OTC Markets Issues Comment Letters On FINRA Rules 6432 And 5250; The 15c2-11 Rules

Posted by on June 14, 2018

OTC Markets Issues Comment Letters On FINRA Rules 6432 And 5250; The 15c2-11 Rules- Today is the first in a LawCast series talking about 15c2-11 requirements. On January 8, 2018, OTC Markets Group submitted a comment letter to FINRA related to FINRA Rule 6432. Rule 6432 requires that a market maker or broker-dealer have the information specified in Securities Exchange Act Rule 15c2-11 before making a quotation in a security on the over-the-counter market. Although I will summarize the salient points of the OTC Markets comment letter in this LawCast series, I encourage those interested to read the entire letter, which contains an in-depth analysis and comprehensive arguments to support its position. On February 8, 2018, OTC Markets submitted a second comment letter to FINRA, this one related to FINRA Rule 5250. Rule 5250 prohibits companies from compensating market makers in connection with the preparation and filing of a Form 211 application.

Rule 6432 is entitled Compliance with the Information Requirements of SEA Rule 15c2-11

Subject to certain exceptions, including the “piggyback exception” which I will explain, Rule 6432 requires that all broker-dealers have and maintain certain information on a non-exchange traded company security prior to resuming or initiating a quotation of that security. Generally, a non-exchange traded security is quoted on the OTC Markets. Compliance with the rule is demonstrated by filing a Form 211 with FINRA. Although the rule requires that the Form 211 be filed at least three days prior to initiating a quotation, in reality FINRA reviews and comments on the filing in a back-and-forth process that can take several weeks or even months.

The specific information required to be maintained by the broker-dealer is delineated in Securities Exchange Act Rule 15c2-11. The core principle behind Rule 15c2-11 is that adequate current information be available when a security enters the marketplace. The information required by the Rule includes either: (i) a prospectus filed under the Securities Act of 1933, such as a Form S-1, which went effective less than 90 days prior; (ii) a qualified Regulation A offering circular that was qualified less than 40 days prior; (iii) the company’s most recent annual report filed under Section 13 or 15(d) of the Exchange Act or under Regulation A and quarterly reports to date; (iv) information published pursuant to Rule 12g3-2(b) for foreign issuers; or (v) specified information that is similar to what would be included in items (i) through (iv).

In addition, Rule 6432 requires the submittal of specified information about the security being quoted (for example, common stock, an ADR or warrant), the quotation medium (for example, OTCQB) and if priced, the basis upon which the price was determined.

Rule 6432 requires a certification confirming that the member broker-dealer has not accepted any payment or other consideration in connection with the submittal of the Form 211 application as prohibited by Rule 5250.

Rule 15c2-11(f)(2) allows a member firm to quote or process an unsolicited order on behalf of a customer without compliance with the information requirements. In such case, the member must document the name of the customer, date and time of the unsolicited order and identifying information on the security.