followed for the majority of the days that its securities had
published quotations during 2018.
    \244\ See supra note 234 for information on data sources. The
Commission uses information on the IDQS and the OTC Markets Group
tier classification to estimate the number of issuers with current
and publicly available disclosures. In particular, the Commission
counts all issuers with securities quoted on OTC Bulletin Board
(``OTCBB'') and specific tiers on OTC Markets Group's system: OTCQX,
OTXQB, and OTC Pink: Current Information and OTC Pink: Limited
Information. This includes all quoted securities other than in the
OTC Market OTC Pink: Limited Information and OTC Pink: No
Information tiers. OTC Bulletin Board requires that quoted
securities are current in their required filings with the SEC or
other federal regulatory authority with proper jurisdiction. All OTC
Markets Group tiers other than OTC Pink: Limited Information and OTC
Pink: No Information require financial information to be at most six
months old and available on www.otcmarkets.com or on the
Commission's EDGAR system. The number the Commission computes here
is a rough estimate as it is possible that some issuers of
securities in the OTC Pink: Limited Information or OTC Pink: No
Information tiers voluntarily release current and public information
somewhere other than on the OTC Markets Group platform. Of all the
quoted securities that qualified for the piggyback exception in
calendar year 2018, the Commission estimates that 68 percent of them
had publicly available current disclosures.
    \245\ OTC Markets Group classifies issuers that provide audited
financial statements. In the analysis, the Commission assumes that
all issuers that have been identified as providing audited financial
statements provide audited balance sheets.
    Although current FINRA and Commission rules do not require the
financial statements of non-SEC reporting OTC securities issuers to
be audited, OTC Markets Group requires audited financials from OTC
issuers with securities quoted in the OTCQX U.S.[supreg] and
OTCQB[supreg] tiers. Issuers with securities quoted in the OTC Pink:
Current Information tier must provide an Attorney Letter with
Respect to Current Information if they do not file with the SEC and
do not publish audited financial information.
    \246\ See supra Part III.C.2.d for a detailed discussion of
shell companies. Even though broker-dealers had the ability to
publish quotes for these securities relying on the piggyback
exception, some quotes broker-dealers published for these securities
may have relied on other exceptions to the Rule.
    \247\ The Commission reviews information on assets and
shareholder equity of OTC issuers from a combination of four
sources: (1) Quarterly and annual filings in EDGAR, (2) S&P Global
Market Intelligence Compustat North America and Compustat Global
databases, (3) Bloomberg, and (4) the OTC Markets Group website
(https://www.otcmarkets.com). The Commission uses data on the most
recent financial information available, as the Commission does not
have access to historical financial data for many issuers. In some
cases, the most recent financial data available is outdated.
Specifically, for approximately 28 percent of OTC issuers, for which
the Commission has data, the financial data are from calendar year
2017 or earlier. Of the 15,851 unique OTC issuers that appear in the
data for calendar year 2018, the Commission is able to draw
financial data for 1,806 (11 percent) of them from EDGAR and
Compustat, 10,333 (65 percent) from Bloomberg, and 1,415 (nine
percent) from the OTC Markets Group website. The Commission is
unable to collect financial information for 2,297 (14 percent) of
OTC issuers because financial statement information for these
issuers was absent in the four data sources the Commission checked.
    The Commission is only able to observe total shareholder equity
and not affiliated shareholder equity on the balance sheets of
issuers of quoted OTC securities. Since total shareholder equity
serves as an upper bound on affiliated shareholder equity, the
number of issuers with affiliated shareholder equity greater than
$10 million must be no greater than the number of issuers with total
shareholder equity greater than $10 million.

                            Table 3--Issuers of Quoted OTC Securities, CY 2018 \248\
----------------------------------------------------------------------------------------------------------------
                                              SEC/Reg. A/ bank   International    No reporting/
                                                  reporting        reporting        disclosure         Total
                                                 obligation        obligation       obligation
----------------------------------------------------------------------------------------------------------------
                                          Public Information Available
----------------------------------------------------------------------------------------------------------------
                                                     (A)              (B)              (C)
----------------------------------------------------------------------------------------------------------------
Issuers.....................................     2,174 (32.44)    4,081 (60.89)       447 (6.67)           6,702
Securities..................................     2,522 (30.71)    5,201 (63.33)       489 (5.95)           8,212
Shell Company...............................       192 (88.48)         1 (0.46)       24 (11.06)             217
Audited Financials..........................     1,921 (59.58)    1,144 (35.48)       159 (4.93)           3,224
Assets >$50 mil & SE >$10 mil...............       578 (56.01)      438 (42.44)        16 (1.55)           1,032
----------------------------------------------------------------------------------------------------------------
                                         No Public Information Available
----------------------------------------------------------------------------------------------------------------
                                                     (D)              (E)              (F)
----------------------------------------------------------------------------------------------------------------
Issuers.....................................     1,146 (35.69)       111 (3.46)    1,954 (60.85)           3,211
Securities..................................     1,179 (35.49)       121 (3.64)    2,022 (60.87)           3,322
Shell Company...............................       136 (66.67)         0 (0.00)       68 (33.33)             204
----------------------------------------------------------------------------------------------------------------
                                           Total (by Reporting Status)
----------------------------------------------------------------------------------------------------------------
Issuers.....................................     3,320 (33.49)    4,192 (42.29)    2,401 (24.22)           9,913
Securities..................................     3,701 (32.09)    5,322 (46.14)    2,511 (21.77)          11,534
----------------------------------------------------------------------------------------------------------------

    The OTC market may attract those seeking to engage in fraudulent
practices, such as pump-and-dump schemes, due to a lack of publicly
available current information about certain issuers of quoted OTC
securities. Two academic studies have found that market manipulation
and pump-and-dump cases are concentrated among issuers of OTC
securities relative to exchange-listed securities.\249\ Another study
has highlighted a higher incidence of cases involving delinquent
filings and pump-and-dump schemes brought against issuers of OTC
securities relative to cases brought against issuers of exchange-listed
securities.\250\ A Commission staff analysis of 4,000 SEC litigation
releases between 2003 and 2012 found that the majority of alleged
violations involving issuers of OTC securities were primarily
classified as reverse mergers of shell companies or as market
manipulation.\251\ In addition, the Commission estimates, from a sample
of 226 Commission enforcement actions filed in fiscal years 2017 and
2018 involving 502 OTC securities, that 171 enforcement actions (76
percent) were

classified as involving delinquent filings and seven enforcement
actions (three percent) were classified as involving market
manipulation. In contrast, the Commission estimates, from a sample of
68 Commission enforcement actions filed in fiscal years 2017 and 2018
involving listed securities, that one enforcement action (two percent)
was classified as involving delinquent filings and three enforcement
actions (five percent) were classified as involving market
manipulation.
---------------------------------------------------------------------------

    \248\ See supra note 234 for information on data sources. The
Commission observes that issuers of OTC securities that trade on the
grey market differ from issuers of quoted OTC securities. The
majority of these issuers followed the alternative reporting
standard (69 percent) and a few (one percent) were identified as
shell companies. In addition four percent of these issuers had total
assets greater than $50 million and shareholder equity greater than
$10 million on their most recent audited balance sheets.
    \249\ One study analyzed 142 stock manipulation cases, including
pump-and-dump cases, in SEC litigation releases from 1990 to 2001
and found that that 48 percent involved OTC securities, while 17
percent involved securities listed on national exchanges. See
Aggarwal & Wu, supra note 22. A more recent study looked at 150
pump-and-dump manipulation cases between 2002 and 2015 and found
that 86 percent of these cases involved OTC securities. See Renault,
supra note 22.
    \250\ This study looked at a broader sample of securities cases
filed between January 2005 and June 2011 and identified 1,880 cases
involving OTC securities and 1,157 cases involving securities listed
on exchanges in the United States. The majority of OTC securities
cases, 1,148 (61 percent), were related to delinquent filings, while
151 (eight percent) were related to a pump-and-dump scheme, 159
(eight percent) were related to financial fraud, 12 (one percent)
were related to insider trading, and 212 (11 percent) were related
to other fraudulent misrepresentation or disclosure. In contrast,
only 26 (two percent) of listed securities cases involved delinquent
filings, 43 (four percent) involved pump-and-dumps, 278 (24 percent)
involved financial fraud, 399 (34 percent) involved insider trading,
and 173 (15 percent) involved other fraudulent misrepresentation or
disclosure. See Cumming & Johan, supra note 23.
    \251\ See Spotlight on Microcap Fraud (Feb. 22, 2019), https://www.sec.gov/spotlight/microcap-fraud.shtml.
---------------------------------------------------------------------------

    To highlight characteristics of securities and issuers in the OTC
market that tend to involve risk of fraud and manipulation, the
Commission examined quoted OTC securities that had been the subject of
Commission-ordered trading suspensions and those that have been
assigned a ``caveat emptor'' designation by OTC Markets Group during
the 2018 calendar year.\252\ The Commission summarizes the findings
below, in Table 4.\253\
---------------------------------------------------------------------------

    \252\ See supra note 25 for information about Commission-ordered
trading suspensions. OTC Markets Group explains that a ``caveat
emptor'' designation may be assigned to a security if OTC Markets
Group becomes aware of a misleading or a manipulative promotion; a
company is under investigation for fraudulent activity; there is a
regulatory suspension on the security; the company fails to disclose
a corporate action, such as a reverse merger; or there is another
public interest concern associated with the security. See Caveat
Emptor Policy, OTC Mkts. Grp. Inc. (last visited July 15, 2019),
https://www.otcmarkets.com/learn/caveat-emptor.
    \253\ All statistics in Table 4 were estimated by analyzing
security and issuer characteristics on the trading day before the
start of a Commission-ordered trading suspension or an assignment of
a ``caveat emptor'' designation by OTC Markets Group.

       Table 4--Quoted OTC Securities, Suspensions and OTC Markets Group ``Caveat Emptor'' Status, CY 2018
----------------------------------------------------------------------------------------------------------------
                                                                                OTC Markets
                                                                                SEC        Group ``caveat
                                                                                suspensions    emptor'' status
----------------------------------------------------------------------------------------------------------------
Issue Characteristics:
    Number of Securities......................................................             318               357
    Multiple Broker-Dealers Quoting...........................................       296 (93%)         336 (94%)
    Quotes with both Bid and Ask..............................................       270 (85%)         309 (87%)
    Piggyback Eligible........................................................       315 (99%)         354 (99%)
Issuer Characteristics:
    Number of Issuers.........................................................             315               349
    SEC/Reg. A/Bank Reporting Standard........................................       225 (71%)         233 (67%)
    International Reporting Standard..........................................         24 (8%)           25 (7%)
    Alternative Reporting Standard (ARS)......................................        65 (21%)          90 (26%)
    Public Information Available..............................................         28 (9%)          56 (16%)
    Audited Financials........................................................       231 (73%)         245 (70%)
    Shell Company.............................................................        30 (10%)          34 (10%)
----------------------------------------------------------------------------------------------------------------

    Overall, 318 quoted OTC securities were the subject of Commission-
ordered trading suspensions over the calendar year 2018. Relative to
the characteristics of the overall quoted OTC security market, broker-
dealers were more likely to be able to rely on the piggyback exception
to publish or submit quotations for quoted OTC securities subject to
trading suspensions. Although issuers of suspended quoted OTC
securities tended to be mostly reporting companies, they were less
likely to have current public information available relative to the
full sample of quoted OTC securities because many failed to file
required reports.\254\ Several of these companies were identified as
shell companies (10 percent).
---------------------------------------------------------------------------

    \254\ Issuers typically become subject to Commission-ordered
trading suspensions under circumstances where there is a lack of
publicly available current, accurate, or adequate information about
the company. This may happen, for example, when a company is not
current in its filings of periodic reports. As a result, it is not
surprising that many of these issuers were not quoted in OTCBB or
OTC market tiers that require current and publicly available
financial information.
---------------------------------------------------------------------------

    In addition, the Commission examined 357 instances in which quoted
OTC securities were flagged with the ``caveat emptor'' designation by
OTC Markets Group to inform investors to exercise additional care when
considering whether to transact in these securities. Most of these
companies had Commission-ordered trading suspensions.\255\ Similar to
the sample of OTC issuers with suspended securities, issuers of these
securities were less likely to have publicly available information.
---------------------------------------------------------------------------

    \255\ For 297 of the 357 ``caveat emptor'' securities, this
designation was assigned at the start of the suspension. In the
remaining 21 suspension over the calendar year 2018, the security
had already been designated with a ``caveat emptor'' status prior to
2018. The remaining 60 instances of ``caveat emptor'' assignment
were associated with fraud or public interest concerns other than
trading suspension.
---------------------------------------------------------------------------

    Increasing the availability of information about OTC issuers has
the potential to counteract misinformation, which can proliferate
through promotions and other channels. Several recent studies have
examined the effects of stock promotions on investor trading in the OTC
market.\256\ For example, one study has found large price and trading
volume movements following spam email campaigns that conveyed optimism
about a particular OTC security's price and were viewed as containing
credible information about the security.\257\ Others have documented
that cases in which issuers have secretly hired stock promoters for
campaigns to increase their stock price and liquidity often are
accompanied by trading by company insiders.\258\ Based on publicly
available website information reviewed by the Commission on OTC
securities that were subjects of promotion campaigns, the Commission
identified 350 OTC securities (three percent of all quoted OTC
securities) that were featured in at least one promotion campaign
during 2018. The vast majority of these OTC securities, 297 (85
percent), were issued by companies that did not otherwise provide
current and publicly available

financial disclosures. An alternative data source from OTC Markets
Group data identified 241 OTC securities (two percent of all quoted OTC
securities) that were involved in at least one promotion campaign
during 2018 with 58 of these securities (24 percent) issued by
companies that did not have publicly available information.
---------------------------------------------------------------------------

    \256\ See White, supra note 41, at 11-12.
    \257\ See Karen K. Nelson et al. Are Individual Investors
Influenced by the Optimism and Credibility of Stock Spam
Recommendations?, 40 J. Business Fin. & Acct. 1155-83 (2013)
(``[T]rading volume more than doubles in the days immediately
following the spam campaign, and the mean return is positive and
significant. However, the median return is zero, with nearly as many
firms experiencing negative returns as positive on the spam date . .
. . [C]ombining optimistic target price projections with credible,
but stale, information from old press releases increase the return
and volume reaction to spam. Moreover, the larger the return implied
by the target price, the larger the market reaction.'').
    \258\ See Nadia Massoud et al., Does It Help Firms to Secretly
Pay for Stock Promoters?, J. Fin. Stability 26, 45-61 (2016)
(sampling both OTC securities and exchange-listed securities).
---------------------------------------------------------------------------

    An academic study has found that OTC stocks tend to be owned
primarily by retail investors rather than institutional investors.\259\
Studies have also found that, on average, quoted OTC securities earn
lower returns than exchange-listed stocks. These investment decisions
by individuals may be due to investors misestimating payoff
probabilities for OTC stocks by overweighting extreme positive
outcomes, particularly in cases where there is a lack of available
information about the issuer.\260\ An alternative explanation,
supported by recent research, indicates that some investors in OTC
securities may be driven by a speculative motive.\261\ Demographic
analysis of OTC investors suggests that they tend toward higher wealth
and education.\262\ However, OTC security holding period returns are
worse for investors residing in locations with populations that may be
more vulnerable in that they are older, lower-income, and less
educated.\263\ Overall, findings in these studies suggest that
investors in the OTC market might benefit from additional information
regarding company fundamentals. For example, some retail investors
could more readily find, through online searches, information that
refutes misinformation disseminated through promotions with publicly
available proposed paragraph (b) information. Other retail investors
could benefit from more efficient prices that are less susceptible to
manipulation as a result of the trading activity of better-informed
investors who acquire this information.
---------------------------------------------------------------------------

    \259\ See Ang et al., supra note 233 (stating that retail
investors are ``the primary owners of most OTC stocks, whereas
institutional investors hold significant stakes in nearly all stocks
on listed exchanges, including small stocks'').
    \260\ See White, supra note 41.
    \261\ See Christian Leuz et al., Who Falls Prey to the Wolf of
Wall Street? Investor Participation in Market Manipulation (NBER,
Working Paper No. 24083, 2017), available at https://www.nber.org/papers/w24083.pdf (finding an average loss of 30 percent in a sample
of 421 pump-and-dump schemes from 2002 to 2015 involving 6,569
German investors). The study also finds that ``35% of the tout
investors have been day-trading in penny stocks or are frequent
traders with short investment horizons. These investors appear to be
willing to take substantial risks and trade aggressively also in
other stocks. These investor types are more likely to invest in
touts, place larger bets and have better returns. Their
participation in touts looks quite differently from more
conservative traders, who trade infrequently and do not invest in
penny stocks. This group could be the ones that were tricked into
the schemes.'' Id.
    \262\ See White, supra note 41; see also John R. Nofsinger &
Abhishek Varma, Pound Wise and Penny Foolish? OTC Stock Investor
Behavior, 6 Rev. Behav. Fin. 2-25 (2014).
    \263\ See White, supra note 41 (``[M]edian holding period
returns deteriorate for zip codes with greater percentages of
elderly, less education and residence stability, and lower income
and wealth. All of the return differences are economically and
statistically significant.'').
---------------------------------------------------------------------------

C. Discussion of Economic Effects

1. Effects of Rule 15c2-11 Amendments
    In this section, the Commission discusses the expected costs and
benefits of the proposed amendments to Rule 15c2-11. These amendments
generally seek to increase the availability of current company
financial information within the quoted OTC market and modify rule
requirements to account for developments in this market.
    The amendments would impact OTC investors, issuers, and
intermediaries such as broker-dealers. The Commission anticipates the
principal economic effects of the proposed amendments to be as follows.
First, the transparency requirements could enable investors to learn
more about the fundamental value of certain companies in the OTC
market, which may direct their funds toward higher-return investments.
In addition, other investors could benefit from more efficient prices
that are less susceptible to manipulation as a result of the trading
activity of better-informed investors who acquire this information.
Second, the amendments may reduce the incidence of fraudulent schemes,
such as pump-and-dump activity, as a result of heightened disclosure
requirements and restrictions on the piggyback exception being applied
to non-transparent and illiquid securities. Finally, broker-dealers
could bear additional costs from the information review requirement as
well as filing FINRA Forms 211 more frequently (e.g., if proposed
paragraph (b) information is not publicly available) as a result of,
among other things, proposed limitations on relying on the piggyback
exception.\264\ To the extent that broker-dealers currently incur costs
associated with disseminating proposed paragraph (b)(5) information,
such costs on broker-dealers may be mitigated to some extent. The
requirement for proposed paragraph (b)(5) information to be publicly
available would reduce the broker-dealer's obligation to make proposed
paragraph (b) information available upon request to interested
investors electronically.
---------------------------------------------------------------------------

    \264\ Several of the proposed amendments would provide
additional exceptions to the Rule (e.g., eliminating the requirement
for 12 business days of quotes within the previous 30 calendar days
to establish piggyback eligibility). However, the Commission does
not expect these amendments to have a significant impact on the
costs and benefits of the Rule, as discussed below.
---------------------------------------------------------------------------

    In specific circumstances, other provisions of the proposed
amendments seek to relieve broker-dealers of costs related to the
information review requirement and filing FINRA Form 211. For example,
the exception for issuers with ADTV value greater than $100,000, total
assets greater than $50 million, and unaffiliated shareholder equity
greater than $10 million will relieve broker-dealers of the information
review requirement for larger, more liquid issuers which are
potentially less susceptible to fraud.
    Broker-dealers could also incur costs and benefits associated with
possible migration in trading activity from certain issuers and markets
to others (e.g., between quoted and grey markets). Some of these costs
and benefits to broker-dealers may be passed on to investors in the
form of higher or lower transaction costs and account fees. The costs
and benefits associated with the specific proposed Rule provisions are
discussed below.
(a) Making Proposed Paragraph (b) Information Current and Publicly
Available
    The costs and benefits discussed below pertain to the general
requirements for proposed paragraph (b) information to be publicly
available and current to publish or submit quotations for, or to
maintain a quoted market in, quoted OTC securities. They also pertain
to the new public disclosure requirements for the unsolicited quotation
exception. The Commission expects that investors would benefit from
easier access to proposed paragraph (b) information through public
mediums, such as EDGAR or the website of a qualified IDQS, a registered
national securities association, the issuer, or a registered broker-
dealer that publishes proposed paragraph (b) information related to
quoted OTC securities.
    Presently, not all issuers of quoted OTC securities publicly
disclose current financial information.\265\ This information could
allow investors to better assess the quality of the issuer

and help them to avoid lower-return investments, such as those involved
in a fraudulent scheme. By enabling investors to compare information
contained in promotion campaigns to that in current company
disclosures, the proposed requirement for proposed paragraph (b)
information to be publicly available may help investors avoid trading
on false information. Investors could also use this information to make
better-informed corporate voting decisions to the extent that OTC
issuers put matters to a shareholder vote in annual or special
meetings.\266\ Investors could also benefit from more efficient prices
that are less susceptible to manipulation as a result of the trading
activity of better-informed investors who acquire this information. In
addition, broker-dealers will be restricted from publishing quotations
for securities without publicly available proposed paragraph (b)
information, which would likely push trading activity in these
securities into the grey market.\267\ Therefore, these proposed
requirements could have a deterrent effect in inhibiting fraudulent
activity related to quoted OTC securities. Investors could benefit from
decreased exposure to investment losses as a result of diminished
frequency of fraudulent activity in the OTC market.
---------------------------------------------------------------------------

    \265\ Notably, there are no requirements to make financial
disclosures publicly available for OTC securities quoted on the OTC
Market OTC Pink: No Information tier. An analysis of quoted OTC
securities during the calendar year 2018 has revealed that
approximately 32 percent of issuers do not publicly disclose current
financial information. See supra Part VIII.B.
    \266\ The Commission lacks data on the quantity and nature of
matters put to a vote at annual or special meetings of issuers of
quoted OTC securities not subject to Commission reporting
obligations.
    \267\ Using data on daily dollar trading volume for quoted OTC
securities during the 2018 calendar year, the Commission finds that
quoting activity and trading activity are correlated. In particular,
the Commission finds that OTC securities with published quotations
were 1.82 times more likely to have reported a positive dollar
trading volume on a given day in 2018 relative to securities trading
on the grey market. In addition, if they were traded, OTC securities
with published quotations had, on average, 6.68 times greater daily
dollar trading volume than securities trading on the grey market.
See supra note 234 for a description of OTC securities data sources.
---------------------------------------------------------------------------

    Higher quality issuers (i.e., issuers more likely to have
productive investment opportunities) could benefit from increased
access to capital to the extent that the change leads to a net increase
in demand for higher quality OTC stocks. Previous academic studies have
highlighted the relationship between the breadth and quality of firm
disclosures and liquidity in the OTC market.\268\ Conversely, issuers
may also incur costs associated with making proposed paragraph (b)
information publicly available to enable broker-dealers to publish or
submit quotations for their securities. These costs could include
preparing and producing proposed paragraph (b) information in document
form and ensuring that the proposed paragraph (b) information is
publicly available.\269\ However, this particular cost is mitigated by
the fact that these amendments would offer several possible
alternatives for releasing proposed paragraph (b) materials, including
making disclosures on public information repositories, such as
EDGAR.\270\ Alternatively, OTC issuers may elect not to provide
proposed paragraph (b) information to the public, in which case their
securities may exit from the quoted market, and their shareholders may
incur costs related to loss of liquidity. The Commission estimates that
the cost to an issuer in connection with this proposed amendment to the
Rule will be, at most, equivalent to the cost of completing and filing
a Form C-AR under Regulation Crowdfunding. The staff report on
Regulation Crowdfunding cites survey data and estimates related costs
to issuers to be, at most $12,804.\271\ There were 3,211 issuers of
quoted OTC securities in 2018 without public information subject to the
requirements of proposed paragraph (b)(5).\272\ Therefore, the
Commission estimates that the maximum annual monetized cost of
producing and updating proposed paragraph (b) information and making it
publicly available every six months to be $82,227,288 across OTC
issuers (and this represents a high upper bound, because the survey
includes costs that may be unrelated to the proposed Rule, such as
legal review of promotional materials).\273\ This cost may be mitigated
by a number of factors, including whether some of the cost associated
with ensuring that the proposed paragraph (b) information is publicly
available may be borne by broker-dealers intending to quote the
security of this issuer.\274\
---------------------------------------------------------------------------

    \268\ See John (Xuefeng) Jiang et al., Private Intermediary
Innovation and Market Liquidity: Evidence from the Pink Sheets
Market, 33 Contemp. Acct. Res. 920-948 (2016) (finding that
following the introduction of Pink tiers in OTC Markets Group, each
associated with different self-established eligibility requirements
pertaining to disclosure, firms with higher levels of disclosure
experienced an increase in liquidity, while firms that did not
disclose information experienced a decrease in liquidity); see also
Bruggemann et al., supra note 49 (finding that market liquidity and
the propensity of a security to experience a crash in returns, both
used as proxies for the quality of a security in the analysis,
decrease monotonically when moving across OTC tiers from those with
high regulatory strictness and disclosure requirements to those with
lower requirements); Ryan Davis et al., Information and Liquidity in
the Modern Marketplace (Working Paper, 2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2873853.
    \269\ Issuers that presently make disclosures publicly
available, either voluntarily or because of a reporting obligation,
and have systems in place for the preparation of these disclosures,
would not face additional costs as a result of this proposed
amendment. An analysis of quoted OTC securities during the calendar
year 2018 has revealed that approximately 68 percent of issuers
publicly disclose current financial information. See supra Part
VIII.B.
    \270\ Presumably, issuers will choose the most cost-effective
method to disseminate proposed paragraph (b) information.
    \271\ See U.S. Securities and Exchange Commission Staff, Report
to the Commission: Regulation Crowdfunding (June 18, 2019),
available at https://www.sec.gov/files/regulation-crowdfunding-2019_0.pdf. This report cites survey data and estimates costs to
issuers undertaking a crowdfunding offering, including accounting
costs of $3289, legal costs of $3297, and certain disclosure costs
of $6218. Some of these costs may include costs unrelated to Form C-
AR (such as legal review of promotional materials). Therefore, the
cost cited above serves as an upper bound for the cost of completing
and filing Form C-AR.
    \272\ See supra Part VIII.B for an analysis of quoted OTC
securities issuers for which there was no public information in
2018. Proposed paragraph (b)(5) would include issuers without a
reporting obligation in addition to issuers delinquent in their
reporting obligations.
    \273\ $12,804 x 3,211 issuers x two times per year =
$82,227,288. In the Commission's estimate of the maximum total cost
to issuers of providing proposed paragraph (b) information publicly,
the Commission has assumed that all issuers of quoted OTC securities
that do not currently provide information publicly will choose to do
so consistent with the proposed rule provisions. In addition, the
Commission has assumed that these issuers will update this
information every six months in order to maintain quoting activity
in their securities. It may be the case that some of these issuers
will choose not to provide any disclosures and quoting in their
securities will cease. In these cases, costs associated with
providing proposed paragraph (b) information for these issuers will
be null.
    \274\ For example, it is unclear the extent to which specific
OTC issuers without public disclosures may already be producing
financial information internally or even have operations producing
income and other accounting items. In these cases, the Commission
expects the cost for these issuers would be less than the
Commission's estimate.
---------------------------------------------------------------------------

    Broker-dealers may incur costs or accrue benefits from changes in
the liquidity of quoted OTC securities as a result of changes in demand
associated with new disclosures within quoted markets. For example,
there may be changes in trading volume which alter the number of
transactions from which broker-dealers earn fees. As discussed below,
there may be migration from the quoted market to the grey market for
OTC issuers avoiding these requirements. Therefore, the proportion of
rents earned by broker-dealers from the grey market for OTC securities
may increase relative to the quoted market. The net effect of these
changes on the profits of trading intermediaries is unclear. Some of
these costs and benefits to broker-dealers may be passed on to
investors in the form of higher or lower transaction costs and account
fees. The Commission anticipates that costs and benefits would be
passed on more readily as competition increases

among broker-dealers for OTC transactions.
(b) Proposed Amendments to Rule 15c2-11 Exceptions
    The following proposed amendments to the piggyback exception would
serve to limit the circumstances under which the exception would apply
relative to the baseline: The requirement for proposed paragraph (b)(5)
information to be current and publicly available within six months
before the date of publication or submission of quotation in an IDQS in
order for broker-dealers to continue to rely on the piggyback
exception; the requirement that reliance on the piggyback exception be
based upon quotations with both bid and ask prices; and the inability
of broker-dealers to rely on the piggyback exception to publish or
submit quotations for securities of shell companies or for securities
within 60 calendar days of a trading suspension. These amendments
generally would serve to draw quotation and trading activity away from
less liquid and less transparent quoted OTC securities.
    Currently, broker-dealers may rely on the piggyback exception to
publish or submit quotations for the vast majority of quoted OTC
securities, but many issuers of these securities do not provide current
publicly available financial disclosures.\275\ This requirement would
encourage OTC issuers that would like to maintain a quoted market for
their securities to provide current information to the public. The
Commission discusses in detail the expected benefits and costs
associated with providing current information publicly for investors,
issuers of quoted OTC securities, and broker-dealers above.
---------------------------------------------------------------------------

    \275\ See supra note 265. The Commission estimates that during
the calendar year 2018, issuers of 3,250 quoted OTC securities for
which broker-dealers were relying on the piggyback exception when
publishing quotations, did not have publicly available current
information.
---------------------------------------------------------------------------

    Generally, these amendments could benefit investors by drawing
their trading activity away from less liquid and less transparent
quoted OTC securities that could attract fraudulent activity. Issuers
in the OTC market could benefit from greater access to capital.\276\
These amendments could also benefit investors by potentially deterring
fraudulent activity. For example, the inability of broker-dealers to
rely on the piggyback exception when publishing quotations for
securities of shell companies could draw trading activity away from
these securities. Currently, many publications of quotations for quoted
OTC securities associated with issuers identified as shell companies
are eligible for broker-dealers to rely on the piggyback exception.
Potential fraudsters would incur costs in providing proposed paragraph
(b) information to perpetrate fraud in shell companies.
---------------------------------------------------------------------------

    \276\ The potential increase in access to capital for issuers is
based on the likelihood that OTC market investors prefer to invest
in unlisted securities, and market changes as a result of the
proposed amendments could result in the divestiture of fraud-related
securities and increased investment in non-fraud-related securities.
However, to the extent that investment decisions are driven by other
factors, such as a personal interest in specific companies, then
there might be no increase in access to capital for issuers.
---------------------------------------------------------------------------

    These amendments could also cause broker-dealers to incur
additional costs. In particular, broker-dealers may need to comply with
the information review requirement as well as file FINRA Forms 211 more
often to maintain a quoted market for securities under these
restrictions. The Commission estimates that it will take broker-dealers
four hours to complete the information review and file Form 211 for
prospectus issuers, Reg. A issuers, and reporting issuers and eight
hours to do so for exempt foreign private issuers or catch-all issuers
whenever a broker-dealer initiates the publication or submission of a
quotation for an OTC security.\277\ Therefore, broker-dealers will bear
a monetized cost of $240 for prospectus issuers, Reg. A issuers, and
reporting issuers, $480 for exempt foreign private issuers and catch-
all issuers whenever a broker-dealer initiates the publication or
submission of a quotation in an OTC security.\278\ The Commission
estimates that 3,696 securities would lose piggyback eligibility as a
result of the proposed restrictions on the piggyback exception.\279\
Therefore, the aggregate monetized cost on broker-dealers would be
$1,426,800 assuming that 1,447 securities were from prospectus, Reg. A,
or reporting issuers, 238 were from exempt foreign private issuers, and
2,011 were from catch-all issuers.\280\
---------------------------------------------------------------------------

    \277\ The Commission estimates that it would take one hour for a
broker-dealer to complete and file FINRA Form 211.
    \278\ 94 hours x $60 per hour = $240 for prospectus, Reg. A, and
reporting issuers; 8 hours x $60 per hour = $480 for exempt foreign
private issuers and for catch-all issuers.
    \279\ The Commission estimates that during 2018, broker-dealers
could publish quotations relying on the piggyback exception for
10,122 quoted OTC securities. The Commission estimates the total
number of securities that would lose piggyback eligibility under the
proposed amendments by considering the number of securities that
were piggyback eligible, but also would meet at least one of the
following conditions: (1) The issuer of the quoted OTC security did
not provide public information (3,022 securities); (2) the issuer of
the quoted OTC security was a shell company (448 securities); (3)
the security did not have both bid and ask quotations for four or
more consecutive days (879 securities); and (4) the security was
piggyback eligible after having been suspended (316 securities).
    Of the 3,696 securities that would lose piggyback eligibility
under the proposed amendments, 1,447 were securities of prospectus
issuers, Reg. A issuers, and reporting issuers, 238 were of exempt
foreign private issuers, and 2,011 were of catch-all issuers.
    \280\ 1,447 x $240 + 238 x $480 + 2,011 x $480 = $1,426,800. To
the extent that broker-dealers may maintain the ability to rely on
the piggyback exception by starting to publish both bid and ask
quotations for securities that are presently piggyback eligible with
only bid, ask or unpriced quotations, fewer securities may lose
piggyback eligibility under the proposed amendments than the
estimates the Commission presents. As noted in the PRA section,
broker-dealers may also withdraw from quoting in securities such as
shell companies and suspended securities. Therefore, the Commission
expects the costs for broker-dealers computed here to be an upper
bound.
---------------------------------------------------------------------------

    Broker-dealers may also incur costs related to determining whether
or not these conditions apply to the issuer (i.e., whether the issuer
is a shell company within the proposed definition). The Commission
believes that broker-dealers could set up information systems to assess
whether these conditions apply to OTC securities such that there would
a one-time cost but negligible ongoing cost. However, these costs on
individual broker-dealers may be mitigated by allowing a qualified IDQS
to satisfy the information review requirement under the Rule, as the
amendments propose. Additionally, these costs may be mitigated by
permitting broker-dealers to rely on determinations by qualified IDQSs
and national securities associations that proposed paragraph (b)
information is publicly available and that an exception to the Rule
applies. The Commission estimates that it would take a broker-dealer,
IDQS, or national securities association fifteen hours to establish a
system to determine whether exceptions apply to an issuer, for a
maximum aggregate cost of $81,900.\281\ Alternatively, broker-dealers
could withdraw from publishing or submitting quotations for certain OTC
securities as a result of the requirements related to proposed
paragraph (b) information, including the requirements to review and
retain this information. This withdrawal may impose costs on investors
by reducing liquidity for OTC securities they might want to purchase or
already own prior to the withdrawal of liquidity. In addition, such
withdrawal might impose costs of raising capital for OTC issuers.
Broker-dealers could, again, incur costs and

benefits associated with possible migration in trading activity from
certain issuers to others as well as from the quoted to non-quoted
market. Some of these costs and benefits to broker-dealers may, again,
be passed on to investors.
---------------------------------------------------------------------------

    \281\ (89 broker-dealers + 1 IDQS + 1 National Securities
Association) x 15 hours x $60 = $81,900. These costs are an upper
bound of the total costs on broker-dealers because the actual number
of broker-dealers quoting OTC securities may be a subset of the 89
broker-dealers identified by OTC Markets Group.
---------------------------------------------------------------------------

    The proposed requirement that reliance on the piggyback exception
be conditioned on quotations with both bid and ask prices could also
impose costs on broker-dealers and issuers of quoted OTC securities by
possibly limiting the formation of an active quoted market for OTC
securities for which broker-dealers initially publish quotes with only
either a bid or ask price or no prices at all. The Commission estimates
that, out of 431 quoted OTC securities for which broker-dealers could
start relying on the piggyback exception to publish or submit
quotations during the calendar year 2018, 45 (10 percent) OTC
securities had quotes with only either a bid or ask price for the
entire first 30-days of being quoted and 14 (three percent) had
unpriced quotes only.\282\ At the same time, however, if the proposed
requirement were to encourage broker-dealers to shift away from
publishing unpriced or quotations with only either a bid or an ask
price to publishing quotations with both bid and ask prices for some
quoted OTC securities, the proposed requirement may expedite the
development of a two-sided market and facilitate price discovery and
liquidity in these securities.
---------------------------------------------------------------------------

    \282\ Of the 14 quoted OTC securities that became piggyback
eligible based on unpriced quotations, six (42 percent) had a
published priced quote within the first 60 days after becoming
piggyback eligible.
---------------------------------------------------------------------------

    In contrast, eliminating from the piggyback exception the
requirement for 12 days of quotations within the previous 30 calendar
days has the potential to widen the circumstances under which broker-
dealers may rely on the piggyback exception relative to the baseline.
This proposed amendment could make publishing quotations and trading
easier in less liquid securities. Therefore, this amendment could, in
principle, mitigate both the benefits and costs of the amendments
described above. However, the Commission expects that eliminating the
12-day publication-of-quotations requirement would have an
insignificant effect on the OTC market as it should only impact a small
fraction of quoting activity. In particular, of all quoted OTC
securities in the calendar year 2018, the Commission estimates that
only nine of more than 10,000 securities had fewer than 12 days of
published quotations within the 30 previous calendar days, with no more
than four business days in succession without a quotation.
    These proposed amendments also include changes to the exception for
unsolicited customer quotations. In particular, the amendments limit
reliance on the unsolicited quotation exception on behalf of company
insiders when proposed paragraph (b) information is not current and
publicly available. These amendments could increase costs for broker-
dealers because they may need to verify whether proposed paragraph (b)
information is current and publicly available. Broker-dealers could
also be required to document and record the circumstances involved in
an unsolicited customer quotation. The Commission estimates that the
cost of establishing systems to document and record these circumstances
would be included in the $81,900 systems cost discussed previously. In
addition, the Commission estimates that it would take a broker-dealer
one minute to document and record these circumstances for each customer
order arising from a distinct customer and circumstance, resulting in a
monetary cost of $89.\283\ The Commission lacks data to estimate how
many unsolicited customer quotations come from distinct customers under
distinct circumstances, which would trigger the need for broker-dealers
to document a new circumstance. They could also increase costs for
broker-dealers as a result of the information review requirement, as
well as filing FINRA Form 211, when the exception does not apply. The
costs to broker-dealers associated with these requirements for various
types of issuers are the same as discussed previously in this section.
However, the Commission lacks data on which unsolicited customer
quotations come from company insiders.
---------------------------------------------------------------------------

    \283\ (89 broker-dealers x 1 hour) x $60 = $5340. (89 broker-
dealers x 1/60 hour) x $60 = $89.
---------------------------------------------------------------------------

    These costs could be passed on to OTC investors. For example, OTC
investors may be required to provide documentation supporting the fact
that they are not a prohibited person within this exception, and may
experience reduced liquidity in certain securities in which they are
invested. The magnitude of this potential cost to OTC investors could
vary significantly depending on the manner in which it is or is not
acquired by broker-dealers. However, the Commission believes that this
cost could be minimal because there are means to provide documentation
such as through attestations which would require minimal resources on
the part of the investor.
    There could also be benefits to OTC investors from the requirement
for broker-dealers to obtain and review proposed paragraph (b)
information when the unsolicited quotation exception does not apply.
For example, the review of proposed paragraph (b) information in order
to provide a quotation for an unsolicited customer quotation of a
company insider could deter fraud by alerting broker-dealers to
potential sales by company insiders related to fraud. In addition, as
discussed above in relation to proposed limitations on the piggyback
exception, the costs and benefits to investors, issuers and broker-
dealers would be qualitatively similar. Issuers in the OTC market could
benefit from greater access to capital if capital flows away from
fraudulent investments. Broker-dealers could also incur costs and
benefits associated with possible migration in trading activity if
unsolicited customer orders move from quoted to non-quoted markets.
These costs and benefits could be passed on to OTC investors. Finally,
there would be benefits and costs associated with the requirements
pertaining to public disclosure of proposed paragraph (b) information,
as the unsolicited quotation exception for a company insider would be
contingent on this information being current and publicly available.
(c) Proposed New Exceptions to Rule 15c2-11 To Reduce Burdens
    These amendments propose three new exceptions to except
publications of quotations for certain OTC securities from the
provisions of Rule 15c2-11, primarily the requirement for broker-
dealers to obtain and review proposed paragraph (b) information. The
first of the three new exceptions would apply to securities with (1) a
$100,000 ADTV value and where (2) the issuer of such security has $50
million total assets value and $10 million unaffiliated shareholders'
equity on the issuer's publicly available audited balance sheet issued
within six months after the end of the most recent fiscal year. This
exception would apply only to securities for which proposed paragraph
(b) information is current and publicly available. This exception is
meant to target more visible quoted OTC securities for which current
and reliable information about the issuer is publicly available to
investors, specifically for larger issuers, and for more liquid
securities. This exception is expected to reduce the broker-dealer
burden of complying with the Rule with respect to publishing quotations
for securities for a subset of issuers of OTC securities. The analysis
in the baseline revealed no

issuers that had financial information publicly available to investors
and that had been the subject of Commission-ordered trading suspensions
or assigned a ``caveat emptor'' designation by OTC Markets Group in
calendar year 2018 would have met both the ADTV and assets tests.\284\
Therefore, the Commission expects that many other quoted OTC securities
that would qualify for these exceptions would be less susceptible to
misinformation campaigns and share price run-ups as a result of buying
pressure.
---------------------------------------------------------------------------

    \284\ The Commission finds that in 2018, five suspended
securities and 17 ``caveat emptor'' securities had an ADTV value in
excess of $100,000. However, issuers of these securities would not
have satisfied the thresholds for assets and unaffiliated
shareholder equity required to qualify for the exemption under the
proposed amendments. Similarly, 11 issuers of suspended securities
and 10 issuers of securities with the ``caveat emptor'' designation
that met the assets and the shareholder thresholds did not have
sufficient trading volume that would meet the liquidity threshold.
    This analysis pertains to total shareholder equity which serves
as an upper bound for unaffiliated shareholder equity. Therefore,
any firms which fall below $10 million in shareholder equity fall
below this threshold for unaffiliated shareholder equity.
    Because delinquent filings may be the reason for the trading
suspension, the Commission is aware that the Commission's analysis
using data on total assets and shareholder equity of issuers with
suspended OTC securities may rely on information which is outdated
and no longer representative of issuer fundamentals.
---------------------------------------------------------------------------

    The main economic effect of this proposed exception regarding ADTV
and assets tests should be to relieve broker-dealers from the
information review requirement and filing a FINRA Form 211 to publish
quotations in a quotation medium. As before, the Commission estimates
that broker-dealers will incur relief from a monetized cost of $240 for
prospectus issuers, Reg. A issuers, and reporting issuers, $480 for
exempt foreign private and catch-all issuers whenever a broker-dealer
publishes or submits a quotation for issuers satisfying these
requirements. According to the Commission's estimates from the PRA, two
issuers would be reporting issuers while one would be a catch-all
issuer per year so that the total cost savings would be $960.\285\
Broker-dealers would also need to incur costs to verify that OTC
issuers satisfy these ADTV and size thresholds. The Commission believes
that broker-dealers could set up information systems to assess whether
these conditions apply to OTC issuers such that there would a one-time
cost but negligible ongoing cost. This cost would be included in the
$81,900 systems cost across broker-dealers, IDQSs, and national
securities associations discussed previously. Some of these benefits
and costs may be passed on to OTC investors. Certain issuers or
securities that would meet the Rule's proposed ADTV and assets test but
currently trade in the grey market may benefit from a broker-dealer
establishing a quoted market without incurring costs associated with
complying with the Rule's provisions. This migration may result in a
benefit to investors to the extent that it may establish a new quoted
market that facilitates price discovery and liquidity for higher
quality securities previously trading in the grey market.
---------------------------------------------------------------------------

    \285\ (2 reporting issuers x $240) + (1 catch-all issuer x $480)
= $960.
    There could be additional relief as a result of the ADTV and
assets exceptions for broker-dealers quoting securities that end up
losing piggyback eligibility under the proposed paragraph (g)(3)
exception. The Commission estimates that out of the 3,696 securities
that would lose piggyback eligibility under the proposed amendments,
four securities of prospectus issuers, Reg. A issuers, and reporting
issuers and three securities of exempt foreign private issuers would
have satisfied the ADTV value and assets thresholds. The ability of
broker-dealers to rely on the proposed paragraph (g)(5) exception
for securities for which they could no longer rely on the proposed
paragraph (g)(3) exception could lead to an additional relief of
four x $240 + 3 x $480 = $2,400.
---------------------------------------------------------------------------

    The second of the three proposed new exceptions would apply to
quotations following a registered or Regulation A offering, where the
broker-dealer was named as an underwriter in the registration statement
or offering circular and publishes or submits quotations for the same
class of security in an IDQS within certain specified time frames. This
exception is targeted towards those OTC securities that were recently
offered in a transaction in which a regulated entity may have conducted
a due diligence review. Because of the liability attached to
underwriting activity, an underwriter typically conducts a due
diligence review to mitigate potential liability associated with
underwriting an offering of securities. Depending on its breadth and
quality, this review may permit an underwriter to assert a defense to
liability under Section 11 or Section 12(a)(2) of the Securities Act.
As a result, underwriters of registered and Regulation A offerings are
incentivized to confirm that the information provided to investors in
the prospectus for a registered offering and offering circular for a
Regulation A offering is materially accurate and obtained from a
reliable source. Thus, excepting these quotations from the Rule's
provisions is expected to reduce the burden of complying with the Rule
for certain broker-dealers without sacrificing investor protection. The
Commission does not currently have data that allow it to estimate the
propensity with which broker-dealers are underwriting offerings for the
same securities for which they are publishing quotations and thus
quantify the effect of this exception on broker-dealers.
    In addition, the Commission is also proposing an exception for
publications or submissions of quotations respecting securities where a
qualified IDQS complies with the Rule's provisions, so long as the
issuer of the security is not a shell company. Broker-dealers could
also rely on a publicly available determination by a qualified IDQS
that proposed paragraph (b) information is current and publicly
available for a given security. This exception is expected to reduce
the burden on some broker-dealers with respect to publishing or
submitting quotations for certain OTC securities. However, broker-
dealers may incur additional costs related to determining certain
characteristics about the issuer (e.g., whether the issuer is a shell
company within the proposed definition). The Commission believes that
broker-dealers or qualified IDQSs could set up information systems to
assess whether these conditions apply to OTC issuers such that there
would a one-time cost but negligible ongoing cost. This cost would
again be included in the $81,900 systems cost across broker-dealers,
IDQSs, and registered national securities associations discussed
previously. These costs and benefits may, again, be passed on to OTC
investors. Although the Commission recognizes that, currently, an IDQS
already operates as a public repository for some information about the
securities that trade in their market, the Commission is unable to
predict how common it would become for a qualified IDQS to be willing
to take on the responsibility of satisfying the requirements of the
qualified IDQS review exception to the Rule, allowing certain broker-
dealers to qualify for this exception.
    Lastly, the Commission is also proposing an exception for
publications or submissions of quotations by broker-dealers that rely
on publicly available determinations by a qualified IDQS or a
registered national securities association that proposed paragraph (b)
information is current and publicly available, as well as whether a
broker-dealer may rely on certain proposed exceptions to the Rule. The
Commission expects the main economic effect of this proposed exception
to be mitigating costs broker-dealers are expected to incur associated
with determining certain characteristics about an issuer (e.g., whether
the issuer is a shell company within the proposed definition, or
whether the security

jointly satisfies the ADTV and assets tests.) However, the Commission
is unable to predict how common it would become for a qualified IDQS or
registered National Securities Association to make these
determinations.
2. Efficiency, Competition, and Capital Formation
    In this section, the Commission discusses the impact that the
proposed amendments to Rule 15c2-11 may have on efficiency,
competition, and capital formation. As discussed above, these
amendments generally would increase transparency by requiring public
availability of proposed paragraph (b) information that is current to
enable broker-dealers to publish or submit quotations for OTC
securities. As a result, the proposed amendments may cause capital to
migrate from opaque to more transparent companies. A transfer of
capital could occur as a result of non-disclosing OTC issuers either
exiting OTC market altogether or migrating from the quoted OTC market
to the grey market. This transfer of capital would occur where OTC
issuers opt not to make existing paragraph (b) information publicly
available. Less liquid OTC securities could also migrate away from the
quoted OTC market as a result of the proposed restrictions on the
piggyback exception pertaining to (1) shell companies, (2) recently
suspended securities, and (3) securities without a sufficient prior
history of both bid and ask prices. One academic study finds that
valuations decrease when firms migrate from more liquid markets to less
liquid markets, possibly as a result of decreased access to
capital.\286\ Therefore, investors may reallocate capital away from OTC
issuers of these less liquid securities as these issuers exit the
quoted OTC market. These proposed amendments could decrease investors'
exposure to fraudulent activity directed toward non-transparent or
illiquid securities. Capital formation could improve as investors'
funds are diverted away from fraudulent OTC securities, which would
migrate away from the quoted OTC market, and investors move toward the
investments that remain.
---------------------------------------------------------------------------

    \286\ See James J. Angel, et al., From Pink Slips to Pink
Sheets: Liquidity and Shareholder Wealth Consequences of NASDAQ
Delistings (Working Paper, Nov. 4, 2004), available at https://www.researchgate.net/profile/Jeffrey_Harris7/publication/4893245_From_Pink_Slips_to_Pink_Sheets_Liquidity_and_Shareholder_Wealth_Consequences_of_Nasdaq_Delistings/links/02e7e527daa56e7612000000.pdf.
---------------------------------------------------------------------------

    In addition, the transparency of the market for quoted OTC
securities should generally improve, particularly for non-disclosing
issuers that decide to start publicly disclosing proposed paragraph (b)
information to remain on the quoted OTC market. Capital formation could
improve as investors allocate funds toward more productive investments
based on enhanced availability of proposed paragraph (b) information in
the quoted market for OTC securities. In particular, investors may be
able to better discern the value of an OTC security from the financial
and qualitative data contained in proposed paragraph (b) information.
As a result of these effects, these proposed amendments could generally
enhance the efficiency of capital allocation, i.e., the degree to which
funds are diverted away from low value investments and toward high
value investments. Previous academic studies have documented a
relationship between greater quality of a firm's disclosures and a
decreased cost of capital for the firm.\287\ Other studies find a
relationship between increased quality and frequency of accounting
disclosures and the productivity of corporate investment.\288\ As
discussed previously, certain OTC issuers may withdraw from quoted
markets as a result of the proposed disclosure requirements and lose
access to capital as a result. However, these issuers may be less
likely to have productive investment opportunities than those that opt
to disclose, which may mitigate the impact on capital formation.
---------------------------------------------------------------------------

    \287\ See supra note 269; Luzi Hail & Christian Leuz,
International differences in the cost of equity capital: Do legal
institutions and securities regulation matter?, 44 J. Acct. Res.
485-531 (2006) (finding that stock markets with greater disclosure
requirements have lower costs of capital in cross-country
comparisons).
    \288\ See e.g., Sugata Roychowdhury et al., The Effects of
Financial Reporting and Disclosure on Corporate Investment: A
Review, J. Acct. & Econ. (forthcoming 2019).
---------------------------------------------------------------------------

    The efficiency of prices (i.e., the degree to which prices reflect
the fundamental value of the security) could also improve in the OTC
market as a result of greater transparency. In particular, prices could
become less susceptible to manipulation as a result of the trading
activity of informed investors who would have access to proposed
paragraph (b) information. These investors could buy underpriced
securities and sell overpriced securities, pushing mispriced securities
toward fundamental values.
    The heightened transparency that would arise from the proposed
amendments could increase competition among both broker-dealers and
issuers of quoted OTC securities. For example, broker-dealers could
access proposed paragraph (b) information at a low cost and establish
more competitive prices. Prior to these proposed amendments, broker-
dealers could have had differential access to proposed paragraph (b)
information in quoted the OTC market and potentially benefited from
non-competitive pricing as a result. As mentioned previously, some
broker-dealers may withdraw from quoting certain OTC securities (e.g.,
shell companies) as a result of the costs of initiating and resuming
quotations associated with the proposed amendments. As a result, there
may be diminished price competition in these types of securities.
    Issuers of quoted OTC securities may also need to price seasoned
equity offerings more competitively because investors would have
improved access to information and might be able to more easily compare
the financials of OTC issuers when allocating their investment dollars.
This information could again enable OTC investors to divert funds more
easily from higher to lower cost issues. As a result, OTC issuers would
have less ability to price their issues high relative to the
fundamental value of the securities being offered.

D. Reasonable Alternatives

    In this section, reasonable alternatives to the proposed amendments
to Rule 15c2-11 are discussed.
1. Eliminating the Piggyback Exception
    The 1999 Reproposing Release proposed to eliminate the piggyback
exception from Rule 15c2-11. This amendment would have required all
broker-dealers to complete the information review requirement and file
FINRA Form 211 before publishing or submitting a quotation in a
quotation medium. Relative to the baseline (i.e., the existing
provisions of Rule 15c2-11), this alternative would have increased the
costs of broker-dealers that complied with the Rule's review, document
collection, and recordkeeping provisions prior to publishing or
submitting a quotation for an OTC security. These costs could be passed
on to OTC investors. Alternatively, some broker-dealers could withdraw
from publishing quotations in the OTC market as a result of the
information review requirement, which could lead to the disappearance
of a quoted market for some OTC securities and a migration of these
securities to the grey market. Both possible effects would benefit
investors by imposing costs on potential fraudsters in the OTC market.
    First, review of proposed paragraph (b) information could help
broker-

dealers increase price efficiency, while deterring fraudsters. Second,
broker-dealers' withdrawal from publishing quotations for OTC
securities could benefit investors by inhibiting fraudulent and
manipulative schemes. However, broker-dealers might also withdraw from
publishing quotations for securities of high quality issuers at the
same time. Eliminating the piggyback exception would be expected to
increase capital raising costs for OTC issuers. Therefore, the net
effect of this alternative on OTC investors and issuers is unclear.
    The Commission preliminarily believes that the proposed Rule more
appropriately meets the Commission's policy goals because the
alternative places the additional burdens upon broker-dealers and OTC
issuers relative to the proposed amendments, while it fails to target
OTC securities most vulnerable to fraud and manipulation. In
particular, broker-dealers would incur additional costs associated with
review of proposed paragraph (b) information and filing FINRA Form 211
for all OTC securities they wish to quote. In addition, this
alternative could raise the cost of capital for OTC issuers relative to
the proposed amendments again without targeting those issuers most
vulnerable to fraud and manipulation.
2. Eliminating the Piggyback Exception for Shell Companies After
Reverse Mergers
    These amendments to Rule 15c2-11 propose to eliminate the piggyback
exception for publications or submissions of quotations for shell
companies, which could inhibit pump-and-dump schemes that can be
targeted toward shell companies. One possible alternative would be to
more narrowly target pump-and-dump schemes by eliminating the piggyback
exception for publications or submissions of shell companies only
during a fixed period after a reverse merger between a shell company
and an operating company. Because there is often no public information
about the post-merger company, eliminating the piggyback exception at
that point would require the issuer to make proposed paragraph (b)
information publicly available for a broker-dealer to maintain an
actively quoted market. The economic effect of this alternative would
be directionally similar to that of the proposed restriction on
publications or submissions of quotations for securities of all shell
companies.
    In particular, this alternative could improve the welfare of
investors by helping them avoid fraud perpetrated through shell
companies following a reverse merger. Second, issuers in the OTC market
could benefit from greater access to capital.\289\ Although broker-
dealers would bear costs from the information review requirement and
filing FINRA Form 211 for securities of shell companies after a reverse
merger (with some of this cost possibly passed on to OTC investors),
this cost may be lower relative to the proposed amendments because,
under this alternative, broker-dealers would only need to bear this
cost after a reverse merger. However, under this alternative, broker-
dealers may incur additional costs in monitoring the OTC market for
reverse mergers relative to the proposed amendments. The Commission
preliminarily believes that the proposed Rule is more appropriate than
the alternative because of the additional cost on broker-dealers. In
addition, the Commission recognizes that broker-dealers may not be able
to accurately identify reverse mergers when they occur.
---------------------------------------------------------------------------

    \289\ The potential increase in capital availability would occur
to the extent that, in response to an exit from quoted markets by
certain issuers, OTC market investors reinvest with other OTC market
companies, reflecting a preference for unlisted investments.
---------------------------------------------------------------------------

3. Alternative Thresholds for Exceptions
    The 1999 Reproposing Release proposed to except publications of
quotations from the provision of Rule 15c2-11 for OTC securities with
at least: (1) $100,000 ADTV value, (2) $50 million total assets value
and $10 million shareholders' equity on the issuer's audited balance
sheet or (3) $50 bid price. These exceptions were less restrictive than
the ones in the current proposed amendments as the exception would
apply if an OTC security could conform to only one of these three
conditions. Therefore, one possible alternative would be to establish
thresholds which conform to these conditions from the 1999 Reproposing
Release.
    Relative to the baseline, the main economic effect of this
alternative would be to relieve broker-dealers from complying with the
Rule's provisions and filing FINRA Form 211 to publish quotations in a
quotation medium. Some of these benefits may be passed on to OTC
investors. Certain issuers or securities that would qualify for these
exceptions but currently trade in the grey market may benefit from a
broker-dealer establishing a quoted market without incurring costs
associated with complying with the Rule's provisions. This migration
may result in a benefit to investors to the extent that it may
establish a new quoted market that facilitates price discovery and
liquidity for quality securities previously trading in the grey market.
    Relative to the proposed amendments, however, this alternative is
more likely to except securities that may be targeted for fraudulent
activity from the Rule's review and document collection provisions. For
example, there were five suspended OTC securities in 2018 with ADTV
value in excess of $100,000 and 11 issuers of suspended OTC securities
that exceeded the thresholds for $50 million in total assets and $10
million in shareholders' equity. Therefore, investors may incur costs
from greater exposure to fraud and manipulation relative to the
proposed amendments. As a result, the Commission preliminarily believes
the proposed Rule is better than the alternative. However, investors in
higher quality OTC issuers could benefit in that a greater number would
qualify for the quoted market relative to the proposed amendments. In
addition, broker-dealers would benefit from even greater relief from
the Rule's provisions and from filing FINRA Form 211.
4. Quotations With Either Bid or Ask Prices for Piggyback Exception
    The proposed amendments condition the piggyback exception on
quotations with both bid and ask prices for the prior 30 calendar days
with no gap in quoting of more than four days. One alternative would be
to condition the exception on quotations with either a bid or ask
price. Relative to the proposed amendments, this alternative would
allow more securities to become eligible for the piggyback exception.
As such, broker-dealers would incur less cost associated with the
Rule's review, document collection, and record-keeping provisions (as
well as filing FINRA Form 211) before publishing or submitting a
quotation for an OTC security relative to the proposed amendments. The
Commission has estimated that 879 OTC securities for which broker-
dealers could publish quotations relying on the piggyback exception
during 2018 did not have quotations with both bid and ask prices for
four days one or more times in a year. Of these securities, 402 were of
prospectus, Reg. A, and reporting issuers, 187 were of exempt foreign
private issuers, and 290 were of catch-all issuers. Therefore, the
Commission estimates that the additional dollar benefit to broker-
dealers from this relief would be $325,440.\290\ OTC investors in

higher quality issuers could benefit from greater liquidity if this
reduced cost results in more securities remaining in the quoted market.
However, this alternative may also allow less liquid securities to
become eligible for piggybacked quotations relative to the proposed
amendments. As a result, OTC investors may suffer costs if these
securities are more prone to fraud than securities with more frequent
quotations with both bid and ask prices. Therefore, the Commission
preliminarily believes the proposed Rule is better than the
alternative.
---------------------------------------------------------------------------

    \290\ (402 x $240) + (187 x $480) + (290 x $480) = $325,440.
---------------------------------------------------------------------------

5. Alternative Disclosure Frequency
    The Commission has sought to align the proposed Rule with existing
regulatory requirements for publicly available information, as well as
with private market solutions that have developed since the Commission
last proposed to amend the Rule. Notwithstanding this, an alternative
to the proposed amendments would be to define proposed paragraph (b)
disclosures as ``current'' for catch-all issuers based on a different
length of time (e.g., four months instead of six months) for the
purposes of the initiation and resumption of quotes or reliance upon
the piggyback exception. For example, increasing the frequency of
disclosures required to qualify as ``current'' could benefit investors
by improving the relevance of information used for investment decisions
relative to the information available under the existing Rule.
Investors could also benefit from decreased exposure to loss from fraud
as heightened disclosure requirements could push trading activity in
less transparent securities out of the OTC market or to the grey
market. Higher quality OTC issuers could benefit from increased access
to capital to the extent that heightened disclosure requirements lead
to a net increase in demand for higher quality OTC stocks.
    However, OTC issuers would face increased costs of providing
disclosures more frequently under such an alternative. In particular,
OTC issuers with no reporting obligations or minimal reporting
obligations would effectively be subject to a more frequent reporting
obligation under such an alternative. Some OTC issuers that wish to
have quoted securities may find themselves effectively subject to a
reporting framework that requires more frequent public disclosures than
their current annual or semiannual reporting obligations as an issuer
under the federal securities laws, such as reporting requirements under
the Securities Act or exchange listing requirements under the Exchange
Act. Broker-dealers, IDQSs, and national securities associations may
also be required to review proposed paragraph (b) information more
frequently under this alternative in order to initially publish or
submit, or maintain, quotes in the OTC market. The Commission
preliminarily believes the proposed Rule is better than the alternative
because the additional benefits from more frequently disclosed
information are likely to be minor, while the costs for issuers,
broker-dealers, and other market participants could increase in
proportion to the required frequency of disclosures.
    Decreasing the frequency of required disclosures could have effects
opposite to those discussed above. The Commission is not proposing such
an alternative because a significant decrease in the frequency of
required disclosures could make the disclosures less relevant for
decision making purposes, driving down their potential benefit to
investors.

E. Request for Comment

    While the Commission welcomes any public input on its economic
analysis, the Commission asks commenters to consider the following
questions:
    Q139. The Commission requests information including data that would
help quantify the costs and the value of the benefits of the proposed
amendments described above. The Commission seeks estimates of these
costs and benefits, as well as any costs and benefits not already
defined, that may result from the proposed amendments. The Commission
also requests qualitative feedback on the nature of the benefits and
costs described above and any benefits and costs the Commission may
have overlooked.
    Q140. In particular, the Commission requests information including
data on the costs to issuers associated with preparing and providing
publicly proposed paragraph (b) information, especially for issuers
that do not currently have a reporting obligation under the Exchange
Act or other federal securities laws or rules. To what extent are these
costs mitigated by offering alternatives for releasing proposed
paragraph (b) materials?
    Q141. What types of investors typically invest in quoted OTC
securities in terms of demographics such as age, income, wealth,
education, gender and other characteristics such as financial literacy
and behavior? What types of investors typically invest in OTC security
promotions or pump-and-dump schemes? What are the typical outcomes from
investment in quoted OTC securities, promotions, and pump-and-dump
schemes for investors with different demographics and characteristics?
    Q142. To what extent do investors consider already publicly
available information about quoted OTC securities when making
investment decisions? Would requiring all quoted OTC securities to have
proposed paragraph (b) information publicly available increase investor
reliance on issuer information (perhaps because it would become easier
to compare among issuers)?
    Q143. To what extent would the proposed amendments change the
number of quoted securities? In particular, which types of quoted OTC
securities will be likely to move away from the quoted OTC market to
the grey market? Which types of OTC securities previously trading on
the grey market are likely to move to the quoted market? Are there
frictions to moving between the quoted OTC market and the grey market?
    Q144. Which types of securities are likely to have significant
discrepancies when comparing worldwide trading volume and trading
volume reported to FINRA? Which data on trading will broker-dealers
likely use when establishing eligibility for relying on the ADTV prong
of the proposed ADTV and asset test exception?
    Q145. What impact would the proposed amendments have on
competition? Would the proposed amendments put issuers of quoted OTC
securities, or particular types of issuers of quoted OTC securities, at
a competitive advantage or disadvantage?
    Q146. What impact would the proposed amendments have on efficiency?
Has the Commission overlooked any positive or negative effects on
efficiency?
    Q147. What impact would the proposed amendments have on capital
formation? Would there be any positive or negative effects on capital
formation that the Commission may have overlooked?
    Q148. To what degree would the costs of the proposed Rule's
provisions be borne by a qualified IDQS on behalf of broker-dealers? To
what degree would a qualified IDQS or registered national securities
association make publicly available determinations that the
requirements of an exception are met?
    Q149. How common is it for broker-dealers to initiate quotations
for OTC securities that were underwritten by them? To what extent would
broker-dealers rely on the proposed exception for securities issued in
offerings that were underwritten?

    Q150. To what extent do certain broker-dealers have information
systems in place to assess whether certain conditions (i.e., whether
the issuer is a shell company within the proposed definition) apply to
OTC issuers? Which types of broker-dealers, if any, have these
information systems in place? What are the costs of setting up and
maintaining such systems? Is it reasonable to assume that setting up
such systems would involve a one-time fixed cost and negligible ongoing
costs?
    Q151. What is the degree of competition among broker-dealers that
publish quotations for OTC securities? Is it the case that there is a
handful of dominant broker-dealers publishing quotations for OTC
securities or is this activity spread across many broker-dealers of
varying size? Do certain broker-dealers publish quotations for a
specific subset of OTC securities and not others (i.e., particular
industries, domiciles, etc.)? How will the degree of competition change
as a result of the proposed amendments? Has there been a change in the
number of broker-dealers publishing quotations for OTS securities over
time? Has there been a change in the number of broker-dealers
conducting the information review under the Rule over time? Commenters
are requested to provide data that would allow the Commission to
identify broker-dealers publishing quotations for OTC securities as
well as the potential costs of the proposed amendments on the broker-
dealer industry.
    Q152. For issuers of quoted OTC securities that do not currently
have a reporting or disclosure obligation outside of the existing Rule,
could requiring disclosures to be publicly available lead to changes in
the nature or the quality of disclosures these companies provide? For
these same issuers, which method of distribution would they likely
choose for making proposed paragraph (b) information publicly
available?
    Q153. To what extent are quoted OTC securities subjects of
promotion campaigns? How is the propensity of a quoted OTC security to
be the subject of a promotion campaign related to there being a lack of
publicly available information about its issuer?
    Q154. Are there alternatives the Commission should consider other
than those discussed in this release? What are the costs and benefits
of those alternatives relative to the regulatory baseline and relative
to the proposed amendments?

IX. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \291\ requires federal
agencies, in promulgating rules, to consider the impact of those rules
on small businesses. Section 603(a) \292\ of the Administrative
Procedure Act,\293\ as amended by the RFA, generally requires the
Commission to undertake a regulatory flexibility analysis of all
proposed rules, or proposed rule amendments, to determine the impact of
such rulemaking on ``small businesses'' \294\ unless the Commission
certifies that the rule, if adopted, would not have a significant
impact on a substantial number of ``small entities.'' \295\ As
discussed above in PRA section above, the Commission believes that the
Rule and proposed amendments impact the 89 broker-dealers that publish
or submit quotations on OTC Markets Group's systems. A broker-dealer is
a small entity if it has total capital (net worth plus subordinated
liabilities) of less than $500,000 on the date in the prior fiscal year
as of which its audited financial statements were prepared pursuant to
Sec.  240.17a-5(d), and it is not affiliated with any person (other
than a natural person) that is not a small business or small
organization.\296\ As of December 31, 2018, the Commission estimates
that there were approximately 1,000 broker-dealers that would be small
entities as defined above.
---------------------------------------------------------------------------

    \291\ 5 U.S.C. 601 et seq.
    \292\ Id.
    \293\ 5 U.S.C. 551 et seq.
    \294\ Although Section 601(b) of the RFA defines the term
``small business,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
small business for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10 under the Exchange
Act. Exchange Act Rule 0-10 (``Rule 0-10'').
    \295\ 5 U.S.C. 605(b).
    \296\ Exchange Act Rule 0-10(c).
---------------------------------------------------------------------------

    Based on a review of data involving the 89 broker-dealers that
publish quotations for OTC securities, the Commission does not believe
that any of the 89 broker-dealers impacted by the Rule are small
entities under the above definition because they either exceed $500,000
in total capital or are affiliated with a person that is not a small
entity as defined in Rule 0-10.\297\ It is possible that in the future
a small entity may become impacted by the Rule and the proposed
amendments. Based on experience with broker-dealers that participate in
this market, however, the Commission preliminarily believes that this
scenario will be unlikely since firms that enter the market are likely
to exceed $500,000 in total capital or be affiliated with a person that
is not a small entity.
---------------------------------------------------------------------------

    \297\ See supra Parts VII.B and VIII.B.
---------------------------------------------------------------------------

    For the foregoing reason, the Commission certifies that the
proposed amendments to Exchange Act Rule 15c2-11 would not have a
significant economic impact on a substantial number of small entities
for purposes of the RFA. The Commission encourages written comments
regarding this certification, and requests that commenters describe the
nature of any impact on small entities and provide empirical data to
illustrate the extent of the impact.

X. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, the Commission is also requesting information regarding
the potential impact of the proposed amendments on the economy on an
annual basis. In particular, comments should address whether the
proposed changes, if adopted, would have a $100,000,000 annual effect
on the economy, cause a major increase in costs or prices, or have a
significant adverse effect on competition, investment, or innovations.
Commenters should provide empirical data to support their views.

XI. Statutory Basis and Text of Proposed Rules

    The rule amendments are being proposed pursuant to Sections 3,
10(b), 15(c), 15(h), 17(a), and 23(a) of the Securities Exchange Act of
1934, 15 U.S.C. 78c, 78j(b), 78o(c), 78o(g), 78q(a), and 78w(a).

XII. List of Subjects

List of Subjects in 17 CFR Parts 230 and 240

    Administrative practice and procedure, Reporting and recordkeeping
requirements, Securities.

    For the reasons set out in the preamble, the Commission is
proposing to amend title 17, chapter II of the Code of the Federal
Regulations as follows.

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The general authority for part 230 continues to read in part as
follows:

    Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h,
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L.

112-106, sec. 201(a), sec. 401, 126 Stat. 313 (2012), unless
otherwise noted.
* * * * *

Sec.  [thinsp]230.144  [Amended]

0
2. Section 230.144, paragraph (c)(2), is amended by removing the text
``(a)(5)(i) to (xiv), inclusive, and paragraph (a)(5)(xvi)'' and adding
in its place ``(b)(5)(i)(A) to (N), inclusive, and paragraph
(b)(5)(i)(P)''.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
3. The authority citation for part 240 continues to read, in part, as
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.

0
4. Section 240.15c2-11 is revised to read as follows:

Sec.  [thinsp]240.15c2-11  Publication or submission of quotations
without specific information.

    (a) Review Requirement. As a means reasonably designed to prevent
fraudulent, deceptive, or manipulative acts or practices, it shall be
unlawful for:
    (1) A broker or dealer to publish any quotation for a security or,
directly or indirectly, to submit any such quotation for publication,
in any quotation medium, unless:
    (i) Such broker or dealer has in its records the documents and
information required by paragraph (b) of this section;
    (ii) Such documents and information required by paragraph (b) of
this section (excluding paragraphs (b)(5)(i)(N) through (P) of this
section) are current and publicly available; and
    (iii) Based upon a review of the documents and information required
by paragraph (b) of this section, together with any other documents and
information required by paragraph (c) of this section, such broker or
dealer has a reasonable basis under the circumstances for believing
that:
    (A) The documents and information required by paragraph (b) of this
section are accurate in all material respects; and
    (B) The sources of the documents and information required by
paragraph (b) of this section are reliable; or
    (2) A qualified interdealer quotation system to make known to
others the quotation of a broker or dealer that is published or
submitted pursuant to paragraph (f)(7) of this section, unless:
    (i) Such qualified interdealer quotation system has in its records
documents and information required by paragraph (b) of this section
(excluding paragraphs (b)(5)(i)(N) through (P) of this section except
where the qualified interdealer quotation system has knowledge or
possession of this information);
    (ii) Such documents and information required by paragraph (b) of
this section (excluding paragraphs (b)(5)(i)(N) through (P) of this
section) are current and publicly available; and
    (iii) Based upon a review of the documents and information required
by paragraph (b) of this section (excluding paragraphs (b)(5)(i)(N)
through (P) of this section except where the qualified interdealer
quotation system has knowledge or possession of this information),
together with any other documents and information required by paragraph
(c) of this section, such qualified interdealer quotation system has a
reasonable basis under the circumstances for believing that:
    (A) The documents and information required by paragraph (b) of this
section are accurate in all material respects; and
    (B) The sources of the documents and information required by
paragraph (b) of this section are reliable.
    (b) Required Information. (1) A copy of the prospectus specified by
section 10(a) of the Securities Act of 1933 for an issuer that has
filed a registration statement under the Securities Act of 1933, other
than a registration statement on Form F-6, that became effective less
than 90 calendar days prior to the day on which such broker or dealer
publishes or submits the quotation to the quotation medium; Provided,
That such registration statement has not thereafter been the subject of
a stop order that is still in effect when the quotation is published or
submitted; or
    (2) A copy of the offering circular provided for under Regulation A
under the Securities Act of 1933 for an issuer that has filed a
notification under Regulation A and was authorized to commence the
offering less than 40 calendar days prior to the day on which such
broker or dealer publishes or submits the quotation to the quotation
medium; Provided, That the offering circular provided for under
Regulation A has not thereafter become the subject of a suspension
order that is still in effect when the quotation is published or
submitted; or
    (3) A copy of the:
    (i) Issuer's most recent annual report filed pursuant to section 13
or 15(d) of the Act, together with any periodic and current reports
that have been filed thereafter under the Act by the issuer, except for
current reports filed during the three business days prior to the
publication or submission of the quotation; Provided, however, That
    (A) Until such issuer has filed its first such annual report, the
broker, dealer, or qualified interdealer quotation system has in its
records a copy of the registration statement filed by the issuer under
the Securities Act of 1933, other than a registration statement on Form
F-6, that became effective within the prior 16 months, or a copy of any
registration statement filed by the issuer under section 12 of the Act
that became effective within the prior 16 months, together with any
periodic and current reports filed thereafter under section 13 or 15(d)
of the Act, and
    (B) The broker, dealer, or qualified interdealer quotation system
has a reasonable basis under the circumstances for believing that the
issuer is current in filing such reports described in this paragraph
(b)(3)(i);
    (ii) Issuer's most recent annual report filed pursuant to
Regulation A (Sec. Sec.  [thinsp]230.251 through 230.263 of this
chapter), together with any periodic and current reports filed
thereafter under Regulation A by the issuer, except for current reports
filed during the three business days prior to the publication or
submission of the quotation; Provided, however, That
    (A) Until such issuer has filed its first such annual report, the
broker, dealer, or qualified interdealer quotation system has in its
records a copy of the offering circular filed by the issuer under
Regulation A, that was qualified within the prior 16 months, together
with any periodic and current reports filed thereafter under Regulation
A, and
    (B) The broker, dealer, or qualified interdealer quotation system
has a reasonable basis under the circumstances for believing that the
issuer is current in filing such reports described in this paragraph
(b)(3)(ii);
    (iii) Annual statement referred to in section 12(g)(2)(G)(i) of the
Act (in the case of an issuer required to file reports pursuant to
section 13 or 15(d) of the Act), together with any periodic and current
reports filed thereafter under the Act by the issuer, except for
current reports filed during the three business days prior to the
publication or submission of the quotation; Provided, however, That
    (A) Until such issuer has filed its first such annual statement,
the broker, dealer, or qualified interdealer quotation system has in
its records a copy of the registration statement filed by the issuer

under the Securities Act of 1933, other than a registration statement
on Form F-6, that became effective within the prior 16 months, or a
copy of any registration statement filed by the issuer under section 12
of the Act, that became effective within the prior 16 months, together
with any periodic and current reports filed thereafter under section 13
or 15(d) of the Act, and
    (B) The broker, dealer or qualified interdealer quotation system
has a reasonable basis under the circumstances for believing that the
issuer is current in filing such reports described in this paragraph
(b)(3)(iii); or
    (iv) Annual statement referred to in section 12(g)(2)(G)(i) of the
Act (in the case of an issuer of a security that falls within the
provisions of section 12(g)(2)(G) of the Act); Provided, however, That
the broker, dealer, or qualified interdealer quotation system has a
reasonable basis under the circumstances for believing that the issuer
is current in filing (in the case of an insurance company exempted from
section 12(g) of the Act by reason of section 12(g)(2)(G) thereof) the
annual statement referred to in section 12(g)(2)(G)(i) of the Act; or
    (4) A copy of the information that, since the beginning of its last
fiscal year, the issuer has published pursuant to Sec.
[thinsp]240.12g3-2(b), which the broker or dealer must make available
upon the request of a person expressing an interest in a proposed
transaction in the issuer's security with the broker or dealer, such as
by providing the requesting person with appropriate instructions
regarding how to obtain the information electronically; or
    (5)(i) The following information, which must be made publicly
available (excluding paragraphs (b)(5)(i)(N) through (P) of this
section) and be current as of a date within 12 months prior to the
publication or submission of the quotation, unless otherwise specified:
    (A) The name of the issuer and its predecessor (if any);
    (B) The address of the issuer's principal executive offices;
    (C) The state of incorporation or registration;
    (D) The title and class of the security;
    (E) The par or stated value of the security;
    (F) The number of shares or total amount of the securities
outstanding as of the end of the issuer's most recent fiscal year;
    (G) The name and address of the transfer agent;
    (H) A description of the issuer's business;
    (I) A description of products or services offered by the issuer;
    (J) A description and extent of the issuer's facilities;
    (K) The name of the chief executive officer, members of the board
of directors, and officers, as well as 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;
    (L) The issuer's most recent balance sheet (as of a date less than
16 months before the publication or submission of the quotation) and
profit and loss and retained earnings statements (for the 12 months
preceding the date of the most recent balance sheet); Provided,
however, That if the balance sheet is not as of a date less than six
months before the publication or submission of the quotation, the
balance sheet must be accompanied with profit and loss and retained
earnings statements for the period from the date of such balance sheet
to a date that is less than six months before the publication or
submission of the quotation;
    (M) Similar financial information for such part of the two
preceding fiscal years as the issuer or its predecessor has been in
existence;
    (N) Whether the broker or dealer or any associated person of the
broker or dealer is affiliated, directly or indirectly, with the
issuer;
    (O) Whether the quotation is being published or submitted on behalf
of any other broker or dealer and, if so, the name of such broker or
dealer; and
    (P) Whether the quotation is being submitted or published, directly
or indirectly, by or on behalf of the issuer or persons identified in
paragraph (b)(5)(i)(K) of this section and, if so, the name of such
person and the basis for any exemption under the federal securities
laws for any sales of such securities on behalf of such person.
    (ii) The broker or dealer must make information required by
paragraph (b)(5)(i) of this section available upon the request of a
person expressing an interest in a proposed transaction in the issuer's
security with the broker or dealer, such as by providing the requesting
person with appropriate instructions regarding how to obtain publicly
available information electronically. If such information is made
available to others upon request pursuant to this paragraph, such
delivery, unless otherwise represented, shall not constitute a
representation by such broker or dealer that such information is
accurate, but shall constitute a representation by such broker or
dealer that the information is current in relation to the day the
quotation is submitted, that the broker or dealer has a reasonable
basis under the circumstances for believing the information is accurate
in all material respects, and that the information was obtained from
sources that the broker or dealer has a reasonable basis for believing
are reliable. Paragraph (b)(5)of this section shall apply to any
security of an issuer that is not included in paragraphs (b)(1) through
(b)(4) of this section. Paragraph (b)(5) of this section shall apply to
any security of an issuer if information described in paragraphs (b)(1)
through (b)(4) of this section is not current.
    (c) Supplemental Information. With respect to any security the
quotation of which is within the provisions of this section, the broker
or dealer submitting or publishing such quotation, or any qualified
interdealer quotation system that makes known to others the quotation
of a broker or dealer pursuant to paragraph (a)(2) of this section,
shall have in its records the following documents and information:
    (1) Records related to the submission or publication of such
quotation, including the identity of the person or persons for whom the
quotation is being published or submitted, whether such person or
persons is the issuer, chief executive officer, any members of the
board of directors, officers, or any person, directly or indirectly,
the beneficial owner of more than 10 percent of the outstanding units
or shares of any class of equity security of the issuer, and any
information regarding the transactions provided to the broker, dealer
or qualified interdealer quotation system by such person or persons;
    (2) A copy of any trading suspension order issued by the Commission
pursuant to section 12(k) of the Act concerning any securities of the
issuer or its predecessor (if any) during the 12 months preceding the
date of the publication or submission of the quotation or a copy of the
public release issued by the Commission announcing such trading
suspension order; and
    (3) A copy or a written record of any other material information
(including adverse information) regarding the issuer that comes to the
knowledge or possession of the broker, dealer, or qualified interdealer
quotation system before the publication or submission of the quotation.
    (d) Recordkeeping. (1)(i) The following persons shall preserve for
a period of not less than three years, the first two years in an easily
accessible place, the documents and information

required under paragraphs (a), (b), and (c) of this section:
    (A) Any broker or dealer publishing or submitting a quotation
pursuant to paragraph (a)(1) of this section concerning a security; or
    (B) Any qualified interdealer quotation system that makes known to
others the quotation of a broker or dealer pursuant to paragraph (a)(2)
of this section concerning a security;
    (ii) Provided, however, That documents and information required by
paragraph (b) of this section are not required to be preserved if it is
available on the Commission's Electronic Data Gathering, Analysis and
Retrieval System (``EDGAR'') and the broker-dealer or qualified
interdealer quotation system documents the documents and information
required by paragraph (b) of this section that it reviewed.
    (2)(i) The following persons shall preserve for a period of not
less than three years, the first two years in an easily accessible
place, the documents and information that demonstrate that the
requirements for an exception under paragraphs (f)(2), (f)(3), (f)(5),
(f)(6), (f)(7), and (f)(8) of this section are met:
    (A) Any qualified interdealer quotation system or registered
national securities association that makes the publicly available
determinations described in paragraph (f)(8) of this section; and
    (B) Any broker or dealer publishing or submitting a quotation
pursuant to paragraph (f) of this section; Provided, however, That any
broker or dealer that relies on a determination described in paragraphs
(f)(7) or (f)(8) of this section is required to preserve only a record
of the exception upon which the broker or dealer is relying and the
name of the qualified interdealer quotation system or registered
national securities association that determined that the requirements
of that exception are met.
    (ii) Provided, further, That paragraph (b) information is not
required to be preserved if it is available on the Commission's
Electronic Data Gathering, Analysis and Retrieval System (``EDGAR'').
    (e) Definitions. For purposes of this section:
    (1) Current shall mean filed, published, or disclosed in accordance
with the time frames identified in each paragraphs (b)(1) through
(b)(5) of this section.
    (2) Interdealer quotation system shall mean any system of general
circulation to brokers or dealers that regularly disseminates
quotations of identified brokers or dealers.
    (3) Issuer, in the case of quotations for American Depositary
Receipts, shall mean the issuer of the deposited shares represented by
such American Depositary Receipts.
    (4) Publicly available shall mean available on the Commission's
Electronic Data Gathering, Analysis and Retrieval System (``EDGAR'') or
on the website of a qualified interdealer quotation system, a
registered national securities association, the issuer, or a registered
broker or dealer; Provided, however, That publicly available shall not
mean where access to documents and information required by paragraph
(b) of this section is restricted by user name, password, fees, or
other restraints.
    (5) Qualified interdealer quotation system shall mean any
interdealer quotation system that meets the definition of an
``alternative trading system'' 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 Act.
    (6) Except as otherwise specified in this rule, quotation shall
mean any bid or offer at a specified price with respect to a security,
or any indication of interest by a broker or dealer in receiving bids
or offers from others for a security, or any indication by a broker or
dealer that wishes to advertise its general interest in buying or
selling a particular security.
    (7) Quotation medium shall mean any ``interdealer quotation
system'' or any publication or electronic communications network or
other device that is used by brokers or dealers to make known to others
their interest in transactions in any security, including offers to buy
or sell at a stated price or otherwise, or invitations of offers to buy
or sell.
    (8) Shell company shall mean any issuer, other than a business
combination related shell company, as defined in Sec.  230.405 of this
chapter, or an asset-backed issuer as defined in Item 1101(b) of
Regulation AB (Sec.  229.1101(b) of this chapter), that has:
    (i) No or nominal operations; and
    (ii) Either:
    (A) No or nominal assets;
    (B) Assets consisting solely of cash and cash equivalents; or
    (C) Assets consisting of any amount of cash and cash equivalents
and nominal other assets.
    (f) Exceptions. Except as provided in paragraph (d)(2) of this
section, the provisions of this section shall not apply to:
    (1) The publication or submission of a quotation concerning a
security that is admitted to trading on a national securities exchange
and that is traded on such an exchange on the same day as, or on the
business day next preceding, the day the quotation is published or
submitted.
    (2) The publication or submission by a broker or dealer, solely on
behalf of a customer (other than a person acting as or for a dealer),
of a quotation that represents the customer's unsolicited indication of
interest; Provided, however, That this paragraph (f)(2) shall not apply
to a quotation:
    (i) Consisting of both a bid and an offer, each of which is at a
specified price, unless the quotation medium specifically identifies
the quotation as representing such an unsolicited customer interest; or
    (ii) Published or submitted, directly or indirectly, by or on
behalf of the chief executive officer, members of the board of
directors, officers, 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, unless
documents and information required by paragraph (b) of this section are
current and publicly available.
    (3)(i)(A) The publication or submission, in an interdealer
quotation system that specifically identifies as such unsolicited
customer indications of interest of the kind described in paragraph
(f)(2) of this section, of a quotation concerning a security that has
been the subject of both bid and ask quotations (exclusive of any
identified customer interests) in such a system at specified prices
within the previous 30 calendar days, with no more than four business
days in succession without such a quotation;
    (B) The publication or submission, in an interdealer quotation
system that does not so identify any such unsolicited customer
indications of interest, of a quotation concerning a security that has
been the subject of both bid and ask quotations in an interdealer
quotation system at specified prices within the previous 30 calendar
days, with no more than four business days in succession without such a
quotation; or
    (C) A dealer acting in the capacity of market maker, as defined in
section 3(a)(38) of the Act, that has published or submitted a
quotation concerning a security in an interdealer quotation system and
such quotation has qualified for an exception provided in this
paragraph (f)(3), may continue to publish or submit quotations for such
security in the interdealer quotation system without compliance with
this section, unless and until such dealer ceases to submit or publish
a quotation

or ceases to act in the capacity of market maker concerning such
security;
    (ii) Provided, however, That this paragraph (f)(3) shall not apply
to the security of an issuer that is a shell company or that was the
subject of a trading suspension order issued by the Commission pursuant
to section 12(k) of the Act until 60 calendar days after the expiration
of such order; and that this paragraph (f)(3) shall apply to a
publication or submission of a quotation concerning a security of an
issuer included in paragraph (b)(5) of this section only where the
information required by paragraph (b)(5)(i) (excluding paragraphs
(b)(5)(i)(N) through (P)) is current and has been made publicly
available within six months before the date of publication or
submission of such quotation.
    (4) The publication or submission of a quotation concerning a
municipal security.
    (5)(i) The publication or submission of a quotation concerning:
    (A) A security with a worldwide average daily trading volume value
of at least $100,000 during the 60 calendar days immediately before the
publication of the quotation of such security; and
    (B) The issuer of such security has at least $50 million in total
assets and $10 million in unaffiliated shareholders' 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;
    (ii) Provided, however, That this paragraph (f)(5) shall apply only
to the publication or submission of a quotation concerning such
security if documents and information required by paragraph (b) of this
section of the issuer of such security are current and publicly
available.
    (6) The publication or submission of a quotation concerning a
security by a broker or dealer that is named as an underwriter in a
registration statement for an offering of that class of security
referenced in paragraph (b)(1) of this section or in an offering
circular for an offering of that class of security referenced in
paragraph (b)(2) of this section; Provided, however, That this
paragraph (f)(6) shall apply only to the publication or submission of a
quotation concerning such security within the time frames identified in
paragraphs (b)(1) or (b)(2) of this section.
    (7) The publication or submission of a quotation by a broker or
dealer, in a qualified interdealer quotation system, concerning a
security where such qualified interdealer quotation system complies
with the requirements of paragraphs (a) through (c) of this section and
also makes a publicly available determination of such compliance, and a
broker or dealer publishes or submits a quotation in reliance on this
exception within three business days after such publicly available
determination; Provided, however, That this paragraph (f)(7) shall not
apply to a quotation concerning a security:
    (i) If the issuer of such security is a shell company; or
    (ii) After the first 30 calendar days of publication or submission
of such quotation by a broker or dealer in reliance on this paragraph
(f)(7).
    (8) The publication or submission of a quotation by a broker or
dealer that relies on publicly available determinations by a qualified
interdealer quotation system or registered national securities
association that:
    (i) Documents and information required by paragraph (b) are current
and publicly available;
    (ii) A broker or dealer may rely on an exception contained in
paragraph (f)(1), (f)(3)(i)(A), (f)(3)(i)(B), (f)(4), (f)(5), or (f)(7)
of this section;
    (iii) The qualified interdealer quotation system or registered
national securities association has reasonably designed written
policies and procedures to determine whether documents and information
required by paragraph (b) of this section are current and publicly
available and that the requirements of an exception under paragraph (f)
of this section are met.
    (g) Exemptive Authority. Upon written application or upon its own
motion, the Commission may, conditionally or unconditionally, exempt by
order any person, security, or transaction, or any class or classes of
persons, securities, or transactions, from any provision or provisions
of this section, to the extent that such exemption is necessary or
appropriate in the public interest, and is consistent with the
protection of investors.

    By the Commission.

     Dated: September 25, 2019.
Vanessa Countryman,
Secretary.
[FR Doc. 2019-21260 Filed 10-29-19; 8:45 am]
 BILLING CODE 8011-01-P