Transforming the OTC Markets

In September 2020, the SEC amended Rule 15c2-11 under the Securities and Exchange Act, modernizing the legal framework and regulatory status of the over-the-counter (OTC) equity markets.  Rule 15c2-11 serves as a regulatory gateway to the public markets, establishing the requirements for public quoting in OTC stocks (i.e. those not listed on an exchange).  Over 11,000 stocks are quoted on the OTC market today, from venture-stage biotech startups to multinational corporations.  The brokers that quote and trade this vast universe of securities must each comply with the provisions of Rule 15c2-11.

The SEC’s recent amendments overhaul the Rule’s existing framework, with the goal of enhancing investor protection and deterring fraud in the OTC market.  The amended Rule, which will be applicable in September 2021, will require OTC-traded companies to make current disclosure publicly available in order to have a publicly quoted market.  The Rule also streamlines the pathway to the public market for companies meeting their disclosure requirements and allows OTC Markets Group to play a greater role in bringing companies on our markets. 

What is Rule 15c2-11?

First adopted nearly fifty years ago in 1971, long before the existence of electronic trading, Rule 15c2-11 was originally designed to deter fraudulent quoting activity by broker-dealers in OTC securities by requiring brokers to obtain and review specified information about the issuer before initiating a quoted market. 

The Rule governs a broker’s ability to submit or publish quotations (i.e. bids and offers) in OTC securities in trading systems such as our OTC Link ATS, whether on a proprietary basis or on behalf of a customer order.  Accordingly, the Rule does not apply to the underlying transactions or the ability of an investor to buy or sell a security, but rather the ability to publish a quotation, or an “indication of interest,” to the greater investing public.   

The SEC’s recent amendments to the Rule remain focused on deterring fraud, while acknowledging the vast improvement in the availability of disclosure in the OTC markets over the past several decades and recognizing our “current information” standards and review processes. 

How does Rule 15c2-11 work now?

Prior to the amendments becoming effective in September 2021, under Rule 15c2-11, brokers seeking to begin quoting a security on OTC Link ATS must collect, review and maintain information concerning the company, including financial statements, a description of the business and other information that would allow investors to make an informed investment decision.  The Rule currently does not require that any of this information be made publicly available.  Rule 15c2-11 works in tandem with FINRA Rule 6432, whereby a broker must file a Form 211 and receive approval from FINRA before it can publicly quote or make a market in the security. 

After FINRA approves the Form 211 and a market maker initiates a quoted market in the stock, other brokers can “piggyback” onto the original quote and publish proprietary quotations in the security with no further obligation to review information about the company.  The result under the existing “piggyback exception” is that brokers are permitted to maintain a public market in securities of “dark” companies (i.e. those that are not providing regular, current disclosure to the market). 

What are the most significant changes to Rule 15c2-11?

The SEC’s amendments are focused on improving the information available to investors, deterring fraud and reducing burdens for broker-dealers quoting OTC securities.  While the final Rule contains many changes, the overarching framework aims to modernize the OTC market in the following ways:

Companies will now be required to publish current information in order to be publicly quoted on OTC Link ATS.  The rule will now require that current information about an issuer be publicly available in order for a security to become quoted initially, and remain quoted, under the amended “piggyback exemption.”  Quotations submitted on an “unsolicited” basis will still be permitted under the amended Rule, subject to additional requirements. 

OTC Markets Group will play a greater role in bringing companies onto our markets.  Under the amended rule, our OTC Link ATS trading platform will function as a “qualified interdealer quotation system” and brokers will be able to rely on our current information designations in lieu of submitting a Form 211 with FINRA.  This new regulatory status will streamline the pathway to the public markets for companies that are current in their disclosure obligations. 

Companies that do not make current information publicly available and meet the requirements for ongoing quoting, will be shifted to our ‘Expert Market.’  The Expert Market will be available for unsolicited quotes only.  This means broker-dealers may use the Expert Market to meet their Best Execution responsibilities under FINRA Rules and publish unsolicited quotes representing Limit Orders from retail and institutional investors who are not affiliates or insiders of the issuer.  

Quotations in Expert Market securities are made available to broker-dealers, institutions, and other sophisticated investors. 

How will the SEC’s amendments to Rule 15c2-11 change the OTC market?

These changes are poised to bring greater transparency and efficiency to the OTC market.  The modernized Rule formally recognizes our existing information review and compliance processes that issuers use to efficiently disclose information and that brokers and investors rely on to price risk and make informed investment decisions.  By requiring current information and shifting the information review obligations to the operator of the trading system, issuers will be encouraged to make disclosure available and brokers can more easily rely upon our current information designations to quote and trade OTC securities. 

The amended rule also improves market efficiency and capital formation by introducing several new exemptions to facilitate the development of public markets in stocks that are less susceptible to fraud.  Securities of large, liquid companies that meet minimum financial standards, and those issued in underwritten offerings, will have a streamlined pathway to a public market under the new Rule.  

On the heels of the SEC’s amendments to Rule 15c2-11, FINRA filed a proposal seeking to cease operation of its OTC Bulletin Board (OTCBB), the legacy quotation system for OTC securities.  The shuttering of the OTCBB, along with the final amendments to Rule 15c2-11, marks the beginning of a new era in the capital markets. 

How will the requirements for companies currently quoted on the OTCQX, OTCQB and Pink markets change as a result of the Amended Rule?

The Rule recognizes current disclosure provided by companies on the OTCQX, OTCQB and Pink Current markets, whether under an SEC Reporting standard, Alternative Reporting Standard, Regulation A, Regulation Crowdfunding or pursuant to Rule 12g3-2(b).  While the disclosure rules for companies on these markets are not expected to change materially, the new rule introduces certain restrictions on public quoting, including those for shells and other non-operational companies that may apply to certain companies currently quoted on the OTCQB or Pink markets. 

Companies that are designated as “Pink No Information” or otherwise fail to provide current information as required by the Rule will no longer be eligible for public quoting, subject to certain limited exceptions (for example, certain quotations submitted on an “unsolicited” basis).  If these companies do not take proactive steps to make disclosure available before the September 2021 compliance date, they will move to the Expert or Grey market.   

When does the new rule go into effect?

OTC Link LLC, our broker-dealer subscribers, and companies quoted on our markets, must comply with the new, amended rule before the September 28, 2021 compliance date.  We continue to actively engage with the Commission and our market participants to ensure a smooth transition to the amended Rule, including seeking exemptive relief for certain categories of issuers on our markets. 

Supporting Links and Resources

SEC Final Rulemaking

SEC Press Release

As Associate General Counsel, Cass supports regulatory and policy making initiatives at OTC Markets Group, focusing on equity market structure, online capital raising and emerging Fintech and RegTech trends. She represents the company on public panels and before regulatory and legislative groups. Prior to joining OTC Markets Group, Cass represented issuers, broker-dealers and individuals in securities litigation, financing, and various corporate and regulatory matters. Cass earned her JD from Hofstra University School of Law and received her BA from Mount Holyoke College. Cass is a member of the New York Bar.

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