x 1 minute)/60 minutes = 3 hours.
---------------------------------------------------------------------------

    Additionally, the Commission estimates that it would take one
minute for a broker-dealer, qualified IDQS, or registered national
securities association to preserve documents and information that
demonstrate that the requirements of the ADTV test have been met and
that each respondent would do this 252 times a year (i.e., each trading
day). Accordingly, each respondent would spend approximately 756 hours
\620\ on this information collection annually, leading to an ongoing
burden of approximately 61,992 hours dispersed between 80 broker-
dealers, one qualified IDQS, and one registered national securities
association. The Commission believes that broker-dealers, the qualified
IDQS, and the registered national securities association would already
have administrative systems and procedures, as well as personnel, in
place to create these records, and that the initial burden of putting
procedures in place to ensure compliance would be three hours of
internal burden per broker-dealer, qualified IDQS, and registered
national securities association, leading to an initial burden of 246
hours for the industry to reprogram systems and capture the record
regarding whether the requirements of the ADTV and asset

tests have been met.\621\ Adding these values together, it is estimated
that, after rounding, the total industry-wide requirement would be
62,238 hours for the first year, and 61,992 hours annually going
forward.
---------------------------------------------------------------------------

    \620\ (252 trading days per year x 180 securities x 1 minute)/60
minutes = 756 hours.
    \621\ This three-hour burden estimate to reprogram systems and
capture records regarding ADTV and asset tests is separate from the
information review requirement discussed in Part V.C.1, and is
analogous to the time burden estimates in the 2010 amendments to
Regulation SHO. See Regulation SHO Release at 11283, 11286
(describing ongoing internal compliance time for self-regulatory
organizations and ``non-SRO trading centers'' to ensure that their
existing written policies and procedures are up-to-date and remain
in compliance with 2010 amendments to Rule 201 of Regulation SHO).
---------------------------------------------------------------------------

(d) Underwritten Offering Exception--Rule 15c2-11(f)(6)
    Paragraph (f)(6) of the amended Rule excepts from the information
review requirement quotations for a security by a broker-dealer that is
named as underwriter in a security's registration statement referenced
in paragraph (b)(1) or in an offering statement referenced in paragraph
(b)(2) of the amended Rule, subject to the time limitations contained
in those sections of the amended Rule. Registration statements and
offering statements are filed in EDGAR. Because the provision in
paragraph (d)(2)(ii) of the amended Rule does not require broker-
dealers to preserve paragraph (b) information that is available on
EDGAR, the Commission is not estimating any initial or ongoing
recordkeeping burden to be associated with this exception.
(e) Exchange-Traded Security Exception and Municipal Security
Exception--Rule 15c2-11(f)(1), (f)(4)
    Amendments to the amended Rule provide exceptions for quotations
for: (1) A security admitted to trading on a national securities
exchange and which is traded on such an exchange on the same day as, or
on the business day immediately preceding, the day of the quote
(paragraph (f)(1)), and (2) a municipal security (paragraph (f)(4)).
The Commission is not estimating any initial or ongoing burden with
respect to these exceptions because the provision in paragraph (d)(2)
of the amended Rule does not require broker-dealers, qualified IDQSs,
or registered national securities association to preserve records under
paragraph (d)(2) for the paragraph (f)(1) or paragraph (f)(4)
exceptions.
(f) Broker-Dealer That Publishes a Qualified IDQS Review Quotation--
Rule 15c2-11(a)(1)(ii)
    Paragraph (a)(1)(ii) of the amended Rule allows broker-dealers to
rely on a qualified IDQS's publicly available determination that it
complied with the information review requirement. Paragraph (d)(1)(ii)
of the amended Rule requires that broker-dealers maintain a record of
the name of the qualified IDQS that made such publicly available
determination. It is unclear for how many OTC securities qualified
IDQSs might choose to comply with the information review requirement
under the amended Rule.
    This provision, which collapses the proposed qualified IDQS review
exception into an unlawful activity provision of the amended Rule,
pertains to the application of the information review requirement with
respect to certain securities that are less likely to be targeted for
fraudulent activity (e.g., securities of large cap foreign issuers).
The Commission conservatively estimates that qualified IDQSs would
conduct the required review for five percent of this subset of quoted
OTC securities \622\ and that each broker-dealer would document its
reliance on a qualified IDQS's compliance with the information review
requirement once per year per issuer.\623\ Assuming that the
information required to document compliance with the information review
requirement for this subset of OTC securities would be publicly
available, the Commission estimates that each broker-dealer would spend
approximately one minute creating each record. Accordingly, broker-
dealers would spend approximately 0.22 hours \624\ on this information
collection annually leading to an ongoing burden of approximately 18
hours (after rounding) \625\ dispersed between 80 broker-dealers. The
Commission believes that broker-dealers would already have
administrative systems and procedures, as well as personnel, in place
to create these records, and that the initial burden of putting
procedures in place to ensure compliance with the amendments would be
three hours of internal burden per broker-dealer leading to an initial
burden of 240 hours for the industry to reprogram systems and capture
the record documenting its reliance the publicly available
determination by a qualified IDQS that such qualified IDQS complied
with the information review requirement.\626\ Adding these values
together, it is estimated that the total industry-wide burden for this
documentation requirement would be 258 hours for the first year, and 18
hours annually going forward.
---------------------------------------------------------------------------

    \622\ According to FINRA Form 211 data, broker-dealers complied
with the information review requirement 384 times, five percent of
which, after rounding, is 19 issuers. The Commission believes that,
given the relatively large number of foreign issuers of quoted OTC
securities, five percent is a reasonable estimate for the proportion
of securities that would be reviewed by qualified IDQSs.
    \623\ As discussed in Part II.A.3 above, under the amended Rule,
broker-dealers can only rely on this provision for a limited period
of time. The Commission, therefore, estimates that the securities
that are quoted under this provision would either become eligible
for the piggyback exception or would not be eligible for quotations
for the remainder of the year given the lack of interest in the
market.
    \624\ 13 issuers x 1 minute = 13 minutes or 0.22 hours.
    \625\ 0.22 hours x 80 broker-dealers = 18 hours.
    \626\ This three-hour burden estimate to reprogram systems and
capture records regarding publicly available determinations that a
qualified IDQS complied with the information review requirement is
separate from the information review requirement discussed in Part
V.C.1, and is analogous to the time burden estimates in the 2010
amendments to Regulation SHO. See Regulation SHO Release at 11283,
11286 (describing ongoing internal compliance time for self-
regulatory organizations and ``non-SRO trading centers'' to ensure
that their existing written policies and procedures are up-to-date
and remain in compliance with 2010 amendments to Rule 201 of
Regulation SHO).
---------------------------------------------------------------------------

(g) Policies and Procedures for a Qualified IDQS or Registered National
Securities Association To Make a Publicly Available Determination--Rule
15c2-11(a)(3)
    Under the amended Rule, a qualified IDQS or registered national
securities association must establish, maintain, and enforce reasonably
designed written policies and procedures to make certain publicly
available determinations.\627\ The Commission estimates that it would
take one qualified IDQS and one registered national securities
association subject to the amended Rule approximately 18 hours of
initial burden each to initially prepare these written policies and
procedures, and an ongoing annual burden of 10 hours each to review and
update policies and procedures. Given the sophistication of the
qualified IDQS and the registered national securities association, the
Commission estimates that this burden would be borne internally.
Accordingly, the total industry-wide burden for this documentation
requirement would be

36 hours for the first year, and 20 hours annually going forward.
---------------------------------------------------------------------------

    \627\ Amended Rule 15c2-11(a)(3). The amended Rule replaces the
proposed requirement that a qualified IDQS or registered national
securities association make a publicly available determination that
it has reasonably designed written policies and procedures, with a
requirement that such an entity establish, maintain, and enforce
reasonably designed policies and procedures to make certain publicly
available determinations--namely, whether issuer information is
current and publicly available, and, in some instances, whether the
requirements of an exception under the Rule are met. See supra Part
II.A.4. The time burden under both the proposed requirement and the
requirement under the amended Rule is the same--the time to
initially prepare such written policies and procedures, and any
ongoing annual burden to review and update such policies and
procedures.
---------------------------------------------------------------------------

(h) Broker-Dealer Recordkeeping in Reliance on Publicly Available
Determinations by a Qualified IDQS or Registered National Securities
Association--Rule 15c2-11(d)(2)(ii)
    Paragraph (d)(2)(ii) of the amended Rule requires broker-dealers
that rely on publicly available determinations described in paragraph
(f)(2)(iii)(B) or (f)(3)(ii)(A) to preserve the name of the qualified
IDQS or registered national securities association that made such a
determination. Paragraph (d)(2)(ii) of the amended Rule also requires
that broker-dealers that rely on publicly available determinations
described in paragraph (f)(7) of the amended Rule preserve a record of
the exception upon which the broker-dealer is relying and the name of
the qualified IDQS or registered national securities association that
determined that the requirements of that exception are met. The
Commission estimates that broker-dealers would create documents as
required by paragraph (d)(2)(ii) each trading day. The Commission
estimates that each broker-dealer would spend approximately one second
creating such a record. The Commission believes that one second is an
appropriate estimate regarding the time it will take to create such a
record because the Commission believes that such a record will be
created through an automated process that will require minimal direct
human intervention, if any. Accordingly, broker-dealers would spend
approximately 808 hours \628\ on this information collection annually
leading to an ongoing burden of approximately 64,635 hours \629\
dispersed between 80 broker-dealers. The Commission believes that
broker-dealers would already have administrative systems and
procedures, as well as personnel, in place to create these records, and
that the initial burden of putting procedures in place to ensure
compliance with the recordkeeping requirement under paragraph
(d)(2)(ii) would be three hours of internal cost per broker-dealer
leading to an initial burden of 240 hours for the industry to reprogram
systems and capture the record documenting its reliance the publicly
available determination by a qualified IDQS or registered national
securities association.\630\ Adding these values together, it is
estimated that the total industry-wide burden for this documentation
requirement would be 64,875 hours for the first year, and 64,635 hours
annually going forward.
---------------------------------------------------------------------------

    \628\ 64,635 hours/80 broker-dealers = 808 hours.
    \629\ (80 broker-dealers) x (1/3600 (one second)) x (252 trading
days per year) x (11,542 securities) = 64,635 hours.
    \630\ This three-hour burden estimate to reprogram systems and
capture records regarding publicly available determinations by a
qualified IDQS or registered national securities association is
separate from the information review requirement discussed in Part
V.C.1, and is analogous to the time burden estimates in the 2010
amendments to Regulation SHO. See Regulation SHO Release at 11283,
11286 (describing ongoing internal compliance time for self-
regulatory organizations and ``non-SRO trading centers'' to ensure
that their existing written policies and procedures are up-to-date
and remain in compliance with 2010 amendments to Rule 201 of
Regulation SHO).

                                 PRA Table 2--Summary of Estimated Other Burdens
----------------------------------------------------------------------------------------------------------------
                                                                     Number of     Total initial   Total annual
            Requirement                    Type of burden            entities        industry        industry
                                                                     impacted         burden          burden
----------------------------------------------------------------------------------------------------------------
Recordkeeping when relying on an    Recordkeeping...............              82              82          44,280
 exception under paragraph (f),
 that paragraph (b) information is
 current and publicly available.
Recordkeeping obligations under     Recordkeeping...............              80             240          96,371
 unsolicited quotation exception
 under paragraph (f)(2).
Recordkeeping obligations           Recordkeeping...............              82             246          66,251
 regarding frequency of a priced
 bid or offer quotation under
 paragraph (f)(3)(i)(A).
Recordkeeping obligations           Recordkeeping...............              82             246          44,280
 regarding determining shell
 status under the provision in
 paragraph (f)(3)(i)(B).
Recordkeeping obligations           Recordkeeping...............              82             246             291
 regarding trading suspensions
 under the provision in paragraph
 (f)(3)(i)(B).
Recordkeeping obligations for the   Recordkeeping...............              82             246             246
 exceptions under paragraph
 (f)(5)--Asset Test.
Recordkeeping obligations for the   Recordkeeping...............              82               0          61,992
 exceptions under paragraph
 (f)(5)--ADTV Test.
Recordkeeping obligations of        Recordkeeping...............              80             240              18
 qualified IDQS complying with
 information review requirement
 pursuant to paragraph (a)(2).
Recordkeeping obligations related   Recordkeeping...............               2              36              20
 to the creation of reasonable
 written policies and procedures
 under paragraph (a)(3).
Recordkeeping obligations of        Recordkeeping...............              80             240          64,635
 broker-dealers relying on
 publicly available determinations
 by qualified IDQSs or registered
 national securities associations
 pursuant to paragraph (d)(2)(ii).
----------------------------------------------------------------------------------------------------------------

3. Collection of Information Is Mandatory
    The information collections for the information review requirement
and recordkeeping requirement are mandatory under the amendments to the
Rule if a broker-dealer wishes to provide the initial publication or
submission of a quotation for an OTC security. Additionally, the
information collections involving documentation and information that
demonstrate that the requirements for an exception have been met are
mandatory under the amendments if a broker-dealer submits or publishes
quotations that rely on an exception in paragraph (f) of the amended
Rule.
4. Confidentiality
    The Commission would not typically receive confidential information
as a result of this collection of information. To the extent that the
Commission receives--through its examination and oversight program,
through an investigation, or by some other means--records or
disclosures from a qualified IDQS or registered broker-dealer that
concern the information review requirement and that are not publicly
available, such information would be kept confidential, subject to the
provisions of applicable law. Likewise, to the extent that the
Commission receives--through its examination and oversight program, or
through an investigation, or by some other means--

records from a qualified IDQS, registered national securities
association, or registered broker-dealer that are related to reliance
on an exception contained in paragraph (f) of the amended Rule and that
are not publicly available, such information would be kept
confidential, subject to the provisions of applicable law.
5. Retention Period of Recordkeeping Requirement
    Under paragraph (d)(1) of the amended Rule, a broker-dealer
publishing or submitting a quotation, or a qualified IDQS that makes
known to others the quotation of a broker-dealer pursuant to paragraph
(a)(2) of the amended Rule, must preserve the documents and information
for a period of not less than three years, the first two years in an
easily accessible place. Under paragraph (d)(2) of the amended Rule, a
broker-dealer publishing or submitting a quotation, or a qualified
IDQS, or a registered national securities association that makes a
publicly available determination pursuant to paragraphs (f)(2)(iii)(B),
(f)(3)(ii)(A), or (f)(7) of the amended Rule must preserve the
documents and information for a period of not less than three years,
the first two years in an easily accessible place.

VI. Economic Analysis

A. Background

    The amended Rule updates investor protection requirements in light
of the substantial reductions in costs for information acquisition and
dissemination due to modern technology. These changes are expected to
better protect retail investors from incidents of fraud and
manipulation in OTC securities, particularly the securities of issuers
for which there is no or limited publicly available information. These
amendments are also intended to reduce regulatory burdens on broker-
dealers for publication of quotations of certain OTC securities that
may be less susceptible to potential fraud and manipulation, such as
highly liquid securities of certain well-capitalized issuers and
securities that were issued in offerings underwritten by the broker-
dealer publishing the quote.
    The Commission is mindful of the costs imposed by and the benefits
obtained from the Commission's rules. Exchange Act Section 3(f)
requires the Commission, when engaging in rulemaking that requires
consideration or determination of whether an action is necessary or
appropriate in the public interest, also to consider, in addition to
the protection of investors, whether the action will promote
efficiency, competition, and capital formation. Additionally, Exchange
Act Section 23(a)(2) requires the Commission, when adopting rules under
the Exchange Act, to consider the impact that any new rule will have on
competition and not to adopt any rule that will impose a burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Exchange Act.
    The discussion below addresses the expected economic effects of
these amendments, including the likely benefits and costs, as well as
the likely effects of the amendments on efficiency, competition, and
capital formation. The Commission has, where possible, quantified the
economic effects that are expected to result from these amendments in
the analysis below. However, the Commission is unable to quantify some
of the potential effects discussed below.
    First, it is unclear to what extent current and publicly available
paragraph (b) information would influence OTC investors' investment
decisions and how these decisions might affect the welfare of these
investors.\631\ In addition, the Commission is unable to estimate
certain costs with precision because it lacks data on the degree of
activity by and concentration in this market of individual broker-
dealers with respect to publishing quotes for OTC securities.\632\
Wherever possible, if more precise estimates were not feasible, the
Commission has estimated a range or bound associated with the costs of
the amendments. Lastly, the Commission is unable to quantify the extent
to which the amendments to the Rule would impact entry of issuers into
the quoted OTC market or the migration between securities in the quoted
OTC market and the grey market, in which trades in OTC securities occur
without broker-dealers publishing quotations in a quotation medium.
Therefore, much of the discussion below is qualitative in nature,
although the Commission describes, where possible, the direction of
these effects.
---------------------------------------------------------------------------

    \631\ For example, the effect of investment decisions on the
welfare of the investor depends on the individual's preference for
risk and return. The Commission lacks data not only on the effect of
disclosure on investment decisions, but also the preferences of OTC
investors.
    \632\ For example, the Commission lacks data on the number and
identities of broker-dealers that are publishing quotes for OTC
securities in reliance on the piggyback exception or other
exceptions to the Rule; much of the analysis in this release is done
at the security- or issuer-level.
---------------------------------------------------------------------------

B. Baseline and Affected Parties

1. Affected Parties
    The final amendments to the Rule would affect broker-dealers that
publish or submit quotations for OTC securities. Besides broker-dealers
and qualified IDQSs, affected parties include issuers of quoted OTC
securities and investors in these securities (either investors already
holding a position in OTC securities or those seeking to acquire such a
position).\633\ The Commission assesses the economic effects of the
amendments relative to the baseline of existing requirements and
practices in the OTC market. Registered broker-dealers participate in
the market for quoted OTC securities by publishing priced and unpriced
quotations representing customer interest in trading, executing
customer orders, and acting as market makers.\634\ OTC Markets Group
identifies 80 broker-dealers that are active on the OTC Link ATS in OTC
securities.\635\ Thirty-four broker-dealers filed at least one FINRA
Form 211 in order to initiate the publication or submission of
quotations for an OTC security during the calendar year 2019.\636\
---------------------------------------------------------------------------

    \633\ The Commission does not have data to estimate the number
of investors currently participating in the OTC securities market.
    \634\ In addition to the Rule, the regulatory baseline includes
SRO rules governing the process of broker-dealers' publication of
quotations for OTC securities. In particular, FINRA Rule 6432
requires broker-dealers to file Form 211 when initiating or resuming
quotations in OTC securities to ensure compliance with the
information requirements of the Rule. See supra Part II.J.1.
    \635\ See Broker-Dealer Directory, OTC Mkts. Grp. Inc., https://www.otcmarkets.com/otc-link/broker-dealer-directory (last visited
Apr. 24, 2020, 2:35 PM). The Commission expects that not all of the
broker-dealers included in the directory are actively engaged in
quoting OTC securities.
    \636\ The Commission received information on FINRA Form 211
filings from FINRA. The total number of FINRA Form 211 filings for
calendar year 2019 was 384 and each broker-dealer filed this form
for approximately 11 OTC securities on average. The total number of
FINRA Form 211 filings has been declining since 2013, the earliest
year of data available to the Commission, when the total number of
FINRA Form 211 filings was 830.
    One commenter stated that the count of unique broker-dealers
filing FINRA Form 211 does not accurately represent the
concentration of broker-dealers conducting the initial information
review because the vast majority of securities that were approved
for trading were foreign securities that were already listed on a
foreign exchange. In addition, the commenter stated that only four
broker-dealers conducted the initial information review for the
remaining domestic issuers and since 2018, three of these broker-
dealers have ceased this activity. See Coral Capital Letter. Based
on information provided by FINRA, 66 percent of FINRA FORM 211
filings were for securities of foreign issuers, and that fraction
has been relatively stable since 2013. Further, the commenter's
analysis may not fully capture all FINRA Form 211 filing activity
because according to data available to the Commission, 28 unique
broker-dealers filed these forms for domestic issuers in 2018 and 13
broker-dealers filed forms for catch-all issuers.
    Filing of FINRA Form 211 is associated with initiating or
resuming quotations only. The Commission lacks data that would allow
it to estimate the number of quotes that broker-dealers published
pursuant to paragraph (a) or in reliance on the piggyback exception,
national securities exchange, or municipal security exceptions to
the Rule. Based on data from OTC Markets Group, broker-dealers
published a total of approximately 3.8 billion quotations during
calendar year 2019, of which 5,782,286 were published in reliance on
the unsolicited quotation exception. See supra note 632 for a
discussion of data limitations. Because broker-dealers could rely on
the piggyback exception for the vast majority (90 percent) of quoted
OTC securities on an average day during 2019, the Commission
believes that it is reasonable to assume that the majority of quotes
that broker-dealers published during 2019 relied on the piggyback
exception. See Table 2 below, which describes average daily activity
for securities that are quoted in the OTC market.

---------------------------------------------------------------------------

2. Baseline

(a) OTC Securities
    Securities that are quoted on the OTC market differ from those
listed on national securities exchanges. In particular, the average OTC
security issuer is smaller, and its securities trade less, on average.
Table 1 below compares quoted OTC securities to those listed on the New
York Stock Exchange (``NYSE'') or Nasdaq.\637\ On average, issuers of
quoted OTC securities have a lower market capitalization than those
with securities that are listed on a national securities exchange.\638\
Panel B of Table 1 shows that this difference is more pronounced when
companies with securities listed on foreign exchanges, such as the
Tokyo Stock Exchange or the TSX Venture Exchange, are excluded from the
sample of quoted OTC securities. Further, Table 1 demonstrates that
quoted OTC securities are characterized by significantly lower dollar
trading volumes than listed stocks, even when comparing securities of
similar size as measured by market capitalization.\639\
---------------------------------------------------------------------------

    \637\ See infra note 640 for a description of OTC securities
data sources. All information for stocks listed on NYSE and Nasdaq
comes from The Center for Research in Security Prices (CRSP).
Statistics are computed by averaging market capitalization and
trading volume for each security across all trading days during the
calendar year 2019. The conclusions drawn from this analysis
regarding how OTC securities compare to exchange-listed securities
with respect to size and volume traded remain qualitatively
unchanged if the Commission extends the analysis to include
securities listed on additional smaller national exchanges.
    \638\ The Commission estimates that securities listed on NYSE
and Nasdaq were valued at approximately $35.7 trillion in total
during calendar year 2019, while quoted OTC securities were valued
at approximately $32.3 trillion with 94.7 percent of the total
market capitalization coming from companies that also have
securities listed on public foreign exchanges.
    \639\ Total dollar volume is annualized by taking the average
daily trading volume and multiplying it by the number of trading
days in 2019. Panels C and E of Table 1 provide statistics for
comparable samples of quoted OTC and exchange listed securities with
a market capitalization between $50 million and $5 billion. Several
academic studies document the differences in liquidity between OTC
and listed stocks using older data. See Bjorn Eraker & Mark Ready,
Do Investors Overpay for Stocks with Lottery-Like Payoffs? An
Examination of the Returns of OTC Stocks, 115 J. Fin. Econ. 486-504
(2015); Ang et al., supra note 3.
    Commenters generally agreed that the key difference between
quoted OTC securities and those listed on national exchanges were
size and trading volume. See, e.g., Mitchell Partners Letter 1.

                   Table 1--Comparison of Quoted OTC Securities and Listed Securities, CY 2019
----------------------------------------------------------------------------------------------------------------
                                                    Quoted OTC                            Exchange listed
                                 -------------------------------------------------------------------------------
                                                                     $50M-$5B                        $50M-$5B
                                        All          Unlisted       Market cap          All         Market cap
                                             (A)             (B)             (C)             (D)             (E)
----------------------------------------------------------------------------------------------------------------
Market Cap--median ($M).........           20.99            3.92          472.74          517.90          485.74
Market Cap--mean ($M)...........        3,601.17          393.19         1158.18        5,890.43          993.98
Volume--median ($M).............            0.29            0.15            0.84          760.02          693.19
Volume--mean ($M)...............          107.76           51.02           29.05       10,375.73        2,549.60
Number of Securities............          11,542           6,253           2,626           6,166           4,277
----------------------------------------------------------------------------------------------------------------

    Table 2 provides more detail on the characteristics of quoted OTC
securities and their issuers for the 2019 calendar year.\640\ The
Commission estimates that, on average, 9,998 quoted OTC securities had
published quotations per day during the calendar year 2019.\641\ A
majority of these had published either bid or offer quotations (93
percent).\642\ The Commission identified that broker-dealers could rely
on the piggyback exception to publish or submit quotations for 90
percent of these quoted OTC securities.\643\ Many quoted OTC securities
are illiquid. For example, the Commission estimates that, on average,
only 44 percent of these quoted securities reported a positive daily
trading volume, with two percent of quoted securities being
``inactive,'' which the Commission defines as not having reported any
trading volume within the last year.\644\ Conversely, only eight
percent of quoted

securities had an ADTV value greater than $100,000.\645\
---------------------------------------------------------------------------

    \640\ The Commission uses three sources of data on OTC
securities. OTC Markets Group's ``End-of-Day Pricing Service'' and
``OTC Security Data File'' provide closing trade and quote data for
the U.S. OTC equity market and include identifying information for
securities and issuers, as well as securities' piggyback
eligibility. The Commission also uses information from the weekly
OTC Markets Group's ``OTC Company Data File.'' Company Data Files
include information about issuer reporting, shell, and bankruptcy
status, as well as the SEC Central Index Key (CIK) identifier and
whether an issuer's financial statements are audited.
    All statistics in Table 1 represent characteristics of OTC
securities and OTC issuers on a typical trading day and are computed
by averaging across all trading days for the 2019 calendar year. The
Commission identified 19,141 unique OTC securities for 16,059 unique
companies from aggregated OTC Markets Group data for the calendar
year 2019. Of these, 11,542 unique OTC securities had at least one
published quotation and 9,895 unique companies had a security that
was quoted at least once during the calendar year 2019. The
Commission believes that OTC Markets Group data are reasonably
representative of all OTC quoting and trading activity in the U.S.
    \641\ The number of securities quoted includes those with
published priced and unpriced quotations. The Commission estimates
that approximately seven percent of quoted OTC securities did not
have priced quotations. The number of OTC securities quoted on an
average day is lower than the total number of OTC securities with
published quotations in 2019 because some securities did not have
published quotations for every trading day in 2019.
    \642\ The Commission estimates the number of securities with
quotations with either bid or offer prices from close of trading day
data. This estimate is a lower bound as the Commission is not able
to identify cases in which a security had a published priced
quotation during the day but was no longer published at day close.
    \643\ See supra Part II.D. A security would qualify for the
piggyback exception if it satisfies the frequency of quotation
requirements pursuant to paragraph (f)(3) of the Rule. For such
securities, a broker-dealer would not need to comply with the Rule's
information review requirement before publishing a quotation on an
IDQS.
    \644\ Broker-dealers trading in quoted OTC securities are
required to report their trades to FINRA, which then disseminates
this information to the market. OTC Markets Group receives trading
data from FINRA's Trade Data Dissemination Service (TDDS) feed and
incudes aggregated daily trading volume data for OTC securities in
the ``End-of-Day Pricing Data File.''
    \645\ The Commission computes the ADTV on a given day by taking
the average of reported dollar trading volume over the previous 60
calendar days. The computed ADTV for each security is a lower bound
estimate of its worldwide ADTV if some of the trading activity was
not reported to FINRA. As such, it is possible that there were more
securities than the Commission identifies that would satisfy the
volume threshold. The Commission estimates that approximately eight
percent of quoted securities had an ADTV value greater than $100,000
and current and publicly available information.

           Table 2--Market for Quoted OTC Securities, CY 2019
------------------------------------------------------------------------

------------------------------------------------------------------------
                         Average Daily Activity
------------------------------------------------------------------------
Number of Securities...........................................    9,998
Priced Quotes with Either Bid or Offer.........................      93%
Piggyback Eligible.............................................      90%
Traded.........................................................      44%
Inactive.......................................................       2%
ADTV value >$100,000...........................................       8%
------------------------------------------------------------------------

    Some OTC securities are traded without having published
quotation.\646\ Broker-dealers might not publicly quote these
securities due to a lack of available issuer information necessary to
satisfy the information review requirement or due to insufficient
investor interest. The Commission estimates that 5,915 OTC securities
were traded at some point during 2018 without having published
quotations, with 553 securities of 538 issuers traded on average per
day during 2018. Despite not having published quotations, some of these
OTC securities were actively traded, with three percent having an ADTV
value greater than $100,000.\647\
---------------------------------------------------------------------------

    \646\ On the OTC Markets Group platform, OTC securities trade
without published quotations on the grey market and on the ``Expert
Market.'' According to OTC Markets Group, the Expert Market is a
``private market to serve broker-dealer pricing and best execution
needs in securities that are restricted from public quoting or
trading.'' OTC Markets Group notes that the restrictions on quoting
or trading can be based on issuer requirements, security attributes,
investor accreditation and/or suitability risks.
    \647\ Conditional on having been traded, the average (median)
dollar trading volume on a given day during 2019 for a security
trading on the grey market was $33,913 ($830) as compared to
$293,608 ($4,000) for quoted OTC securities.
---------------------------------------------------------------------------

(b) Issuers of OTC Securities
    Table 3 below provides detail on issuers of quoted OTC
securities.\648\ The Commission estimates that brokers participating in
the OTC market published quotations for the securities of 9,895 issuers
during the calendar year 2019.\649\ These issuers differed in
regulatory status, which determines the information that needs to be
provided to comply with securities regulations and the type of
paragraph (b) information that would be required to be current and
publicly available by the amendments. Thirty-one percent of issuers
followed the Exchange Act, Regulation A, or the U.S. Bank reporting
standards; 45 percent followed international reporting standards; and
the remaining 24 percent followed an alternative reporting
standard.\650\ Given that issuers of quoted OTC securities follow
different reporting standards, current financials are available for
some issuers but not others. The Commission estimates that current
financials were publicly available for approximately 70 percent of
issuers of quoted OTC securities.\651\ In particular, the Commission
estimates that broker-dealers published quotations for a total of 3,008
issuers of OTC securities with no current and publicly available
information, although, as commenters stated, the Commission recognizes
that some of these issuers may have published current financial
information somewhere other than on the OTC Markets Group
platform.\652\ Of these, 946 issuers had an obligation to disclose
information under the Exchange Act, Regulation A, or the U.S. Bank
reporting standards; 82 issuers had an obligation under an
international reporting standard; and the remaining 1,980 issuers did
not have a reporting or disclosure obligation. Although the majority of
issuers of quoted OTC securities provided current financial information
publicly, financial statements of these issuers are not always audited.
---------------------------------------------------------------------------

    \648\ See supra note 640 for information on data sources.
Numbers in parenthesis represent percentages of the row totals.
    \649\ During the 2019 calendar year, 14 percent of issuers of
quoted OTC securities had multiple (two or more) quoted OTC
securities with published quotations.
    \650\ The Exchange Act reporting standard requires that issuers
are in compliance with their SEC reporting requirements. The
Regulation A reporting standard applies to companies subject to
reporting obligations under Tier 2 of Regulation A under the
Securities Act. These companies must file annual, semi-annual, and
other interim reports on EDGAR. The U.S. Bank reporting standard
applies to companies in the OTCQX U.S. Bank Tier on OTC Markets
Group's system and may be satisfied by following the SEC reporting
standards, Regulation A reporting standards, or reporting standards
outlined in OTCQX Rules for U.S. Banks (https://www.otcmarkets.com/files/OTCQX_Rules_for_US_Banks.pdf). Foreign issuers that are exempt
from registering a class of equity securities under Section 12(g) of
the Exchange Act pursuant to Rule 12g3-2(b) follow international
disclosure requirements. Lastly, the alternative reporting standard,
which could apply to all remaining OTC security issuers and is based
on the information required by former Rule 15c2-11(a)(5), has
varying requirements for disclosure depending on the OTC Markets
Group Tier in which quotations for the security are published.
    The Commission observed several instances in the data in which
issuers of quoted OTC securities changed their reporting standard
during 2019, for example, by switching from following an alternative
reporting standard to the Exchange Act reporting standard. In these
instances, for the computation of statistics in Table 3, the
Commission attributed a reporting standard that the issuer followed
for the majority of the days that its securities had published
quotations during 2019.
    \651\ See supra note 640 for information on data sources. The
Commission uses information on the IDQS and the OTC Markets Group
tier classification to estimate the number of issuers with current
and publicly available information. In particular, the Commission
counts all issuers with securities quoted on OTC Bulletin Board
(``OTCBB'') and specific tiers on OTC Markets Group's system: OTCQX,
OTXQB, and OTC Pink: Current Information. This includes all quoted
securities other than in the OTC Market OTC Pink: Limited
Information and OTC Pink: No Information tiers. OTC Bulletin Board
requires that quoted securities are current in their required
filings with the SEC or other federal regulatory authority with
proper jurisdiction. All OTC Markets Group tiers other than OTC
Pink: Limited Information and OTC Pink: No Information require
financial information to be at most six months old and available on
www.otcmarkets.com or on the Commission's EDGAR system.
    The number the Commission computes here is a rough estimate as
it is possible that some issuers of securities in the OTC Pink:
Limited Information or OTC Pink: No Information tiers voluntarily
release current and public information somewhere other than on the
OTC Markets Group platform. In particular, some commenters stated
that certain issuers of quoted OTC securities publish current
financial information on their websites. See, e.g., Beacon
Redevelopment Letter; Braxton Gann; Hamilton & Associates Letter;
Dave Peirce; Peter Quagliano; Dan Schum.
    Of all the quoted securities that qualified for the piggyback
exception in calendar year 2019, the Commission estimates that 69
percent of them had publicly available current disclosures based on
data from OTC Markets Group.
    \652\ See, e.g., Beacon Redevelopment Letter; Braxton Gann;
Hamilton & Associates Letter; Dave Peirce; Peter Quagliano; Dan
Schum.

---------------------------------------------------------------------------

The Commission estimates that 48 percent of issuers with publicly
available financial statements with quoted OTC securities in 2019
provided audited financial statements.\653\ Several commenters stated
that certain issuers of quoted OTC securities provide current financial
information to their shareholders, including in connection with
disclosure requirements under the laws of the state in which the
company is incorporated.\654\ Other commenters stated difficulties that
investors may face when trying to access financial information for
companies in which they hold shares, such as having to provide proof of
ownership or having to sign a non-disclosure agreement.\655\ Commenters
also argued that while certain issuers provide information to their
shareholders, they are hesitant to do so more widely because they do
not want to reveal information to their competitors.\656\ In summary,
current information is either not readily available, especially for
persons not holding these securities, or not available at all for a
subset of OTC securities.
---------------------------------------------------------------------------

    \653\ OTC Markets Group classifies issuers that provide audited
financial statements. In the analysis, the Commission assumes that
all issuers that have been identified as providing audited financial
statements provide audited balance sheets.
    Although current FINRA and Commission rules do not require the
financial statements of non-SEC reporting OTC securities issuers to
be audited, OTC Markets Group requires audited financials from OTC
issuers with securities quoted in the OTCQX U.S.[supreg] and
OTCQB[supreg] tiers. Issuers with securities quoted in the OTC Pink:
Current Information tier must provide an Attorney Letter with
Respect to Current Information if they do not file with the SEC and
do not publish audited financial information.
    \654\ See, e.g., James Duade; Caldwell Sutter Capital Comment;
Drinker Letter; Christian Gabis; Mitchell Partners Letter 1; Dan
Schum; Michael Tofias.
    \655\ See, e.g., Tim Bergin; Richard Kogut; Jim Rivest.
    \656\ See, e.g., Drinker Letter; Peter Quagliano.
---------------------------------------------------------------------------

    Three percent of issuers with quoted OTC securities were shell
companies, and broker-dealers were able to rely on the piggyback
exception to publish or submit quotations for nearly all securities of
shell companies (99 percent).\657\ Lastly, the Commission estimates
that 1,030 (10 percent) of issuers with quoted OTC securities and
current and publicly available information had total assets greater
than $50 million and shareholder equity greater than $10 million on
their most recent audited balance sheets.\658\
---------------------------------------------------------------------------

    \657\ See supra Part II.D.4 for a detailed discussion of shell
companies. Even though broker-dealers had the ability to publish
quotes for these securities relying on the piggyback exception, some
quotes broker-dealers published for these securities may have relied
on other exceptions to the Rule.
    In its comment letter, OTC Markets Group stated that, as of
December, 2019, 339 issuers of OTC securities have self-reported in
their public filings as shell companies, as defined by Rule 405 of
Regulation C. OTC Markets Group has flagged an additional 534
issuers as ``shell risk,'' based on the following annual financial
metrics: (i) Revenue less than $100,000; (ii) total assets (less
cash and cash equivalents) less than $100,000; (iii) gross profit or
loss less than $100,000; and (iv) research and development costs
under $50,000. See OTC Markets Group Letter 2.
    \658\ The Commission reviewed information on assets and
shareholder equity of OTC issuers from a combination of three data
sources: (1) S&P Global Market Intelligence Compustat North America
and Compustat Global databases, (2) the OTC Markets Group website
(https://www.otcmarkets.com), and (3) Bloomberg. For the analysis in
the Proposing Release, the Commission also reviewed information from
quarterly and annual filings in EDGAR. However, there is significant
overlap in these datasets and data from annual and quarterly filings
did not provide any additional information to what was already
contained in the three datasets described above. The Commission used
data on the most recent financial information available, as the
Commission does not have access to historical financial data for
many issuers. In some cases, the most recent financial data
available is outdated. Specifically, for approximately 30 percent of
OTC issuers, for which the Commission has data, the financial data
are from calendar year 2018 or earlier. Of the 16,059 unique OTC
issuers that appear in the data for calendar year 2019, the
Commission is able to draw financial data for 2,791 (17 percent) of
them from Compustat, 7,461 (46 percent) from Bloomberg, and 3,300
(21 percent) from the OTC Markets Group website. The Commission is
unable to collect financial information for 2,507 (16 percent) of
OTC issuers because financial statement information for these
issuers was absent in the three data sources the Commission
reviewed.

                              Table 3--Issuers of Quoted OTC Securities, CY 2019 a
----------------------------------------------------------------------------------------------------------------
                                              SEC/Reg. A/Bank   International    No reporting/
                                                 reporting        reporting        disclosure         Total
                                               obligation \b\     obligation       obligation
----------------------------------------------------------------------------------------------------------------
                                          Public Information Available
----------------------------------------------------------------------------------------------------------------
                                                          (A)              (B)              (C)
----------------------------------------------------------------------------------------------------------------
Issuers.....................................    2,134 (30.99)    4,331 (62.90)       421 (6.11)            6,886
Securities..................................    2,531 (29.97)    5,470 (64.76)       445 (5.27)            8,446
Shell Company...............................      136 (80.95)            0 (0)       32 (19.05)              168
Audited Financials..........................    1,908 (58.17)    1,254 (38.23)       118 (3.60)            3,280
Assets >$50 mil & SE >$10mil................      571 (55.44)      448 (43.50)        11 (1.07)            1,030
----------------------------------------------------------------------------------------------------------------
                                         No Public Information Available
----------------------------------------------------------------------------------------------------------------
                                                          (D)              (E)              (F)
----------------------------------------------------------------------------------------------------------------
Issuers.....................................      946 (31.45)        82 (2.73)    1,980 (65.82)            3,008
Securities..................................      969 (31.31)        85 (2.75)    2,041 (65.95)            3,095
Shell Company...............................       96 (55.81)             0(0)       76 (44.19)              172
----------------------------------------------------------------------------------------------------------------
                                           Total (by Reporting Status)
----------------------------------------------------------------------------------------------------------------
Issuers.....................................    3,081 (31.14)    4,413 (44.60)    2,401 (24.26)            9,895
Securities..................................    3,501 (30.33)    5,555 (48.13)    2,486 (21.54)           11,542
----------------------------------------------------------------------------------------------------------------
\a\ See supra note 640 for information on data sources. The Commission observes that issuers of OTC securities
  that trade on the grey or expert markets differ from issuers of quoted OTC securities. The majority of these
  issuers followed the alternative reporting standard (63 percent) and a few (one percent) were identified as
  shell companies. In addition, three percent of these issuers had total assets greater than $50 million and
  shareholder equity greater than $10 million on their most recent audited balance sheets.
\b\ Estimates of issuers in this column include issuers that make filings pursuant to Regulation Crowdfunding.
  The Commission estimates that there were five such issuers that had quoted OTC securities, of which four (80
  percent) had publicly available financial information. These issuers were included in the economic analysis of
  the Proposing Release, but not discussed separately as they are in this note.

(c) Risk of Fraud and Manipulation
    The OTC market may be attractive to those seeking to engage in
fraudulent practices, such as pump-and-dump schemes, due to a lack of
publicly available current information about certain issuers of quoted
OTC securities.\659\ Two academic studies have found that market
manipulation and pump-and-dump cases are concentrated among issuers of
OTC securities relative to exchange-listed securities.\660\ Another
study has highlighted a higher incidence of cases involving delinquent
filings and pump-and-dump schemes brought against issuers of OTC
securities relative to cases brought against issuers of exchange-listed
securities.\661\ A Commission staff analysis of 4,000 SEC litigation
releases between 2003 and 2012 found that the majority of alleged
violations involving issuers of OTC securities were primarily
classified as reverse mergers of shell companies or as market
manipulation.\662\ One commenter stated that the majority of the pump-
and-dump schemes that he has observed involved shell companies.\663\ In
addition, the Commission estimates, from a sample of 323 Commission
enforcement actions filed in fiscal years 2017 to 2019 involving 689
OTC securities, that 250 enforcement actions (77 percent) were
classified as involving delinquent filings and 11 enforcement actions
(three percent) were classified as involving market manipulation.\664\
In contrast, the Commission estimates, from a sample of 109 Commission
enforcement actions filed in fiscal years 2017 to 2019 involving listed
securities, that four enforcement actions (four percent) was classified
as involving delinquent filings and three enforcement actions (three
percent) were classified as involving market manipulation.
---------------------------------------------------------------------------

    \659\ The Commission lacks data on the costs associated with
fraudulent schemes involving OTC securities. One study found that
pump-and-dump schemes result in sizable losses for market
participants. See Hackethal et al., supra note 407 (finding an
average loss of 30 percent per investor and a loss of at least
[euro]1.2 million per tout aggregated across investors in a sample
of 421 pump-and-dump schemes from 2002 to 2015 involving 6,569
German investors).
    \660\ One study analyzed 142 stock manipulation cases, including
pump-and-dump cases, in SEC litigation releases from 1990 to 2001
and found that that 48 percent involved OTC securities, while 17
percent involved securities listed on national exchanges. See
Aggarwal & Wu, supra note 6. A more recent study looked at 150 pump-
and-dump manipulation cases between 2002 and 2015 and found that 86
percent of those cases involved OTC securities. See Renault, supra
note 6.
    \661\ This study looked at a broader sample of securities cases
filed between January 2005 and June 2011 and identified 1,880 cases
involving OTC securities and 1,157 cases involving securities listed
on exchanges in the United States. The majority of OTC securities
cases, 1,148 (61 percent), were related to delinquent filings, while
151 (eight percent) were related to a pump-and-dump scheme, 159
(eight percent) were related to financial fraud, 12 (one percent)
were related to insider trading, and 212 (11 percent) were related
to other fraudulent misrepresentation or disclosure. In contrast,
only 26 (two percent) of listed securities cases involved delinquent
filings, 43 (four percent) involved pump-and-dumps, 278 (24 percent)
involved financial fraud, 399 (34 percent) involved insider trading,
and 173 (15 percent) involved other fraudulent misrepresentation or
disclosure. See Cumming & Johan, supra note 7.
    \662\ See Spotlight on Microcap Fraud (Feb. 22, 2019), https://www.sec.gov/spotlight/microcap-fraud.shtml.
    \663\ Morning Light Mountain Comment. It is difficult to draw
conclusions about shell companies' involvement in fraudulent schemes
from the commenter's statement without information on the sample of
pump-and-dump schemes that the commenter has observed.
    \664\ One commenter stated that it is difficult to infer a
causal relationship between delinquent or unavailable financial
information about the OTC security issuer and fraud because the OTC
market is complex. See GTS Letter.
---------------------------------------------------------------------------

    To highlight characteristics of securities and issuers in the OTC
market that tend to involve risk of fraud and manipulation, the
Commission examined quoted OTC securities that had been the subject of
Commission-ordered trading suspensions and those that have been
assigned a ``caveat emptor'' designation by OTC Markets Group during
the 2019 calendar year.\665\ The Commission summarizes the findings
below, in Table 4.\666\
---------------------------------------------------------------------------

    \665\ See Trading Suspensions (2019), https://www.sec.gov/litigation/suspensions.shtml; Annual Report, SEC, Div. Enforcement,
5 (2018), https://www.sec.gov/files/enforcement-annual-report-2018.pdf; Addendum to Annual Report, SEC, Div. Enforcement, 2
(2017), https://www.sec.gov/files/enforcement-annual-report-2017-addendum-061918.pdf; Select SEC and Market Data Fiscal 2016, 2
(2016), https://www.sec.gov/files/2017-03/secstats2016.pdf. OTC
Markets Group explains that a ``caveat emptor'' designation may be
assigned to a security if OTC Markets Group becomes aware of a
misleading or a manipulative promotion; a company is under
investigation for fraudulent activity; there is a regulatory
suspension on the security; the company fails to disclose a
corporate action, such as a reverse merger; or there is another
public interest concern associated with the security. See Caveat
Emptor Policy, OTC Mkts. Grp. Inc., https://www.otcmarkets.com/learn/caveat-emptor (last visited Apr. 28, 2020).
    \666\ All statistics in Table 4 were estimated by analyzing
security and issuer characteristics on the trading day before the
start of a Commission-ordered trading suspension or an assignment of
a ``caveat emptor'' designation by OTC Markets Group.
---------------------------------------------------------------------------

       Table 4--Quoted OTC Securities, Suspensions and OTC Markets Group ``Caveat Emptor'' Status, CY 2018
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
                                                                   SEC suspensions
                                                                  OTC markets group
                                                              ``caveat emptor'' status
----------------------------------------------------------------------------------------------------------------
Issue Characteristics:
    Number of Securities....................................             213                       241
    Quotes with Either Bid or Offer.........................             209     (98%)             230     (95%)
    Piggyback Eligible......................................             212    (100%)             238     (98%)
Issuer Characteristics:
    Number of Issuers.......................................             213                       236
    SEC/Reg. A/Bank Reporting Standard......................             169     (79%)             176     (75%)
    International Reporting Standard........................               0      (0%)               1      (0%)
    Alternative Reporting Standard (ARS)....................              44     (21%)              62     (26%)
    Public Information Available............................              13      (6%)              33     (14%)
    Audited Financials......................................             162     (76%)             173     (73%)
    Shell Company...........................................              20      (9%)              23     (10%)
----------------------------------------------------------------------------------------------------------------

    Overall, 213 quoted OTC securities were the subject of Commission-
ordered trading suspensions over the calendar year 2019.\667\ Relative
to the characteristics of the overall quoted OTC security market,
broker-dealers were more likely to be able to rely on the piggyback
exception to publish or submit quotations for quoted OTC

securities subject to trading suspensions on the trading day
immediately prior to the commencement of the trading suspension.
Although issuers of suspended quoted OTC securities tended to be mostly
reporting companies, they were less likely to have current public
information available relative to the full sample of quoted OTC
securities because many failed to file required reports.\668\ Several
of these companies were identified as shell companies (nine percent).
---------------------------------------------------------------------------

    \667\ The results are qualitatively similar for the set of 1,369
Commission-ordered trading suspensions in the past five calendar
years, 2015-2019. In particular, the Commission estimates that
almost all quoted OTC securities subject to Commission-ordered
trading suspensions (1,364) were piggyback eligible, approximately
seven percent had publicly available current financial information,
and 10 percent were shell companies.
    \668\ Issuers typically become subject to Commission-ordered
trading suspensions under circumstances where there is a lack of
publicly available current, accurate, or adequate information about
the company. This may happen, for example, when a company is not
current in its filings of periodic reports. As a result, it is not
surprising that many of these issuers were not quoted in OTCBB or
OTC market tiers that require current and publicly available
financial information.
---------------------------------------------------------------------------

    In addition, the Commission examined 241 instances in which quoted
OTC securities were flagged with the ``caveat emptor'' designation by
OTC Markets Group to inform investors to exercise additional care when
considering whether to transact in these securities. Most of these
companies had Commission-ordered trading suspensions.\669\ Similar to
the sample of OTC issuers with suspended securities, issuers of these
securities were less likely to have publicly available information.
---------------------------------------------------------------------------

    \669\ For 187 of the 241 ``caveat emptor'' securities, this
designation was assigned at the start of the suspension. In the
remaining 26 suspensions over the calendar year 2019, the security
had already been designated with a ``caveat emptor'' status prior to
2019. The remaining 54 instances of ``caveat emptor'' assignment
were associated with fraud or public interest concerns other than
trading suspensions.
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    Increasing the availability of information about OTC issuers has
the potential to counteract misinformation, which can proliferate
through promotions and other channels. Several recent studies have
examined the effects of stock promotions on investor trading in the OTC
market.\670\ For example, one study has found large price and trading
volume movements following spam email campaigns that conveyed optimism
about a particular OTC security's price and were viewed by investors as
containing credible information about the security.\671\ Others have
documented that cases in which issuers have secretly hired stock
promoters for campaigns to increase their stock price and liquidity
often are accompanied by trading by company insiders.\672\ Based on
publicly available website information reviewed by the Commission on
OTC securities that were subjects of promotion campaigns, the
Commission identified 288 OTC securities (two percent of all quoted OTC
securities) that were featured in at least one promotion campaign
during 2019.\673\ The vast majority of these OTC securities, 240 (83
percent), were issued by companies that did not otherwise provide
current and publicly available financial information.\674\
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    \670\ See White, supra note 5.
    \671\ See Nelson et al., supra note 252 (``[T]rading volume more
than doubles in the days immediately following the spam campaign,
and the mean return is positive and significant. However, the median
return is zero, with nearly as many firms experiencing negative
returns as positive on the spam date . . . . [C]ombining optimistic
target price projections with credible, but stale, information from
old press releases increase the return and volume reaction to spam.
Moreover, the larger the return implied by the target price, the
larger the market reaction.'').
    \672\ See Nadia Massoud et al., Does It Help Firms to Secretly
Pay for Stock Promoters?, 26 J. Fin. Stability 45-61 (2016)
(sampling both OTC securities and exchange-listed securities).
    \673\ One commenter stated that sometimes it is not the absence
of current information, but rather the abundance of false
information that facilitates fraudulent behavior in the OTC market.
See Caldwell Sutter Capital Comment. However, current financial
information can serve to limit the effectiveness of misinformation
in the OTC market.
    \674\ The Proposing Release included additional information from
OTC Markets Group data that identified 241 OTC securities (two
percent of all quoted OTC securities) that were involved in at least
one promotion campaign during 2018 with 58 of these securities (24
percent) issued by companies that did not provide current and
publicly available information. The Commission did not receive
updated promotion data from OTC markets for calendar year 2019.
---------------------------------------------------------------------------

(d) Investors
    One academic study has found that OTC stocks are owned primarily by
retail investors rather than institutional investors.\675\ However,
retail investors' access to OTC securities is not frictionless in all
cases. For instance, several commenters stated that broker-dealers put
up ``gates'' that restrict retail investors' access to OTC securities,
such as signing agreements and disclaimers before allowing these
investors to purchase OTC stocks. Studies have also found that, on
average, quoted OTC securities earn lower returns than exchange-listed
stocks.\676\ These investment decisions by individuals may be due to
investors misestimating payoff probabilities for OTC stocks by
overweighting extreme positive outcomes, particularly in cases where
there is a lack of available information about the issuer.\677\ Some
investors in OTC securities may be driven by a speculative motive.\678\
Demographic analysis of OTC investors suggests that they tend toward
higher wealth and education.\679\ However, OTC security holding period
returns are worse for investors residing in locations with populations
that may be more vulnerable in that they are older, lower-income, and
less educated.\680\ Overall, findings in these studies suggest that
investors in the OTC market might benefit from additional information
regarding company fundamentals.\681\ For example, some retail investors
could more readily find, through online searches, information that
refutes misinformation disseminated through promotions with publicly
available paragraph (b) information. One commenter argued that OTC
investors lose money in OTC securities because they are not educated on
how to interpret the information that issuers provide and are thus
susceptible to misinformation campaigns.\682\ Nevertheless, these
investors could benefit from more efficient prices that are less
susceptible to manipulation as a result of the trading activity of
better-informed investors who acquire and are better equipped at
interpreting this information.
---------------------------------------------------------------------------

    \675\ See Ang et al., supra note 3 (stating that retail
investors are ``the primary owners of most OTC stocks, whereas
institutional investors hold significant stakes in nearly all stocks
on listed exchanges, including small stocks'').
    \676\ See White, supra note 5; see also Ang et al., supra note
3; Eraker & Ready, supra note 639.
    \677\ See White, supra note 670.
    \678\ See Hackethal et al., supra note 407 (finding an average
loss of 30 percent in a sample of 421 pump-and-dump schemes from
2002 to 2015 involving 6,569 German investors). The study finds that
``35% of the tout investors have been day-trading in penny stocks or
are frequent traders with short investment horizons. These investors
appear to be willing to take substantial risks and trade
aggressively also in other stocks. These investor types are more
likely to invest in touts, place larger bets and have better
returns. Their participation in touts looks quite differently from
more conservative traders, who trade infrequently and do not invest
in penny stocks. This group could be the ones that were tricked into
the schemes.'' Id.
    \679\ See White, supra note 5; see also John R. Nofsinger &
Abhishek Varma, Pound Wise and Penny Foolish? OTC Stock Investor
Behavior, 6 Rev. Behav. Fin. 2-25 (2014).
    \680\ See White, supra note 5 (``[M]edian holding period returns
deteriorate for zip codes with greater percentages of elderly, less
education and residence stability, and lower income and wealth. All
of the return differences are economically and statistically
significant.'').
    \681\ Some commenters stated that investors are aware of the
risks associated with trading in OTC securities. See, e.g., David
Aldridge; R. Berkvens; Dana Blanc; Caldwell Sutter Capital Comment;
Frank Danna III; Ralf Erz; Philippe Goodwill; Richard Kogut; Aharon
Levy; Tracy Michaels; Michael E. Reiss; Robert Ringelberg; Jim
Rivest; David Sanders; Thomas Schiessling; Lucas H. Selvidge;
Terravoir Venture Letter; Kevin Ward.
    \682\ Alexandra Elliott.
---------------------------------------------------------------------------

C. Discussion of Economic Effects

1. Effects of Rule 15c2-11 Amendments
    In this section, the Commission discusses the expected costs and
benefits of the amendments to Rule 15c2-11. These amendments modify

rule requirements to account for the reduction in information
acquisition costs, and generally seek to increase the availability of
current company financial information within the quoted OTC market.
    The amendments would affect OTC investors, issuers, and
intermediaries such as broker-dealers. The Commission anticipates the
principal economic effects of the amendments to be as follows. First,
the transparency requirements could enable investors to learn more
about the fundamental value of certain companies in the OTC market,
which may direct their funds toward higher-return investments. These
benefits are directly linked to modern technology that enables
relatively low cost access to and dissemination of company filings. In
addition, other investors could benefit from more efficient prices that
are less susceptible to manipulation as a result of the trading
activity of better-informed investors who acquire this information.
Second, the amendments may reduce the incidence of fraudulent schemes,
such as pump-and-dump activity, as a result of heightened information
requirements and restrictions on the piggyback exception being applied
to securities without current and publicly available information.
Finally, broker-dealers could bear additional costs from the
information review requirement as well as filing FINRA Forms 211 more
frequently (e.g., if paragraph (b) information is not publicly
available) as a result of, among other things, limitations on relying
on the piggyback exception.\683\ Costs borne by broker-dealers may be
heterogeneous and depend on whether the broker-dealer specializes in
retail or institutional orders, market making, or some combination of
these services. To the extent that broker-dealers currently incur costs
associated with disseminating paragraph (b)(5) information, such costs
on broker-dealers may be mitigated to some extent. The requirement for
paragraph (b)(5) information to be publicly available would reduce the
broker-dealer's obligation to make paragraph (b) information available
upon request to interested investors electronically.
---------------------------------------------------------------------------

    \683\ Several of these amendments would provide additional
exceptions to the Rule (e.g., eliminating the requirement for 12
business days of quotes within the previous 30 calendar days to
establish piggyback eligibility). However, the Commission does not
expect these amendments to have a significant impact on the costs
and benefits of the Rule, as discussed below.
---------------------------------------------------------------------------

    In specific circumstances, other provisions of the amended Rule
seek to relieve broker-dealers of costs related to the information
review requirement and filing FINRA Form 211. For example, the
exception for issuers with ADTV value greater than $100,000, total
assets greater than $50 million, and shareholder equity greater than
$10 million will relieve broker-dealers of the information review
requirement for larger, more liquid issuers which are potentially less
susceptible to fraud.\684\
---------------------------------------------------------------------------

    \684\ The Commission estimates that approximately 180 (two
percent) of quoted OTC securities on an average day during calendar
year 2019 would be eligible for the ADTV and assets exception.
---------------------------------------------------------------------------

    Broker-dealers and investors could also incur costs and benefits
associated with possible migration in trading activity from certain
issuers and markets to others (e.g., between quoted and grey markets).
For example, commenters highlighted difficulties that broker-dealers
and issuers of such OTC securities may face in resuming a quoted market
once the securities have migrated to the grey market.\685\ On the other
hand, to the extent that the Rule amendments lead to a net increase in
the demand for OTC securities that continue to be quoted, broker-
dealers and issuers of these securities may accrue benefits. Some of
these costs and benefits to broker-dealers may be passed on to
investors in the form of higher or lower transaction costs and account
fees. Further, as discussed in more detail below, OTC investors may
incur costs associated with a decrease in liquidity and share value as
a result of losing piggyback eligibility for OTC securities without
current and publicly available information.
---------------------------------------------------------------------------

    \685\ In particular, commenters have highlighted the costs to
issuers associated with providing current disclosures and to broker-
dealers associated with complying with the information review
requirement to resume quoting. See, e.g., Coral Capital Letter;
Tyler Black; Woessner & Associates Letter.
---------------------------------------------------------------------------

    The costs and benefits associated with the specific amended Rule
provisions are discussed below.
(a) Making Paragraph (b) Information Current and Publicly Available
    The costs and benefits discussed below pertain to the general
requirements for paragraph (b) information to be current and publicly
available to publish or submit quotations for, or to maintain a quoted
market in, quoted OTC securities. They also pertain to the new public
information requirements for the unsolicited quotation exception. The
Commission expects that investors would benefit from easier access to
paragraph (b) information through public media, such as EDGAR or the
website of a qualified IDQS, a registered national securities
association, the issuer, or a registered broker-dealer that publishes
paragraph (b) information related to quoted OTC securities.
    Presently, not all issuers of quoted OTC securities provide current
and publicly available financial information.\686\ Some of these OTC
issuers may choose to provide such information under the amended Rule
in order to maintain the liquidity of their securities in the quoted
market. The Commission further believes that the rule amendments should
incentivize issuers to make information current and publicly available
to allow broker-dealers to continuously quote their securities. This
information could allow investors to better assess the quality of the
issuer and help them to avoid lower-return investments, such as those
involved in a fraudulent scheme. By enabling investors to compare
information contained in promotion campaigns to that in current company
information, the new requirement for paragraph (b) information to be
publicly available may help investors avoid trading on false
information. In general, the ease of accessing information on the
internet should allow investors to migrate toward forming inferences
about the value of OTC securities based upon paragraph (b) information
and away from inferences based principally upon quoted prices.
Investors could also use this information to make better-informed
corporate voting decisions to the extent that OTC issuers put matters
to a shareholder vote in annual or special meetings.\687\ Investors
could also benefit from more efficient prices that are less susceptible
to manipulation as a result of the trading activity of better-informed
investors who acquire this information. The amended Rule provides
flexibility with respect to the format of the paragraph (b) information
issuers may opt to provide. Certain formats such as machine-readable
content might facilitate processing of information by sophisticated or
institutional investors and thereby promote arbitrage activity as well
as price efficiency in OTC securities. However, issuers may opt to not
submit information in this format as the final Rule maintains
flexibility with respect

to information format.\688\ In addition, broker-dealers will be
restricted from publishing quotations for securities without publicly
available paragraph (b) information, which would likely push trading
activity in these dark issuers' (i.e., issuers that do not make their
information publicly available) securities into the grey market.\689\
The lack of a quoted market could curtail the trading activity of
retail investors, making such securities less attractive to
perpetrators of fraud. Therefore, these new requirements could deter
fraudulent activity related to quoted OTC securities. Investors could
benefit from decreased exposure to investment losses as a result of
diminished frequency of fraudulent activity in the OTC market.
---------------------------------------------------------------------------

    \686\ Notably, there are no requirements to make financial
disclosures publicly available for OTC securities quoted on the OTC
Market OTC Pink: No Information tier. An analysis of quoted OTC
securities during the calendar year 2019 has revealed that
approximately 30 percent of issuers do not provide current and
publicly available financial information. See supra Part VI.B.
    \687\ The Commission lacks data on the quantity and nature of
matters put to a vote at annual or special meetings of issuers of
quoted OTC securities not subject to Commission reporting
obligations.
    \688\ In the Proposing Release, recognizing the value that
machine-readable information can have to market participants, the
Commission solicited commenters' views on whether at a later date
the Commission might propose that paragraph (b) information should
be published in this format. The Commission did not receive any
comments directly supporting or opposing whether paragraph (b)
information should be published in this format. One commenter
supported requiring issuers to have their latest filings and
investor information immediately downloadable from a centralized
site or from issuer websites, and noted that the information could
be provided in XML or XBRL format. See Lake Highlands Comment.
    \689\ Using data on daily dollar trading volume for quoted OTC
securities during the 2019 calendar year, the Commission finds that
quoting activity and trading activity are correlated. In particular,
the Commission finds that OTC securities with published quotations
were 4.9 times more likely to have reported a positive dollar
trading volume on a given day in 2019 relative to securities trading
on the grey or Expert markets. In addition, if they were traded, OTC
securities with published quotations had, on average, 1.98 times
greater daily dollar trading volume than securities trading on the
grey market. See supra note 640 for a description of OTC securities
data sources.
---------------------------------------------------------------------------

    Higher quality issuers (i.e., issuers more likely to have
productive investment opportunities) could benefit from increased
access to capital to the extent that the change leads to a net increase
in demand for higher quality issuers' OTC stocks.\690\ Previous
academic studies have highlighted the relationship between the breadth
and quality of firm disclosures and liquidity in the OTC market.\691\
Therefore, investors in these higher quality issuers could benefit from
greater liquidity and an associated reduction in trading costs.
According to studies, these more liquid securities should trade at
higher prices based on lower costs associated with their resale.\692\
---------------------------------------------------------------------------

    \690\ The potential increase in access to capital for issuers is
based on the likelihood that market changes as a result of the
amendments could result in the divestiture of OTC securities more
susceptible to fraud and manipulation and increased investment in
OTC securities less susceptible to fraud and manipulation. However,
to the extent that investment decisions are driven by other factors,
such as a personal interest in specific companies, there might be no
increase in access to capital for issuers.
    \691\ See John (Xuefeng) Jiang et al., Private Intermediary
Innovation and Market Liquidity: Evidence from the Pink Sheets
Market, 33 Contemp. Acct. Res. 920-48 (2016) (finding that,
following the introduction of Pink tiers in OTC Markets Group, each
associated with different self-established eligibility requirements
pertaining to disclosure, firms with higher levels of disclosure
experienced an increase in liquidity, while firms that did not
disclose information experienced a decrease in liquidity); see also
Br[uuml]ggemann et al., supra note 72 (finding that market liquidity
and the propensity of a security to experience a crash in returns,
both used as proxies for the quality of a security in the analysis,
decrease monotonically when moving across OTC tiers from those with
high regulatory strictness and disclosure requirements to those with
lower requirements); Ryan Davis et al., Information and Liquidity in
the Modern Marketplace (Working Paper, Nov. 21, 2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2873853.
    \692\ See Ang et al., supra note 3.
---------------------------------------------------------------------------

    Conversely, issuers may also incur costs associated with making
paragraph (b) information publicly available before broker-dealers can
publish or submit quotations for their securities. We focus our
discussion below on the costs of providing current and publicly
available information for non-transparent catch-all issuers as any
issuers that make disclosures pursuant to reporting obligations other
than those contained within the amended Rule would incur costs
attributable to those obligations and not to Rule 15c2-11. These costs
could include preparing and producing paragraph (b) information in
document form and ensuring that the paragraph (b) information is
publicly available.\693\ Some commenters stated that certain OTC
security issuers that do not make financial information widely
available make the information available to their current shareholders
either on a periodic basis or upon request.\694\ In addition, certain
issuers may prepare financial information to meet state-level public
reporting requirements. These issuers would likely face minimal costs
associated with the preparation of paragraph (b) information. One
commenter stated that because issuers of OTC securities have to prepare
financial reports for reasons such as tax reporting, there would not be
a burden associated with publishing unaudited financial statements on
their websites.\695\ Other commenters stated that a qualified IDQS may
charge a fee for publication of an OTC issuer's financial information
on its website.\696\ However, the costs associated with making current
information publicly available are mitigated by the fact that these
amendments would offer several possible alternatives for releasing
paragraph (b) materials, including making this information available on
an issuer's website.\697\ The availability of multiple acceptable
locations will provide issuers or other publishers of paragraph (b)
information with flexibility in meeting the public availability
requirement. To facilitate investor access to information, the amended
Rule requires broker-dealers to make catch-all issuer information
available upon the request of a person expressing an interest in a
proposed transaction in the issuer's security, such as by providing the
requesting person with appropriate instructions regarding how to obtain
publicly available information electronically. In this regard, if such
information is located on different websites, broker-dealers may
provide the website addresses at which investors can find the
information that is required to be publicly available. The amended Rule
also provides flexibility with respect to the format of the paragraph
(b) information issuers may opt to post on these websites. Certain
formats such as standard text might reduce direct costs of information
production for issuers.
---------------------------------------------------------------------------

    \693\ Issuers that presently make disclosures publicly
available, either voluntarily or because of a reporting obligation,
and have systems in place for the preparation of these disclosures,
would not face additional costs as a result of this amendment. An
analysis of quoted OTC securities during the calendar year 2019 has
revealed that approximately 18 percent of all catch-all issuers
provide current and publicly available financial information. This
estimate represents a lower bound as it is possible that some catch-
all issuers provide current and publicly available information
somewhere other than on the OTC Markets Group platform, such as the
issuer's website. See supra Part VI.B.
    \694\ See supra notes 257 and 258.
    \695\ Michael Hess.
    \696\ See, e.g., Beacon Redevelopment Letter; Virtu Letter.
    \697\ Presumably, issuers, investors, qualified IDQSs, the
registered national securities association, or broker-dealers would
choose the most cost-effective method to disseminate paragraph (b)
information.
---------------------------------------------------------------------------

    Finally, there may also be indirect costs to OTC issuers of
disclosing paragraph (b) information, such as costs of revealing
sensitive financial information that might be exploited by competitor
firms, as discussed by commenters.\698\ The Commission recognizes that
compliance with this requirement, including with respect to the
financial information for an issuer that does not have a statute- or
rule-based reporting obligation, such as a catch-all issuer, may reveal
confidential financial or business information to competitors. The
Commission nevertheless believes that, on balance, requiring current
and publicly available information can help to better facilitate
informed investment decisions by both existing investors and potential

investors in addition to better protecting retail investors from
incidents of fraud and manipulation in OTC securities.
---------------------------------------------------------------------------

    \698\ See, e.g., Drinker Letter; Peter Quagliano.
---------------------------------------------------------------------------

    Alternatively, OTC issuers, including dark catch-all issuers and
delinquent reporting issuers, may elect not to provide paragraph (b)
information to the public. The securities of these dark OTC issuers may
exit from the quoted market as a result. A number of commenters stated
that the absence of published quotes may limit liquidity in OTC
securities without current and publicly available information and lead
to losses for existing investors in these securities.\699\ One
commenter argued that this effect may be more pronounced among retail
investors because institutional investors may be able to sell stakes in
dark companies through block trades.\700\ On the other hand, one
commenter observed that published quotes for OTC securities without
current and publicly available information may not be representative of
the underlying value of the security.\701\
---------------------------------------------------------------------------

    \699\ See supra notes 207 and 209.
    \700\ Richard Krejcarek.
    \701\ See Jim Rivest (describing purchasing OTC securities of
dark issuers at bargain prices relative to the value).
---------------------------------------------------------------------------

    The Commission acknowledges that OTC investors may incur costs
associated with a loss of liquidity and possible associated decrease in
share value if OTC issuers elect not to provide current and publicly
available paragraph (b) information. While these costs to investors may
be significant, the Commission believes that deterring fraud and
manipulation in OTC securities justifies the requirement for paragraph
(b) information to be current and publicly available to maintain a
quoted market in these securities. This loss in share value, if it
occurred, could arise from an increase in the costs of resale
associated with the OTC stock when migrating to the grey market. The
Commission does not believe that the securities of issuers with
operations and profitability (or the prospect of future profitability)
will become ``worthless'' as a result of the amendments, as suggested
by one commenter.\702\ Issuers with operations and profits, even
without a quotation for their securities by a broker-dealer, would
presumably continue to operate and generate profits for their
shareholders; thus, OTC shares will continue to represent a claim on
these profits and assets. For newer issuers with prospective future
profits, OTC shares would similarly represent a claim on these
prospective profits. Therefore, they should continue to have some
positive value. The Commission recognizes, however, that the share
value may be lower than it would have been for the same financials due
to a perceived loss of liquidity when losing the quoted market.
---------------------------------------------------------------------------

    \702\ Andersen Letter.
---------------------------------------------------------------------------

    The Commission is unable to reasonably predict the extent to which
OTC securities issuers that do not presently provide current and
publicly available information will choose to do so, or continue not
to, as a result of final amendments.\703\ Further, to the extent that
certain OTC security issuers may choose to remain dark, the Commission
is unable to quantify the potential impact on liquidity and value.\704\
Prior academic research and the Commission's own analysis suggests that
there is presently limited liquidity and price discovery in the market
for OTC securities of dark issuers, even when broker-dealers are
frequently publishing quotations for such securities.\705\ In addition,
the potential costs associated with a loss in liquidity may be
partially mitigated by the ability of broker-dealers to publish
quotations on behalf of existing shareholders relying on other
exceptions (e.g., the unsolicited quotation exception), provided the
requirements of the exception are met, as all investors, other than
company insiders and issuer affiliates, will continue to have access to
the quoted market. Any potential loss of liquidity for certain dark
companies also may be mitigated to the extent the Commission issues
exemptions to permit broker-dealers, subject to certain conditions and
in limited circumstances, to continue to publish or submit quotations
for dark issuers in reliance on the piggyback exception. Lastly, the
amendments do not restrict investors from trading OTC securities
without quotations on the grey market, and so investors will continue
to be able to trade OTC securities of dark issuers.\706\
---------------------------------------------------------------------------

    \703\ For example, the Commission is unable to quantify the
benefits of disclosure to an issuer in terms of enhanced liquidity
and access to capital. This benefit net of the costs of disclosure
should, in principle, inform whether an issuer elects to provide
current and publicly available paragraph (b) information or not.
    \704\ Using data available to the Commission, it is impossible
to reliably isolate the effect of the presence and characteristics
of published quotations from other factors that may affect liquidity
and value of a particular OTC security. While the Commission does
observe instances in which cessation of published quotations and
migration to the grey market for some OTC securities is followed by
subsequent drops in price and share volume, a causal relationship is
difficult to establish because of other confounding factors
contributing to the migration to the grey market (i.e., Commission-
ordered trading suspensions, financial distress, negative news
releases, etc.).
    \705\ See supra note 64 for a discussion of academic studies
examining the relationship between transparency and liquidity in the
OTC market.
    The Commission estimates that an average (median) quoted OTC
security of a dark issuer reported a positive dollar trading volume
for 70 (51) days during calendar year 2019, while an average
(median) quoted OTC security of an issuer with current and publicly
available information reported trading for 100 (71) days during the
same period. Further, on an average trading day during 2019, trading
in quoted OTC security of dark issuers accounted for approximately
one percent of aggregate daily trading volume across all OTC
securities. Among OTC securities of catch-all issuers only, trading
in dark OTC securities accounted for 12 percent of aggregate daily
trading.
    In addition, the Commission finds that bid-offer spreads for
dark OTC securities are significantly higher than those of OTC
securities with current and publicly available information. In
particular, during the average trading day during 2019, the average
(median) bid-offer spread for a dark OTC security was 63 (50)
percent, which was approximately 3 (8) times higher than the bid-
offer spread for OTC security with current and publicly available
information. Bid-offer spreads are computed as the absolute
difference between best closing bid and closing offer prices,
divided by the midpoint of the bid and offer prices. See supra note
640 for a description of OTC securities data sources.
    Lastly, based on data provided to the Commission by OTC Markets
Group on the total counts of quote updates for each OTC security for
calendar year 2019, the Commission finds that the mean (median) OTC
security of a dark issuer saw 70 (6) times fewer quotation updates
as compared to an OTC security of an issuer with current and
publicly available information. Among OTC securities of catch-all
issuers only, the mean (median) number of quotation updates during
2019 was 4 (3) times lower for OTC securities of dark issuers.
    \706\ See supra note 647 for a comparison of daily trading
volumes between quoted and grey OTC securities. The Commission also
finds that while a lower number of grey securities traded on an
average trading day during the calendar year 2019 as compared to the
number of quoted OTC securities of dark issuers (553 grey securities
vs. 965 dark quoted OTC securities), the total daily dollar volume
in the grey market was approximately 43 percent higher than the
total dollar trading volume of dark OTC securities. Among OTC
securities of catch-all issuers only, the total daily dollar volume
in the grey market was approximately 47 percent higher than the
total dollar trading volume of dark OTC securities.
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    Some commenters were concerned that the amendments would encourage
issuers to remain dark \707\ and make minority shareholders vulnerable
to management buyouts at unfair discount prices.\708\ The Commission
acknowledges that existing shareholders, including minority
shareholders, of companies that do not have current and publicly
available paragraph (b) information could incur costs if broker-dealers
cease publishing quotations for the securities of such companies and,
for example, OTC company insiders are able to repurchase shares from
outside investors at lower

stock prices. However, the Commission believes that such impact would
affect a limited number of existing shareholders in the overall market,
since the Commission expects a majority of issuers may not engage in
such activity. In addition, broker-dealers would not be able to publish
a quotation relying on the unsolicited quotation exception on behalf of
insiders of dark OTC issuers, possibly limiting insiders' ability to
engage in these transactions. Furthermore, the Commission believes this
impact is justified by the benefits of deterring fraud and manipulation
and incentivizing greater issuer transparency, and contributing to more
efficient price formation. The requirement for current and publicly
available issuer information for a broker-dealer to rely on the
piggyback exception to maintain a quoted market could also benefit
existing shareholders, including minority shareholders or non-company
insiders, due to more efficient pricing of securities that are less
susceptible to manipulation.
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    \707\ See, e.g., Anbec Partners Letter; Tim Bergin; Lucas
Elliott; Ralf Erz; Braxton Gann; James Gibson; Han Han; William E.
Mitchell; Daniel Raider; Michael E. Reiss; Mark Schepers; Dan Schum;
Michael Tofias; Raymond Webb.
    \708\ Caldwell Sutter Capital Comment; Professor Angel Letter.
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    Lastly, one commenter stated that a lack of quotations may make
certain OTC securities more susceptible to manipulation.\709\ However,
the Commission believes that the lack of a quoted market will be more
likely to curtail trading by retail investors, making such securities
less attractive to perpetrators of fraud.
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    \709\ See Brad Christensen.
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    The Commission estimates that the cost to a catch-all issuer in
connection with preparing and publishing the information required by
the amended Rule may be comparable to the cost of completing and filing
a Form C-AR under Regulation Crowdfunding.\710\ The staff report on
Regulation Crowdfunding cites survey data and estimates related costs
to issuers to be, at most $12,804.\711\ The Commission estimates that
3,008 issuers of quoted OTC securities in 2019 did not provide current
and publicly available information subject to the requirements of
paragraph (b)(5).\712\ These non-transparent OTC issuers could make the
specified information current and publicly available pursuant to the
amended Rule's requirements for catch-all issuers and become eligible
for a quoted market.\713\ Therefore, the Commission estimates that the
maximum annual monetized cost of producing and updating paragraph (b)
information and making it publicly available annually to be $38,514,432
across OTC issuers.\714\ This cost may be mitigated by a number of
factors, including whether some of the cost associated with ensuring
that the paragraph (b) information is publicly available may be borne
by broker-dealers intending to quote the security of this issuer.\715\
In addition, this estimate likely overstates the costs of preparing
information as certain dark OTC issuers currently make financial
information available to their current shareholders either on a
periodic basis or upon request. Other OTC issuers on OTC Market's Pink
Limited Information and Pink No Information tiers prepare financial
information to meet state-level public reporting requirements. Both
sets of issuers would likely face minimal costs associated with the
preparation of paragraph (b) information.
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    \710\ Costs associated with preparing and publishing the
information required by the amended Rule may depend on issuer
characteristics (e.g., age, size, state of incorporation, etc.) and
catch-all issuers of quoted OTC securities may differ from those
subject to Regulation Crowdfunding. The Commission recognizes that
the methodology above may underestimate or overestimate the costs of
preparing and publishing the information for certain catch-all
issuers.
    \711\ See SEC Staff, Report to the Commission: Regulation
Crowdfunding (June 18, 2019), available at https://www.sec.gov/files/regulation-crowdfunding-2019_0.pdf. This report cites survey
data and estimates costs to issuers undertaking a crowdfunding
offering, including accounting costs of $3289, legal costs of $3297,
and certain disclosure costs of $6218. Some of these costs may
include costs unrelated to Form C-AR (such as legal review of
promotional materials). Therefore, the cost cited above serves as an
upper bound for the cost of completing and filing Form C-AR.
    \712\ See supra Part VI.B for an analysis of quoted OTC
securities issuers for which there was no public information in
2019.
    The number of issuer estimates here represents an upper bound on
the number of issuers impacted by this amendment to the Rule for two
reasons. First, certain issuers may be making current information
publicly available (e.g., via the issuer's website or the website of
a state of federal agency), but the issuer's security may still be
quoted on the Pink Limited Information or Pink No Information tiers
on the OTC Markets Platform. See supra note 651. Second, because OTC
Markets Group's alternative reporting standard for catch-all issuers
requires more frequent updating of financial information than this
amendment to the Rule, some of the 1,980 catch-all issuers with OTC
securities that are quoted on the Pink Limited Information or Pink
No Information tiers may actually meet the amended Rule's
requirement for current and publicly available information. In
particular, using data from financial statements of quoted OTC
securities, the Commission estimates that 222 dark catch-all issuers
of quoted OTC securities (approximately seven percent of 3,008 dark
issuers) had publicly available financial information dated within
12 months of their OTC securities being quoted. See supra note 658
for information on the data used.
    \713\ Any delinquent issuers that provide information pursuant
to reporting obligations other than those contained within the
amended Rule would incur costs attributable to those obligations and
not to Rule 15c2-11.
    \714\ $12,804 x 3,008 issuers = $38,514,432. In the Commission's
estimate of the maximum total cost to issuers of providing paragraph
(b) information publicly, the Commission has assumed that all
issuers of quoted OTC securities that do not currently provide
information publicly will choose to do so consistent with the rule
provisions. In addition, the Commission has assumed that these
issuers will update this information annually to maintain
eligibility for quotes in their securities to be initiated or
submitted within an IDQS. It may be the case that some of these
issuers will choose not to provide current and publicly available
paragraph (b) information and quoting in their securities will
cease. In these cases, costs associated with providing paragraph (b)
information for these issuers will be null.
    \715\ For example, it is unclear the extent to which specific
OTC issuers without current and publicly available paragraph (b)
information may already be producing financial information
internally or even have operations producing income and other
accounting items. In these cases, the Commission expects the cost
for these issuers would be less than the Commission's estimate.
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    Broker-dealers will also incur costs related to determining and
documenting whether or not OTC issuers have current and publicly
available paragraph (b) information. The Commission believes that
broker-dealers could set up information systems to assess whether these
conditions apply to OTC securities such that there would be a one-time
cost plus an ongoing cost for each security. The Commission believes
that the hours in all of the following compliance cost estimates will
be borne by internal staff at a rate of $70 per hour.\716\ Consistent
with the PRA section,\717\ the Commission estimates that it would take
a broker-dealer, IDQS, or national securities association one hour to
establish a system to determine whether issuers have current and
publicly available paragraph (b) information as well as to create
associated documentation, for an aggregate cost of $5,740.\718\
Consistent with the PRA section,\719\ the Commission also estimates
that it would take a broker-dealer, IDQS, or national securities
association at most one minute per each OTC issuer to determine and
document whether the issuer has current and publicly available
paragraph (b) information; and that broker-dealers, qualified IDQSs,
and registered national securities associations would create

such documentation no more frequently than quarterly for issuers with
reporting obligations under the federal securities laws, Regulation A
or bank reporting obligations, foreign private issuers,\720\ and
annually for catch-all issuers.\721\ Therefore, the total cost per year
of this determination and documentation would be $37,773 per year.\722\
However, the costs on individual broker-dealers may be substantially
mitigated by permitting broker-dealers to rely on publicly available
determinations by qualified IDQSs and national securities associations
that an issuer has current and publicly available paragraph (b)
information.
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    \716\ The $70 per hour figure for a compliance clerk is based on
SIFMA's ``Office Salaries in the Securities Industry 2013,'' and has
been modified by Commission staff to account for an 1,800-hour work
year and inflation, and multiplied by 2.93 to account for bonuses,
firm size, employee benefits and overhead.
    \717\ See supra Part V.C.2. The one hour burden in the PRA
section includes the establishment of systems to both determine and
document that paragraph (b) information is current and publicly
available.
    \718\ (80 broker-dealers + 1 IDQS + 1 national securities
association) x 1 hour x $70 = $5,740. These costs are an upper bound
of the total costs on broker-dealers because the actual number of
broker-dealers quoting OTC securities may be a subset of the 80
broker-dealers identified by OTC Markets Group.
    \719\ See supra Part V.C.2. The one minute burden in the PRA
section includes the time required to both determine and document
that paragraph (b) information is current and publicly available.
    \720\ For purposes of paragraph (b)(3) of the amended Rule, the
reporting issuer information considered timely filed and made
publicly available would be the issuer's most recent annual report,
together with any periodic or current reports filed thereafter by
the issuer. Paragraph (b)(4) of the amended Rule provides a similar
standard for foreign private issuer information, and calls for the
information the issuer has published pursuant to 12g3-2(b) since the
first day of the issuer's most recently completed fiscal year. The
Commission expects that respondents will preserve records to
document compliance with this requirement on a quarterly basis to
capture quarterly reporting for these issuers. For purposes of this
Economic Analysis, the Commission has adopted a more conservative
approach of grouping Reg. A issuers, which have a semi-annual
obligation, with issuers with quarterly reporting obligations.
    \721\ Paragraph (b)(5) of the amended Rule requires that the
catch-all issuer information be ``current'' and publicly available
annually, except for certain financial information: A balance sheet
(as of a date less than 16 months before the publication or
submission of a broker-dealer's quotation) and profit and loss and
retained earnings statements (for the 12 months preceding the date
of the most recent balance sheet). See supra Part II.B.3.
    \722\ (3081 SEC/Reg. A/Bank Reporting Obligation issuers x 1
minute x 4 responses per year) + (4,413 exempt foreign private
issuers x 1 minute x 4 responses per year) + (2,401 catch-all
issuers x 1 minute x 1 response per year)]/60 x $70 = $37,773.
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    Broker-dealers may also incur costs or accrue benefits from changes
in the liquidity of quoted OTC securities as a result of changes in