Amended Rule 15c2-11(f)(3)(i)(B).
    \318\ Proposed Rule 15c2-11(f)(3)(ii). As explained in the
Proposing Release, ``[a] continuously quoted market can increase the
share price of a shell company that may have been promoted using
inaccurate or misleading representations and could allow fraudsters
to more easily fool new investors into believing there is an active
and independent market for its security.'' Proposing Release at
58222.
    \319\ See id.
    \320\ See Coral Capital Letter; see also Anthony Letter.
---------------------------------------------------------------------------

    The Commission sought comment about the proposal to eliminate the
ability of a broker-dealer to rely on the piggyback exception for the
securities of ``shell companies.'' Commenters who supported this
limitation stated that it should reduce fraud and abuse of OTC
securities,\321\ especially in the context of reverse mergers.\322\
Those who opposed this aspect of the proposal stated that it would be
difficult to implement, leaving room for interpretation and potentially
harming capital formation for those companies and their securities'
liquidity.\323\ The Commission appreciates that a security's liquidity
may be negatively impacted if a broker-dealer declines to rely on the
piggyback exception under the amended Rule because it believes that a
determination (that the issuer of a security is not a shell company)
cannot be made with certainty. As discussed more fully below, the
definition of a shell company in the amended Rule tracks the definition
of shell company in Rule 405 of Regulation C and in Exchange Act Rule
12b-2, the provisions of which apply to registrants, and comports with
the provisions of Securities Act Rule 144(i)(1)(i) regarding the
availability of that safe harbor for the resale of securities initially
issued by certain

issuers.\324\ In light of the concern that such determination cannot be
made with certainty, however, the amended Rule applies a ``reasonable
basis'' standard for making such determination. Accordingly, a broker-
dealer may rely on the piggyback exception to quote the security of an
issuer that the broker-dealer has a reasonable basis under the
circumstances for believing is a shell company for the 18 months
following the initial priced quotation for an issuer's security.\325\
In addition, a qualified IDQS or registered national securities
association may make a publicly available determination that the
requirements of the piggyback exception are met based, in part, on its
having a reasonable basis under the circumstances for believing that
the issuer is a shell company.\326\
---------------------------------------------------------------------------

    \321\ See Massachusetts Letter; see also Peregrine Comment.
    \322\ FINRA Letter (requesting that, given the fluidity of
corporate actions, the Commission clarify how often a broker-dealer
or qualified IDQS is expected to confirm that a company is not a
shell company); Michael Goode, Managing Member, Morning Light
Mountain, LLC (Dec. 16, 2019) (``Morning Light Mountain Comment'');
Hamilton & Associates Letter.
    \323\ Coral Capital Letter; see Leonard Burningham Letters;
Letter from William T. Hart, Hart & Hart, LLC, to SEC (Feb. 24,
2020); Sosnow & Associates Letter.
    \324\ See Proposing Release at 58236. While the definition of
``shell company'' in amended Rule 15c2-11 mirrors the definition of
``shell company'' in Rule 405 of Regulation C and in Rule 12b-2,
these provisions apply to registrants, and the definition of shell
company for purposes of Rule 15c2-11 is not limited to companies
that have filed a registration statement or have an obligation to
file reports under Section 13 or Section 15(d) of the Exchange Act.
Instead, the definition of ``shell company'' covers all issuers of
securities because the provisions of Rule 15c2-11 apply to
publications and submissions of quotations for securities of
reporting issuers as well as catch-all issuers. Id.
    \325\ See Amended Rule 15c2-11(f)(3)(i)(B)(2).
    \326\ See Amended Rule 15c2-11(f)(3)(i)(B)(2); Amended Rule
15c2-11(f)(7).
---------------------------------------------------------------------------

    As discussed below in Part II.J.2, a broker-dealer, qualified IDQS,
or registered national securities association has a reasonable basis
under the circumstances for determining that an entity is a shell
company by relying on an issuer's self-identification as a shell
company (or not) by reviewing, for example, the issuer's financial
information, or, alternatively, by reviewing a description of its
business, as specified in paragraph (b)(5)(i)(H) of the amended Rule or
in any disclosures provided to the Commission pursuant to reporting
obligations under the federal securities laws, without reviewing the
issuer's financial information.\327\ Broker-dealers have experience in
making determinations of shell company status in other contexts that
should help to provide increased certainty regarding shell company
determinations for purposes of the Rule.\328\ Further, as discussed
more fully below, the amended Rule provides a new exception that
permits broker-dealers to publish or submit quotations in reliance on
the publicly available determination of a qualified IDQS or a
registered national securities association that certain exceptions are
available, including the piggyback exception.\329\ This new exception
may help to alleviate burdens on broker-dealers associated with
determining whether an issuer is a shell company. How often a broker-
dealer, qualified IDQS, or registered national securities association
may need to determine whether an issuer is a shell company for a
broker-dealer to rely on the piggyback exception is based on how
frequently information for that issuer is filed or made current and
publicly available.\330\ For example, a broker-dealer, qualified IDQS,
or registered national securities association may determine that a
reporting issuer is a shell company when its annual or periodic reports
are filed. Similarly, a broker-dealer, qualified IDQS, or registered
national securities association may determine that a catch-all issuer
is a shell company on an annual basis.\331\
---------------------------------------------------------------------------

    \327\ See infra note 473 and accompanying text.
    \328\ For example, broker-dealers have experience in making such
determination in deciding whether Securities Act Rule 144 is
available for the resale of securities. See infra note 333 and
accompanying text.
    \329\ Amended Rule 15c2-11(f)(7).
    \330\ See infra Part V.C.2.b.
    \331\ For example, a broker-dealer, qualified IDQS, or
registered national securities association could make such
determination based on a review of the description of the issuer's
business, as specified in paragraph (b)(5)(i)(H) of the amended
Rule.
---------------------------------------------------------------------------

    Further, consistent with Commission guidance regarding the
definition of ``shell company'' for purposes of Rule 144(i)(1)(i), the
Commission believes that it is appropriate in the context of this Rule
to reiterate that startup companies, or companies that have a limited
operating history, such as early-stage biotechnology companies with no
or limited assets and revenues and substantial expenses,\332\ are not
intended to be captured by the definition of ``shell company'' because
the Commission believes that such companies do not meet the condition
of having ``no or nominal operations.'' \333\ A startup company that
has limited operating history would not meet the condition of having
``no or nominal operations'' in paragraph (e)(9)(i) of the amended
Rule's definition of shell company. This is consistent with the
Commission's recognition that providing avenues for liquidity
encourages investment in companies,\334\ to promote opportunities for
liquidity in the securities of such start-up companies.
---------------------------------------------------------------------------

    \332\ See, e.g., Wendy Tsai & Stanford Erickson, Early-Stage
Biotech Companies: Strategies for Survival and Growth, 3 Biotech.
Healthcare 49-53 (2006).
    \333\ See Revisions to Rules 144 and 145, Securities Act Release
No. 8869 (Dec. 6, 2007), 72 FR 71546, 71557 n.172 *Dec. 17, 2007)
(``Rules 144 and 145 Release'').
    \334\ See Amendments for Small and Additional Issues Exemptions
Under the Securities Act (Regulation A), Securities Act Release No.
9741 (Mar. 25, 2015), 80 FR 21806, 21814 (Apr. 20, 2015).
---------------------------------------------------------------------------

    As discussed above, the Commission believes that the amended Rule
appropriately balances the promotion of investor protection and the
facilitation of capital formation with respect to broker-dealers'
reliance on the piggyback exception to publish or submit quotations for
the securities of shell companies. For example, the Commission believes
that permitting broker-dealers to publish or submit quotations for the
securities of shell companies for a time-limited period of 18 months
following the publication or submission of the initial priced quotation
for such issuers' securities in an IDQS would facilitate capital
formation and liquidity by permitting broker-dealers to maintain a
quoted market in these securities during a defined period while
limiting the risk that they could become the subject of a pump-and-dump
scheme(s) if such quotations were permitted for an indefinite period.
Further, even during the 18-month period that broker-dealers may rely
on the piggyback exception to quote the securities of shell companies,
broker-dealers are nevertheless subject to liability under the
antifraud provisions of the securities laws, such as Exchange Act
Section 10(b) and Rule 10b-5, if they publish quotations for the
securities of shell companies with the intent to further a fraudulent
or manipulative scheme.
    Other commenters who opposed this part of the proposal stated that
the proposal would prevent existing shareholders from being able to
recover losses from investing in companies that become shell companies
subsequent to purchasing shares in those companies.\335\ Shell
companies can be used for valid reasons; however, the Commission has
noted that unregistered reverse mergers between privately held
companies and publicly traded shell companies commonly are used to
develop a market for the merged entity's securities, often as part of a
pump-and-dump scheme.\336\ The Commission recognizes that shareholders
of shell companies may suffer a loss on their investment as a result of
broker-dealers not being able to rely indefinitely on the piggyback
exception to publish or submit quotations for the shell

company's security,\337\ but the Commission also recognizes the
potential for investor harm as a result of the securities of shell
companies being used in fraudulent and manipulative schemes, such as
pump-and-dump schemes. Therefore, the Commission has determined to
preclude a broker-dealer from relying on the piggyback exception to
maintain a market in the security of an issuer that the broker-dealer
(or any qualified IDQS or registered national securities association
pursuant to a publicly available determination) has a reasonable basis
for believing is a shell company unless such quotation is published or
submitted within the 18 months following the initial quotation for such
issuer's security that is the subject of a bid or offer quotation in an
IDQS at a specified price.\338\ Other commenters believed that broker-
dealers should be able to maintain a quoted market in the securities of
shell companies so long as their paragraph (b) information is current
and publicly available.\339\
---------------------------------------------------------------------------

    \335\ See, e.g., Tom Amenda; Letter from Ronald A. Woessner,
Principal, Woessner & Associates, to SEC (Apr. 16, 2020) (``Woessner
& Associates Letter'').
    \336\ See, e.g., Registration of Securities on Form S-8,
Securities Act Release No. 7646 (Feb. 25, 1999), 64 FR 11103, 11106
(Mar. 8, 1999).
    \337\ See infra Part VI.C.1.b.
    \338\ See Amended Rule 15c2-11(f)(3)(B)(2).
    \339\ Woessner & Associates Letter; see OTC Markets Group Letter
3.
---------------------------------------------------------------------------

    Under the amended Rule, a broker-dealer may maintain a quoted
market for the security of an issuer that the broker-dealer has a
reasonable basis under the circumstances for believing is a shell
company by relying on the piggyback exception during the 18-month
period following the initial publication or submission of a priced bid
or offer quotation for the security in an IDQS, assuming all other
requirements of the piggyback exception are met.\340\ After such period
ends, the broker-dealer may publish or submit a quotation for the
issuer's security if the broker-dealer complies with the information
review requirement or relies on a publicly available determination of a
qualified IDQS that the qualified IDQS complied with the information
review requirement.\341\ Such compliance involves, among other things,
the broker-dealer or qualified IDQS having a reasonable basis under the
circumstances for believing that such issuer's paragraph (b)
information is accurate in all material respects and is from a reliable
source.\342\ Thereafter, the broker-dealer may continue to publish or
submit a quotation for the issuer's security so long as either the
broker-dealer continues to comply with the information review
requirement or relies on a publicly available determination of a
qualified IDQS that such qualified IDQS complied with the information
review requirement. The Commission believes that compliance with the
information review requirement is needed following the 18-month period
to appropriately balance the facilitation of capital formation and the
promotion of investor protection. In this regard, compliance with the
information review requirement before a broker-dealer may publish a
subsequent quotation for the security of an issuer that the broker-
dealer has a reasonable basis under the circumstances for believing is
a shell company helps to promote the Rule's investor protection goals.
Specifically, such compliance is designed to prevent the security of an
issuer that has yet to engage in a reverse merger with a privately held
company during the 18-month period from being used in a pump-and-dump
scheme. As part of such compliance, the broker-dealer must continuously
monitor the amended Rule's specified information regarding such issuer
to form a reasonable basis that the issuer's paragraph (b) information
is accurate in all material respects and is from a reliable source.
---------------------------------------------------------------------------

    \340\ See Amended Rule 15c2-11(f)(3)(i)(B)(2).
    \341\ See Amended Rule 15c2-11(a)(1)(i), (ii).
    \342\ See Amended Rule 15c2-11(a)(1)(i)(C), (a)(2)(iii).
---------------------------------------------------------------------------

    Further, one commenter stated that this aspect of the proposal
would harm the ability of privately held companies to become publicly
traded issuers by engaging in a reverse merger,\343\ while other
commenters who advocated for broker-dealers to be able to rely on the
piggyback exception for self-identified shell companies stated that the
reverse merger process, as opposed to the IPO process, is an economical
and attractive alternative for companies seeking to become publicly
traded and gain greater access to capital markets.\344\ The amended
Rule does not affect a private operating company's ability to become a
publicly traded company by engaging in a reverse merger with a quoted
shell company. Although there can be significant existence of and
potential for fraud arising from shell companies in the context of
reverse mergers,\345\ reverse mergers are also an important tool for
capital formation.\346\ The piggyback exception under the amended Rule
appropriately balances these concerns by permitting broker-dealers to
publish quotations for the securities of shell companies but only for a
limited period. Investor protection will be furthered by preventing
broker-dealers from relying on the piggyback exception to publish
quotations for the securities of shell companies indefinitely.\347\
However, in response to capital formation concerns raised by
commenters, the Commission is permitting broker-dealers to rely on the
piggyback exception to quote the security of a shell company for the 18
months following the initial priced bid or offer quotation for an
issuer's security that is published or submitted in an IDQS.\348\
---------------------------------------------------------------------------

    \343\ Woessner & Associates Letter.
    \344\ Coral Capital Letter; see Anthony Letter.
    \345\ See Proposing Release at 58223. As stated in the Proposing
Release, 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. See id. at 58252 (citing Spotlight on Microcap Fraud
(Feb. 22, 2019), https://www.sec.gov/spotlight/microcap-fraud.shtml).
    \346\ Proposing Release at 58223 (stating that the Commission
has previously brought enforcement actions involving fraud arising
from shell companies, often in the context of reverse mergers).
    \347\ See, e.g., id. at 58223.
    \348\ See Amended Rule 15c2-11(f)(3)(i)(B)(2).
---------------------------------------------------------------------------

    The Commission believes that permitting broker-dealers to rely on
the piggyback exception for the 18 months following the initial
publication or submission of a bid or offer quotation at a specified
price for an issuer's security provides a sufficient amount of time for
a quoted shell company to engage in a reverse merger with a private
operating company and is similar to the time frame specified in other
Commission rules governing acquisitions and mergers.\349\ Following the
merger of an operating company into a shell company, the combined
entity would not meet the definition of a shell company, and broker-
dealers may continue to rely on the piggyback exception to publish or
submit quotations for the issuer's security so long as the other
requirements of the piggyback exception are met.\350\
---------------------------------------------------------------------------

    \349\ See, e.g., Securities Act Rule 419(e)(2)(iv) (requiring
that funds held in an escrow or trust account be returned if a
consummated acquisition(s) meeting the requirements of Rule 419 has
not occurred by a date 18 months after the effective date of the
initial registration statement).
    \350\ For a discussion of this process, see Proposing Release at
58222-23.
---------------------------------------------------------------------------

    Other commenters suggested, instead, that the regulation of
quotations for shell companies should focus on insiders, affiliates,
and enhanced corporate governance because the problems that the
Commission identified in the proposal regarding shell companies are
driven by insiders and affiliates.\351\ According to this

commenter, such an approach would involve the restriction of trading by
company insiders and stronger corporate governance requirements to
promote transparency.\352\ This commenter stated that the Rule should
require additional disclosure from shell companies regarding their
operations and insider and affiliate activities.\353\ The Commission
agrees with commenters that much of the risk regarding shell companies
involves activities of individuals closely associated with the company
using public markets to distribute unregistered shares. The Commission
will continue to monitor the operation of this market, including the
quoting and trading of shell companies' securities, to consider whether
any further amendments to Rule 15c2-11, or any amendments to other
Commission rules involving issuer disclosure, enhanced corporate
governance, or trading restrictions by company insiders, are warranted.
---------------------------------------------------------------------------

    \351\ OTC Markets Group Letter 2; OTC Markets Group Letter 3;
see Securities Law USA Letter; Zuber Lawler Letter. Commenters
stated that much of the risk arising from shell companies concerns
activities of individuals closely associated with the company using
public markets to distribute unregistered shares. OTC Markets Group
Letter 2; see Adler Silverberg Letter; Securities Law USA Letter;
Sosnow & Associates Letter; Zuber Lawler Letter.
    \352\ OTC Markets Group Letter 2.
    \353\ OTC Markets Group Letter 3; see Sosnow & Associates
Letter.
---------------------------------------------------------------------------

5. Frequency of Quotation Requirement--Rule 15c2-11(f)(3)(i)(A)
    In light of technological advances that have taken place since the
Rule was last amended, the Commission is eliminating both the 12-
business-day requirement and the 30-calendar-day window from the
frequency of quotation requirement. The proposal would have replaced
the requirement that quotations occur on each of at least 12 days
within the previous 30 calendar days, with no more than four business
days in succession without a quotation, with a requirement that
quotations occur within the previous 30 calendar days, with no more
than four business days in succession without a quotation. Commenters
on this aspect of the proposal also requested the removal of the 30-
calendar-day piggyback-eligibility period following an initial
quotation for a security, given market-based solutions that render
obsolete the need for a 30-calendar-day window.\354\ Commenters also
stated that there should be no limit on the number of broker-dealers
that are permitted to publish quotations for a security after a
qualified IDQS makes a publicly available determination to allow the
initiation for a quoted market because, according to the commenter, the
30-calendar-day period delays and impedes the creation of a larger,
more efficient public market for a security, and allowing multiple
broker-dealers to publish quotations for such securities would remove
an ``artificial barrier'' to price transparency, promoting competition,
and enhancing liquidity.\355\
---------------------------------------------------------------------------

    \354\ OTC Markets Group Letter 1; OTC Markets Group Letter 2;
see Securities Law USA Letter; Zuber Lawler Letter. One commenter
represented that it already performs, and would continue to perform,
an ongoing review of issuer disclosure to make determinations as to
whether broker-dealers should be allowed to continue to quote in
accordance with the Rule. OTC Markets Group Letter 2.
    \355\ OTC Markets Group Letter 2; see Securities Law USA Letter;
Zuber Lawler Letter.
---------------------------------------------------------------------------

    The Commission has determined to adopt the proposed amendment to
eliminate the 12-business-days frequency of quotation requirement
because technological advances that have taken place since this
provision was adopted have obviated the need for it, given that it is
now easier for broker-dealers to continuously update and widely
disseminate quotations and information about issuers to investors.\356\
As suggested by commenters, the Commission has also determined to
eliminate the 30-calendar-day window from the frequency of quotation
requirement in the amended Rule. Under the amended Rule, for a broker-
dealer to rely on the piggyback exception, a quoted OTC security of an
issuer would need to be the subject of a bid or offer quotation, in an
IDQS, at a specified price, with no more than four business days in
succession without such a quotation.\357\
---------------------------------------------------------------------------

    \356\ Proposing Release at 58223.
    \357\ Amended Rule 15c2-11(f)(3)(i)(A).
---------------------------------------------------------------------------

    The frequency of quotation requirement is designed to permit a
broker-dealer to rely on the piggyback exception only when quotations
are continuous. A requirement that quotations occur with no more than
four business days in succession without such a quotation generally
requires one quotation per week. The presence or elimination of the 30-
calendar-day window does not alter this requirement. For that reason,
the Commission believes that the 30-calendar-day window is not
necessary to ensure that quotations are continuous for purposes of the
piggyback exception (assuming all other requirements of the exception
are met).
    The Commission believes that the elimination of the 30-calendar-day
window could contribute to a more liquid, efficient market because
broker-dealers could rely on the piggyback exception to publish or
submit quotations immediately after a quoted market is initiated (i.e.,
after a broker-dealer publishes an initial quotation after complying
with the information review requirement).\358\ Further, the Commission
does not believe that the elimination of the 30-calendar-day window
would lessen the effects of the amended Rule's investor protections
because the remaining requirements of the piggyback exception under the
amended Rule are sufficient to help prevent misuse of the exception.
---------------------------------------------------------------------------

    \358\ The amended Rule does not impose any limit on the number
of broker-dealers that are permitted to publish quotations for a
security after a qualified IDQS makes a publicly available
determination to allow the initiation for a quoted market. See
Amended Rule 15c2-11(f)(7).
---------------------------------------------------------------------------

6. Grace Period--Rule 15c2-11(f)(3)(ii)
    The Commission posed a question in the Proposing Release about
whether the piggyback exception should include a grace period during
which a broker-dealer could continue to publish or submit quotations
following the expiration of the proposed six-month period specified in
paragraph (f)(3)(ii) of the proposed Rule.\359\ The Commission inquired
about the length of such a grace period and the role of an IDQS or the
use of tags to identify quotations for any security of an issuer if its
information has not been made publicly available within a specified
time frame.
---------------------------------------------------------------------------

    \359\ Proposed paragraph (f)(3)(ii) would have required catch-
all issuer information, including financial information, to be
current and publicly available within six months of the date of the
publication or submission of a broker-dealer's quotation in reliance
on the piggyback exception.
---------------------------------------------------------------------------

    Several commenters offered solutions to address broker-dealer
quotations that are no longer eligible for the piggyback exception.
These commenters supported the idea of a ``grace period'' with respect
to companies that are no longer eligible to be publicly quoted (e.g.,
because their information is no longer ``current'' or because a broker-
dealer cannot rely on any exception to the Rule) to serve as a notice
to investors and issuers, allow time to take appropriate action before
the loss of quote eligibility (e.g., remedy the absence of current and
publicly available information),\360\ and facilitate investor
transactions in the securities.\361\ One commenter advocated for a
minimum of 90 days for such a grace period.\362\ Another commenter
requested clarification as to, if such a grace period were implemented,
when a broker-dealer would be required to cease publishing or
submitting quotations (e.g., whether the broker-dealer would be
required to cease

publishing or submitting quotations on the next business day rather
than intra-day).\363\
---------------------------------------------------------------------------

    \360\ OTC Markets Group Letter 2; see Securities Law USA Letter;
Zuber Lawler Letter.
    \361\ SIFMA Letter (suggesting also that a ``tag'' on a
quotation and notice on the website of a qualified IDQS would help
in these types of scenarios).
    \362\ Coral Capital Letter.
    \363\ FINRA Letter.
---------------------------------------------------------------------------

    The Commission has determined to adopt a grace period in the
piggyback exception to permit broker-dealers to continue quoting
securities of any issuer for a limited period once the requisite
information for such issuer is, depending on the regulatory status of
the issuer, no longer current and publicly available, timely filed, or
filed within 180 calendar days from a specified period.\364\ This
limited, conditional grace period is designed to provide the
opportunity for investors to liquidate positions into a broker-dealer-
quoted market for up to 15 calendar days from the publicly available
determination that the issuer's information is no longer current and
publicly available, timely filed, or filed within 180 calendar days
from a specified period. A longer period of time, such as 90 days, as
suggested by one commenter, would allow a quoted market for an issuer's
security to be maintained in the absence of issuer transparency, which
is inconsistent with the objective of the amendments to the Rule.
---------------------------------------------------------------------------

    \364\ The grace period under the amended Rule extends to all
issuers because the piggyback exception's requirement under the
amended Rule for an issuer's information to be current and publicly
available, timely filed, or filed within 180 calendar days from a
certain reporting period, and publicly available similarly extends
to all issuers. See Amended Rule 15c2-11(f)(3)(i)(C)(1) through (3).
---------------------------------------------------------------------------

    Specifically, paragraph (f)(3)(ii) of the amended Rule provides a
limited grace period to rely on the piggyback exception if issuer
information is, depending on the regulatory status of the issuer, no
longer current and publicly available, timely filed, or filed within
180 calendar days from a specified period--or, the time frames
specified in paragraph (f)(3)(i)(C) of the amended Rule--so long as
three conditions are met. First, a qualified IDQS or registered
national securities association must make a publicly available
determination that the specified information for such issuer is no
longer current and publicly available, timely filed (with respect to an
issuer for which documents and information are specified in paragraph
(b)(3)(ii) or (b)(3)(iii) of the amended Rule), or filed within 180
calendar days from a specified period (with respect to an issuer for
which documents and information are specified in paragraph (b)(3)(i),
(b)(3)(iv), or (b)(3)(v) of the amended Rule) \365\ within the first
four business days that such information is no longer current and
publicly available, timely filed, or filed within 180 calendar days
from the specified period, as applicable.\366\ Accordingly, if the
qualified IDQS or registered national securities association were to
make a publicly available determination five business days after the
issuer's information is, depending on the regulatory status of the
issuer, no longer current and publicly available, timely filed, or
filed within 180 calendar days from the specified period, broker-
dealers would not be afforded a grace period to quote the issuer's
security. The Commission believes that this condition is important to
facilitate immediate notice to market participants--including retail
investors--that an issuer's information is no longer current and
publicly available, timely filed, or filed within 180 calendar days
from the specified period, as applicable.\367\
---------------------------------------------------------------------------

    \365\ This requirement is measured from the end of the issuer's
most recent fiscal year or any quarterly reporting period that is
covered by a report required by Exchange Act Section 13 or 15(d), as
applicable. See Amended Rule 15c2-11(f)(3)(ii) (referencing the
applicable paragraph (f)(3)(i)(C)(1) of the amended Rule for this
category of issuer).
    \366\ Amended Rule 15c2-11(f)(3)(ii)(A). This four-business-day
window mirrors the time frame provided in the requirement in the
piggyback exception that quotations occur with no more than four
business days in succession without a priced quotation. See Amended
Rule 15c2-11(f)(3)(i). Accordingly, the requirement that such
publicly available determination be made during this four-business-
day window allows broker-dealers to maintain the frequency of
quotation requirement of the piggyback exception, as specified in
paragraph (f)(3)(i)(A) of the amended Rule. Because such publicly
available determinations are likely to be made through an automated
process, the Commission expects that such publicly available
determinations generally will be made on the business day following
the date on which issuer information is no longer current and
publicly available, timely filed, or filed within 180 calendar days
from the specified period, as applicable.
    \367\ While only a qualified IDQS or registered national
securities association must make any such publicly available
determination, an investor or broker-dealer may choose to alert a
qualified IDQS or national securities association that the issuer's
paragraph (b) information is no longer current and publicly
available, timely filed, or filed within 180 calendar days from the
specified period, as applicable. In such scenario, the qualified
IDQS or registered national securities association must comply with
its policies and procedures, as required under paragraph (a)(3) of
the amended Rule, for making such publicly available determination.
---------------------------------------------------------------------------

    Further, as discussed below in Part II.H, the Commission is
requiring that any qualified IDQS or registered national securities
association that makes a publicly available determination that a
broker-dealer may rely on the piggyback exception must subsequently
make a publicly available determination if that issuer's paragraph (b)
information is no longer current and publicly available, timely filed,
or filed within 180 calendar days from the specified period, as
applicable. The qualified IDQS or registered national securities
association must make such subsequent publicly available determination
within the first four business days that such documents and information
are no longer current and publicly available, timely filed, or filed
within 180 calendar days.\368\ To ensure the wide availability of such
notice to market participants, the Commission strongly encourages, and
Commission staff intends to offer assistance and support to,\369\
qualified IDQSs and the registered national securities association to
establish a means to tag, or otherwise provide freely available public
indication of notice, that an issuer's paragraph (b) information is no
longer current and publicly available, and that, as a result, the
security has entered the 15-calendar-day grace period before it is
ineligible to maintain its quoted market through reliance on the
piggyback exception. However, the Commission also recognizes the
importance of accommodating the flexibility of qualified IDQSs and
national securities associations in displaying notices and information
to broker-dealers, market participants, and investors; therefore, the
indication of such notice may take different forms. In this regard, a
registered national securities association could append a fifth letter
identifier to the security's symbol, or an indicator could be displayed
on the website of a qualified IDQS or a registered national securities
association next to the security's name or quote, to provide sufficient
notice to investors and other market participants that the issuer's
security has entered the 15-calendar-day grace period.
---------------------------------------------------------------------------

    \368\ See Amended Rule 15c2-11(f)(7); infra Part II.H.
    \369\ See infra Part II.P.
---------------------------------------------------------------------------

    Second, the grace period is conditioned on the broker-dealer's
compliance with the requirements of paragraphs (d)(2) and (f)(3)(i),
except for the requirement regarding the public availability of current
issuer information, timely filed issuer information, or issuer
information that is filed within 180 calendar days from the specified
period, as applicable.\370\ In other words, under the amended Rule, a
broker-dealer may rely on the piggyback exception during the grace
period only if each of the other conditions in the piggyback exception
is met--the quotation must not be for the security of a shell company
(unless the quotation is published or submitted within 18 months of the
initial priced

quotation for such issuer's security in an IDQS), the quotation must
represent a bid or an offer at a specified price, and no more than four
days in succession may elapse without a quotation for the security--and
the broker-dealer must comply with the recordkeeping requirements in
paragraph (d)(2).
---------------------------------------------------------------------------

    \370\ Amended Rule 15c2-11(f)(3)(ii)(B).
---------------------------------------------------------------------------

    Lastly, paragraph (f)(3)(ii)(C) of the amended Rule specifies the
duration of the grace period: The shorter of the period beginning with
the date on which a qualified IDQS or registered national securities
association makes a publicly available determination identified in
paragraph (f)(3)(ii)(A) and ending on either (1) the specified issuer
information being current and made publicly available or filed, or (2)
the fourteenth calendar day following the date on which such publicly
available determination was made.\371\ Therefore, if the specified
issuer information is current and made publicly available, or is filed,
during the fourteen calendar days following the publicly available
determination identified in paragraph (f)(3)(ii)(A), the grace period
ends on that date. While the grace period ends on such date, piggyback
eligibility under paragraph (f)(3)(i)(A) of the amended Rule resumes on
such date, assuming all conditions in that paragraph are met.\372\
Specifically, broker-dealers may continue to rely on the piggyback
exception to publish quotations after the grace period ceases to apply
if: (1) The documents and information specified in paragraph (b)(3) of
the amended Rule for a reporting issuer were filed within 15 calendar
days starting on the date on which the qualified IDQS or registered
national securities association makes a publicly available
determination that the issuer's paragraph (b) information is no longer
timely filed or filed within 180 calendar days from a specified
period,\373\ and (2) all other requirements in paragraph (f)(3)(i) were
met. Similarly, broker-dealers may continue to rely on the piggyback
exception to publish quotations after the grace period ceases to apply
if: (1) The documents and information specified in paragraph (b)(4) or
paragraph (b)(5)(i) are current and publicly available within 15
calendar days starting on the date on which the qualified IDQS or
registered national securities association makes a publicly available
determination that the issuer's paragraph (b) information is no longer
current and publicly available, and (2) all other requirements in
paragraph (f)(3)(i) were met. However, if the specified issuer
information is not made current and publicly available, or is not
filed, during the 15 calendar days starting on the date of a publicly
available determination identified in paragraph (f)(3)(ii)(A), a
broker-dealer may no longer rely on the piggyback exception and would
need to either comply with the information review requirement or rely
on another of the amended Rule's exceptions to resume a quoted market
in the security.
---------------------------------------------------------------------------

    \371\ Amended Rule 15c2-11(f)(3)(ii)(C).
    \372\ Broker-dealer quotations that are published or submitted
in reliance on the grace period are not required to cease intra-day
upon such public availability of current issuer information.
    \373\ See Amended Rule 15c2-11(f)(3)(i)(C)(4).
---------------------------------------------------------------------------

7. Removal of Certain Piggyback Exception Provisions Under the Former
Rule
    The Commission is removing certain provisions of the former Rule's
piggyback exception to streamline the piggyback exception under the
amended Rule. The Commission sought comment about eliminating
paragraphs (f)(3)(ii) and (f)(3)(iii) of the former Rule.\374\
Paragraph (f)(3)(ii) of the former Rule allowed broker-dealers to rely
on the piggyback exception to publish or submit quotations in an IDQS
that does not identify unsolicited customer indications of interest. In
addition, paragraph (f)(3)(iii) of the former Rule allowed broker-
dealers to piggyback off their own quotations. Commenters did not
address the issue of eliminating such paragraphs and did not raise any
concerns about any potential negative consequences that could result
from removing these paragraphs from the piggyback exception. Further,
no comment was received regarding the Commission's understanding that
broker-dealers tend to rely on the piggyback exception as provided in
paragraph (f)(3)(i) of the former Rule.\375\ In light of the above, the
Commission has determined to eliminate paragraphs (f)(3)(ii) and
(f)(3)(iii) of the former Rule.
---------------------------------------------------------------------------

    \374\ See Proposing Release at 58225.
    \375\ See id.
---------------------------------------------------------------------------

E. Unsolicited Quotation Exception--Rule 15c2-11(f)(2)

    The Commission has determined to adopt the unsolicited quotation
exception, substantially as proposed, with modifications from the
proposal to enhance the effectiveness of the proposed amendments'
investor protections and, specifically, to: (1) Prohibit reliance on
the exception for a quotation on behalf of an affiliate of the issuer
if the issuer's information is not current and publicly available, and
(2) permit reliance on written representations that a customer is not a
company insider or an affiliate of the issuer. The Commission sought
comment about the proposal to require that certain issuer information
be current and publicly available for a broker-dealer to rely on the
unsolicited quotation exception to publish or submit a quotation on
behalf of a company insider.\376\ The Commission also solicited comment
about whether affiliates of the issuer should be specified as persons
for whom the unsolicited quotation exception would be unavailable,
unless the issuer's paragraph (b) information is current and publicly
available.
---------------------------------------------------------------------------

    \376\ The proposed amendment was intended to help prevent the
potential misuse of the exception by company insiders who might
create the appearance of an active market in quoted OTC securities
to entice new investors to invest, or to facilitate pump-and-dump
schemes. See id.
---------------------------------------------------------------------------

    Some commenters supported this aspect of the proposal,\377\ one of
whom suggested easing the burden on broker-dealers by removing the
obligation to identify company insiders from the exception and
requiring additional disclosures (in Commission rules other than Rule
15c2-11) from certain market participants.\378\ In the Proposing
Release, the Commission did not propose to require the identification
of company insiders and affiliates in Commission rules other than Rule
15c2-11. However, the Commission believes that permitting reliance on a
written representation from the customer's broker that such customer is
not a company insider or an affiliate of the issuer would help to
alleviate burdens on broker-dealers associated with the identification
of company insiders and affiliates.
---------------------------------------------------------------------------

    \377\ See, e.g., SIFMA Letter.
    \378\ OTC Markets Group Letter 1; OTC Markets Group Letter 2.
---------------------------------------------------------------------------

    The Commission believes that imposing a limitation, such that the
customer requesting that a quote be published is not a company insider
or affiliate, helps to prevent misuse of the unsolicited quotation
exception by company insiders and affiliates who may take advantage of
access to information about the company that is not available to non-
insiders. Therefore, the Commission has determined to make the
unsolicited quotation exception in the amended Rule unavailable for
company insiders and affiliates if the information required to be
reviewed under the Rule is not current and publicly available.\379\
This limitation, under paragraph (f)(2)(ii)(B) of the amended Rule, is
being adopted with modifications.\380\ The exception, as

adopted, adds the term ``affiliate'' for the same reasons the
Commission believes the exception should be unavailable to company
insiders. The definition of the term ``affiliate'' in the rule text is
the same as the definition of that term in Securities Act Rule
144(a)(1) because the Commission believes that the definition
appropriately captures the scope of persons other than company
insiders, as that term is defined in paragraph (e)(1) of the amended
Rule, who also may have the potential for a heightened incentive to
manipulate the price of a security. In addition, the Commission
believes that broker-dealers, qualified IDQSs, and registered national
securities associations have experience in applying this definition to
determine whether a person is an affiliate because it is a well-
established and broadly used definition in other areas of the federal
securities laws. The Commission remains concerned about the increased
potential for fraud and manipulation when securities trade in the
absence of information about the issuer and the heightened incentive
for company insiders and affiliates to engage in misconduct to
artificially affect the price and trading volume of an OTC security.
The Commission believes that protecting retail investors from fraud and
manipulation in the OTC market requires a limitation on quotations on
behalf of company insiders and affiliates when certain information is
not current and publicly available. In response to a comment requesting
that the Commission ``reinforce the principle that allowing insiders to
trade in dark companies results in an uneven playing field and often
constitutes a Rule 10b-5 violation,'' \381\ the Commission reiterates
to market participants that any transaction by a company insider or an
affiliate is subject to applicable anti-fraud and anti-manipulation
rules.
---------------------------------------------------------------------------

    \379\ See Proposing Release at 58225.
    \380\ The adopted exception uses the newly defined term
``company insider,'' which is defined in paragraph (e)(1) of the
amended Rule.
    \381\ OTC Markets Group Letter 2. This commenter also stated
that insiders, affiliates, and employees should not be permitted to
transact in securities of companies for which paragraph (b)
information is not current and publicly available because market
makers are unable to distinguish between affiliate and non-affiliate
quotations. OTC Markets Group Letter 3.
---------------------------------------------------------------------------

    Other commenters expressed the concern that the broker-dealer
publishing a quotation might not have a direct relationship with a
customer (e.g., when a retail customer order is routed from a retail
broker to a broker-dealer acting as a market maker), which commenters
stated would make it difficult to know whether that customer is a
company insider.\382\ Some commenters suggested that the Rule permit a
broker-dealer to rely on an affidavit from the investor regarding
whether that investor is an accredited investor, unaffiliated with the
issuer, and not listed in the SEC Action Lookup for Individuals,\383\
or by relying on a negative consent letter or similar approach from the
broker-dealer that has the relationship with the ultimate customer to
meet this requirement of the exception.\384\ The Commission appreciates
that the customer on whose behalf a quotation is published or submitted
may not be the direct customer of the broker-dealer. Therefore, the
amended Rule includes a provision designed to ease the burden on
broker-dealers obligated to determine whether the person on whose
behalf the quotation is published or submitted is a company insider or
an affiliate. For purposes of the unsolicited quotation exception, the
amended Rule permits a broker-dealer to rely on a written
representation from the customer's broker that such customer is not a
company insider or an affiliate if two conditions are met.\385\ The
written representation and the reasonable basis requirements provide a
degree of assurance with regard to who the customer is, without
imposing the higher burden that would result from mandating an
affidavit or other sworn statement.
---------------------------------------------------------------------------

    \382\ E.g., Canaccord Letter; CrowdCheck Letter; STA Letter. But
see Leonard Burningham Letters (stating that gatekeepers--broker-
dealers, lawyers, transfer agents, and issuers--should be able to
determine when transactions of insiders are affiliates).
    \383\ Mitchell Partners Letter 1 (stating that the display of
unsolicited orders increases competition but that accredited
investors do not need the Rule's investor protections). Launched in
2018, the SEC Action Lookup for Individuals is a search feature on
the Commission's website that allows users to look up information
about individuals who have been named as defendants in SEC federal
court actions or respondents in SEC administrative hearings. See SEC
Action Lookup--Individuals, https://www.sec.gov/litigations/sec-action-look-up (last visited June 13, 2020); see also Press Release,
SEC Launches Additional Investor Protection Search Tool, (May 2,
2018), https://www.sec.gov/news/press-release/2018-78. While this
tool allows for respondents' information to be researched, it may
not necessarily provide information about insider or affiliate
status.
    \384\ Canaccord Letter.
    \385\ Amended Rule 15c2-11(f)(2)(iii)(A).
---------------------------------------------------------------------------

    The first condition is that the broker-dealer publishing or
submitting the quotation receives the written representation before,
and on the same day that, the quotation representing the customer's
unsolicited indication of interest is published or submitted. This
condition is designed to promote the accuracy of the representation
because a person's status as a company insider or an affiliate may
change over time. The second condition is that the broker-dealer
publishing or submitting the quotation has a reasonable basis under the
circumstances for believing that the customer's broker is a reliable
source.\386\ For example, the broker-dealer publishing or submitting
the quotation may receive information or a certification from the
customer's broker regarding the reasonable steps that the customer's
broker takes to determine whether its customers are company insiders or
affiliates. Moreover, the broker-dealer publishing or submitting the
quotation should question the reliability of the customer's broker if
circumstances indicate that the customer's broker may be an unreliable
source.
---------------------------------------------------------------------------

    \386\ The condition mirrors the requirement to have ``a
reasonable basis under the circumstances for believing'' that is
used elsewhere in the Rule. Former Rule 15c2-11(a); Proposed Rule
15c2-11(a)(1)(iii), (a)(2)(iii); Amended Rule 15-11(a)(1)(iii),
(a)(2)(iii).
---------------------------------------------------------------------------

    The Commission believes that permitting a broker-dealer to rely on
a written representation from the customer's broker that such customer
is not a company insider or an affiliate is a more narrowly tailored
approach to achieve the objectives of these amendments than requiring
issuers or other market participants to comply with new disclosure
requirements in other rules in an effort to alleviate burdens on
broker-dealers for purposes of the unsolicited quotation exception.
Further, as one commenter acknowledged, the suggestion to revise the
disclosure requirements in other Commission rules is outside the scope
of the amendments.\387\ The Commission believes that the use of a
written representation, as provided in paragraph (f)(2)(iii)(A) of the
amended Rule, responds to comments about easing broker-dealer burdens
in connection

with the publication or submission of quotations without necessitating
amendments to Commission rules other than Rule 15c2-11 and that could
require disclosure of information even in circumstances where a broker-
dealer is not publishing or submitting a quotation. Moreover, the
customer's broker and the broker-dealer acting as a market maker
typically already have processes in place for sharing information, such
as information about the quotation, and the Commission believes broker-
dealers have a variety of ways to share information related to the
written statement. The Commission has determined to narrowly tailor the
written representation to require the broker-dealer to provide only a
statement that the customer is not a company insider or an affiliate.
The Commission believes limiting the representation to a simple
statement, without imposing additional costs and burdens associated
with supplying extra information in the written representation that may
not be needed by the broker-dealer, helps to prevent misuse of the
unsolicited quotation exception while balancing considerations related
to the benefits and burdens of affidavits or other additional types of
disclosures in other Commission rules.
---------------------------------------------------------------------------

    \387\ See OTC Markets Group Letter 2. This commenter stated
that, because ``Rule 15c2-11 is fairly limited in scope, regulating
only the publication of quotations by broker-dealers[,] . . . the
Rule on its own cannot solve the breakdown in the information
`supply chain.' '' Id. The commenter suggested the following for the
Commission to ``more effectively address these issues outside the
scope of the Rule, in large part by requiring additional disclosure
from powerful market participants'': (1) Affiliates, insiders, and
paid promoters should not be afforded the ability to hide their
positions in anonymous objecting beneficial owner accounts; (2)
disclosure of transaction information for officers and affiliates of
non-reporting issuers should be required in a manner similar to
Forms 3, 4, and 5; (3) institutions should be required to disclose
their holdings in non-exchange listed securities under Exchange Act
Section 13(f); (4) Securities Act Section 17(b) should be amended to
require additional disclosure from paid stock promoters; and (5)
transfer agent regulations should be updated to require disclosure
of share issuance and transfer information, and broker-dealers
should be permitted to rely on this information in facilitating
transactions in restricted and control securities. Id.
---------------------------------------------------------------------------

    One commenter sought clarity regarding the ability of a broker-
dealer that publishes or submits a quotation pursuant to the
unsolicited quotation exception to rely on a qualified IDQS's
determination that issuer information is current and publicly available
for purposes of the unsolicited quotation exception.\388\ The
Commission is modifying the unsolicited quotation exception text to
allow a broker-dealer to rely on publicly available determinations by a
qualified IDQS or a registered national securities association that
paragraph (b) information is current and publicly available. This
revision is designed to clarify that a broker-dealer may rely on a
publicly available determination by a qualified IDQS or a registered
national securities association that paragraph (b) information is
current and publicly available when relying on the unsolicited
quotation exception, specifically.
---------------------------------------------------------------------------

    \388\ SIFMA Letter.
---------------------------------------------------------------------------

F. ADTV and Asset Test Exception--Rule 15c2-11(f)(5)

    To provide retail investors with greater price transparency, and to
reduce burdens on broker-dealers in publishing quotations for highly
liquid securities of well-capitalized issuers where the Rule's goals
can be achieved through alternative means, the Commission is adopting
the ADTV and asset test exception substantially as proposed, with
modifications, as discussed below. Specifically, the proposed exception
would have permitted a broker-dealer to publish or submit quotations
without complying with the information review requirement where: (1) A
security has a worldwide average daily trading volume value (the ``ADTV
value'') of at least $100,000 during the 60 calendar days immediately
before the publication of a quotation for such security, and (2) 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.\389\ In addition,
the proposed exception would also have required that paragraph (b)
information about the issuer be current and publicly available.\390\
The Commission sought comment on such an exception. Commenters
expressed support for an exception for highly liquid securities of
well-capitalized issuers.\391\
---------------------------------------------------------------------------

    \389\ Proposed Rule 15c2-11(f)(5).
    \390\ Proposed Rule 15c2-11(f)(5)(ii).
    \391\ See MCAP Letter; OTC Markets Group Letter 2; SIFMA Letter;
Virtu Letter (stating, however, its concern that the proposal would
not reach enough securities, specifically those of issuers that have
not been involved in market manipulation and fraud).
---------------------------------------------------------------------------

    Because a pump-and-dump scheme often involves a thinly traded
security of an issuer with limited assets, this exception recognizes
that such fraudulent and manipulative activity generally does not
involve issuers with substantial assets.\392\ The Commission believes
that the exception (i.e., one that is based on a security's ADTV value
and the issuer's total assets and shareholders' equity) will help to
ensure that the Rule's policy goal of deterring broker-dealers from
commencing quotations for quoted OTC securities that may facilitate a
fraudulent or manipulative scheme is not undermined.\393\ Further, the
Commission believes that the exception's three thresholds of ADTV
value, total assets, and shareholders' equity are tailored to
appropriately capture issuers of securities that are less susceptible
to fraud and manipulation based on the liquidity of the security and
size of the issuer.\394\
---------------------------------------------------------------------------

    \392\ See Proposing Release at 58226.
    \393\ See id. at 58228.
    \394\ See infra Part VI.C.1.c.
---------------------------------------------------------------------------

    Some commenters stated their view that identifying ``unaffiliated''
shareholders' equity can be difficult, if not impossible.\395\
Commenters also stated that using the proposed requirement of $10
million in unaffiliated shareholders' equity may be difficult to
measure in practice because information regarding affiliated versus
unaffiliated shareholders' equity may be unavailable \396\ or that this
proposed requirement was problematic because large companies can have
negative shareholders' equity.\397\ In response to these commenters,
paragraph (f)(5) of the amended Rules uses a ``shareholders' equity''
prong instead of ``unaffiliated shareholders' equity'' as proposed.
With this modification, the Commission intends to address commenters'
concerns regarding the operational difficulty in determining
unaffiliated shareholders' equity, particularly where unaffiliated
shareholders' equity is not disclosed by the issuer. The shareholders'
equity must also be as reflected in the issuer's publicly available
audited balance sheet.\398\ One commenter, however, expressed concern
that financial statements may not be reliable, such as when the issuer
finds a mistake and states that the financial statements cannot be
relied upon.\399\ Depending on the facts and circumstances, a broker-
dealer may no longer be able to rely on the ADTV and asset test
exception to publish or submit quotations if the issuer finds a mistake
and states that the financial statements cannot be relied upon. The
asset test and shareholders' equity prong under amended Rule, however,
require use of an audited balance sheet, which should help mitigate any
potential concerns about the reliability of the financial information.
---------------------------------------------------------------------------

    \395\ OTC Markets Group Letter 2; OTC Markets Group Letter 3;
SIFMA Letter.
    \396\ Canaccord Letter; SIFMA Letter.
    \397\ Professor Angel Letter (stating that it is not uncommon
for large companies to have negative equity in certain cases, such
as legitimate start-ups with losses or after a leveraged
recapitalization). The Commission does not believe that the
exception should apply to the securities of companies with negative
equity because such securities may be more prone to manipulation as
a result of being inexpensive to acquire for fraudulent purposes,
which could possibly allow for more issuers that could be vulnerable
to pump-and-dump schemes to be admitted within the exception, thus
increasing investor exposure to fraud. See infra Part VI.C.1.c.
    \398\ The shareholders' equity prong is based on total permanent
equity and includes noncontrolling interests presented within
permanent equity in the issuer's consolidated financial statements.
See, e.g., Financial Accounting Standards Board Accounting Standards
Codification (ASC) 505-10-05-3; ASC 810-10-45-15 through 45-16;
paragraph 54 of International Accounting Standard 1, Presentation of
Financial Statements; and Rule 5-02 of Regulation S-X.
    \399\ See Professor Angel Letter.

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

    Some commenters suggested that certain parts of the test be
replaced. One commenter suggested that market capitalization of $150
million should replace the unaffiliated shareholders' equity prong of
the exception,\400\ while another suggested that the asset test should
be replaced with a market capitalization test.\401\ The Commission does
not believe that market capitalization is an appropriate alternative
for either of these two prongs of the exception because market
capitalization fluctuates based on share price. In the ``pump'' phase
of a pump-and-dump scheme, a security's market price may rise to an
artificially high level. As a result, market capitalization (which
rises as market price rises) may quickly exceed this $150 million
threshold. Shareholders' equity, however, is independent of market
price and thus less susceptible to pump-and-dump schemes that may
impact the price of a security.
---------------------------------------------------------------------------

    \400\ OTC Markets Group Letter 2.
    \401\ Professor Angel Letter.
---------------------------------------------------------------------------

    Paragraph (f)(5)(i) of the amended Rule has been modified from the
proposed rule text to clarify that a security must have a ``reported''
worldwide ADTV value of at least $100,000 during the 60 calendar days
immediately before the publication or submission of a quotation of such
security. The addition of the term ``reported'' clarifies that the
exception requires that the standard for determining ADTV value be
based on information that is publicly available.\402\ This modification
is consistent with and clarifies the Commission statement in the
Proposing Release that ADTV value could be determined from information
that is publicly available and from a reliable source (i.e., trading
volume as reported by a self-regulatory organization or comparable
entity, or an electronic information system that regularly provides
information regarding securities in markets around the world).\403\
Thus, to satisfy the ADTV value prong in the amended Rule, a broker-
dealer or qualified IDQS would need to determine the value of a
security's ADTV from information that is publicly available. Further,
the amended Rule permits that any reasonable and verifiable method may
be used, as proposed.\404\
---------------------------------------------------------------------------

    \402\ See Proposing Release at 58227.
    \403\ See id. at 58227 nn.119, 120.
    \404\ See id. at 58227 n.120.
---------------------------------------------------------------------------

    Further, the requirements of the exception, as adopted, have been
streamlined. While paragraph (f)(5)(ii) of the proposed Rule also would
have expressly required that the issuer's paragraph (b) information be
current and publicly available,\405\ this requirement is unnecessary in
paragraph (f)(5) of the amended Rule because, in addition to requiring
a security's ADTV to be based on information that is publicly available
during a specific 60-calendar-day period, paragraph (f)(5)(ii) of the
amended Rule expressly requires that an issuer's audited balance sheet
be publicly available and issued within six months after the end of its
most recent fiscal year, which results in the public availability of
financial information that is specified in paragraph (b).
---------------------------------------------------------------------------

    \405\ See OTC Markets Group Letter 3 (suggesting that the
requirement in the exception that paragraph (b) information be
current and publicly available should be removed).
---------------------------------------------------------------------------

    The Commission has determined not to adopt certain other
modifications suggested by commenters. One commenter requested a 30-
calendar-day period to review the information required by the Rule if a
quoted OTC security ceases to qualify for the ADTV and asset test
exception and if the piggyback exception is unavailable.\406\ The
Commission believes that permitting a 30-calendar-day period to comply
with the information review requirement if the conditions of the ADTV
and asset test exception were not met and no other exception were
available would be inconsistent with investor protection because the
targets of pump-and-dump schemes are often thinly traded securities of
issuers with limited assets, and such an extension could provide the
opportunity for a pump-and-dump scheme to be carried out where the
Rule's objectives cannot be achieved through the requirements of this
exception, any of the amended Rule's other exceptions, or the Rule's
information review requirement being met.\407\
---------------------------------------------------------------------------

    \406\ Coral Capital Letter.
    \407\ See, e.g., Andreas Hackethal et al., Who Falls Prey to the
Wolf of Wall Street? Investor Participation in Market Manipulation
(ECGI, Working Paper No. 446, 2019), available at https://ecgi.global/sites/defalt/files/working_papers/douments/finalleuzmeyermulhnsolteshackethal.pdf (stating that, in pump-and-
dump schemes, promoters often target thinly traded penny stocks for
which limited liquidity leads to fast price increases when demand
rises); see also Michael Hank & Florian Hause, On the effects of
stock spam emails, 11 J. Fin. Mkts 57, 60 (2008).
---------------------------------------------------------------------------

    One commenter suggested that the Rule exempt securities of issuers
with over $10 million in equity, as demonstrated by audited financial
statements no older than 18 months, and that have been trading for more
than $10 per share since January 1, 2017.\408\ As discussed in the
Economic Analysis, the Commission considered alternatives based on
other thresholds, including price.\409\ As a result, the Commission
believes that the thresholds of the amended Rule \410\ confine the
exception to OTC securities that are not prone to fraudulent or
manipulative activity.\411\
---------------------------------------------------------------------------

    \408\ Letter from Dan Kanter, President, and Craig Carlino,
Chief Compliance Officer, Monroe Financial Partners, Inc. (Dec. 30,
2019) (``Monroe Letter'').
    \409\ See infra Part VI.C.1.c.
    \410\ In addition to the exception's ADTV value threshold, as
discussed above, the exception also provides a threshold requiring
that the issuer have at least $50 million in total assets and $10
million in 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. See Amended Rule 15c2-
11(f)(5)(ii).
    \411\ As stated in the Economic Analysis, the Commission has
found that zero issuers in 2019 that simultaneously met the $50
million total assets, $10 million shareholders' equity, and $100,000
ADTV value thresholds were subject to trading suspensions or caveat
emptor status. See infra Part VI.C.1.c.
---------------------------------------------------------------------------

    Three commenters supported an exemption that would allow broker-
dealers to publish quotations for the securities of exempt foreign
private issuers that satisfy the ADTV test, are traded on an ``offshore
securities market'' that meets the requirements in Securities Act Rule
902(b)(2), and are not suspended to trade by a foreign financial
regulatory authority.\412\ The Commission recognizes that the expansion
of the exception to securities of foreign private issuers that are
traded on a ``designated offshore securities market'' within the
meaning of Securities Act Rule 902(b)(2) could reduce burdens on
broker-dealers in publishing quotations for securities of certain types
of issuers, though the Commission believes that such a test would cover
many of the same securities that would qualify for the ADTV and asset
test exception, which already is designed to accommodate foreign
private issuers. In addition, the Commission is concerned that
securities that might not satisfy the asset test prong of the ADTV and
asset test may meet the requirements of this suggested ``offshore
securities market'' exception, and the Commission believes that the
thresholds included by both prongs of the ADTV and asset test under the
amended Rule appropriately capture issuers and their securities that
are less susceptible to fraud and manipulation based on the liquidity
of the securities and size of the issuer.\413\ Further, the Commission
believes that compliance with such an alternative would raise practical
and implementation issues with respect to, for example, whether a

particular offshore market or jurisdiction has comparable securities
regulations and market practices and standards.
---------------------------------------------------------------------------

    \412\ Canaccord Letter; MCAP Letter; Virtu Letter.
    \413\ See infra Part VI.C.1.c; Proposing Release at 58226.
---------------------------------------------------------------------------

    One commenter suggested that the exception be expanded to include
other categories of issuers, such as banks and insurance companies that
provide information to their regulators, companies that undergo
bankruptcy proceedings and provide information to a bankruptcy court,
and other issuers that have a verifiable operating history and revenues
and that pay dividends.\414\ The Commission believes that the proposed
exception appropriately identifies those well-capitalized issuers of
securities that are highly liquid and thus are less likely to be
susceptible to the type of fraudulent and manipulative conduct that
Rule 15c2-11 is designed to prevent. The Commission does not believe
that it would be appropriate to except from the requirement for current
and publicly available information securities of banks and insurance
companies that provide certain information to their regulators, which
generally is not the same as the information specified in paragraph (b)
of the amended Rule.\415\ Further, the regulation of banks' and
insurance companies' capital and reserves is not designed to provide
the same investor protections that the amended Rule provides. In
particular, the information review requirement is designed to help
ensure that a quoted market for a security is less susceptible to
fraudulent or manipulative schemes.\416\ Similarly, an exception for
securities based on an issuer's status of undergoing a bankruptcy
proceeding and providing information to a bankruptcy court would not
provide the same investor protections that the amended Rule provides.
Finally, the Commission does not believe it would be appropriate to
except all securities of issuers that pay dividends in light of its
concerns that the payment of dividends alone does not prevent the
securities of such issuers from being used as part of a fraudulent or
manipulative scheme or indicate that an issuer is any less likely to be
part of a fraudulent or manipulative scheme. The Commission, however,
will continue to monitor trading in this market to consider whether any
further expansion of this exception is warranted.
---------------------------------------------------------------------------

    \414\ Virtu Letter.
    \415\ See also supra note 249.
    \416\ See Proposing Release at 58208.
---------------------------------------------------------------------------

G. Underwritten Offering Exception--Rule 15c2-11(f)(6)

    To help expedite the availability of securities to retail investors
in the OTC market following an underwritten offering, and to facilitate
capital formation, the Commission is adopting the underwritten offering
exception, as proposed. The Commission sought comment about an
exception from the information review requirement that permits a
broker-dealer to publish or submit quotations for a security issued in
an underwritten offering if: (1) The broker-dealer is named as an
underwriter in the registration statement or offering statement for the
underwritten offering, and (2) the broker-dealer that is the named
underwriter publishes or submits the quotation.\417\ All commenters on
the proposed underwritten offering exception supported the proposal,
except for one.\418\ One of the comments also stated that the liability
standards and professional obligations of underwriters in registered
and Regulation A offerings are a sufficient basis for the
exception.\419\
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    \417\ Proposed Rule 15c2-11(f)(6). Although the proposed Rule
used the term ``circular,'' the amended Rule uses the term
``statement'' to be consistent with Regulation A. See Amended Rule
15c2-11(f)(6). The Commission is also making a technical edit to the
proposed Rule to replace the word ``identified'' with the word
``specified'' so that the underwritten offering exception is
consistent with the amended Rule's other provisions.
    \418\ Better Markets Letter. This commenter stated generally
that the proposed new exception further ``fragments markets and
introduces unnecessary complexity.'' Id. The Commission does not
believe that the underwritten offering exception would fragment the
OTC market because this exception does not change any existing
market structure. Rather, this exception provides an alternative
means for broker-dealers to initiate a quoted market. In addition,
the Commission disagrees with the comment that the underwritten
offering exception would introduce unnecessary complexity because
the requirements of the exception are provided in a bright-line
fashion: (1) The broker-dealer must be named as an underwriter in
the registration statement or offering statement for the
underwritten offering, and (2) the broker-dealer that is the named
underwriter publishes or submits the quotation. The Commission does
not believe that compliance with the requirements is operationally
difficult or complex because any broker-dealer seeking to rely on
the exception will know if it is named as an underwriter in the
exception's specified documents. Further, the Commission believes
that the underwritten offering exception appropriately eases broker-
dealer burdens in publishing quotations based on the performance of
an activity (i.e., a review of the issuer) that such broker-dealers
are likely to have already performed, as discussed below, while at
the same time helping to ensure that a quoted market for a security
is less susceptible to fraudulent or manipulative schemes.
    \419\ Coral Capital Letter.
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    The Commission agrees and has determined to adopt the underwritten
offering exception, as proposed, with a technical edit.\420\ To avoid
requiring a redundant review where the objectives of the information
review requirement have already been achieved, the amended Rule allows
a broker-dealer, without complying with the information review
requirement, to publish or submit a quotation for a security of the
same class issued in an underwritten offering if the broker-dealer
served as the underwriter, so long as the broker-dealer's quotation is
published or submitted within a certain time frame.\421\ Specifically,
paragraph (f)(6) of the amended Rule excepts the publication or
submission of a quotation for a security by a broker-dealer that is
named as an underwriter either in: (1) A registration statement that
became effective fewer than 90 calendar days before the day on which
such broker-dealer publishes or submits the quotation to the quotation
medium, for an offering for that class of security, as is referenced in
paragraph (b)(1), or (2) an offering statement that was qualified fewer
than 40 calendar days before the day on which such broker-dealer
publishes or submits the quotation to the quotation medium for an
offering of that class of security, as referenced in paragraph (b)(2).
Like the proposed Rule, the amended Rule includes a provision that the
exception shall apply only for a limited period following the
effectiveness of the registration statement or the qualification of the
Regulation A offering statement.
---------------------------------------------------------------------------

    \420\ Amended Rule 15c2-11(f)(6). The technical edit in the
amended Rule replaces the term ``circular'' with ``statement'' to be
consistent with Regulation A.
    \421\ As the Commission explained in the Proposing Release,
``[b]ecause of a broker-dealer's involvement in the registered or
Regulation A offering, including their assumption of liability for
misstatements or omissions in the prospectus or offering [statement]
and public availability of the proposed paragraph (b) information on
EDGAR, the Commission believes that a subsequent review requirement
would be redundant and, thus, unnecessary.'' Proposing Release at
58230.
---------------------------------------------------------------------------

    A comment suggested that the Commission broaden the exception to
apply to: (1) Subscription rights, warrants, and units consisting of
common stock and warrants, and (2) broker-dealers other than the
underwriter.\422\ This aspect of paragraph (f)(6) of the amended Rule,
which has not been changed from the proposed amendment, refers to a
quotation for a security by a broker-dealer that is named as an
underwriter in a registration statement or in an offering statement.
Accordingly, the exception is available for the quotation of any
security, including subscription rights, warrants, and units consisting
of common stock

and warrants, so long as the conditions of the exception are met.
---------------------------------------------------------------------------

    \422\ Coral Capital Letter.
---------------------------------------------------------------------------

    Another commenter suggested that the exception be expanded to cover
``any'' broker-dealer (including the underwriter), assuming the
requirements in paragraphs (a) and (b) of the Rule are met.\423\ The
Commission believes that extending the exception to include broker-
dealers that were not named as an underwriter would risk important
investor protections and undermine the goals of the amended Rule, so it
is not adopting this suggestion. As discussed in the Proposing Release,
broker-dealers that act as underwriters in registered offerings or
offerings conducted pursuant to Regulation A are subject to potential
liability for misstatements and omissions in the related prospectus or
offering statement.\424\ As a result, unlike broker-dealers acting as
market makers, underwriters are highly incentivized to confirm that
information provided to investors in the prospectus for a registered
offering or in an offering statement for a Regulation A offering is
materially accurate and from a reliable source.
---------------------------------------------------------------------------

    \423\ OTC Markets Group Letter 3.
    \424\ Proposing Release at 58229-30.
---------------------------------------------------------------------------

    Accordingly, an underwriter typically conducts a due diligence
review to mitigate potential liability for misstatements and omissions
in the related prospectus or offering statement (and, therefore, is
likely to have already conducted a review of the issuer).\425\ Thus,
the Commission believes that the underwritten offering exception should
be unavailable for the publication or submission of a quotation by a
broker-dealer that is not named as an underwriter.
---------------------------------------------------------------------------

    \425\ See id.
---------------------------------------------------------------------------

H. Publicly Available Determination That an Exception Applies--Rule
15c2-11(f)(7)

    The Commission has determined to adopt, with minor modifications,
the proposal to permit a broker-dealer to rely on a publicly available
determination by a qualified IDQS or a registered national securities
association that certain exceptions are available. The proposed
exception would have permitted broker-dealers to rely on the publicly
available determination of a qualified IDQS or a registered national
securities association that: (1) Paragraph (b) information is current
and publicly available, or (2) a broker-dealer may rely on the proposed
Rule's exchange-traded security exception, the piggyback exception, the
municipal security exception, the ADTV and asset test exception, or the
proposed qualified IDQS review exception. The Commission sought comment
about this proposed exception to allow broker-dealers' reliance on
publicly available determinations.
    Commenters supported this aspect of the proposal,\426\ stating that
it would greatly enhance marketplace efficiency \427\ and improve
liquidity.\428\ Commenters stated their confidence in certain market
participants to make such determinations.\429\ The Commission is
adopting the exception substantively as proposed, with certain
technical, streamlining, and clarifying amendments in light of other
amendments that the Commission is adopting.\430\ The Commission
believes that this exception will make it easier for broker-dealers to
maintain a market in OTC securities and promote the potential for
liquidity in providing retail investors with greater opportunity to buy
and sell such securities while at the same time achieving the
amendments' investor protection goals, including through facilitating
Commission oversight of the policies and procedures for making such
determinations.\431\ The amended Rule also clarifies that the exception
allows broker-dealers to rely on publicly available determinations by a
regulated third party (i.e., a qualified IDQS or registered national
securities association) that the following four exceptions are
available: The exchange-traded security exception,\432\ the piggyback
exception,\433\ the municipal security exception,\434\ and the ADTV and
asset test exception.\435\
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    \426\ Canaccord Letter; MCAP Letter; Robert E. Schermer, Jr.;
Virtu Letter (stating that it could not estimate the potential
financial burden, given that it was uncertain of the fees that a
qualified IDQS would charge for providing such a service); Zuber
Lawler Letter.
    \427\ OTC Markets Group Letter 1.
    \428\ Coral Capital Letter.
    \429\ Global OTC Letter; Keating Letter; see Coral Capital
Letter (advocating for broker-dealers to be able to rely on the
publicly available determinations of both qualified IDQSs and
registered national securities associations).
    \430\ First, the paragraph that describes this exception in the
amended Rule has been renumbered to paragraph (f)(7) in light of the
fact that the Commission is adopting the proposed qualified IDQS
review exception as part of paragraph (a) of the amended Rule rather
than, as proposed, paragraph (f)(7). See supra Part II.A.3. Second,
paragraph (f)(7) of the amended Rule has been streamlined and no
longer contains the provision in proposed Rule 15c2-11(f)(8)(i) that
described a publicly available determination that paragraph (b)
information is current and publicly available because the
requirement for paragraph (b) information to be current and publicly
available has been incorporated into the amended Rule's individual
exceptions. Third, while the Commission is adopting this amendment
substantially as proposed, it includes a modification to explicitly
incorporate into the unsolicited quotation exception the ability of
broker-dealers to rely on publicly available determinations that
paragraph (b) information is current and publicly available. See
Amended Rule 15c2-11(f)(2)(iii)(B). Fourth, paragraph (f)(8)(ii) of
the proposed Rule would have permitted broker-dealers to rely on the
publicly available determination of a qualified IDQS or a registered
national securities association that the exceptions in proposed
paragraphs (f)(3)(i)(B) (i.e., one of the provisions of the
piggyback exception that the amended Rule no longer contains) and
(f)(7) (i.e., the proposed qualified IDQS review exception) are
available. However, as discussed above, the piggyback exception in
paragraph (f)(3)(i)(B) of the proposed Rule is not incorporated into
the amended Rule and thus is not enumerated in paragraph (f)(7) of
the amended Rule. Finally, paragraph (f)(8)(iii) of the proposed
Rule, which would have provided a requirement regarding policies and
procedures for making publicly available determinations, is also not
incorporated into paragraph (f)(7) of the amended Rule because new
paragraph (a)(3) of the amended Rule imposes a similar written
policies and procedures requirement.
    \431\ See supra Part II.A.4.
    \432\ See Amended Rule 15c2-11(f)(1).
    \433\ See Amended Rule 15c2-11(f)(3)(i).
    \434\ See Amended Rule 15c2-11(f)(4).
    \435\ See Amended Rule 15c2-11(f)(5).
---------------------------------------------------------------------------

    One commenter stated that a broker-dealer should be permitted to
publish a quotation pursuant to this exception in any IDQS based on the
publicly available determination of a qualified IDQS or registered
national securities association to create competition and avoid a
monopoly based on issuers providing information necessary to make a
publicly available determination to only one qualified IDQS.\436\ The
Commission agrees, and this exception under the amended Rule does not
include any such limitation. Another commenter requested that the
Commission clarify: (1) Whether a broker-dealer that relies on a
publicly available determination that an exception applies must
independently verify the availability of the applicable exception, and
(2) how often a qualified IDQS or registered national securities
association must confirm the accuracy of its publicly available
determination that an exception applies (e.g., whether the ADTV and
asset test exception must be confirmed each day).\437\ The amended Rule
does not require a broker-dealer that relies on a publicly available
determination that an exception applies to independently verify the
availability of that exception. As discussed above in Part II.A.4,
qualified IDQSs and registered national securities associations that
make publicly available determinations must establish, maintain, and
enforce reasonably designed written policies and procedures to
determine whether: (1) Paragraph (b) information is (or is not) current
and publicly available and (2) the requirements of the applicable

paragraph (f) exceptions for which it has made a publicly available
determination under paragraph (f)(7) are (or are not) met.\438\ The
Commission believes that the qualified IDQS or registered national
securities association that makes a publicly available determination
that an exception applies must establish, maintain, and enforce
reasonably designed written policies and procedures to determine when
the requirements of an exception for which it made such publicly
available determination are no longer met. For example, depending on
the exception, the frequency with which a qualified IDQS or registered
national securities association must make a subsequent determination
may depend on the frequency with which an issuer's reports are required
to be filed with the Commission, according to the issuer's Exchange Act
or Securities Act reporting obligation, or be as of a certain date and
publicly available (in the case of a catch-all issuer).\439\ In other
cases, the frequency with which a qualified IDQS or registered national
securities association must make such determination may be every
trading day (e.g., with respect to a security's reported worldwide ADTV
value).\440\
---------------------------------------------------------------------------

    \436\ Global OTC Letter.
    \437\ See FINRA Letter; see also Global OTC Letter.
    \438\ See Amended Rule 15c2-11(a)(3).
    \439\ See, e.g., Amended Rule 15c2-11(f)(3)(i)(C). For example,
as discussed above in Part II.D.1, a qualified IDQS or registered
national securities association may determine that an issuer's
paragraph (b) information, such as a required annual or semi-annual
report, is timely filed twice a year based on the prescribed due
date for such issuer's report in compliance with its Regulation A
reporting obligation. See Form 1-SA, General Instructions, A.(2).
    \440\ See Amended Rule 15c2-11(f)(5)(i).
---------------------------------------------------------------------------

    Finally, in light of the adoption of the piggyback exception's
grace period,\441\ and because the loss of current and publicly
available issuer information may impact individual investment decisions
and the market for these securities, the Commission is requiring any
qualified IDQS or registered national securities association that makes
a publicly available determination that a broker-dealer may rely on the
piggyback exception to subsequently make a publicly available
determination if the issuer's paragraph (b) information is no longer
current and publicly available, timely filed, or filed within 180
calendar days from the specified period, as applicable. The qualified
IDQS or registered national securities association must make such
subsequent publicly available determination within the first four
business days that such documents and information are no longer current
and publicly available, timely filed, or filed within 180 calendar
days, respectively.\442\
---------------------------------------------------------------------------

    \441\ See Amended Rule 15c2-11(f)(3)(ii); supra Part II.D.6.
    \442\ See Amended Rule 15c2-11(f)(7); see also supra note 366.
---------------------------------------------------------------------------

I. Recordkeeping Requirement--Rule 15c2-11(d)

    The Commission is adopting the recordkeeping requirement
substantially as proposed, with slight modifications from the proposal.
The Commission sought comment about the recordkeeping requirement for:
(1) Broker-dealers and qualified IDQSs that comply with the information
review requirement, and (2) broker-dealers, qualified IDQSs, and
registered national securities associations to demonstrate that the
requirements of an exception to the information review requirement are
met. One commenter stated that it is reasonable for market participants
to keep records that support their information review or reliance on an
exception.\443\ This commenter stated that it was difficult to follow
the proposed recordkeeping requirement and that electronic copies of
records should suffice, and that records should always be readily
accessible.\444\ Similarly, another commenter suggested that paragraph
(b) information that already is publicly available (e.g., in addition
to on EDGAR, on the website of a broker-dealer, qualified IDQS,
registered national securities association, or an issuer) should not be
required to be preserved as part of the recordkeeping requirement.\445\
---------------------------------------------------------------------------

    \443\ Hamilton & Associates Letter.
    \444\ Id.
    \445\ OTC Markets Group Letter 3 (suggesting streamlining
changes to the proposed Rule).
---------------------------------------------------------------------------

    The Commission has determined to adopt the recordkeeping
requirement substantially as proposed, with modifications to: (1) Make
clarifying edits to align the provisions regarding publicly available
determinations with the corresponding recordkeeping requirement, and
(2) eliminate the provisions stipulating that a broker-dealer or
qualified IDQS document the paragraph (b) information that it reviewed
that is available on EDGAR.\446\
---------------------------------------------------------------------------

    \446\ Such documents and information already would be ``publicly
available'' on EDGAR and, therefore, the Commission believes that a
requirement for broker-dealers and qualified IDQSs to document such
paragraph (b) information would result in unnecessary burdens for
such broker-dealers and qualified IDQSs that would not facilitate
the Commission's oversight because such paragraph (b) information is
otherwise accessible. The Commission is making a technical edit from
the proposal to define the term ``EDGAR'' in paragraph (d)(1)(i) of
the amended Rule's recordkeeping requirement while removing the
words ``Electronic Data Gathering, Analysis and Retrieval System''
in subsequent paragraphs of the rule text for streamlining purposes.
---------------------------------------------------------------------------

    The amendments to the recordkeeping requirement are designed to
help facilitate the Commission's oversight of broker-dealers that rely
on certain exceptions under the amended Rule. Paragraph (d)(1) of the
amended Rule outlines the recordkeeping requirement associated with
compliance by a broker-dealer or qualified IDQS with the information
review requirement.\447\ This requirement applies to both a broker-
dealer that publishes or submits a quotation pursuant to paragraph
(a)(1) and a qualified IDQS that makes known to others the quotation of
a broker-dealer pursuant to paragraph (a)(2).
---------------------------------------------------------------------------

    \447\ Amended Rule 15c2-11(d)(1).
---------------------------------------------------------------------------

    Paragraph (d)(1)(i) provides that the records to be preserved are
the documents and information required to be obtained and reviewed
under paragraphs (a), (b), and (c) of the amended Rule with respect to
compliance with the information review requirement, while paragraph
(d)(1)(ii) provides that a broker-dealer that publishes a quotation in
reliance on a broker-dealer's compliance with the information review
requirement need only preserve a record of the name of the qualified
IDQS that made the publicly available determination. The retention
period for such records is not less than three years, the first two
years in an easily accessible place. Further, unlike in the proposed
Rule, paragraph (d)(1) of the amended Rule does not require that a
broker-dealer or qualified IDQS document the paragraph (b) information
that it reviewed on EDGAR. The Commission believes that such
documentation is unnecessary and could create regulatory redundancies.
Lastly, for purposes of complying with the amended Rule, broker-
dealers, qualified IDQSs, or registered national securities
associations may comply with the amended Rule's recordkeeping
requirement in the same manner as that described in Exchange Act Rule
17a-4(f).\448\
---------------------------------------------------------------------------

    \448\ See, e.g., Exchange Act Rule 17a-4. Because the amended
Rule requires the preservation of ``the documents and information
required under paragraphs (a), (b), and (c)'' (e.g., that
demonstrate that the requirements of a particular exception under
the amended Rule are met), a broker-dealer, qualified IDQS, or
registered national securities association may not satisfy the
relevant recordkeeping requirement by relying on a link or similar
reference to a record maintained by another entity, such as a link
to an issuer's or qualified IDQS's website and must, instead,
preserve its own copy of the relevant contents of such website dated
from the period for which the entity is relying on such information
for purposes of complying with the amended Rule. See Amended Rule
15c2-11(d).
---------------------------------------------------------------------------

    Paragraph (d)(2) of the amended Rule applies to: (1) Any qualified
IDQS or registered national securities association that makes a
publicly available

determination described in the unsolicited quotation exception, the
piggyback exception, and the exception for a publicly available
determination by a qualified IDQS or a registered national securities
association that an exception applies, and (2) any broker-dealer that
publishes or submits a quotation pursuant to any exception provided in
paragraph (f). Paragraph (d)(2) provides that the records to be
preserved are the documents and information that demonstrate that the
requirements of the following exceptions are met: The unsolicited
quotation exception, the piggyback exception, the ADTV and asset test
exception, the underwritten offering exception, or the exception for a
publicly available determination by a qualified IDQS or a registered
national securities association that an exception applies. The
retention period for such records is not less than three years, the
first two years in an easily accessible place. Consistent with the
proposal, paragraph (d)(2) of the amended Rule does not require the
preservation of records for the exchange-traded security exception or
the municipal security exception because whether a security is
exchange-traded or is a municipal security is widely known without the
need for a broker-dealer, qualified IDQS, or a registered national
securities association to preserve a separate record.\449\ Paragraph
(d)(2) of the amended Rule also excepts from the recordkeeping
requirement any paragraph (b) information that is available on EDGAR
because such documents and information are readily and easily
accessible on an electronic platform provided by the Commission.
---------------------------------------------------------------------------

    \449\ Proposing Release at 58234 (stating that whether a
security is traded on an exchange or is a municipal security is
widely known such that demonstrating that the requirements of those
exceptions are met does not require independent preservation of
records to support such reliance or to make a publicly available
determination).
---------------------------------------------------------------------------

    Consistent with the proposal, the amended Rule limits the
recordkeeping requirement for a broker-dealer that relies on a publicly
available determination by a qualified IDQS or a registered national
securities association that an exception is available or that an
issuer's paragraph (b) information is current and publicly
available.\450\ Specifically, if a broker-dealer relies on a publicly
available determination described in paragraph (f)(2)(iii)(B) of the
unsolicited quotation exception or (f)(3)(ii)(A) of the piggyback
exception under the amended Rule, the broker-dealer must preserve: (1)
The name of the qualified IDQS or registered national securities
association that made such determination and (2) the documents and
information that demonstrate that the other requirements of the
exception provided in paragraph (f)(2) or (f)(3), respectively, are
met. A broker-dealer that relies on a publicly available determination
of a qualified IDQS or a registered national securities association
that an exception applies (i.e., paragraph (f)(7) of the amended Rule)
must preserve only a record of the exception for which the publicly
available determination is made--whether the exchange-traded security
exception, the piggyback exception, the municipal security exception,
or the ADTV and asset test exception--and the name of the qualified
IDQS or registered national securities association that made the
publicly available determinations that the requirements of that
exception are met. While the proposed recordkeeping requirement would
have required such broker-dealer to document, among other things, the
exception upon which the broker-dealer is relying,\451\ the Commission
is clarifying in the amended Rule's recordkeeping requirement that the
word ``exception'' refers to the exception for which the publicly
available determination is made, not the exception provided in
paragraph (f)(7).
---------------------------------------------------------------------------

    \450\ See Amended Rule 15c2-11(d)(2)(ii).
    \451\ See Proposed Rule 15c2-11(d)(2)(i)(B); Proposing Release
at 58223 (stating that ``[a] broker-dealer that relies on a
determination pursuant to proposed paragraph (f)(7) by a qualified
IDQS or proposed paragraph (f)(8) by a qualified IDQS or a
registered national securities association, however, is required
only to document the exception upon which the broker-dealer is
relying and the name of the qualified IDQS or registered national
securities association that determined that the requirements of that
exception are met'').
---------------------------------------------------------------------------

J. Definitions

    In light of the amendments that the Commission is adopting, as
discussed above, the Commission is also adopting definitions of certain
terms that are used throughout these amendments.
1. Current--Rule 15c2-11(e)(2)
    The Commission is adopting a definition of ``current'' only for
purposes of the amended Rule to mean that the paragraph (b) information
of a prospectus issuer, a Reg. A issuer, an exempt foreign private
issuer, or a catch-all issuer is current if it is filed, is published,
or is as of a date in accordance with the time frames specified in the
applicable subparagraph for such information (i.e., paragraph (b)(1),
(b)(2), (b)(4), or (b)(5), respectively). In addition, under the
amended Rule's definition of ``current,'' the paragraph (b) information
of a reporting issuer is current only for the purposes of Rule 15c2-11
if it is the issuer's most recently required annual report or statement
filed pursuant to Section 13 or 15(d) of the Exchange Act and any
rule(s) thereunder, Regulation A, Regulation Crowdfunding, or Section
12(G)(2)(g) of the Exchange Act, together with any subsequently
required periodic reports or statements filed pursuant to Section 13 or
15(d) of the Exchange Act and any rule(s) thereunder, Regulation A,
Regulation Crowdfunding, or Section 12(G)(2)(g) of the Exchange
Act.\452\ The Commission sought, but did not receive any, comment on
the proposal to define ``current'' to mean filed, published, or
disclosed, in accordance with the time frames specified in each of the
paragraphs (b)(1) through (b)(5).\453\
---------------------------------------------------------------------------

    \452\ The Commission is making a clarifying change from the
proposed definition of ``current'' to specify the application of the
definition of the term ``current'' in light of the fact that some
issuers have an Exchange Act reporting obligation while others do
not. In addition, the Commission is also making technical edits from
the proposed definition of current. First, the Commission is
replacing the word ``disclosed'' (in the proposed definition) with
the words ``are as of a date'' to align the amended Rule's
definition of ``current'' with paragraph (b)(5)(i) of the amended
Rule, which provides that a catch-all issuer's information must ``be
. . . as of'' a certain date. Second, the amended Rule provides the
definition of ``current'' in paragraph (e)(2) in light of the
addition of the definition for the term ``company insider'' in
paragraph (e)(1) of the amended Rule. The addition of the definition
of ``company insider'' has changed the subparagraph numbers for
other definitions under the amended Rule, and the Commission is also
making technical amendments to include the term ``interdealer
quotation system'' in paragraph (e)(3), ``issuer'' in paragraph
(e)(4), ``quotation'' in (e)(7), and ``quotation medium'' in (e)(8)
of the amended Rule.
    \453\ Proposed Rule 15c2-11(e)(1).
---------------------------------------------------------------------------

    The definition sets forth the time frames within which issuer
information must be filed, be published, or be as of a certain date for
the issuer's information to be current for purposes of the amended
Rule. Paragraphs (b)(1) through (b)(5) of the amended Rule provide a
comprehensive delineation of the documents and information that must be
``current'' for purposes of the amended Rule, depending on the
regulatory status of the issuer, including with respect to a
crowdfunding issuer.\454\ Summarized below are examples of paragraph
(b) information that would be current for purposes of the amended Rule:
---------------------------------------------------------------------------

    \454\ See Amended Rule 15c2-11(b)(1) through (5).
---------------------------------------------------------------------------

     A prospectus specified by section 10(a) of the Securities
Act for an issuer that filed a registration statement under the
Securities Act, other than a registration statement on Form F-6, that
became effective fewer than 90 calendar days before the day on which
such

broker-dealer publishes or submits the quotation to the quotation
medium; \455\
---------------------------------------------------------------------------

    \455\ See Amended Rule 15c2-11(b)(1).
---------------------------------------------------------------------------

     An offering statement provided for under Regulation A for
an issuer that has filed an offering statement under Regulation A that
was qualified fewer than 40 calendar days before the day on which such
broker-dealer publishes or submits the quotation to the quotation
medium; \456\
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    \456\ See Amended Rule 15c2-11(b)(2).
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     An issuer's most recent annual report filed pursuant to
Section 13 or 15(d) of the Exchange Act, together with any periodic or
current reports that have been filed thereafter under the Exchange Act
by the issuer, except for current reports filed during the three
business days before the publication or submission of the quotation,
provided that the issuer has filed all required annual and periodic
reports within the time frames specified; \457\
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    \457\ See Amended Rule 15c2-11(b)(3)(i).
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     An issuer's most recent annual report filed pursuant to
Regulation A, together with any periodic and current reports filed
thereafter under Regulation A by the issuer, except for any current
reports filed during the three business days before the publication or
submission of the quotation, provided that the issuer has filed all
required annual and periodic reports within the time frames specified;
\458\
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    \458\ See Amended Rule 15c2-11(b)(3)(ii).
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     An issuer's most recent annual report filed pursuant to
Regulation Crowdfunding, provided that the issuer has filed the
required annual report within the time frame specified; \459\
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    \459\ See Amended Rule 15c2-11(b)(3)(iii).
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     An issuer's most recent annual statement referred to in
Section 12(g)(2)(G)(i) of the Exchange Act, together with any periodic
and current reports filed thereafter under the Exchange Act, except for
current reports filed during the three business days before the
publication or submission of the quotation, provided that the issuer
has filed all required annual and statements within the time frame
specified; \460\
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    \460\ See Amended Rule 15c2-11(b)(3)(iv).
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     The information that, since the first day of its most
recently completed fiscal year, the issuer has published as required to
establish the exemption from registration under Section 12(g) of the
Exchange Act pursuant to Exchange Act Rule 12g3-2(b); \461\ and
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    \461\ See Amended Rule 15c2-11(b)(4). The Commission is
including technical edits to paragraph (b)(4) of the amended Rule to
align the amended Rule with Exchange Act Rule 12g3-2(b), which
refers to information required to be published for the foreign
private issuer to avail itself of an exemption from registration
under Section 12(g) of the Exchange Act. Accordingly, the amended
Rule replaces the text ``beginning of its last fiscal year'' with
``first day of its most recently completed fiscal year'' and added
the text ``as required to establish the exemption from registration
under section 12(g) of the Act.''
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     The information specified in paragraph (b)(5)(i)(A) though
(P) (excluding paragraph (b)(5)(i)(L)) of the amended Rule that is as
of a date within 12 months before the publication or submission of the
quotation in addition to: (1) The issuer's most recent balance sheet
that is as of a date less than 16 months before the publication or
submission of the quotation for the issuer's security, and (2) the
profit and loss and retained earnings statements for the 12 months
preceding the date of the most recent balance sheet.\462\
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    \462\ See Amended Rule 15c2-11(b)(5)(i).
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2. Shell Company--Rule 15c2-11(e)(9)
    The Commission has determined to adopt the definition of a ``shell
company'' as proposed, with a technical edit from the proposal.\463\
The Commission sought comment regarding the proposal to define ``shell
company'' to mean any issuer other than a business combination related
shell company, as defined in Rule 405 of Regulation C, or an asset-
backed issuer, as defined in Item 1101(b) of Regulation AB, that has:
(1) No or nominal operations; and (2) 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.\464\ As the Commission explained in the Proposing
Release, this definition of shell company closely tracks the definition
of shell company in Rule 405 of Regulation C and in Exchange Act Rule
12b-2, the provisions of which apply to registrants, and comports with
the provisions of Rule 144(i)(1)(i) regarding the availability of that
safe harbor for the resale of securities initially issued by certain
issuers.\465\
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    \463\ The term ``shell company'' is defined in paragraph (e)(9)
of the amended Rule in light of the addition of the definition for
the term ``company insider'' in paragraph (e)(1) of the amended
Rule.
    \464\ See Proposed Rule 15c2-11(e)(8).
    \465\ See Proposing Release at 58236.
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    Commenters who opposed the proposed definition stated that,
although there is a need to curtail abusive reverse mergers that can be
facilitated by shell companies, the proposed definition would be
ambiguous and difficult to apply.\466\ The Commission believes the
definition of shell company is a well-established and broadly used
definition in other areas of the federal securities laws. The
definition of shell company that the Commission is adopting does not
preclude a broker-dealer, qualified IDQS, or registered national
securities association from determining that an entity is a shell
company based on an observation that a company has identified itself as
a shell company (or as not a shell company) or, alternatively, review
of a company's financial information, including asset composition,
operational expenditures, and income-related metrics. The definition of
shell company under the amended Rule is consistent with the
requirements of other established and broadly used Commission rules to
provide market participants flexibility in analyzing the particular
facts and circumstances involving an issuer, such as the issuer's
financial information and information related to its operations.\467\
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    \466\ Anthony Letter; Coral Capital Letter; Leonard Burningham
Letters; OTC Markets Group Letter 1; Sosnow & Associates Letter; STA
Letter. But see Lowy Letter.
    \467\ See, e.g., Proposing Release at 58236 n.157.
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    Some commenters advocated for more of a bright-line definition of
``shell company'' \468\ or examples of the types of attributes of
companies that would meet the Rule's definition of shell company to
reduce the likelihood of inconsistent determinations.\469\ One
commenter stated that the definition should also include self-
identified shell companies and companies that are ``shell risk''
companies based on a review of a company's financial information,
including asset composition, operational expenditures, and income-
related metrics.\470\ The Commission continues to believe that defining
the term ``nominal'' with reference to quantitative thresholds would be
unworkable in this context.\471\ However, in determining whether the
requirements of the piggyback exception are met,\472\ a market
participant may rely on an issuer's self-identification as a shell
company (or as not a shell company), unless it has a reasonable basis
to believe otherwise.\473\ Further, a

broker-dealer may rely on a catch-all issuer's self-identification as a
shell company in its review of the issuer's documents and information
in paragraph (b)(5)(i)(H) of the amended Rule regarding a description
of the issuer's business or any other statement from the issuer
regarding its status as a shell company. Consistent with the definition
of shell company in the proposal, the definition of a shell company
under the amended Rule applies to all issuers of securities, and is not
limited to companies that have filed a registration statement or have
an obligation to file reports under Section 13 or Section 15(d) of the
Exchange Act, because Rule 15c2-11 applies to the publication and
submission of quotations for the securities of all types of issuers,
including reporting issuers and catch-all issuers.\474\ In response to
comment,\475\ the Commission reiterates that startup companies, or, in
other words, companies with a limited operating history, are not
captured in the definition of ``shell company'' because such companies
do not meet the condition of having ``no or nominal operations.'' \476\
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    \468\ E.g., STA Letter; see Lucosky Brookman Letter. But see
Peregrine Comment.
    \469\ FINRA Letter.
    \470\ OTC Markets Group Letter 2; OTC Markets Group Letter 3;
see Coulson Comment; Sosnow & Associates Letter.
    \471\ See Proposing Release at 58236.
    \472\ See Amended Rule 15c2-11(f)(3)(i)(B)(2).
    \473\ In the absence of any information that, under the
circumstances, reasonably indicates that the source is unreliable, a
broker-dealer, qualified IDQS, or registered national securities
association could satisfy the amended Rule's requirement regarding
the reliability of the information source if that information were
provided by the issuer of the security or its agents, including its
officers and directors, attorneys, or accountants. See infra Part
II.O.2. The Commission understands that some instances exist in
which an issuer may not identify as a shell company, such as in the
context of a reverse merger screening, but that other factors may
suggest that the issuer is a shell company. See, e.g., Use of Form
S-8, Form 8-K, and Form 20-F by Shell Companies, Securities Act
Release No. 8587 (July 15, 2005), 70 FR 42234, 42236 nn.31, 32 (July
21, 2005).
    \474\ See Proposing Release at 58236.
    \475\ See OTC Markets Group Letter 1.
    \476\ The Commission has stated that startup companies that have
limited operating history do not meet the condition of having ``no
or nominal operations'' for the purposes of Securities Act Rule
144(i)(1)(i). See also Rules 144 and 145 Release at 71557 n.172. The
Commission also believes that this is appropriate in the context of
broker-dealers determining whether a company fits within the meaning
of ``shell company'' as defined in the amended Rule when deciding
whether they may rely on the piggyback exception because it is
consistent with other Commission statements. See, e.g., id.
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3. Publicly Available--Rule 15c2-11(e)(5)
    The Commission has determined to adopt the definition of ``publicly
available'' substantially as proposed, with a modification to expand
the proposed definition's list of locations to include: (1) The website
of a state or federal agency, and (2) an electronic information
delivery system that is generally available to the public in the
primary trading market of a foreign private issuer, as defined in Rule
3b-4 of the Exchange Act.\477\ In addition, the Commission is requiring
that access to any specified location under the amended Rule's
definition of ``publicly available'' must not be restricted by user
name, password, fees, or other restraints.\478\ The Commission sought
comment about the proposal to define ``publicly available'' to mean
available on EDGAR, or on the website of a qualified IDQS, a registered
national securities association, the issuer, or a registered broker-
dealer, provided that access is not restricted by user name, password,
fees, or other restraints.\479\ Commenters supported this aspect of the
proposal,\480\ acknowledging that, today, issuer information is
available to the public on a wide variety of platforms--from EDGAR
\481\ to issuers' own websites.\482\ Commenters generally agreed that
the term ``publicly available'' should not apply if money is charged
for access.\483\ One commenter did not foresee any privacy concerns
associated with making paragraph (b) information publicly available on
the internet.\484\
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    \477\ See Amended Rule 15c2-11(e)(5). The Commission is also
adopting a technical edit from the proposal to define the term
``publicly available'' in paragraph (e)(5) of the amended Rule in
light of the addition of the definition for the term ``company
insider'' in paragraph (e)(1) of the amended Rule.
    \478\ As proposed, only access to paragraph (b) information was
required to be unencumbered. See Proposed Rule 15c2-11(e)(4);
Proposing Release at 58236. In addition, the Commission is also
making a technical edit from the proposed definition of ``publicly
available.'' Whereas the provision in the proposed Rule's definition
of ``publicly available'' specified that the term ``publicly
available shall not mean where access to documents and information .
. . is restricted,'' see Proposed Rule 15c2-11(e)(4) (emphasis
added), the provision in the amended Rule's definition of ``publicly
available'' specifies that ``publicly available shall mean where
access is not restricted,'' see Amended Rule 15c2-11(e)(5) (emphasis
added).
    \479\ See Proposed Rule 15c2-11(e)(4).
    \480\ E.g., Global OTC Letter; NASAA Letter.
    \481\ Hamilton & Associates Letter.
    \482\ E.g., Leonard Marx, Jr., Retired Chairman & President,
Merchants National Properties (Oct. 8, 2019); Mitchell Partners
Letter 1; Braxton Gann.
    \483\ Canaccord Letter; Coral Capital Letter; NASAA Letter; see
Global OTC Letter.
    \484\ NASAA Letter.
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    Commenters suggested that the list of websites in the definition of
``publicly available'' be expanded to include Canada's System for
Electronic Document Analysis and Retrieval (``SEDAR'') or other similar
foreign regulatory or exchange websites (so long as information is
available in English and access is not restricted by user name,
password, fees, or other restraints) \485\ and the websites of other
financial regulators (e.g., the Federal Deposit Insurance Corporation's
website).\486\ One commenter suggested that the Commission clarify that
``publication'' by an exempt foreign private issuer of information
required by Rule 12g3-2(b) means that the information must be
``publicly available'' consistent with the definition of that term in
proposed Rule 15c2-11(e)(4).\487\
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    \485\ FINRA Letter.
    \486\ Monroe Letter.
    \487\ Murphy & McGonigle Letter.
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    The expansion of the list of specified locations under the amended
Rule to include the websites of state and federal agencies accommodates
state and federal agency websites that routinely make paragraph (b)
information available to the public (e.g., the Federal Deposit
Insurance Corporation's website, which makes information about certain
insured depositary institutions, including community banks, available
for viewing by the public).\488\ In addition, the expansion of the list
to include an electronic information delivery system that is generally
available to the public in the primary trading market of a foreign
private issuer,\489\ as defined in Rule 3b-4 of the Exchange Act,
aligns the definition of publicly available in the amended Rule with
Exchange Act Rule 12g3-2(b) and is appropriate because paragraph (b)
information regarding an exempt foreign private issuer must, among
other things, be publicly available for purposes of compliance with the
information review requirement, reliance on an exception, or making a
publicly available determination before a broker-dealer can publish a
quotation for an exempt foreign private issuer's security.
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    \488\ E.g., Securities Exchange Act Filings, Federal Deposit
Insurance Corporation, https://efr.fdic.gov/fcxweb/efr/index.html
(last visited June 1, 2020).
    \489\ See Exemption From Registration Under Section 12(G) of the
Securities Exchange Act of 1934 for Foreign Private Issuers,
Exchange Act Release No. 58465 (Sept. 5, 2008), 73 FR 52752, 52759
(Sept. 10, 2008) (stating that Rule 12g3-2(b) permits issuers to
meet the rule's electronic publication requirement concurrently with
the publishing in English of a non-U.S. disclosure document through
an electronic information delivery system generally available to the
public in its primary trading market).