Securities and Exchange Act of 1934 (Exchange Act) Rule 15c2-11 governs the submission and publication of quotations by brokers and dealers for certain non-NASDAQ over-the-counter equity securities. Specifically, the rule applies to a broker/dealer's initiation or resumption of quotations for such securities in any inter-dealer quotation medium, including the OTCBB and the Pink Quote system. Pursuant to the rule, brokers and dealers are required to review and maintain specified information about the issuer of the security before publishing a quotation for that security.
SEC Rule 15c2-11. Click this link to see the complete rule.
The following are selected from a compilation of questions and answers relative to SEC Rule 15c2-11 and Schedule H of the FINRA By-Laws. The complete Q&A can be found in FINRA Notice to Members 92-50.
RULE 15C2-11 INFORMATIONAL REQUIREMENTS
Question #1: What degree of scrutiny must a broker/dealer give the required Rule 15c2-11 documentation prior to submitting the information to FINRA seeking clearance to publish a quotation?
Answer: Prior to submitting the information to FINRA, a broker/dealer must have a reasonable basis for believing that the information is accurate in all material respects and is obtained from a reliable source.
Question #2: What steps should a broker/dealer take to have a reasonable basis to believe that the information is accurate in all material respects?
Answer: A broker/dealer must review the material for obvious errors, internal inconsistencies, and questionable disclosures. This review must be in the context of all other information about the issuer in the broker/dealer's knowledge or possession, including the information required by paragraph (b).
Questions #3: What are the requirements of Rule 15c2-11 paragraph (b)?
Answer: Paragraph (b) requires a broker/dealer to have in its possession:
(1) A record of the circumstances surrounding the quotation request, including the identity of the person for whom the quotation is being submitted,
(2) a copy of the trading suspension order or the Commission release announcing the suspension if the security has been suspended by the Commission during the last 12 months, and
(3) a copy or written record of other material information, including adverse information, that the broker/dealer becomes aware of prior to publishing a quotation.
Question #4: What steps should a broker/dealer take to have a reasonable basis to believe that the information is obtained from a reliable source?
Answer: Generally, a broker/dealer can be satisfied that information is obtained from a reliable source if it is received from the issuer or its agents, or was obtained from an independent information service such as the Commission's public reference room. If a broker/dealer receives information about an issuer from another market maker or someone other than an agent of the issuer, the broker/dealer should verify the validity of the information with the issuer. Agents do not include promoters or others outside the issuer that may have a personal or an indirect interest in the security.
Questions #5: Under what circumstances would a broker/dealer be required to take further steps to have a reasonable basis to believe that the information is accurate in all material respects and the sources of the information are reliable?
Answer: Ordinarily the broker/dealer need not do any further review unless a potential material deficiency has been detected. Examples of potential material deficiencies are material inconsistencies in the information or between the information and other information in the broker/dealer's possession, a qualified auditor's report, a recently acquired asset that materially enhances the financial condition of the issuer, or a material asset listed on the balance sheet that is unrelated to the issuer's business.
Question #6: What should a broker/dealer do if a potential material deficiency is detected in the documents?
Answer: A broker/dealer's specific efforts to satisfy itself with respect to the accuracy of the information if a potential material deficiency has been detected will vary with the circumstances, and may require the broker/dealer to obtain additional information or seek to verify existing information. For example, the broker/dealer may be satisfied that the information is correct after questioning the issuer, or the broker/dealer may need to consult an independent source, such as an attorney or accountant. Regardless of the methodology used to review a potential material deficiency, members are required to maintain in their records any other material information (including adverse information) regarding the issuer which comes to the member's knowledge or possession before the publication or submission of the quotation. Members are also strongly urged to document the manner in which the material deficiencies are resolved.
Question #7: May a broker/dealer satisfy its obligation to review the required information and have a reasonable belief as to its accuracy and the reliability of its source solely because its documentation has been reviewed by the NASD?
Answer: No. A broker/dealer must independently satisfy the requirements of Rule 15c2-11. Clearance by FINRA to initiate quotations in a quotation medium is not a substitute for this review.
Questions #8: Are a wholesale market's obligations under Rule 15c2-11 any different than a retail market maker's obligations?
Answer: No. Commission Release No. 34-29094 states that the rule is directed at the fraudulent, deceptive, or manipulative potential of a broker/dealer's quotations, and does not focus on whether the broker/dealer also engages in retail activity.
Question #9: Can a supplemental prospectus satisfy Rule 15c2-11(a)(1)?
Answer: Yes. As long as the supplemental prospectus is filed pursuant to Section 10(a) of the Securities Act and includes sufficient information about the issuer to enable the broker/dealer to satisfy its obligation under Rule 15c2-11, i.e., it contains the types of information described in Rule 15c2-11(a)(5). However, if the issuer meets the requirements of Rule 15c2-11(a)(3), the broker/dealer must obtain the documents required by Rule 15c2-11(a)(3).
Question #10: Is the issuer required to be current in its filings with the Commission in order for the broker/dealer to utilize Rule 15c2-11(a)(3)?
Answer: Yes. Issuers that meet the requirements of Rule 15c2-11(a)(3) are those issuers that report to the Commission and are current in their reports. The broker/dealer must have the issuer's latest form 10-K and all subsequent form 10-Qs and those Form 8-Ks filed within five business days prior to publication or submission of the quotation. If the issuer has not filed a Form 10-K, the broker/dealer must have a copy of the prospectus, which has been in effect less than 16 months, and all subsequent Form 10-Qs and Form 8-Ks. If a filing is due at the Commission prior to FINRA's clearance of the Form 211 application, that filing must also be submitted with the application.
Question #11: What happens if an issuer is not current in its filings with the Commission?
Answer: If the issuer is not current in its filings with the Commission, the broker/dealer can seek to satisfy another subsection of the rule. Usually this would be Rule 15c2-11(a)(5). However, the fact that the issuer is not current in its filings may bear upon the determination of whether the available information is materially accurate.
Questions #12: Can banks that file Form 10-Ks and Form 10-Qs with the Office of Thrift Supervision or other bank regulators satisfy Rule 15c2-11(a)(3)?
Answer: If the reports are filed pursuant to Section 13 or 15(d) of the Exchange Act with bank regulators, the reports will satisfy Rule 15c2-11(a)(3).
Questions #13: What information is required to be submitted under Rule 15c2-11(a)(4) relating to certain foreign issuers which are exempt from the periodic reporting requirements of Section 12(g) of the Exchange Act?
Answer: The broker/dealer is required to submit all the information that the issuer has furnished during its past fiscal year to the Commission in order for the issuer to maintain its Rule 12g3-2(b) exemption.
Question #14: Must the financial information required under Rule 15c2-11(a)(5) be independently audited?
Answer: No. rule 15c2-11(a)(5) does not require audited financials. However, a broker/dealer would ordinarily be required to review unaudited financial statements more closely than if the statements were independently audited. Nevertheless, simply because the statements have been audited, a broker/dealer cannot avoid its responsibility to review the financial statements in order to have a reasonable basis to believe that the information is accurate.
Questions #15: If an issuer has filed a Form 10-K or a prospectus with the Commission and the issuer is current in its reports to the Commission, can the broker rely on Rule 15c2-11(a)(5)?
Answer: No. If an issuer has filed a 10-K or prospectus with the Commission and is current in its reports, the broker must file under, and have in its possession, the information required by, rule 15c2-11(a)(3).
Questions #16: What are the requirements for a broker/dealer if the issuer or its predecessor has been the subject of a Commission trading suspension during the preceding year?
Answer: An SEC trading suspension should alert the broker/dealer of the possibility that information in its possession concerning the issuer may no longer be current or accurate. The broker/dealer must be particularly cautious when seeking to reinstate quotations following an SEC trading suspension. The member must obtain a copy of the Commission trading suspension order or the Commission release announcing the trading suspension. A broker/dealer should, at a minimum, receive assurances or additional information with respect to matters cited in the suspension order or with respect to other matters affecting the broker/dealer's reasonable belief as to the accuracy of the information. Reliance on new information or assurances from prior sources of information in these circumstances, however, requires caution. In exceptional cases, where the source is unable to provide reasonable assurances about the reliability of the information, consultation with an independent accountant or attorney may be warranted. All information gathered in the broker/dealer's investigation of the issues must accompany the Form 211 application.
RULE 15c2-11 EXCEPTIONS
Question #17: Are there any exceptions from the informational requirements of Rule 15c2-11?
Answer: Yes. If a broker/dealer can meet one of the exceptions of Rule 15c2-11, it is not required to maintain or submit to FINRA any documents required by Rule 15c2-11. These exceptions primarily relate to instances where a broker/dealer wishes to quote a security that: is traded on a national securities exchange in the United States; represents unsolicited customer interest; has been the subject of regular and continuous quotations for the past 30 days; or is traded on Nasdaq.
Question #18: When does the Rule 15c2-11(f)(1) "exchange" exception apply?
Answer: The exchange exception applies to securities that are traded on a United States national securities exchange on the same day or the business day prior to the day the application is made to the quotation medium.
Question #19: If the common stock of an issuer trades on the New York Stock Exchange, are the warrants of the same issuer exempt from Rule 15c2-11?
Answer: No. The exception relates only to specific securities and not to the issuer. Each security must independently meet the requirements of the exception.
Question #21: If the broker/dealer is claiming the Rule 15c2-11(f)(2) "unsolicited customer interest" exception of Rule 15c2-11, can the broker/dealer publish quotations for the security in a quotation medium for its own account?
Answer: No. If the broker/dealer claims the unsolicited customer interest exception, it can only publish or submit a quotation for that customer account. If the broker/dealer wishes to publish or submit a quotation for its own account or any other accounts, it must comply with Rule 15c2-11. Paragraph (f)(2) of Rule 15c2-11 does not apply to a quotation consisting of both a bid and an offer, each at a specified price, unless the quotation medium specifically identifies the quotation as representing a customer's unsolicited indication of interest.
Questions #22: Will FINRA be monitoring the broker/dealer's compliance with the unsolicited customer interest exception?
Answer: Yes. FINRA monitors all aspects of broker/dealer compliance with Rule 15c2-11, including a quotation utilizing the unsolicited customer interest exception. FINRA may require the broker/dealer to produce its trading records and other documents to determine whether the broker/dealer traded for any account other than the indicated customer.
Question #23: What are the requirements of Rule 15c2-11(f)(3), the "piggyback" exception?
Answer: If a broker/dealer is relying on the Rule 15c2-11(f)(3) exception, the security must be quoted in the same interdealer quotation medium as the intended quotation during the past 30 calendar days, and that during those 30 days the security had to be quoted on at least 12 days without more than four consecutive business days without quotations.
Question #24: Do "name only" quotations satisfy the piggyback exception requirement that the security be quoted in the quotation medium?
Answer: Yes. The information requirements of Rule 15c2-11 apply to name only as well as priced quotations. Both types of quotations can be used to satisfy the piggyback exception. If should be noted, however, that each broker/dealer submitting a quotation must satisfy the informational requirements of Rule 15c2-11 until all of the requirements of the piggyback exception, including the 30-day quotation period, have been satisfied.
Question #25: What happens when a security is no longer quoted by a broker/dealer in the quotation medium?
Answer: If a security is not quoted by any broker/dealer for a period of more than 4 business days, the security no longer qualifies for the piggyback exception. A broker/dealer would be required to comply with Rule 15c2-11 before it could initiate or resume quotation of the security.
Question #26: What constitutes a "business day" for purposes of Rule 15c2-11?
Answer: For purposes of Rule 15c2-11, a "business day" is defined by reference to the quotation medium to which a broker/dealer submits the quotation. Any day that the quotation medium accepts and disseminates quotations would constitute a "business day" under Rule 15c2-11.
Question #27: Must a broker/dealer quote a security for an entire "business day" to qualify for the "piggyback" exception contained in paragraph (f)(3) of Rule 15c2-11?
Answer: Under the "piggyback" exception, a security will be deemed to have been quoted on a business day where a broker/dealer has continuously quoted a security for all or a substantial portion of that day. The existence of closing quotations on the OTCBB may be used by FINRA to create a rebuttable presumption that the broker/dealer continuously quoted a security for a substantial portion of the business day.
Question #28: If a security qualifies for the piggyback exception in one quotation medium, does it meet the piggyback exception for other quotation mediums? For example, if a security is quoted in the OTCBB, can a market maker quote the security in the "pink sheets" without filing a Form 211 application?
Answer: No. The staff of the SEC takes the position that the piggyback exception does not transfer from one quotation medium to another. Thus, quotations for a security in the OTCBB may not be used to satisfy the piggyback requirements for the "pink sheets." [See GlobeNet Exemption, which provides that under certain conditions a market maker quoting a security in the OTCBB may publish a quote in the Pink Quote system for that same security without filing a Form 211.]
Question #29: What are the requirements of Rule 15c2-11(f)(5), the "NASDAQ" exception?
Answer: In order for a broker/dealer to rely on the NASDAQ exception, the security must be authorized for quotation on NASDAQ and the authorization must not be suspended, terminated, or prohibited.
Question #31: If the common stock and units of an issuer are already quoted on the OTCBB [or the Pink Quote system], does a Form 211 application need to be submitted for the warrants of the same issuer?
Answer: Yes. Rule 15c2-11 applies to securities, not issuers. Quotations for the common stock and units may be in compliance with Rule 15c2-11, but that does not qualify any other securities of the issuer. Accordingly, a completed Form 211 and the Rule 15c2-11 information would have to be submitted for the warrants. However, if the broker/dealer has previously submitted documents relating to the issuer that continue to meet the requirements of Rule 15c2-11, it need not refile identical documents. The broker/dealer need only submit a completed Form 211 alone or with any additional documents needed to comply with Rule 15c2-11.
SCHEDULE H QUESTIONS
Question #32: What must be included in the basis and factors for a broker/dealer's initial priced entry?
Answer: A broker/dealer's basis and factors should relate to the price that the broker/dealer is proposing. The statement on the Form 211 must be concise and directly related to the proposed bid and/or offer. The basis and factors should not be broad generalized statements but should articulate how the priced quotation was determined, including the factors taken into consideration. FINRA is not conducting merit review but must be able to clearly understand the basis for the initial priced entry.
Question #33: If a broker/dealer's Rule 15c2-11 documentation has been cleared by FINRA, but the broker/dealer did not request clearance for a priced quotation, is the broker/dealer required to file anything additional when it changes its unpriced quotation to a priced quotation?
Answer: Yes. The broker/dealer must supplement its original application with the Form 211 indicating the intended priced entry and the basis and factors even if other broker/dealers are publishing priced quotations for the security or a piggyback exception has become available.
Question #34: Can Form 211 applications be faxed to FINRA?
Answer: No. The original Form 211 must be mailed and requires original signatures.
Question #36: What are the filing requirements of Schedule H if another security of the issuer is trading on NASDAQ, i.e., if a broker/dealer wishes to quote the warrants of an issuer that has a common stock listed on NASDAQ?
Answer: Since an issuer that has a security trading on NASDAQ will be a reporting company, the broker/dealer need only submit the Form 211 and indicate on the Form 211, under Rule 15c2-11(a)(3), the reports that the broker/dealer has in its possession. These reports would include the issuer's latest Form 10-K and all subsequent Form 10-Qs and Form 8-Ks. In this case the Form 211 can be faxed to FINRA.
Question #37: Is there an expedited procedure for listing recently delisted NASDAQ securities on the OTCBB [or Pink Sheets ]?
Answer: Yes. On February 28, 1992, the SEC granted an exemption from Rule 15c2-11 for securities that will be delisted from NASDAQ due to the revised listing and maintenance requirements for the NASDAQ Small-Cap Market. When these securities are delisted, they will automatically be eligible to quote on the OTCBB or any other quotation medium the next business day without the filing of a Form 211, as long as the following requirements are met:
(1) The security must have been traded on NASDAQ for the past 30 days;
(2) The issuer must not be subject to bankruptcy proceedings;
(3) The issuer must be current in its SEC reporting requirements; and
(4) The broker/dealer relying on this exception must have been a market maker in the subject security during the 30 days prior to delisting.
Question #38: Can more than one security of an issuer be included on a Form 211?
Answer: Yes. More than one security for a single issuer may be requested on a single Form 211.
Question #39: Can a broker/dealer accept payment to make a market in an issuer's securities?
Answer: No. A market maker cannot accept any form of compensation, including cash, securities, products, or services, for the purposes of making a market, to cover out-of-pocket expenses for making a market, or for submitting an application to make a market in an issuer's securities. This activity was addressed in Notice to Members 75-16 in 1975.
Question #45: Does Rule 15c2-11 and Schedule H apply to secondary market transactions in direct participation program securities?
Answer: Yes. Both Rule 15c2-11 and all of the sections of Schedule H apply. Pursuant to Schedule H, Section 4, members are required to submit their Rule 15c2-11 information to FINRA prior to publishing quotations. Moreover, members must report their volume in secondary market transactions, and certain pricing information in direct participation program trading as required by Schedule H, Section 2 of the FINRA By-Laws. For more information on trade reporting for these securities, please call Automated Reports at (301) 590-6887. In addition, a separate Notice will be issued addressing this subject.
FOR MORE INFORMATION ON SEC RULE 15C2-11:
All interested broker/dealers should read Rule 15c2-11, Commission Release No. 34-29094, Schedule H, Section 4 of the FINRA By-Laws, and Notice to Members 90-40. Additionally, the Compliance Division's OTC Compliance Unit (240)386-5100 is available throughout the business day and by voice mail during non-business hours to respond to inquiries or to direct the caller to the appropriate party. Also, broker/dealers with questions regarding Rule 15c2-11 may contact the Office of Trading Practices, Division of Market Regulation, Securities and Exchange Commission at (202) 272-2848.
