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

    While one commenter stated that the term ``publicly available''
correctly excludes websites that have barriers to access
information,\490\ another commenter suggested that the term's
definition be expanded to include receipt, free of charge, via the
internet or upon request by email.\491\ The definition of ``publicly
available'' for purposes of the amended Rule does not include delivery
or receipt, free of charge, via the internet or upon request by
email.\492\ The requirement for publicly available information is
designed to give all investors free,

unfettered access to certain information about an issuer to reduce
information asymmetries that all investors could use to better
understand and evaluate the issuer and the issuer's security before
making an investment decision. The Commission believes, therefore, that
the definition of publicly available should not include transmissions
of information that are made upon request or are not freely available
to all market participants at once.
---------------------------------------------------------------------------

    \490\ Global OTC Letter.
    \491\ Coral Capital Letter; see Mitchell Partners Letter 1
(commenting that some issuers have a policy of sending financial
information to non-shareholders who inquire, which might not be
captured in the definition of ``publicly available'').
    \492\ Nor does the definition under the amended Rule require
availability in a centralized location.
---------------------------------------------------------------------------

    Further, the definition of ``publicly available'' does not require
that an issuer itself make its information available. Instead, the
amended Rule defines the term ``publicly available'' as ``available on
. . . or through'' a specified list of locations so that an investor
could work with a broker-dealer or a qualified IDQS to make an issuer's
information publicly available on the website of a broker-dealer or a
qualified IDQS.\493\
---------------------------------------------------------------------------

    \493\ See Amended Rule 15c2-11(e)(5).
---------------------------------------------------------------------------

    Some commenters suggested that companies make their information
publicly available in an immediately downloadable form, from a
centralized website or on their own website.\494\ While such a measure
could facilitate access to such information, the Commission does not
believe that it is necessary for such a measure to be required in the
amended Rule, given that widespread use of the internet has made it
easier and less burdensome to facilitate access to information in many
different ways and that the definition of ``publicly available''
requires that access to information be unencumbered by user name,
password, fees, or other constraints. Therefore, the Commission is not
requiring under the amended Rule that information be in an immediately
downloadable form, from a centralized website or from an issuer's own
website, for such information to meet the definition of ``publicly
available.'' Such publications would meet the amended Rule's definition
of ``publicly available'' so long as: (1) The website is one of the
enumerated locations in the definition (i.e., EDGAR; the website of a
state or federal agency, a qualified IDQS, a registered national
securities association, an issuer, or a registered broker-dealer; or an
electronic information delivery system that is generally available to
the public in the primary trading market of a foreign private issuer,
as defined in Exchange Act Rule 3b-4); and (2) access to such
centralized website is not restricted by user name, password, fees, or
other restraints.
---------------------------------------------------------------------------

    \494\ Brett Dorendorf; Lake Highlands Comment; Ariel Ozick.
---------------------------------------------------------------------------

    Finally, to ensure the free and wide availability to market
participants and investors, including retail investors, of publicly
available determinations by any qualified IDQSs or registered national
securities association regarding the public availability of current
paragraph (b) information and the applicability of certain of the
amended Rule's exceptions,\495\ the Commission is expanding the
proposed requirement that access to paragraph (b) information must not
be restricted by user name, password, fees, or other restraints.\496\
Rather, access to any specified location under the amended Rule's
definition of ``publicly available'' must not be restricted by user
name, password, fees, or other restraints. In this regard, access to a
publicly available determination of a qualified IDQS or a registered
national securities association, such as, for example, that the
piggyback exception applies or a subsequent determination that an
issuer's information is no longer current and publicly available, also
must not be restricted by user name, password, fees, or other
restraints.
---------------------------------------------------------------------------

    \495\ See, e.g., supra Part II.D.6.
    \496\ See Proposed Rule 15c2-11(e)(4).
---------------------------------------------------------------------------

4. Qualified Interdealer Quotation System--Rule 15c2-11(e)(6)
    The Commission has determined to adopt the definition of a
qualified IDQS as proposed, with technical revisions.\497\
Specifically, paragraph (e)(6) of the amended Rule defines a
``qualified interdealer quotation system'' to mean any interdealer
quotation system that meets the definition of an ATS under Rule 300(a)
of Regulation ATS and operates pursuant to the exemption from the
definition of an ``exchange'' under Rule 3a1-1(a)(2) of the Exchange
Act.
---------------------------------------------------------------------------

    \497\ The Commission is making a non-substantive change to
replace references to Regulation ATS and Exchange Act Rule 3a1-
1(a)(2) in the proposed Rule with their Code of Federal Regulations
cites. This technical edit does not change the meaning or operation
of the term ``qualified interdealer quotation system'' in the
amended Rule. Finally, the Commission is adopting a technical
amendment to define the term ``qualified interdealer quotation
system'' in paragraph (e)(6) of the amended Rule in light of the
addition of the definition for the term ``company insider'' in
paragraph (e)(1) of the amended Rule.
---------------------------------------------------------------------------

    The Commission sought comment regarding the proposal to define a
``qualified interdealer quotation system'' as any IDQS that meets the
definition of an ATS, as defined under Rule 300(a) of Regulation ATS,
and operates pursuant to the exemption from the definition of an
``exchange'' under Rule 3a1-1(a)(2) of the Exchange Act.\498\ Although
the Commission received comment on other aspects of the proposed Rule
regarding certain activities of qualified IDQSs,\499\ the Commission
received no comment on the proposed definition of a qualified IDQS. The
Commission continues to believe that the regulatory requirements for an
IDQS that operates as an ATS under the Exchange Act--and the
concomitant SRO and Commission oversight of this type of entity--would
help to ensure investor protection and to prevent fraud and
manipulation for the reasons discussed in the Proposing Release.\500\
---------------------------------------------------------------------------

    \498\ See Proposed Rule 15c2-11(e)(5).
    \499\ See, e.g., supra Part II.A.2 (discussing the requirements
for a qualified IDQS to comply with the information review
requirement).
    \500\ See Proposing Release at 58236-37. For example, the
requirements of Regulation ATS would provide the Commission with
relevant information about the IDQS function of the qualified ATS
and quoting and trading activity in the ATS, and therefore
contribute to Commission oversight of an ATS that may choose to
operate as a qualified IDQS. The amendments do not change the
definition of an alternative trading system under Rule 300(a) for
Regulation ATS or the conditions to the ATS exemption provided under
Exchange Act Rule 3a1-1(a)(2).
---------------------------------------------------------------------------

5. Company Insider--Rule 15c2-11(e)(1)
    The Commission has determined to add a definition of the term
``company insider.'' Specifically, paragraph (e)(1) of the amended Rule
defines the term ``company insider'' to mean any officer or director of
the issuer, or person that performs a similar function, or any person
who is, directly or indirectly, the beneficial owner of more than 10
percent of the outstanding units or shares of any class of any equity
security of the issuer.\501\ As discussed below, this definition is
consistent with the list of persons in the proposed rule text and with
how the term ``company insider'' was used in the Proposing
Release.\502\
---------------------------------------------------------------------------

    \501\ Amended Rule 15c2-11(e)(1).
    \502\ See Proposing Release at 58208 n.9.
---------------------------------------------------------------------------

    The Commission sought comment regarding whether the Rule should
include the defined term ``company insiders'' to describe the list of
persons specified in paragraphs describing the requirements for certain
catch-all issuer information (i.e., paragraph (b)(5)(i)(K)),
supplemental information (i.e., paragraph (c)(1)), and the unsolicited
quotation exception (i.e., paragraph (f)(2)(ii)) and whether such a
definition should include any other additional persons.\503\ Although
the Commission received no comment specifically on the proposed
definition of ``company insider,'' commenters suggested generally that
the Rule's investor protections could be enhanced by increasing the
amount of current and

publicly available information regarding insiders and affiliates of
issuers.\504\ In addition, one commenter suggested that the Commission
recognize that the financial decisions of lower level officers who do
not manage the company are largely based on personal financial
considerations, not on material non-public information.\505\
---------------------------------------------------------------------------

    \503\ See Proposing Release at 58237.
    \504\ See, e.g., OTC Markets Group Letter 2.
    \505\ See Computer Services Letter.
---------------------------------------------------------------------------

    Under the amended Rule, this definition applies to the same list of
persons that were individually described in paragraphs (b)(5)(i)(K),
(c)(1), and (f)(2) of the proposed Rule while also applying to any
person that performs a similar function to that of an officer or
director. Though this definition does not explicitly include the terms
``chief executive officer'' and ``member of the board of directors,''
the definition nevertheless applies to such person so long as he or she
is an officer, director, or person that performs a similar
function.\506\ The Commission believes the definition of the term
``company insider'' in the amended Rule appropriately captures persons
who manage a company or have a greater degree of access to issuer
information and who may have a heightened incentive to engage in
fraudulent or manipulative conduct.
---------------------------------------------------------------------------

    \506\ See Amended Rule 15c2-11(e)(1).
---------------------------------------------------------------------------

K. Removal of Outdated Provisions

    The Commission is rescinding the Nasdaq security exception, as
proposed, because the Nasdaq security exception is obsolete in light of
Nasdaq's registration as a national securities exchange.\507\ The
publication or submission of quotations by a broker-dealer of
securities that are traded on a national securities exchange is already
excepted from a broker-dealer's compliance with the information review
requirement by paragraph (f)(1) of the amended Rule.
---------------------------------------------------------------------------

    \507\ The Commission received one comment in support of removing
obsolete provisions from the Rule. Virtu Letter.
---------------------------------------------------------------------------

    The Commission is also rescinding the requirement in former Rule
15c2-11(d)(1) that a broker-dealer that submits a quotation for the
security of a catch-all issuer furnish to the IDQS, at least three
business days before the quotation is published or submitted, the
documents and information that the broker-dealer is required to
maintain pursuant to paragraph (a)(5) of the former Rule. This
requirement is unnecessary in light of the amendments to the
recordkeeping requirement, which require that the applicable documents
and information be preserved for a period of not less than three years,
the first two years in an easily accessible place,\508\ that help to
facilitate the Commission's oversight of broker-dealers that publish
quotations after complying with the information review requirement
themselves, by relying on a qualified IDQS's publicly available
determination that it complied with the information review requirement,
or by relying on certain of the amended Rule's exceptions.\509\
Accordingly, it is redundant to require broker-dealers both to submit
information to an IDQS and to comply with the amended Rule's
recordkeeping requirement. The Commission received no comment on this
aspect of the proposal.
---------------------------------------------------------------------------

    \508\ See Amended Rule 15c2-11(d)(1), (2).
    \509\ See supra Part II.I.
---------------------------------------------------------------------------

    In addition, the Commission is rescinding the provision in the Rule
that allowed a broker-dealer to comply with the requirement to obtain
annual, quarterly, and current reports filed by the issuer where the
broker-dealer has made arrangements to receive such reports when they
are filed by the issuer and has regularly received reports from the
issuer on a timely basis. As the Commission explained above and in the
Proposing Release, this requirement is outdated because such reports
can be obtained by broker-dealers through EDGAR.\510\ No commenters
opposed the rescission of this requirement.
---------------------------------------------------------------------------

    \510\ See supra Part II.B.1; Proposing Release at 58237.
---------------------------------------------------------------------------

    Finally, the Commission is removing the ``Preliminary Note'' from
the Rule and including new guidance to accompany the Rule. The
Commission solicited comment on whether the Preliminary Note should be
retained in its current form, in the form of guidance as proposed, or
in a different form. The Commission received one comment in support of
removing obsolete provisions from the Rule \511\ and, for the reasons
discussed in the Proposing Release, is removing the Preliminary Note
from the Rule and, instead, is including new guidance to accompany the
amended Rule.\512\ This guidance is discussed in Part II.O below.
---------------------------------------------------------------------------

    \511\ Virtu Letter.
    \512\ As the Commission explained in the Proposing Release, if
the Commission were to include new guidance to accompany the Rule,
the guidance provided in the 1991 Adopting Release and referenced in
the Preliminary Note to the Rule would be superseded. Proposing
Release at 58239.
---------------------------------------------------------------------------

L. Exemptive Authority--Rule 15c2-11(g)

    The Commission is amending paragraph (g) to conform the standard
for the amended Rule's exemptive authority to the provision for
exemptive authority in Section 36 of the Exchange Act because the
Commission believes that the appropriate standard for granting an
exemption from Rule 15c2-11 should mirror the statutory standard.
Specifically, paragraph (g) of the amended Rule provides that the
Commission may grant, conditionally or unconditionally, an exemption
from the Rule to the extent such exemption ``is necessary or
appropriate in the public interest, and is consistent with the
protection of investors.'' As discussed in the Proposing Release,
Section 36 was enacted after the most recent substantive amendments to
this Rule were adopted.\513\ The Commission sought comment on this
aspect of the proposal and received no comment.
---------------------------------------------------------------------------

    \513\ See Proposing Release at 58238.
---------------------------------------------------------------------------

M. Technical Amendments

    As discussed above in Parts II.A through II.K, and for the reasons
discussed in the Proposing Release, the Commission is adopting non-
substantive technical amendments to the Rule's text. The Commission
solicited comment on the proposed technical amendments, including
whether any additional technical amendments would be appropriate and
whether any of the Rule's text should be revised to improve the Rule's
effectiveness and clarity. The Commission received one comment in
support of streamlining the Rule and making technical, non-substantive
changes \514\ and is adopting the technical amendments as proposed in
light of other amendments to the Rule.
---------------------------------------------------------------------------

    \514\ Virtu Letter.
---------------------------------------------------------------------------

    Specifically, because the Commission is separating the review
requirement from the Rule's specified information provisions, the
Commission is re-lettering the Rule's provisions and making conforming
edits to all cross-references within the Rule to reflect the re-
lettering. The Commission is also alphabetizing defined terms under the
Rule's definitional section and re-lettering the Rule's definitional
provisions.
    In addition, the Commission is adopting grammatical edits to the
Rule. For example, the Commission is (1) amending the Rule's definition
of ``quotation'' in paragraph (e)(7) by replacing the word ``he'' with
``its,'' (2) replacing the word ``which'' with the word ``that'' where
appropriate, (3) adding and deleting commas in paragraph (b)(5)(i)(P)
to provide clarity, (4) fixing typographical errors, (5) replacing the
phrase ``required by'' with the phrase ``specified in'' with respect to
paragraph (b) information, and (6)

replacing the word ``specific'' with the word ``specified'' in the
Rule's title. In addition, the Commission is spelling out all numbers
that are less than 10.
    Further, the Commission is adopting amendments to aid in the Rule's
readability. For example, the Commission is amending the Rule by adding
headings before certain of the Rule's provisions and by addressing
instances of inconsistent letter capitalization (e.g., by ensuring that
all phrases such as ``Provided, however, that'' are written
consistently throughout the Rule). In addition, the Commission is
adding the term ``that is'' in paragraph (f)(1) when referring to a
security that is admitted to trading on a national securities exchange.
The Commission also is adopting amendments to replace the word
``shall'' with ``must'' where appropriate (e.g., paragraph (b)(5),
addressing catch-all issuer information), and is replacing the word
``respecting'' with the word ``for'' (e.g., paragraph (f)(3), in the
provisions of the piggyback exception).\515\ To be consistent with
other rules under the Exchange Act, the Commission is replacing (1) any
references to the Financial Industry Regulatory Authority, Inc. with a
reference to a registered national securities association and (2)
adding CFR citations where appropriate (e.g., replacing the words
``under the Securities Act'' in the paragraph pertaining to Reg. A
issuers with ``(Sec. Sec.  230.251 through 230.263 of this chapter)''
to reflect a reference to the CFR cite to Regulation A). In this
regard, to align the amended Rule with Regulation A, the Commission is
also adopting amendments in paragraph (b)(2) to replace the phrases (1)
``authorized to commence the offering'' with the word ``qualified,''
and (2) ``offering circular provided for under'' with the phrase
``exemption, with respect to such issuer,'' after the reference to
Regulation A that existed in the former Rule. Similarly, to align the
amended Rule with Exchange Act Rule 12g3-2(b), the Commission is
adopting technical amendments to (1) replace the word ``beginning''
with the words ``first day'' and the word ``last'' with the phrase
``most recently completed fiscal year,'' (2) add the phrase ``as
required to establish the exemption from registration under section
12(g) of the [Exchange] Act,'' and (3) delete the word ``reasonably''
before the phrase ``available at the request.'' In addition, the
Commission is adding the phrase ``of the broker or dealer'' in
paragraph (b)(5)(i)(N) to clarify that the specified information refers
to any associated person of the broker-dealer. Also, the Commission is
adopting conforming changes to begin each paragraph of paragraph (b) in
the same manner to be consistent in listing the issuer information that
the Rule requires. Further, the Commission is also adding the words
``under the circumstances'' to paragraph (b)(5)(ii) so that the
standard for source reliability of catch-all issuer information is the
same standard that is stated for the accuracy of catch-all issuer
information. The Commission is also making a technical amendment to the
definition of ``quotation'' so that it is provided in the same style as
the amended Rule's other definitions.
---------------------------------------------------------------------------

    \515\ While the proposed Rule would have used the word
``concerning,'' the amended Rule uses the word ``for'' when
describing publications or submissions of quotations to be
consistent with the rule text in paragraph (a). In addition, the
amended Rule uses the word ``regarding'' instead of the word
``concerning,'' as proposed, when describing an issuer or its
documents and information.
---------------------------------------------------------------------------

    The Commission also is adopting amendments to streamline and
clarify the Rule's text. For example, the Commission is replacing the
phrase ``a record of the circumstance involved in'' with the phrase
``records related to'' in paragraph (c)(1). The Commission also is
replacing ``customer's indication of interest and does not involve the
solicitation of the customer's interest'' in paragraph (f)(2) with
``customer's unsolicited indication of interest'' in paragraph (f)(2).
The Commission is also replacing the list of ``any director, officer or
any person, directly or indirectly the beneficial owner of more than 10
percent of the outstanding units or shares of any equity security of
the issuer'' with the newly defined term ``company insider.'' Finally,
the Commission is deleting the word ``exact'' from paragraphs (a)(5)(i)
and (iv) of the former Rule and replacing the phrase ``the nature''
with the phrase ``a description'' in paragraphs (a)(5)(viii), (ix), and
(x).
    The Commission also is adopting amendments to avoid redundancy in
the Rule's text. For example, the Commission is removing from the Rule
all instances of the phrase ``as defined in this section'' because the
text of the Rule's definitional section, paragraph (f), makes it
sufficiently clear that all instances where a particular defined term
is mentioned are for the purposes of the Rule, unless as otherwise
specified. In addition, the Commission is deleting the word ``said''
from the former Rule's paragraph (d)(1) because the words ``of this
section'' also appear in the text of the Rule. The Commission is also
deleting the phrase ``the issuer's most recent'' from the phrase ``a
copy of the issuer's most recent'' in paragraph (b)(3) and also
replacing ``[i]ssuer's most recent'' with the word ``[a]n'' in the
beginning of paragraphs (b)(3)(i) through (iv) to avoid a redundancy.
    Finally, the Commission is adopting amendments to paragraph (b)(2)
of the amended Rule to align with Regulation A, which requires that all
issuers who conduct offerings pursuant to Regulation A electronically
file an offering statement on Form 1-A, on EDGAR.\516\ The amended Rule
references the offering circular for the issuer's security, the
description of an issuer's filing under Regulation A is updated to more
closely reflect Regulation A's requirement for an issuer that conducts
an offering pursuant to Regulation A to electronically file an offering
statement (as opposed to an offering notification) on EDGAR.\517\
Further, paragraph (b)(2) of the amended Rule also reflects, consistent
with Regulation A, that issuers are only permitted to begin selling
securities pursuant to Regulation A once the offering statement has
been qualified by the Commission.\518\
---------------------------------------------------------------------------

    \516\ Technical edits from the proposal include the deleting
words ``under the Securities Act'' and adding Code of Federal
Regulations (the ``CFR'') citations. In addition, the amended Rule
includes technical edits from the proposed Rule to be consistent
with Regulation A. For example, technical edits in this regard
include changing the phrase ``a notification'' to ``an offering
statement;'' changing text regarding commencing to ``qualified;''
and replacing the words ``offering circular provided for under''
with a reference to the Regulation A exemption with respect to the
issuer. Lastly, technical edits have been made to delete the word
``the'' before the word ``subject;'' and replacing the word ``of''
with the word ``to.'' See Amended Rule 15c2-11(b)(2). The Commission
did not receive comment on the proposed amendments to paragraph
(b)(2).
    \517\ Rule 251(f) of Regulation A.
    \518\ Rule 251(d)(2) of Regulation A.
---------------------------------------------------------------------------

N. Conforming Rule Change--Rule 144(c)(2)

    The Commission proposed to make conforming amendments to Rule
144(c)(2) \519\ in light of the proposal to re-letter the provision
addressing catch-all issuer information in paragraph (b)(5) of the
proposed Rule. The Commission did not receive any comment on this
aspect of the proposal. In light of the amendments adopted, the
Commission is making conforming amendments to cross-references in the
provisions of Rule 144(c)(2) that cite to Rule 15c2-11(a)(5).
Specifically, the Commission is amending Rule 144(c)(2) to cross-
reference Rule 15c2-11(b)(5)(i)(A) to (N) and Rule 15c2-11(b)(5)(i)(P),
and the Commission is removing the cross-references to Rule 15c2-
11(a)(5)(i) to (xiv) and Rule 15c2-11(a)(5)(xvi).
---------------------------------------------------------------------------

    \519\ Securities Act Rule 144(c)(2).

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

O. Guidance

    As discussed above, the Commission is removing the Preliminary Note
from the former Rule and adopting as proposed the guidance that appears
below. This guidance is based on the 1991 Adopting Release (the ``1991
Guidance'') and the Appendix in the 1999 Reproposing Release (the
``1999 Appendix'').\520\ The guidance includes targeted updates to: (1)
The discussions related to source reliability and the information
review requirement that were included in the 1991 Guidance,\521\ and
(2) the examples of red flags that were included in the 1999
Appendix.\522\ In addition, the guidance below discusses the
obligations of broker-dealers and qualified IDQSs in considering
supplemental information as part of complying with the information
review requirement. The guidance below supersedes the 1991 Guidance
that was referenced in the Preliminary Note.
---------------------------------------------------------------------------

    \520\ The Commission took no further action on the guidance
included in the 1999 Appendix in the 1999 Reproposing Release.
    \521\ Proposing Release at 58239.
    \522\ 1999 Reproposing Release at 11145. The 1999 Appendix
supplemented the guidance from the 1991 Adopting Release, which was
incorporated into the Rule through the Preliminary Note, by
providing additional guidance on, among other things, ``red flags''
regarding the issuer that broker-dealers should consider as part of
complying with the information review requirement. See id. at 11145.
The Commission had proposed in the Proposing Release to update the
1991 Guidance. See Proposing Release at 58239.
---------------------------------------------------------------------------

    The Commission solicited comment on the guidance, including whether
the 1999 Appendix should be incorporated into the new guidance. The
1999 Appendix provided guidance to broker-dealers on the scope of the
review required by the Rule and offered examples of red flags that
broker-dealers should look for when reviewing issuer information.
Commenters suggested that the Commission provide updated guidance to
the industry on the process involved in complying with the Rule's
information review requirement, particularly with respect to any ``red
flags'' regarding an issuer or its securities.\523\ One commenter
stated that broker-dealers' compliance with the provisions of the
amended Rule involves the exploration of any red flags that may arise
with respect to an issuer or security.\524\ For example, one commenter
stated that pump-and-dump schemes occur where companies in ``hot''
sectors use constant streams of press releases and promotional
announcements, implying large quick profits to create a fear of missing
out in order to appeal to unsophisticated investors.\525\ Another
commenter suggested that ``additional regulatory guidance is necessary
to give effect to the proposed Rule.'' \526\
---------------------------------------------------------------------------

    \523\ See Coral Capital Letter; FINRA Letter; OTC Markets Group
Letter 1.
    \524\ FINRA Letter. FINRA stated that both it and the industry
rely on the 28 examples of red flags that the Commission provided in
the 1999 Appendix. Further, FINRA stated that broker-dealers being
alert to possible red flags during the review process is an
important component to achieving the investor protection and market
integrity benefits for which the Rule is designed. In particular,
FINRA stated its view about the continued importance of several of
the red flags examples to firms' reviews, including regarding
concentration of ownership, the presence of unusual auditing issues,
suspicious documents, and large reverse stock splits. FINRA stated
that, while some of the red flag examples may be less prevalent
today than others, it believes that the Commission should
incorporate all of the red flag examples into the adopted guidance.
Id.
    \525\ Caldwell Sutter Capital Comment.
    \526\ Anthony Letter.
---------------------------------------------------------------------------

    The Commission has determined to include the guidance,
substantially as proposed, with a modification to include and update
the red flags examples that were included in the 1999 Appendix. With
one exception, the Commission continues to believe that all of the red
flag examples from the 1999 Appendix, as updated, remain valid. The
exception appeared in the section entitled, ``Offerings under Rule 504
of Regulation D where [certain] factors are present.'' \527\ There have
been amendments to Rule 504 of Regulation D and changes in the OTC
market regarding use of that exemption since the list was last
updated.\528\ As a result, the Commission no longer believes that
including an example to highlight certain fact patterns only in the
context of Rule 504 of Regulation D would be useful for broker-dealers
or qualified IDQSs in identifying the particular types of circumstances
that require additional scrutiny in complying with the information
review requirement.
---------------------------------------------------------------------------

    \527\ See 1999 Reproposing Release at 11150 (describing the
example of a Rule 504 offering that is preceded by an unregistered
offering to insiders or others for services rendered at prices well
below the price in the subsequent offering).
    \528\ See, e.g., Exemptions to Facilitate Intrastate and
Regional Securities Offerings, Securities Act Release No. 10238
(Oct. 26, 2016), 81 FR 83494 (Nov. 21, 2016).
---------------------------------------------------------------------------

1. Introduction
    Broker-dealers and qualified IDQSs complying with the information
review requirement under the amended Rule must have a reasonable basis
under the circumstances for believing, based on a review of paragraph
(b) information, together with any supplemental information required by
paragraph (c), that: (1) The paragraph (b) information is accurate in
all material respects, and (2) the sources of the paragraph (b)
information are reliable.\529\ Accordingly, the Commission is providing
the following basic principles to guide broker-dealers and qualified
IDQSs in complying with the information review requirement.
---------------------------------------------------------------------------

    \529\ Amended Rule 15c2-11(a)(1)(i)(C), (a)(2)(iii).
---------------------------------------------------------------------------

2. Source Reliability
    The amended Rule requires that the broker-dealer or qualified IDQS
must have a reasonable basis for believing that any source of the
paragraph (b) information is reliable. In the absence of any red flag
(e.g., information that, under the circumstances, reasonably indicates
that the source is unreliable), a broker-dealer or qualified IDQS could
satisfy the amended Rule's requirement regarding the reliability of the
information source if that information were provided by the issuer of
the security or its agents, including its officers and directors,
attorneys, or accountants, or was obtained from an independent
information service, a document retrieval service, or standard research
sources, such as reputable and commonly used internet websites used to
research information related to securities issuers.
    Occasionally, a broker-dealer or qualified IDQS may receive
information specified in paragraph (b) and required by paragraph (c) of
the amended Rule about an issuer from someone other than another
broker-dealer, the issuer or its agents, or an independent information
service. In such situations, while the broker-dealer or qualified IDQS
might be aware of the identity of the immediate source of the specified
information, it might not have any knowledge about the person that
compiled such information. However, to comply with the amended Rule's
requirement regarding source reliability, the broker-dealer or
qualified IDQS is required to ascertain the reliability of the sources
of the information. In this regard, when the immediate source
represents that the information was compiled by the issuer, the broker-
dealer generally should verify that representation by contacting the
issuer directly.
    If, however, the broker-dealer or qualified IDQS receives the
information from an independent and objective source representing that
it received the information directly from the issuer, the broker-dealer
or qualified IDQS could rely on that representation absent
countervailing information. When a red flag regarding the source's
reliability exists, the broker-dealer or qualified IDQS should conduct
the inquiry called for under the circumstances to

reasonably assess whether the source of the information is reliable.
3. Information Review Requirement
    Once the broker-dealer or qualified IDQS has a reasonable belief as
to the source's reliability, it should examine the materials in its
records to make certain that all of the specified information has been
obtained. Next, the broker-dealer or qualified IDQS should review the
paragraph (b) information in the context of all other information,
including supplemental information under paragraph (c), about the
issuer that has come to its knowledge or is in its possession.
Ordinarily, the broker-dealer or qualified IDQS need not take any
further steps (e.g., look behind the financial statements or
affirmatively seek out information about the issuer beyond that
specifically required by the amended Rule). However, the broker-dealer,
consistent with paragraphs (a)(1)(i)(C)(1) and (2), or qualified IDQS,
consistent with paragraphs (a)(2)(iii)(A) and (B), should be alert to
any red flags (i.e., information under the circumstances that
reasonably indicates that one or more of the required items of
information may be materially inaccurate or from an unreliable source).
Red flags would be indicated, for example, by material inconsistencies
in the paragraph (b) information or material inconsistencies between
that information and other information that comes to the knowledge or
possession of the broker-dealer or qualified IDQS. In the absence of
red flags during the review of such information, a broker-dealer or
qualified IDQS does not have an obligation to make further inquiries to
determine whether it has a reasonable basis to believe that the issuer
information is accurate.
    Where no red flags appear during this review process, the broker-
dealer or qualified IDQS could have a reasonable basis for believing
that the information is accurate. If red flags appear, the broker-
dealer or qualified IDQS could attempt to reasonably address any red
flags or decide not to publish or submit a quotation for the issuer's
security. In such case, the specific efforts by the broker-dealer or
qualified IDQS to satisfy the reasonable basis standard with respect to
the accuracy of the information and the reliability of sources can vary
with the circumstances and may require the broker-dealer or qualified
IDQS to obtain additional information or seek to verify the accuracy of
existing information. For example, the broker-dealer or qualified IDQS
may have a reasonable basis to believe that the information is accurate
in all material respects after questioning the issuer directly. When
red flags are present such that they bring into question the
reliability of an issuer or its officers and directors, attorneys, or
accountants, as a source of information, the broker-dealer or qualified
IDQS may need to consult independent sources, such as an attorney or
accountant.
    As discussed above, the amended Rule requires that a broker-dealer
or qualified IDQS have a reasonable basis under the circumstances for
believing that paragraph (b) information, in light of any other
documents and information required by the amended Rule, such as
paragraph (c) information, is accurate in all material respects.
However, the amended Rule does not require that, before submitting or
publishing quotations for a security, a broker-dealer or qualified IDQS
conduct an independent ``due diligence'' investigation regarding the
issuer or its business operations and financial condition such as the
investigation expected to be conducted by an underwriter. A broker-
dealer or qualified IDQS publishing quotations may have no relationship
with or access to the issuer of the security. The amended Rule does not
require that the broker-dealer or qualified IDQS develop such a
relationship to obtain information about the issuer. Rather, as
described above, the amended Rule specifies the information that must
be gathered, and the information review requirement would be satisfied
if the broker-dealer or qualified IDQS had a reasonable basis for
believing that the information is accurate in all material respects and
obtained from a reliable source, after reviewing that information.
    In short, a reasonable basis for belief in the accuracy of the
paragraph (b) information can be founded solely on a careful review of
the paragraph (b) information together with paragraph (c) information,
provided that the paragraph (b) information was obtained from sources
reasonably believed to be reliable and there are no red flags. When red
flags are initially present, the broker-dealer or qualified IDQS may,
upon inquiry, obtain additional information that provides a reasonable
basis for believing that the information is accurate in all material
respects and that the sources are reliable.
4. Examples of Red Flags
    The Commission is providing examples of red flags where the broker-
dealer or qualified IDQS may want to apply additional scrutiny. These
examples, however, are not exhaustive. Conversely, the presence of
these or other red flags is not necessarily an indication of fraud or
inaccurate information; it simply means that the broker-dealer or
qualified IDQS should consider questioning whether the issuer
information is accurate, and in certain cases, from a reliable source.
The more red flags that are present, the more a broker-dealer or
qualified IDQS may want to scrutinize the issuer information.
    a. Commission and Foreign Trading Suspensions. Trading suspensions,
including foreign trading suspensions, generally raise significant red
flags as to whether the issuer's information is accurate and whether
the sources of such information are reliable. Once a trading suspension
terminates, and before a broker-dealer can publish a quote, a broker-
dealer or qualified IDQS must comply with the information review
requirement if it cannot rely on an exception to the Rule. While
conducting its information review under the amended Rule following a
trading suspension, a broker-dealer or qualified IDQS may want to
attempt to determine the basis for the suspension order and assess
whether the issuer information that is current and publicly available
following the trading suspension is accurate and whether its source is
reliable. Such review may include seeking verification from the issuer
or soliciting the views of an independent professional.
    b. Concentration of ownership of the majority of outstanding,
freely tradeable stock. Concentration of ownership of freely tradeable
securities is a prominent feature of microcap fraud cases. When one
person or group controls the flow of freely tradeable securities, this
person or persons can have a much greater ability to manipulate the
stock's price than when the securities are widely held.
    c. Large reverse stock splits. Fraudulent and manipulative activity
in OTC securities can involve the substantial concentration of the
publicly traded float through a reverse stock split. The subsequent
issuance of large amounts of stock to insiders increases their control
over both the issuer and trading of the stock.
    d. Companies in which assets are large and revenue is minimal
without any explanation. A red flag exists when the issuer assigns a
high value on its financial statements to certain assets, often assets
that are unrelated to the company's business and were recently acquired
in a non-cash transaction. While assets that are unrelated to the
business of the issuer are not always an indication of potential fraud,
some unscrupulous issuers have overvalued these types of assets in an
effort to

inflate their balance sheet. In such situations, the company's revenues
often are minimal and there appears to be no valid explanation for such
large assets and minimal revenues. Also, a red flag is present when the
financial statements of a development stage issuer list as the
principal component of the issuer's net worth an asset wholly unrelated
to the issuer's line of business.
    e. Shell company's acquisition of private company or other material
business development. Shell companies have been used as vehicles for
fraud in a number of different fact patterns and schemes.\530\ The
piggyback exception under the amended Rule prohibits broker-dealers
from relying on the piggyback exception for shell companies after a
certain period.\531\ The Commission remains concerned about the
potential that a continuously quoted market could be used to entice
investors to make an investment decision based on what appears to be an
active and independent market when, in fact, the investor may be
considering the security price of the shell company that increased due
to inaccurate and misleading promotional information.\532\ A broker-
dealer should be mindful of the potential for abuse when reviewing
issuer information where a shell company is involved, in particular if
the shell company has acquired a privately held company or has
undergone other material business developments (including, but not
limited to, declarations of bankruptcy, re-organizations and mergers).
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    \530\ See, e.g., Proposing Release at 58222-23 (discussing fact
patterns in which shell companies have been used to defraud
investors). See Amended Rule 15c2-11(e)(9) for a definition of the
term ``shell company.''
    \531\ See Amended Rule 15c2-11(f)(3)(i)(B).
    \532\ See Proposing Release at 58222-23.
---------------------------------------------------------------------------

    f. A registered or unregistered offering raises proceeds that are
used to repay a bridge loan made or arranged by the underwriter where:
(1) The bridge loan was made at a high interest rate for a short
period; (2) the underwriter received securities at below-market rates
prior to the offering; and (3) the issuer has no apparent business
purpose for the bridge loan.
    g. Significant write-up of assets upon a company obtaining a patent
or trademark for a product. The significant write-up of assets once an
issuer obtains a patent or trademark for a product may be a technique
used by issuers engaged in fraud to inflate their balance sheets.
    h. Significant assets consist of substantial amounts of shares in
other OTC companies. Some fraudulent activity may involve issuers whose
major assets are substantial amounts of shares in other OTC companies.
    i. Assets acquired for shares of stock when the stock has no market
value. The issuer's financial statements often can indicate that the
issuer acquired assets to which it assigned substantial value in
exchange for its essentially worthless stock.
    j. Unusual auditing issues. Examples of this include auditors who
refuse to certify financial statements or who issue audited reports
containing a qualified opinion, where there has been an unexplained
change of accountants, or an accountant has resigned or been dismissed.
Rule 15c2-11 does not contemplate that a broker-dealer or qualified
IDQS will scrutinize the issuer's financial statements with the
expertise of an accountant. If, however, a broker-dealer or qualified
IDQS sees any of these examples of red flags, it may wish to confirm
the auditor's credentials with the appropriate state licensing
authority, question the circumstances of the change in accountants, and
carefully scrutinize the Rule's specified information.
    k. Significant write-up of assets in a business combination of
entities under common control or extraordinary items in notes to the
financial statements. Unusual related party transactions are sometimes
found in fraud schemes and may be used to write up the value of an
issuer's assets after a merger between the related parties.
    l. Suspicious documents. Examples can include inconsistent
financial statements, altered financial statements, and altered
certificates of incorporation. Issuer information that is altered on
its face raises red flags that, at a minimum, could lead a broker-
dealer or qualified IDQS to determine it does not have a reasonable
basis to believe the issuer's information is accurate.
    m. A broker-dealer or qualified IDQS receives substantially similar
offering documents from different issuers with certain characteristics.
Such characteristics include: The same attorney is involved; the same
officers and directors are listed; or the same shareholders are listed.
If a broker-dealer or qualified IDQS realizes, after reviewing the
information for several issuers, that the same individuals are involved
with these entities, the broker-dealer or qualified IDQS should
consider inquiring further to determine whether it has a reasonable
basis to believe that the issuer information is accurate.
    n. Extraordinary gains in year-to-year operations. Such gains may
be achieved through assigning an artificially high value to certain
assets or through other manipulative devices that are red flags, such
as the significant write-up of assets upon merger or acquisition.
    o. Reporting company fails to file an annual report. A reporting
company's failure to file an annual report suggests that there is a
potential problem with the company.
    p. Disciplinary actions against an issuer's officers, directors,
general partners, promoters, auditors, or control persons. The
following types of disciplinary actions raise red flags: An indictment
or conviction in a criminal proceeding; an order permanently or
temporarily enjoining, barring, suspending or otherwise limiting an
officer, director, general partner, promoter, auditor, or control
person's involvement in any type of business, securities, commodities,
or banking activities; an adjudication by civil court of competent
jurisdiction, the Commission, the Commodity Futures Trading Commission
or a state securities regulator of a violation of federal or state
securities or commodities law; or an order by a SRO permanently or
temporarily barring, suspending or otherwise limiting involvement in
any type of business or securities activities.
    q. Significant events involving an issuer or its predecessor, or
any of its majority owned subsidiaries. The following types of
significant events raise red flags: Change in control of the issuer;
substantial increase in equity securities; merger, acquisition, or
business combination; acquisition or disposition of significant assets;
bankruptcy proceedings; or delisting from any securities exchange.
These are all examples of significant events involving the issuer,
though they are not per se examples that reflect fraud and
manipulation. However, certain events--a change in control of the
issuer; merger, acquisition, or business combination; or acquisition or
disposition of significant assets--can provide unscrupulous issuers an
opportunity to artificially overvalue the issuer's assets to support an
upward manipulation of the issuer's stock. An increase in the number of
an issuer's equity securities provides the securities necessary for
such manipulation. Bankruptcy proceedings or delisting from an exchange
may also indicate facts surrounding an issuer that could lead a broker-
dealer or qualified IDQS to conclude that it does not have a reasonable
basis to believe that the issuer's financial information is accurate.
    r. Request to publish both bid and offer quotes on behalf of a
customer for the same stock. The highly unusual request from a customer
for the broker-

dealer to publish both bid and offer quotes is a red flag that may
indicate manipulative trading (e.g., wash trades) and may call for
appropriate inquiry on the part of a broker-dealer or qualified IDQS.
    s. Issuer or promoter offers to pay a fee. If a broker-dealer
receives an offer from an issuer, any affiliate or promoter thereof, to
pay a fee in connection with making a market in the issuer's security,
this is both a red flag and a potential FINRA rule violation.
Specifically, it is a violation of FINRA Rule 5250 for a broker-dealer
or any person associated with a broker-dealer to accept any payment or
other consideration, directly or indirectly, from an issuer of a
security, or any affiliate or promoter thereof, for publishing a
quotation, acting as market maker in a security, or submitting an
application in connection therewith.\533\
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    \533\ See FINRA Rule 5250, available at https://www.finra.org/rules-guidance/rulebooks/finra-rules/5250. FINRA Rule 5250, however,
does not preclude: (1) Payment for bona fide services, including,
but not limited to, investment banking services (including
underwriting compensation and fees); (2) reimbursement of any
payment for registration imposed by the Commission or state
regulatory authorities and for listing of an issue of securities
imposed by a SRO; and (3) any payment expressly provided for under
the rules of a national securities exchange that are effective after
being filed with, or filed with and approved by, the Commission
pursuant to the Exchange Act.
---------------------------------------------------------------------------

    t. Regulation S transactions of domestic issuers. Regulation S
provides a safe harbor from the registration requirements of the
Securities Act for offers and sales of securities by both foreign and
domestic issuers that are made outside the United States. In 1998, the
Commission adopted amendments to Regulation S designed to prevent the
abuses that relate to offshore offerings of equity securities of
domestic issuers, in particular transactions involving large amounts of
the securities of U.S. issuers for which little information was
available. Broker-dealers and qualified IDQSs should be alert to any
questionable activities involving Regulation S offerings.
    u. Form S-8 stock. Form S-8 is the short-form registration
statement for offers and sales of a company's securities to its
employees, including its consultants and advisors.
    v. ``Hot industry'' OTC stocks. Another characteristic of
misconduct in the OTC market is that it often can involve stocks that
are in vogue.
    w. Unusual activity in brokerage accounts of issuer affiliates,
especially involving ``related'' shareholders. Fraudulent and
manipulative activity in the OTC market can begin with the deposit and
sale of large blocks of an obscure stock by a new and unfamiliar
customer who often is affiliated with an issuer and a simultaneous
request by the issuer that the broker-dealer make a market in the
stock.
    x. Companies that frequently change their names or lines of
business. The Commission and other regulators have brought enforcement
actions in which this type of activity among OTC issuers has been a
characteristic of the alleged misconduct.\534\
---------------------------------------------------------------------------

    \534\ See, e.g., Press Release, SEC Charges Eight for Roles in
Widespread Pump-and-Dump Scheme Involving California-Based Microcap
Company (Sept. 18, 2014), https://www.sec.gov/news/press-release/2014-202.
---------------------------------------------------------------------------

P. Compliance Date

    The Commission is providing a compliance date that is nine months
after the effective date of the amended Rule, except for the compliance
date for paragraph (b)(5)(i)(M) of the amended Rule. The compliance
date for paragraph (b)(5)(i)(M) of the amended Rule is two years after
the effective date of the amended Rule.\535\
---------------------------------------------------------------------------

    \535\ In this regard, the compliance date for the requirement in
the piggyback exception that a catch-all issuer's information that
is specified in paragraph (b)(5)(i)(M) must be current and publicly
available is two years after the effective date of the amended Rule.
This compliance date is designed to provide a sufficient window
during which such current information can be prepared and made
publicly available.
---------------------------------------------------------------------------

    After considering the comments received regarding the transition
period for compliance with the amended Rule's provisions,\536\ the
Commission believes that these compliance dates will provide sufficient
time for broker-dealers to prepare to comply with the amended Rule,
including by creating or updating any necessary systems or internal
measures, such as training modules, and to develop and update any
necessary policies and procedures, as appropriate, to achieve
compliance with the amended Rule. The Commission further believes that
these compliance dates provide sufficient time for qualified IDQSs and
registered national securities associations to implement technological
or other changes that they determine to make in light of the amended
Rule.
---------------------------------------------------------------------------

    \536\ FINRA Letter (requesting nine months for covered entities
to comply with the provisions of the amended Rule); Jason Hirschman
(Oct. 8, 2019) (stating that there should be an ``extended
transition period'' for the amended Rule).
---------------------------------------------------------------------------

    The Commission recognizes that there are market participants who
are concerned about the loss of a quoted market for certain securities
as a result of the amended Rule and that such market participants may
wish to seek relief from the provisions of the amended Rule. The
Commission encourages such persons to submit relief requests
expeditiously during the nine-month transition period. The Commission
notes, however, that it will consider relief requests at any time,
including after the nine-month transition period.
    On and after the nine-month transition period, broker-dealers that
publish or submit quotations in a quotation medium, qualified IDQSs
that make known to others certain broker-dealer quotations and make
certain publicly available determinations, and registered national
securities associations that make certain publicly available
determinations would be required to comply with the amended Rule when
they perform those activities. The Commission staff intends to offer
assistance and support to covered entities during the transition period
and thereafter, with the aim of helping to ensure that the investor
protections and other benefits of the amended Rule are implemented in
an efficient and effective manner.

III. Comments on the Concept Release

A. Information Repositories

    The Commission is not making any changes in the regulatory
structure around information repositories. The Commission solicited
comment on the designation of certain entities as information
repositories, including whether investors and other market participants
would benefit from having access to proposed paragraph (b) information
solely through a centralized location, such as an information
repository. Two commenters supported the idea of a centralized location
for paragraph (b) information,\537\ though both commenters stated that
some companies may prefer to make current information available only on
their websites or upon request.\538\ Because the amended Rule's
definition of ``publicly available'' already provides the opportunity
for, among other things, free access to issuer information through the
internet, the Commission is not taking further action in this regard.
One commenter advocated for the public availability of past issuer
information in addition to current issuer information.\539\ On balance,
the Commission believes that the requirement for the publicly
availability of current paragraph (b) information provides appropriate
information to

facilitate informed investment decisions without adding the potential
for an overly burdensome requirement to make older issuer information
publicly available in addition to current information.
---------------------------------------------------------------------------

    \537\ Coral Capital Letter; Hamilton & Associates Letter
(observing that some market participants might be more useful than
others in serving as an information repository).
    \538\ Coral Capital Letter; Hamilton & Associates Letter.
    \539\ Coral Capital Letter.
---------------------------------------------------------------------------

B. Other Issues

    Certain commenters urged the Commission to take additional or
different regulatory and non-regulatory actions than the approach
adopted, including actions that the Commission did not propose. These
suggestions covered a variety of areas, including settlement
cycles,\540\ short sale regulation,\541\ rules governing stock
splits,\542\ state laws,\543\ changes regarding publication of
information and ``offers'' under the federal securities laws,\544\
rules governing the sales of securities,\545\ shareholder of record
rules,\546\ transfer agent rules,\547\ sales practice issues,\548\ paid
promotions,\549\ and alternative venues.\550\ The Commission
appreciates the helpful feedback on these issues and will take such
views into account as part of its ongoing consideration of the markets
and the federal securities rules and regulations. The Commission
believes that they are outside the scope of the proposed Rule and that
the amended Rule appropriately furthers the Commission's objectives of
promoting investor protection, enhancing market efficiency, and
facilitating capital formation by promoting greater transparency,
efficiency, and capital formation and helping to prevent incidents of
fraud and manipulation in OTC securities. Other suggestions covered
FINRA rules.\551\ As discussed above, the Commission's staff expects to
work with FINRA on an ongoing basis regarding the implementation of the
amended Rule.\552\
---------------------------------------------------------------------------

    \540\ Alan S. Cameron (Nov. 24, 2019).
    \541\ OTC Markets Group Letter 2; see also Canaccord Letter;
Christopher, DiIorio; GTS Letter; MCAP Letter; Professor Angel
Letter; Securities Law USA Letter; Zuber Lawler Letter. In response
to the Proposing Release's Q133, some commenters stated that it
would be helpful to extend the close-out period for lower-volume
securities. See, e.g., OTC Markets Group Letter 2; see also
Canaccord Letter; GTS Letter; Securities Law USA Letter; Zuber
Lawler Letter. These commenters stated that doing so might, for
example, increase short sale volume in the OTC market. E.g.,
Canaccord Letter. Amending Regulation SHO to extend the close-out
period for OTC securities is outside the scope of the proposed
rulemaking.
    \542\ Christian Gabis (suggesting that any company trading below
$1.00 for six months be required to perform a reverse split to
``remain listed''); John Guerriero (Oct. 4, 2019) (advocating for
reform to the grey market).
    \543\ Braxton Gann; Daniel Raider.
    \544\ Beacon Redevelopment Letter (changes to allow non-
reporting issuers to publish their information, in the spirit of the
JOBS Act); Murphy & McGonigle Letter (changes necessary to allow
exempt foreign private issuers to publish their Rule 12g3-2(b)
information). One commenter also suggested that the Commission, as
necessary, provide guidance that publication by an exempt foreign
private issuer on its website (or on EDGAR) of the information
required by Rule 12g3-2(b), ``without more,'' would not be an
``offer'' under the Securities Act. Murphy & McGonigle Letter.
    \545\ GUARDD Letter.
    \546\ See Anbec Partners Letter; Franklin Antonio; Caldwell
Sutter Capital Comment; Brett Dorendorf; Lucas Elliott; David J.
Flood; Jason Hirschman; Letter from James E. Mitchell, General
Partner, Mitchell Partners, L.P., to Hon. Hester M. Peirce, Comm'r,
SEC (Oct. 11, 2019) (``Mitchell Partners Letter 2''); Ariel Ozick;
Anthony Perala; Daniel Raider; Michael E. Reiss; Dan Schum; Michael
Tofias; Don C. Whitaker.
    \547\ GTS Letter; STA Letter.
    \548\ See Raymond Balser (Oct. 27, 2019); Coulson Comment; James
Duade; GTS Letter; Michael Tofias; Alex Toppan; Kevin Ward. For
example, commenters stated that some issuers issue ``toxic notes''
that are convertible into shares at a deep discount to the market
price that dilute existing shareholders. R. Berkvens; Coral Capital
Letter; John Guerriero; Leonard Burningham Letters. Another
commenter, however, suggested that warnings like ``caveat emptor''
and ``buyer beware'' do nothing to restore what victims of
fraudulent and manipulative schemes have lost. Coral Capital Letter;
Brett Dorendorf; David J. Flood; Braxton Gann; Jason Hirschman; Lake
Highlands Comment; Ron Lefton; Ariel Ozick.
    \549\ Ariel Ozick; STA Letter.
    \550\ See Todd Blue (Oct. 9, 2019); Andersen Letter; GTS Letter
(advocating for a ``task force''); see also supra Part II.A.1
(discussing the suggestion to exempt quoting in OTC securities in a
market for certain types of individuals).
    \551\ See Tyler Black (discussing securities that trade in the
grey market for which broker-dealers desire to create a quoted
market); Coral Capital Letter; CrowdCheck Letter; HTFL Letter;
Mitchell Partners Letter 1; OTC Markets Group Letter 2 (stating that
the process, which includes requests for additional information, can
take anywhere from weeks to months, with the average amount of time
for FINRA to process a Form 211 being 34 days); Sosnow & Associates
Letter; see also Andersen Letter; Coral Capital Letter (stating
that, as a result, only one broker-dealer remains that is willing to
file a Form 211 for domestic issuers); FINRA Letter (requesting
further guidance as to whether a new Form 211 would need to be filed
when a broker-dealer relies on a publicly available determination
that the piggyback exception--or any of the other exceptions--is
available; whether such a requirement to file a new Form 211 for
quotations that are published or submitted pursuant to the piggyback
exception would apply only for securities of catch-all issuers;
whether any transition period would be prolonged for the securities
of catch-all issuers if a Form 211 were processed during the 12
months before the adoption of the amendments; and whether any grace
period would apply if an issuer's shell company status becomes
unclear); Leonard Burningham Letters; Lucosky Brookman Letter; OTC
Markets Group Letter 2; Securities Law USA Letter; STA Letter
(advocating for qualified IDQSs to be permitted to file a Form 211
with FINRA, or to allow broker-dealers to rely on a qualified IDQS's
compliance with the information review requirement without filing a
Form 211 at all); Zuber Lawler Letter. As explained in the Proposing
Release, FINRA Rule 6432 requires broker-dealers to file a Form 211
when the Rule requires them to comply with the information review
requirement. Proposing Release at 58242. The amended Rule does not
impose obligations with respect to FINRA Rule 6432, as discussed
above in Part II.A.3, and does not require broker-dealers that rely
on a publicly available determination that the piggyback exception--
or any of the other exceptions--is available to file Forms 211 with
FINRA. The Commission will continue to monitor the operation of this
market and expects FINRA to do the same, including through
examinations of qualified IDQSs. See supra Part II.A.3.
    \552\ As discussed above in Part II.P, the Commission staff
intends to offer assistance and support to covered entities during
the transition period and thereafter, with the aim of helping to
ensure that the investor protections and other benefits of the
amended Rule are implemented in an efficient and effective manner.
---------------------------------------------------------------------------

    Some commenters advocated that persons complying with the
information review requirement should have a reasonable basis for
believing that the issuer's information is complete and from a reliable
source, rather than accurate and from a reliable source.\553\ The
Commission believes a review for ``completeness'' rather than for
``accuracy'' would weaken the important investor protections that the
Rule is designed to provide. Broker-dealers are required ``to give some
measure of attention to financial and other information about the
issuer of a security before it commences trading that security.'' \554\
However, as discussed in above in Part II.O, the requirements of the
amended Rule do not contemplate that, before submitting or publishing
quotations for a security, a broker-dealer or qualified IDQS must
conduct an independent ``due diligence'' investigation regarding the
issuer or its business operations and financial condition such as the
investigation expected to be conducted by an underwriter. The
Commission is not aware of any developments in the OTC market since the
initial adoption of the Rule that warrant changing this standard from
``accuracy'' to ``completeness.'' Moreover, the ``accuracy'' standard
of review, specified in paragraphs (a)(1)(iii)(C) and (a)(2)(iii) of
the amended Rule, is the same for a catch-all issuer as it is for all
other categories of issuers (i.e., a prospectus issuer, a Reg. A
issuer, a reporting issuer, and an exempt foreign private issuer),\555\
so the standard for compliance with the information review

requirement is the same notwithstanding whether a broker-dealer or
qualified IDQS is reviewing the documents and information of an issuer
that has an Exchange Act or Securities Act reporting obligation or has
no such reporting obligation whatsoever.
---------------------------------------------------------------------------

    \553\ OTC Markets Group Letter 2; OTC Markets Group Letter 3;
see also Canaccord Letter; Lucosky Brookman Letter; Robert E.
Schermer, Jr.; Securities Law USA Letter; Sosnow & Associates
Letter; Zuber Lawler Letter.
    \554\ 1991 Adopting Release at 19149.
    \555\ See Proposing Release at 58216.
---------------------------------------------------------------------------

    In addition, some commenters stated their views regarding
alternatives to the requirement that paragraph (b) information be
current and publicly available \556\ and exceptions to Rule 15c2-11
that were not proposed.\557\ The Commission believes that the
amendments that require paragraph (b) information to be current and
publicly available, provide certain new exceptions, and modify
exceptions that existed before the amendments were adopted are narrowly
tailored to appropriately further the Commission's objectives of
promoting investor protection while facilitating market efficiency. The
Commission, however, will continue to monitor trading in this market to
consider whether any further amendments to the Rule in this regard are
warranted.
---------------------------------------------------------------------------

    \556\ Anbec Partners Letter; Tim Bergin; Brett Dorendorf; David
J. Flood; Christian Gabis; Braxton Gann; Paul Lucot; Ariel Ozick
(stating that companies should still be able to de-register but
provide annual reporting at a lower standard); Dave Peirce; Michael
E. Reiss; Mark Schepers; Dan Schum; John Sheehy; Symphony Financial
Comment; Michael Tofias.
    \557\ E.g., Alluvial Letter; Anbec Partners Letter; Caldwell
Sutter Capital Comment; Brandon Cline; Coral Capital Letter; FINRA
Letter; GTS Letter; Coral Capital Letter; Jason Hirschman; Aharon
Levy; Mitchell Partners Letter 2; Mitchell Partners Letter 3; Doug
Mohn; Monroe Letter; OTC Markets Group Letter 2; OTC Markets Group
Letter 3; Ariel Ozick; Professor Angel Letter; Peter Quagliano;
Securities Law USA Letter; Zuber Lawler Letter; Michael Tofias;
Total Clarity Comment; Joep vd Berg (Dec. 15, 2019); David W.
Wright; Samuel J. Yake.
---------------------------------------------------------------------------

IV. Other Matters

    Pursuant to the Congressional Review Act,\558\ the Office of
Information and Regulatory Affairs has designated these rules as a
``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \558\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

    If any of the provisions of these final rules, or the application
thereof to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or application of such
provisions to other persons or circumstances that can be given effect
without the invalid provision or application.

V. Paperwork Reduction Act Analysis

A. Background

    Certain provisions of the amended Rule impose ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\559\
---------------------------------------------------------------------------

    \559\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The title for this collection of information is ``Publication or
submission of quotations without specified information.'' In accordance
with the PRA, the Commission submitted the collection of information
for the proposed amendments to the Rule to the Office of Management and
Budget (``OMB'') for review.\560\ An agency may not conduct or sponsor,
and a person is not required to respond to, a collection of information
unless it displays a current valid control number. OMB has assigned
control number 3235-0202 to this collection of information.
---------------------------------------------------------------------------

    \560\ See 44 U.S.C. 3507; 5 CFR 1320.11.
---------------------------------------------------------------------------

    The Commission published notice and solicited comments on the
collection of information requirements for the proposed amendments in
the Proposing Release.\561\ The Commission received one comment
regarding the collection of information requirements, which focused on
the Commission's estimates of burdens and costs associated with
determining an issuer's status as a shell company.\562\ The Commission
did not receive any other comments regarding its other estimates of
burdens and costs that were included in the Proposing Release's PRA. In
addition, the Commission's estimates of the collection of information
for the amendments, as adopted, have been updated from the estimates
included in the Proposing Release, as appropriate, with the updated
estimates based on more recent data.
---------------------------------------------------------------------------

    \561\ See Proposing Release at 58249.
    \562\ Leonard Burningham Letters.
---------------------------------------------------------------------------

    The Rule is designed to prevent broker-dealers from publishing or
submitting quotations for OTC securities that may facilitate a
fraudulent or manipulative scheme. Subject to certain exceptions, the
Rule prohibits broker-dealers from publishing or submitting a quotation
for a security, or submitting a quotation for publication, in a
quotation medium, unless they have reviewed specified information
regarding the issuer. The Commission is adopting amendments designed to
modernize the Rule, promote investor protection, and help prevent
incidents of fraud and manipulation by, among other things, requiring
information about the issuers of securities that are quoted in the OTC
market to be current and publicly available; narrowing certain
exceptions from the Rule's requirements, including the piggyback
exception and unsolicited quotation exception; adding new exceptions
for the quotations of securities that may be less susceptible to fraud
and manipulation; removing obsolete provisions; adding new definitions;
and making technical amendments.

B. Respondents Subject to the Rule

    Generally, the Rule applies to broker-dealers that participate in
the quoted market for OTC securities. The amendments modify some of the
existing information collection burdens on broker-dealers and create
new record retention obligations on broker-dealers that rely on
exceptions to the Rule. The Commission believes that approximately 34
broker-dealers will be subject to the burdens associated with
publishing or submitting a quotation without an exception,\563\ and
approximately 80 broker-dealers will be subject to the burdens
associated with documenting reliance on an exception in paragraph (f)
of the amended Rule.\564\ Additionally, the Commission estimates that,
at this time, one qualified IDQS \565\ and one registered national
securities association \566\ will be subject to burdens associated with
making publicly available determinations pursuant to paragraph (a)(3)
of the amended Rule.\567\
---------------------------------------------------------------------------

    \563\ Thirty-four broker-dealers submitted Forms 211 to FINRA in
2019. The Commission uses this number as a proxy for broker-dealers
that comply with the information review requirement under paragraphs
(a), (b), and (c) of the amended Rule.
    \564\ As of April 24, 2020, there are 80 broker-dealers that
publish quotations on OTC Markets Group's systems. The Commission
believes that this number reasonably estimates the number of broker-
dealers that would engage in activities that would subject them to
the requirements discussed in the section ``Other Burden Hours''
below because they are the only broker-dealers that are publishing
or submitting quotations for OTC securities.
    \565\ Based on the current structure of the market for quoted
OTC securities, the Commission believes that only one qualified IDQS
would engage in a review pursuant to paragraph (a)(2) or make
publicly available determinations pursuant to paragraph (a)(3).
    \566\ As of May 14, 2020, one registered national securities
association exists.
    \567\ In making this estimate, the Commission is mindful that a
qualified IDQS or a registered national securities association may
elect not to make publicly available determinations pursuant to
paragraph (a)(3), or may elect to do so at a later date. The
Commission also recognizes that, in the future, other market
participants may become qualified IDQSs, or new national securities
associations may be established, that make publicly available
determinations pursuant to paragraph (a)(3).
---------------------------------------------------------------------------

    The amendments permit a qualified IDQS to comply with the
information review requirement in certain circumstances.\568\ A
qualified IDQS

must meet the definition of an alternative trading system under Rule
300(a) of Regulation ATS and operate pursuant to the exemption from the
definition of an ``exchange'' under Rule 3a1-1(a)(2) of the Exchange
Act. As such, a qualified IDQS must be registered as a broker-
dealer.\569\ The amendments modify only the allocation of burden from
existing paragraphs (a), (b), and (c) between qualified IDQSs and
broker-dealers that are not qualified IDQSs, rather than create new and
distinct burdens.\570\ Therefore, burdens of the amended Rule on
qualified IDQSs have not been analyzed below in a manner that is
distinct from those of broker-dealers. The analysis of burdens for
qualified IDQSs and registered national securities associations are
separated from those of broker-dealers in the section discussing the
requirement in paragraph (a)(3) of the amended Rule that such entities
must establish, maintain, and enforce reasonably designed written
policies and procedures to make certain publicly available
determinations.
---------------------------------------------------------------------------

    \568\ More specifically, under the amended Rule, a qualified
IDQS that makes known to others the quotation of a broker-dealer
that is published or submitted pursuant to paragraph (a)(1)(ii) of
the amended Rule must first have complied with paragraphs (a), (b),
and (c) of the amended Rule.
    \569\ See Rule 301(a) of Regulation ATS.
    \570\ See Amended Rule 15c2-11(a)(2).
---------------------------------------------------------------------------

    For the purposes of the analysis below, the Commission has made
assumptions regarding how respondents would comply with the amended
Rule.

C. Summary of Collections of Information

    The collections of information associated with the initial
publication or submission of a quotation are intended to prevent
broker-dealers from publishing or submitting quotations for OTC
securities that may facilitate a fraudulent or manipulative scheme. In
addition, information collections associated with recordkeeping and
establishing, maintaining, and enforcing reasonably designed written
policies and procedures under the amended Rule are intended to help
ensure compliance with the Rule's exceptions.\571\
---------------------------------------------------------------------------

    \571\ The recordkeeping obligations under the amended Rule,
including those relating to the creation of reasonable policies and
procedures under paragraph (a)(3) of the amended Rule, are discussed
in Part V.C.2.g below.
---------------------------------------------------------------------------

1. Burden Associated With the Initial Publication or Submission of a
Quotation in a Quotation Medium
    Absent an exception, broker-dealers must comply with the
information review requirement of the Rule before initiating the
publication or submission of a quotation for an OTC security. The
Commission believes that, as was the case with the former Rule, the
information collections associated with the information review
requirement and recordkeeping requirement under the amended Rule
involve conducting a review of and maintaining the specified
information.\572\
---------------------------------------------------------------------------

    \572\ As discussed in Part II.K above, the Commission is
removing the disclosure requirement in paragraph (d)(1) of the
former Rule. This disclosure requirement previously has been
discussed as a component of the estimated burden associated with all
types of issuers (regardless of their reporting obligations), and,
as a result, is included in the existing burden estimates for the
Rule.
---------------------------------------------------------------------------

    A broker-dealer that initiates or resumes a quotation in an OTC
equity security is subject to FINRA Rule 6432, which requires the
broker-dealer to demonstrate compliance with, among other things, Rule
15c2-11 by filing a Form 211. Given the alignment of this FINRA
requirement and the Rule, the Commission believes that the number of
Forms 211 filed with FINRA in 2019 provides a reasonable baseline from
which to estimate the burdens associated with the information review
requirement under both the former Rule and the amended Rule. Based on
information provided by FINRA, broker-dealers submitted a total of 384
Forms 211 to initiate the publication or submission of quotations of
OTC securities in 2019: 87 of these Forms 211 concerned securities of
prospectus issuers, Reg. A issuers, and reporting issuers; 253
concerned securities of exempt foreign private issuers; and 44
concerned securities of catch-all issuers. The Commission estimates
that it takes approximately three hours to review, record, and retain
the information pertaining to prospectus issuers, Reg. A issuers, and
reporting issuers, and seven hours to review, record, and retain the
information pertaining to exempt foreign private issuers and catch-all
issuers.\573\ Before taking into account any potential changes to
burdens that could be imposed by the amendments, the estimated total
annual burden of the information collection by the 34 broker-dealers
that complied with the information review requirement for the 384 OTC
securities referred to above would be 2,340 hours.\574\
---------------------------------------------------------------------------

    \573\ The Commission believes that these burden hour estimates
reasonably measure the time required to comply with the information
review requirement and recordkeeping requirement utilizing available
technology. In addition, because the specified information regarding
exempt foreign private issuers and catch-all issuers may not be as
readily available as the specified information regarding prospectus,
Reg. A, and reporting issuers, these burden hour estimates include
four additional hours to review information about such issuers.
    \574\ (87 prospectus, Reg. A, and reporting issuers x 3 hours) +
(253 exempt foreign private issuers x 7 hours) + (44 catch-all
issuers x 7 hours review and recordkeeping) = (261 hours) + (1,771
hours) + (308 hours) = 2,340 hours. The burden hours for compliance
with the information review requirement does not include securities
that are piggyback eligible on the compliance date. A broker-dealer
or qualified IDQS would not be required to comply with the
information review requirement because broker-dealers would be able
to publish quotations based on the piggyback exception. Burden hours
associated with documenting that information is current and publicly
available for purposes of relying on an exception are discussed
below in Part V.C.2.
---------------------------------------------------------------------------

    The information review requirement is set forth in paragraphs (a),
(b), and (c) of the amended Rule. The amendments change the information
review requirement by adding, among other things, the requirement that
paragraph (b) information be current and publicly available before the
initial publication or submission of a quotation for an OTC
security.\575\ The Commission believes that these changes would not
modify the burden hours for completion of the information review
requirement that are estimated above. Additionally, it is not expected
that these changes to the information review requirement would create
any initial one-time burden as it is unlikely that a broker-dealer or
qualified IDQS would need to modify its systems or training practices
to comply with the information review requirement under the amended
Rule.
---------------------------------------------------------------------------

    \575\ The Commission does not believe that the expansion of the
types of market participants that comply with the information review
requirement--to include not only broker-dealers publishing or
submitting a quotation for an OTC security in a quotation medium but
also a qualified IDQS that makes known to others that the qualified
IDQS conducted the information review (paragraph (a)(2))--will
impact the hourly burden attributable to completion of the
information review requirement. The adopted modification to the Rule
does not affect the information review burden itself, but rather
spreads that burden among more entities. Similarly, the Commission
does not believe that the modifications to the information specified
in paragraph (b) or the supplemental information in paragraph (c)
affects the information review requirement itself because such
information is already gathered and maintained, or the modifications
to the previously existing information required by former Rule 15c2-
1l are so minor that these changes are not expected to have an
impact on the overall time burden related to the information review
requirement.
    Modifications to the Rule, as well as several of the proposed
changes to exceptions from the requirements of the Rule, do,
however, affect the recordkeeping obligations of broker-dealers and
qualified IDQSs. The impact of paragraph (a)(1)(ii) on the
recordkeeping requirement in paragraph (d)(1)(i), as well as the
recordkeeping requirements in paragraph (d)(2) for revised and new
exceptions, is discussed in Part V.C.2 below.
---------------------------------------------------------------------------

(a) Amendments to the Piggyback Exception
    As discussed above, the amendments would modify the piggyback
exception in various ways, and these amendments would, in turn, impact
the burdens associated with the information review requirement.\576\
Paragraph (f)(3)(i)(A) of

the amended Rule limits broker-dealers' reliance on the piggyback
exception to securities with a one-sided priced quotation in an
IDQS.\577\ Broker-dealers would have to comply with the information
review requirement before initially publishing or submitting quotations
on securities that currently are quoted and that would lose piggyback
eligibility as a result of this provision. According to estimates based
on data from OTC Markets Group for 2019, 264 out of 9,864 piggyback
eligible quoted OTC securities, would lose piggyback eligibility under
this amendment because there was no publication of either a bid or an
offer quotation for five or more business days in succession on one or
more occasions during that year.\578\
---------------------------------------------------------------------------

    \576\ See supra Part II.D.
    \577\ As discussed in Part II.D.2 above, after considering the
comments, and in conjunction with the other requirements to the
piggyback exception and SRO rules that apply to the quotations of a
broker-dealer as a regulated entity, the Commission determined to
narrowly tailor this part of the piggyback exception to require a
one-sided priced quotation rather than a two-sided priced quotation,
as proposed.
    \578\ The amended Rule, unlike the proposed Rule, permits
broker-dealers to rely on the piggyback exception based on at least
a one-way (rather than a two-way) priced quotation, as long as there
are no more than four business days in succession without a
quotation. See, e.g., supra Part II.D.2; infra Part VI.C.1.b. This
modification increases the size of the subset of piggyback eligible
quoted OTC securities, as reflected in these estimates.
---------------------------------------------------------------------------

    Based on the lack of quotes by broker-dealers for these securities
in 2019, it is unclear whether broker-dealers would conduct the
required review for most of these securities that would no longer be
eligible for the piggyback exception provided under paragraph
(f)(3)(i)(A). Taking a conservative approach in assessing the burden
that may arise under this amendment, the Commission estimates that
broker-dealers would comply with the information review requirement
once annually for each security that would lose piggyback
eligibility.\579\ Therefore, it is estimated that broker-dealers would
comply with the information review requirement 264 additional times
annually. The Commission estimates that 88 (approximately 33%) would be
securities of prospectus, Reg. A, or reporting issuers, 143
(approximately 54%) would be securities of exempt foreign private
issuers, and 33 (approximately 13%) would be securities of catch-all
issuers, leading to an increase in the total annual burden of 1,496
hours.\580\
---------------------------------------------------------------------------

    \579\ The Commission believes that this conservative approach is
reasonable because it accounts for all securities that may lose
piggyback eligibility under this amendment. While broker-dealers may
not comply with the information review requirement for every
security that loses piggyback eligibility, broker-dealers may comply
with the requirement multiple times regarding the same issuer.
Therefore, the Commission believes that this reasonably approximates
the impact of the amendments industry-wide.
    \580\ The total annual burden is computed as follows: (88
prospectus, Reg. A, or reporting issuers x 3 hours) + (143 exempt
foreign private issuers x 7 hours) + (33 catch-all issuers x 7 hours
review and recordkeeping) = (264 hours) + (1,001 hours) + (231
hours) = 1,496 hours.
---------------------------------------------------------------------------

    The Commission is increasing the estimated overall burdens related
to the information review requirement based on the provision in
paragraph (f)(3)(i)(C) of the amended Rule, which would allow broker-
dealers to rely on the piggyback exception to publish quotations for
the securities of (1) issuers for which documents and information are
specified in paragraphs (b)(4) or (b)(5) if paragraph (b) information
is current and publicly available, (2) issuers for which documents and
information are specified in paragraphs (b)(3)(i), (b)(3)(iv), or
(b)(3)(v) if paragraph (b) information is filed within 180 calendar
days from a specified time frame, or (3) issuers for which documents
and information are specified in paragraphs (b)(3)(ii) or (b)(3)(iii)
if paragraph (b) information is timely filed. Paragraphs (a)(1)(i)(B)
and (a)(2)(ii) of the amended Rule require that paragraph (b)
information be current and publicly available as a component of the
review requirement, and thus a broker-dealer or qualified IDQS would
not be able to comply with the information review requirement under the
amended Rule for securities that lose piggyback eligibility as a result
of their issuers' paragraph (b) information not being current and
publicly available.
    To the extent that paragraph (b) information becomes current and
publicly available after the loss of the piggyback exception, a broker-
dealer or qualified IDQS would need to comply with the information
review requirement in order to be able to publish or submit a quotation
for such OTC security.
    There were 3,095 securities of issuers of quoted OTC securities in
2019 without current and publicly available information.\581\ 946 of
these issuers were issuers referenced in paragraph (f)(3)(i)(C)(1) that
are delinquent in their filing obligations with the Commission.\582\ As
is the case in the context of one-way priced quotations, it is unclear
whether broker-dealers would conduct the required review for securities
of issuers subject to the provision in paragraph (f)(3)(i)(C) that lose
piggyback eligibility. Taking a conservative approach in assessing the
burden that may arise under this amendment to the piggyback exception,
the Commission estimates that broker-dealers would comply with the
information review requirement once annually for each such security
that would lose piggyback eligibility. Accordingly, this amendment
would increase burdens by 17,789 hours.\583\
---------------------------------------------------------------------------

    \581\ This total consists of 969 securities of SEC reporting
companies (including issuers that make filings pursuant to
Regulation Crowdfunding)/Reg. A issuers/other reporting issuers, 85
foreign private issuers, and 2,041 catch-all issuers.
    \582\ For purposes of the PRA analysis, the Commission assumes
that each delinquent filer has not timely filed a quarterly, semi-
annual, or annual report, or filed a required report, within 180
calendar days from the end of a reporting period.
    \583\ (969 securities of SEC reporting companies/Reg. A issuers/
other reporting issuers x 3 hours review and recordkeeping) + (85
foreign private issuers x 7 hours review and recordkeeping) + (2,041
catch-all issuers x 7 hours review and recordkeeping) = (2,907) +
(595) + (14,287) = 17,789 hours.
---------------------------------------------------------------------------

    The Commission is revising the estimates of current burdens of the
information review requirement based on the provision in paragraph
(f)(3)(i)(B) of the amended Rule, which 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 and for securities within 60 calendar days following a
trading suspension under Section 12(k) of the Exchange Act. With
respect to shell companies, as stated in the Economic Analysis, the
Commission believes that approximately 460 securities of shell
companies that are quoted in the OTC market would lose piggyback
eligibility. The Commission also believes that there are approximately
219 securities that were piggyback eligible within 60 calendar days
following a trading suspension under Section 12(k) of the Exchange Act.
As is the case in the context of one-way priced quotations, it is
unclear whether broker-dealers would conduct the required review for
securities of issuers subject to the provision in paragraph
(f)(3)(i)(B) that lose piggyback eligibility. Taking a conservative
approach in assessing the burden that may arise under this amendment to
the piggyback exception, the Commission estimates that broker-dealers
would comply with the information review requirement once annually for
each such security that would lose piggyback eligibility. Accordingly,
this amendment would increase burdens by 2,829 hours.\584\
---------------------------------------------------------------------------

    \584\ There were no securities of foreign issuers in either
category below.
    For securities of shell companies: (306 securities of SEC
reporting companies/Reg. A issuers/other reporting issuers x 3 hours
review and recordkeeping) + (154 catch-all issuers x 7 hours review
and recordkeeping) = (918) + (1,078) = 1,996 hours.
    For securities subject to trading suspensions: (175 securities
of SEC reporting companies/Reg. A issuers/other reporting issuers x
3 hours review and recordkeeping) + (44 catch-all issuers x 7 hours
review and recordkeeping) = (525) + (308) = 833 hours.
    Grand total: (1,996) + (833) = 2,829 hours.

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

    In summary, the amendments to the piggyback exception would impact
the burdens associated with the information review requirement in
various ways. Paragraph (f)(3)(i)(A) of the amended Rule permits
broker-dealers to piggyback on one-way priced quotations. The
Commission estimates that this amendment would increase the annual
burden by 1,496 hours. The provision in paragraph (f)(3)(i)(C) of the
amended Rule permits broker-dealers to piggyback quotations of the
securities of certain issuers only if paragraph (b) information is,
depending on the regulatory status of the issuer, (1) current and
publicly available, (2) timely filed, or (3) filed within 180 calendar
days from a specified period. The Commission estimates that this
amendment would increase the annual burden by 17,789 hours. The
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 and for securities within 60 calendar days following a
trading suspension under Section 12(k) of the Exchange Act. The
Commission estimates that this amendment would increase the annual
burden by 2,829 hours.
(b) Other Amendments
    Amendments to the Rule create a new exception that is intended to
reduce burdens related to publishing or submitting quotations for OTC
securities that are highly liquid and of an issuer that is well-
capitalized. Specifically, paragraph (f)(5) of the amended Rule
provides an exception for securities with a worldwide ADTV value of at
least $100,000 during the 60 calendar days immediately before the date
of the publication of a quotation for such security, and of an issuer
with $50 million in total assets and $10 million in shareholder's
equity as reflected in the issuer's publicly available audited balance
sheet issued within six months after the end of its most recent fiscal
year. The amendment is estimated to reduce the burden of information
collection by creating an exception from the information review
requirement under the Rule for broker-dealers publishing or submitting
quotations for OTC securities that are less susceptible to fraud or
manipulation.
    The Commission estimates that approximately 180 of quoted OTC
securities on an average day during calendar year 2019 would be
eligible for the ADTV and asset test exception set forth in paragraph
(f)(5) of the amended Rule.\585\ Approximately 35 percent (63) of these
are securities of reporting issuers, approximately 63 percent (113) are
securities of exempt foreign issuers, and approximately two percent (4)
are securities of catch-all issuers.\586\ From this number of excepted
securities (180) and the total number of quoted OTC securities
(11,542), it can be estimated that the amendments would reduce the
number of times broker-dealers conduct the required review by
approximately 1.6 percent annually. Therefore, after rounding, the
Commission estimates that the exceptions would reduce the number of
times broker-dealers conduct the required review by six per year,\587\
twice with respect to securities of reporting issuers and four times
with respect to securities of exempt foreign issuers and catch-all
issuers,\588\ resulting in a total reduction of 34 burden hours per
year.\589\
---------------------------------------------------------------------------

    \585\ See infra Part VI.C.1.c.
    \586\ See infra Part VI.C.1.c.
    \587\ 384 completions of the information review requirement x
1.6% = 6.
    \588\ 6 x 35% for reporting issuers and 6 x 65% for exempt
foreign issuers and catch-all issuers.
    \589\ [2 (regarding securities of reporting issuer) x 3 hours] +
[4 (regarding securities of exempt foreign issuers and catch-all
issuer) x 7 hours] = (6 hours) + (28 hours) = 34 hours.
---------------------------------------------------------------------------

    The Commission also believes, however, that amendments to other
Rule exceptions--namely, those set forth in paragraphs (f)(2)(ii) and
(f)(6) of the amended Rule--do not impact the burden of the information
review requirement. More specifically, paragraph (f)(2)(ii) of the
amended Rule, which provides an exception for a broker-dealer to
publish or submit a quotation by or on behalf of certain company
insiders and affiliates of the issuer in reliance on the unsolicited
quotation exception only if paragraph (b) information is current and
publicly available,\590\ limits the availability of the unsolicited
quotation exception in certain circumstances. This amendment would not
decrease the burden of the information review requirement, however,
because under paragraph (f)(2) of the former Rule, broker-dealers were
not required to conduct an information review before publishing or
submitting a quotation that represented a customer's unsolicited
indication of interest. Nor would this amendment increase the burden of
the information review requirement: If the unsolicited quotation
exception becomes unavailable due to this amendment, broker-dealers
would not be able to comply with the information review requirement as
an alternative to utilizing this exception because current and publicly
available information is a condition of the information review
requirement in paragraphs (a)(1)(ii) and (a)(2)(ii) of the amended
Rule.\591\
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    \590\ The burden related to a broker-dealer's determination of
whether paragraph (b) is current and publicly available is discussed
below.
    \591\ The unsolicited quotation exception, as adopted, adds the
term ``affiliate'' to enhance the investor protections under the
proposed amendments by capturing more fully the types of persons
with the potential for a heightened incentive to manipulate the
price of a security. The addition of the word ``affiliate'' has no
impact on the burden of the information review requirement, for the
reasons described above.
---------------------------------------------------------------------------

    Further, paragraph (f)(6) of the amended Rule provides an exception
from the information review requirement for certain quotations of
broker-dealers named as underwriters in the registration statement or
offering statement of a security within the time frames specified in
paragraphs (b)(1) or (b)(2) of the amended Rule, as applicable. The
Commission believes that no broker-dealer would be required to comply
with the information review requirement for quoted OTC securities that
meet the requirements of the underwriter exception. While it is
estimated that this amendment would result in a slight reduction in the
number of times broker-dealers comply with the information review
requirement annually, out of an abundance of caution given the lack of
granular data, the Commission has not decreased the overall burden
estimates associated with the information review requirement as a
result of the underwritten offering exception provided in paragraph
(f)(6) of the amended Rule.

            PRA Table 1--Summary of Estimated Burdens Associated With Initial Publication or Submission of a Quotation in a Quotation Medium
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Number of
                                                                                times the     Annual burden
                                            Type of issuer            Type of burden      Initial burden     specified     per response   Total industry
                                                                                \a\       information is      (hours)     burden (hours)
                                                                                reviewed
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline Information Review                                            Information review requirement absent changes \b\
 Requirement Burdens.
                                      ------------------------------------------------------------------------------------------------------------------
                                       Prospectus, Reg. A, or    Recordkeeping and                     0              87               3             261
                                        reporting issuers.        Review.
                                       Exempt foreign private    Recordkeeping and                     0             253               7           1,771
                                        issuers.                  Review.
                                       Catch-all issuers.......  Recordkeeping and                     0              44               7             308
                                                                  Review.
                                      ------------------------------------------------------------------------------------------------------------------
Changes to Exceptions................                Limiting piggyback exception to at least a bid or offer quotation at a specified price
                                      ------------------------------------------------------------------------------------------------------------------
                                       Prospectus, Reg. A, or    Recordkeeping and                     0              88               3             264
                                        reporting issuers.        Review.
                                       Exempt foreign private    Recordkeeping and                     0             143               7           1,001
                                        issuers.                  Review.
                                       Catch-all issuers.......  Recordkeeping and                     0              33               7             231
                                                                  Review.
                                      ------------------------------------------------------------------------------------------------------------------
                                         Requiring publicly available paragraph (b) information within specified time frames for issuers' securities to
                                                                                remain piggyback eligible
                                      ------------------------------------------------------------------------------------------------------------------
                                       Prospectus, Reg. A, or    Recordkeeping and                     0             969               3           2,907
                                        reporting issuers.        Review.
                                       Exempt foreign private    Recordkeeping and                     0              85               7             595
                                        issuers.                  Review.
                                       Catch-all issuers.......  Recordkeeping and                     0           2,041               7          14,287
                                                                  Review.
                                      ------------------------------------------------------------------------------------------------------------------
                                                              Eliminating piggyback eligibility for securities of shell companies
                                      ------------------------------------------------------------------------------------------------------------------
                                       Prospectus, Reg. A, or    Recordkeeping and                     0             306               3             918
                                        reporting issuers.        Review.
                                       Catch-all issuers.......  Recordkeeping and                     0             154               7           1,078
                                                                  Review.
                                      ------------------------------------------------------------------------------------------------------------------
                                                     Eliminating piggyback eligibility for securities subject to a trading suspension order
                                      ------------------------------------------------------------------------------------------------------------------
                                       Prospectus, Reg. A, or    Recordkeeping and                     0             175               3             525
                                        reporting issuers.        Review.
                                       Catch-all issuers.......  Recordkeeping and                     0              44               7             308
                                                                  Review.
                                      ------------------------------------------------------------------------------------------------------------------
                                                        Exception for securities that meet ADTV and asset test (decreases annual burden)
                                      ------------------------------------------------------------------------------------------------------------------
                                       Prospectus, Reg. A, or    Recordkeeping and                     0               2               3               6
                                        reporting issuers.        Review.
                                       Exempt foreign private    Recordkeeping and                     0               4               7              28
                                        issuers and catch-all     Review.
                                        issuers.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ As mentioned above, it is not expected that the changes to the information review requirement effected by the amendments would create any initial
  one-time burden as it is unlikely that broker-dealers would need to modify their systems or conduct training to comply with the information review
  requirement under the amended Rule.
\b\ Because the exception for securities that meet the ADTV and asset tests would decrease the annual burden from the 2019 baseline, the numbers in this
  section of the chart reflect the number of times the specified information was reviewed in 2019, multiplied by the hourly burden estimates for
  compliance with the information review requirement.

2. Other Burden Hours

    The amendments also create burdens relating to recordkeeping
obligations under the amended Rule. The amendments update the
recordkeeping requirements under the Rule to require broker-dealers,
qualified IDQSs, and registered national securities associations to
keep records that demonstrate that the requirements of a Rule exception
are met.\592\ The types of documentation that a broker-dealer,
qualified IDQS, or registered national securities association would
need to maintain would vary based upon the exception. Certain
exceptions, such as the unsolicited quotation exception,\593\ require
that paragraph (b) information be current and publicly available.
Additionally, the piggyback exception \594\ requires that paragraph (b)
information be (1) filed within 180 calendar days from the end of a
reporting period for issuers referenced in paragraph (f)(3)(i)(C)(1) of
the amended Rule, (2) timely filed for issuers referenced in paragraph
(f)(3)(i)(C)(2), or (3) current and publicly available for issuers
referenced in paragraph (f)(3)(i)(C)(3). Notably, however, the
amendments except from these recordkeeping requirements any paragraph
(b) information that is available on EDGAR. The Commission believes
that the requirement in these exceptions to have paragraph (b)
information current and publicly available, timely filed, or filed
within 180 calendar days from a specified period would create ongoing
recordkeeping burdens for broker-dealers under paragraph (d)(2) of the
amended Rule.
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    \592\ Amended Rule 15c2-11(d)(2).
    \593\ Amended Rule 15c2-11(f)(2).
    \594\ Amended Rule 15c2-11(f)(3).
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    As shown in the Table 3 of the Economic Analysis, there are 9,895
unique issuers of quoted OTC securities for which broker-dealers would
be required to maintain records to establish that paragraph (b)
information is, depending on the regulatory status of the issuer,
current and publicly available, timely filed, or filed within 180
calendar days from the specified period. Of these 9,895 issuers, 3,081
are SEC/Reg. A/Bank Reporting Obligation issuers, 4,413 are exempt
foreign private issuers, and 2,401 are catch-all issuers.\595\ It is
estimated that it would take one minute to create documentation
regarding the determination that paragraph (b)

information is current and publicly available, timely filed, or filed
within 180 calendar days from the specified period, as applicable; and
that broker-dealers, qualified IDQSs, and registered national
securities associations would create such documentation no more
frequently than quarterly for SEC/Reg. A/bank reporting obligation
issuers and foreign private issuers,\596\ and annually for catch-all
issuers.\597\ Accordingly, each broker-dealer would spend approximately
540 hours 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.\598\ The Commission
believes that broker-dealers, qualified IDQSs, and a registered
national securities association would already have systems and
personnel in place to create these records, so the initial burden of
putting procedures in place to ensure compliance with the amendments
would be one hour of internal cost per broker-dealer, qualified IDQS,
and registered national securities association to reprogram systems and
capture records pursuant to the recordkeeping requirement, leading to
an initial burden of 82 hours for the industry. Adding these values
together, it is estimated that the total industry-wide burden for this
documentation requirement would be 44,362 hours for the first year, and
44,280 hours annually going forward.
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    \595\ See infra Part VI.B, Table 3.
    \596\ The amended Rule defines ``current'' to mean, for the
documents and information specified in paragraph (b)(3) of the
amended Rule, the most recently required annual report or statement
filed pursuant to Section 13 or 15(d) of the Exchange Act and any
rule(s) thereunder, Regulation A, Regulation Crowdfunding, or
section 12(g)(2)(g) of the Exchange Act, together with any
subsequently required periodic reports or statements, filed pursuant
to section 13 or 15(d) of the Act and any rule(s) thereunder,
Regulation A, Regulation Crowdfunding, or Section 12(G)(2)(g) of the
Exchange Act. Accordingly, the definition of ``current'' includes
quarterly reports, as well as semi-annual reports, depending on the
issuer's reporting obligations. Paragraph (b)(4) of the amended Rule
provides a similar standard for exempt 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 PRA 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.
    \597\ Paragraph (b)(5)(i) of the amended Rule requires that the
catch-all issuer information be as of a date within twelve months
before the publication or submission of the quotation, 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.
    \598\ [(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.
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    The amendments would also create ongoing recordkeeping burdens for
broker-dealers relying on exceptions under paragraphs (f)(2), (f)(3),
(f)(5), (f)(6), or relying on a qualified IDQS's publicly available
determination that it has complied with the information review
requirement of the amended Rule (pursuant to paragraph
(a)(1)(ii)).\599\
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    \599\ As discussed in Part II.A.3 above, the amendments collapse
the exception in proposed paragraph (f)(7) into an unlawful activity
provision of the amended Rule, paragraph (a)(1)(ii).
---------------------------------------------------------------------------

(a) Unsolicited Quotation Exception--Rule 15c2-11(f)(2)
    Although there is current and publicly available information for
many issuers of securities involving unsolicited customer order
quotations, out of an abundance of caution, the Commission is basing
its estimate of recordkeeping obligations under this exception on data
regarding all unsolicited customer quotations, and assuming that the
number would remain consistent on an annual basis. According to OTC
Markets Group data, there were 5,782,286 quotations published in
reliance on the unsolicited quotation exception in 2019. Therefore, it
is estimated that there would be 5,782,286 quotations published in
reliance on the unsolicited quotation exception annually that would
require documentation and information to demonstrate that the quotation
is not by or on behalf of a company insider or an affiliate of the
issuer.
    Further, it is estimated that it would take a broker-dealer
approximately one minute to create a record regarding such unsolicited
customer quotation or, pursuant to paragraph (f)(2)(iii) of the amended
Rule, to review and document the written representation of a customer's
broker that the quotation is not on behalf of a company insider or an
affiliate of the issuer. Accordingly, it is estimated that annually,
broker-dealers would spend approximately 96,371 hours \600\ in the
aggregate (after rounding) complying with this recordkeeping
requirement. These 96,371 hours would be dispersed between 80 broker-
dealers, leading to an annual burden of approximately 1,205 hours per
broker-dealer.\601\
---------------------------------------------------------------------------

    \600\ (5,782,286 quotations x 1 minute)/60 minutes = 96,371
hours.
    \601\ 96,371 hours/80 broker-dealers = 1,205 hours.
---------------------------------------------------------------------------

    The Commission believes that broker-dealers would already have
administrative systems and procedures, as well as personnel, in place
to document and record the circumstances involved in unsolicited
customer quotations, and that the initial burden of putting procedures
in place to ensure compliance with this amendment would be three hours
of internal burden per broker-dealer to reprogram systems and capture
the requisite records relating to unsolicited quotations,\602\ leading
to an initial burden of 240 hours for the industry.\603\ Adding these
values together, it is estimated that the total industry-wide burden
for this documentation requirement would be 96,611 hours for the first
year, and 96,371 hours annually going forward.
---------------------------------------------------------------------------

    \602\ This three-hour burden estimate to reprogram systems and
capture records regarding the unsolicited quotation exception 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 Amendments to Regulation SHO,
Exchange Act Release No. 61595, at 183, 193 (Feb. 26, 2010), 75 FR
11232, 11283, 11286 (May 10, 2010) (``Regulation SHO Release'')
(describing ongoing internal compliance time for SROs 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).
    \603\ Supplemental Material .01 to FINRA Rule 6432 requires that
broker-dealers initiating or resuming quotations in reliance on the
exception provided by Rule 15c2-11(f)(2) (i.e., the unsolicited
quotation exception) must be able to demonstrate eligibility for the
exception by making a contemporaneous record of (1) the
identification of each associated person who receives the
unsolicited customer order or indication of interest directly from
the customer, if applicable; (2) the identity of the customer; (3)
the date and time the unsolicited customer order or indication of
interest was received; and (4) the terms of the unsolicited customer
order or indication of interest that is the subject of the quotation
(e.g., security name and symbol, size, side of the market, duration
(if specified) and, if priced, the price). Given this FINRA
recordkeeping requirement, the Commission believes that broker-
dealers will already have systems in place to document information
related to the unsolicited quotation exception.
---------------------------------------------------------------------------

(b) Piggyback Exception--Rule 15c2-11(f)(3)
    The piggyback exception requires that there be no more than four
business days in succession without a bid or offer priced quotation. To
comply with the recordkeeping requirement in paragraph (d)(2) of the
amended Rule, broker-dealers 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 this frequency of priced bid or offer quotation
requirement. The Commission estimates that broker-dealers, qualified
IDQSs, and registered national securities associations would make
determinations regarding the frequency of quotation requirement once
per trading day.
    Further, it is estimated that it would take a broker-dealer, a
qualified IDQS, or a registered national securities association
approximately one second to create a record regarding the frequency of
a priced bid or offer quotation, pursuant to paragraph (f)(3)(i) of the
amended Rule. 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, it is estimated that, annually,
broker-dealers, qualified IDQSs, and a registered national securities
association would spend approximately 66,251 hours \604\ in the
aggregate (after rounding) complying with this recordkeeping
requirement. These 66,251 hours would be dispersed between 80 broker-
dealers, one qualified IDQS, and one registered national securities
association leading to an annual burden of approximately 808 hours per
entity.\605\ The Commission believes that broker-dealers, qualified
IDQSs, and a registered national securities association already have
administrative systems and procedures, as well as personnel, in place
to create these records, so 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 the frequency of a priced bid or offer