Trade associations and state regulators offered recommendations on the SEC proposal to "tighten" the requirements that broker-dealers must meet before being permitted to post public quotations on OTC securities.

As previously covered, under proposed amendments to Rule 15c2-11 ("Initiation or resumption of quotations without specific information"), the "piggybacking exemption" to the rule would be significantly reduced, and would be eliminated in the case of shell companies. (Currently, a broker-dealer either must (i) have access to specified information regarding the issuer or (ii) be able to rely on the fact that at least one other broker-dealer has been posting quotations (i.e., the "piggybacking exemption").)

Under the proposed amendments, it would not be sufficient for the broker-dealer to have the relevant information; the necessary information would have to be current and "publicly available." The SEC said it had found widespread fraud in connection with the sale of securities and that issuers were delinquent in their public filings; i.e., the relevant information was not current.

Selected comments are noted below.

Security Trade Association ("STA")

The STA stated that:

  • placing the burden on broker-dealers to "remain vigilant whether they may rely on, or continue to rely on, the piggyback exception if the issuer of that security becomes a shell company" could result in deterring broker-dealers from making markets in OTC securities;

  • prohibiting company insider quotes from being displayed unless current information is made public could make compliance obligations more difficult for market makers; and

  • if securities without specified information are not eligible for public quoting, it could result in an artificial decline in their value due to the difficulty retail investors will face when trying to sell them.

To mitigate some of the potential consequences, the STA recommended (i) clarifying the definition of shell companies, including requiring companies to identify themselves as shells in their filings, and (ii) implementing an "expert market" for securities no longer eligible for public quoting.

The North American Securities Administrators Association ("NASAA")

  • information restricted behind any form of paywall or password-protected site not be considered "publicly available";

  • the proposed requirement that all OTC issuers disclose their Rule 15c2-11 information on a semiannual basis in order to continue an OTC market for their securities is a "needed market place reform" that the SEC should not hold "captive to the potential that some issuers may elect to go dark rather than comply with the requirements"; and

  • the SEC amend the proposal to make issuers ineligible for the piggyback exemption if they undergo material business developments (e.g., declarations of bankruptcy or re-organization and mergers).


SIFMA encouraged the SEC to provide a grace period with respect to changes in the eligibility for piggyback exceptions. SIFMA stated that the grace period during which a security would be allowed to be quoted following the loss of eligibility would (i) ensure that market participants become aware of the loss of eligibility, (ii) enable issuers to update relevant information, and (iii) facilitate investor transactions in the securities.

In addition, SIFMA asked the SEC to amend the proposal to update the "asset test" under the new exception to (i) provide alternative measures and (ii) offer a grace period if a quoted security no longer qualifies for the exception.

Massachusetts Securities Division of the Office of the Secretary of the Commonwealth (the "Division")

The Division urged the SEC to:

  • make information on issuers and securities available on a publicly accessible website at no charge;

  • monitor the implementation of the amendments, if adopted, regarding (i) promoting the distribution of current information on non-listed securities, and (ii) protecting retail investors in the non-listed markets; and

  • consider further reform to non-listed markets by barring shell companies from registration.