September 9, 2021

Falling Off the Rule 15c2-11 Cliff

As we roll into (and through) September, the attention of some non-listed issuers will inevitably turn to an impending SEC rule change that could cause the quotation of their securities in the over-the-counter markets to abruptly cease. Back in September 2020, the SEC adopted a number of amendments to Rule 15c2-11 that the Commission believed were necessary to protect investors in securities that are traded over-the-counter, and compliance with the amendments must generally be achieved by September 28, 2021. As this Baker & Hostetler memo notes:

The Amendment adds additional investor protections by mandating that investors have access to the current and publicly available information of issuers whose securities trade on the OTC markets, and it further requires broker-dealers to confirm that certain information about the issuer and its security is current and publicly available before quoting that security.

As amended, Rule 15c2-11 provides a broker-dealer with two ways to satisfy this obligation: (i) independently obtaining such information from issuers (or their agents) and reviewing it for material accuracy and reliability or (ii) relying on a publicly available determination by a qualified interdealer quotation system (an “IDQS”). OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.) is an IDQS, and the old OTC Bulletin Board (which is a facility of FINRA) is an IDQS (FINRA filed with the SEC to shutter the OTCBB back in September 2020, after the SEC adopted the Rule 15c2-11 amendments.

For the so-called “catch-all issuers” that are not subject to disclosure and reporting requirements under the federal securities laws, broker-dealers and the IDQSs will have to review an expanded list of financial and nonfinancial information about the catch-all issuers that is likely difficult for many such issuers to provide. Further, Rule 15c2-11 requires broker-dealers to be able to provide such information upon the request of any person who expresses an interest in a proposed transaction in the issuer’s security with the broker-dealer. SEC-reporting issuers that are delinquent in their filing obligations (and therefore without current, publicly available information) are also treated as catch-all issuers, but only for purposes of initiating or resuming a quoted market in such issuers’ securities.

With the compliance date of the rule fast approaching, catch-all issuers without current and publicly available information that broker-dealers and the IDQSs can review will find themselves in a position of no longer being quoted in the over-the-counter markets (unless some exception to Rule 15c2-11 applies), and the investors in such issuers will be in for a rude awakening when they are unable to get quotes such issuers’ securities.

– Dave Lynn