[Federal Register Volume 63, Number 37 (Wednesday, February 25, 1998)]
[Proposed Rules]
[Pages 9661-9680]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4460]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-39670; File No. S7-3-98]
RIN 3235-AH40


Publication or Submission of Quotations Without Specified 
Information

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
publishing for public comment proposed amendments to Rule 15c2-11 
(``Rule'') under the Securities Exchange Act of 1934 (``Exchange 
Act''). The Commission is publishing these proposals in response to 
increasing incidents of fraud and manipulation in the over-the-counter 
securities market involving thinly traded securities of thinly-
capitalized issuers (i.e., ``microcap securities''). Rule 15c2-11 
governs the publication of quotations for securities that are traded in 
a quotation medium other than a national securities exchange or Nasdaq. 
The proposals would require all broker-dealers to review information 
about the issuer when they first publish or resume publishing a 
quotation for a security subject to the Rule, document that review, 
annually update the information if they publish priced quotations, and 
make the information available to other persons upon request. In 
addition, the proposals would enhance the Rule's information 
requirements for quotations for the securities of non-reporting issuers 
and ease the Rule's recordkeeping requirements when broker-dealers have 
electronic access to information about reporting issuers. The 
Commission also is proposing a number of textual and structural changes 
in an effort to simplify and streamline the Rule. Finally, the 
Commission is proposing an amendment to Rule 17a-4 under the Exchange 
Act that would incorporate the record retention requirements currently 
contained in Rule 15c2-11.

DATES: Comments must be received on or before April 27, 1998.

ADDRESSES: Persons wishing to submit written comments should send three 
copies to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, Mail Stop 6-9, 450 Fifth Street, N.W., Washington, D.C. 
20549. Comments also may be submitted electronically at the following 
E-mail address: [email protected]. All comment letters should refer 
to File No. S7-3-98; this file number should be included on the subject 
line if E-mail is used. Comment letters received will be available for 
public inspection and copying in the Commission's Public Reference 
Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Electronically 
submitted comment letters will be posted on the Commission's Internet 
web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Any of the following attorneys in the 
Office of Risk Management and Control, Division of Market Regulation, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549, at (202) 942-0772: Nancy J. Sanow, Alan Reed, Irene Halpin, 
Florence Harmon, Denise Landers, or Chester McPherson.

SUPPLEMENTARY INFORMATION: The Commission is proposing for comment 
amendments to Rule 15c2-11 1 and Rule 17a-4 2 
under the Securities Exchange Act of 1934 (``Exchange 
Act'').3
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    \1\ 17 CFR 240.15c2-11.
    \2\ 17 CFR 240.17a-4.
    \3\ 15 U.S.C. 78a et seq.
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I. Executive Summary and Background

A. Executive Summary

    Incidents involving fraud and manipulation of microcap securities 
that trade in the over-the-counter (``OTC'') securities market appear 
to be rising.\4\ This trend has been the subject of Congressional 
hearings,\5\ state hearings \6\ and numerous media reports.\7\ These 
developments have caused the Commission to reexamine Exchange Act Rule 
15c2-11, its rule governing the publication of quotations in the non-
Nasdaq OTC market. As a result, the Commission is proposing 
comprehensive amendments to Rule 15c2-11 that address abuses involving 
microcap securities and more generally would enhance the integrity of 
quotations for securities in this market sector. The proposed 
amendments also would reorganize and simplify the Rule's provisions.
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    \4\ See, e.g., M. Rimson & Co., Inc., 1997 WL 93628 (February 
25, 1997) (Initial Decision); (Securities Exchange Act Release No. 
38489 (April 9, 1997) (Finality Order)); See also, SEC v. Jeffrey 
Szur, No. 97 Civ. 9305 (S.D.N.Y. December 18, 1997); SEC v. George 
Badger, No. 97 CV 963K (D. Utah December 18, 1997); SEC v. Andrew 
Scudiero, No. 97 Civ. 9304 (S.D.N.Y. December 18, 1997); SEC v. 
Leonard Alexander Ruge, No. 97 Civ. 9306 (S.D.N.Y. December 18, 
1997); SEC v. Joseph Pignatiello, No. 97 Civ. 9303 (S.D.N.Y. 
December 18, 1997). For a summary of the SEC's allegations in these 
cases, see Litigation Release No. 15595 (December 18, 1997), 1997 
SEC LEXIS 2602.
    \5\ See United States Senate Committee on Governmental Affairs 
Permanent Subcommittee on Investigations, Hearing on Fraud in the 
Micro Capital Market (September 22, 1997) (testimony of Arthur 
Levitt, Chairman of the U.S. Securities and Exchange Commission) 
(``Senate Testimony on Microcap Fraud'').
    \6\ N.Y. Attorney General, REPORT ON MICRO-CAP FRAUD (December 
1997).
    \7\ See, e.g., Weiss, ``Investors Beware--Chop Stocks Are on the 
Rise,'' Business Week, December 15, 1997, at 112-128; Lohse and 
Emshwiller, ``Bulletin Board Likely to Remain Wild West of Wall 
Street,'' The Wall Street Journal, December 15, 1997, at C1; 
Schroeder, ``Despite Reforms, Penny-Stock Fraud is Roaring Back,'' 
The Wall Street Journal, September 4, 1997, at A12; Byrne, ``The 
Real OTC Market: The Spectacular Success of Pink Sheet and Bulletin 
Board Trading: Why the NASD is Toughening Standards,'' Traders, 
September 1997, at 36-39; Lohse, ``Fraud by Small-Stock Operators 
Flourishes in Long Bull Market,'' The Wall Street Journal, July 31, 
1997, at C1.
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    Microcap securities \8\ generally are characterized by low share 
prices and little or no analyst coverage. The issuers of microcap 
securities typically are thinly capitalized and often are not required 
to file periodic reports with the Commission. Securities of microcap 
companies usually are quoted on the OTC Bulletin Board (``Bulletin 
Board'') operated by the National Association of Securities Dealers, 
Inc. (''NASD'') or in the Pink Sheets published by the National 
Quotation Bureau (``NQB''), but they are not exclusive to these

[[Page 9662]]

mediums.\9\ The Commission recognizes, however, that not all securities 
traded in this market sector are tainted by fraud.
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    \8\ The term ``microcap securities'' is not defined under the 
federal securities laws or regulations. The use of the term 
``microcap securities'' in this release, however, should be 
distinguished from its use in the mutual fund context. For example, 
Lipper Analytical Services, a mutual fund rating organization, 
generally categorizes microcap companies as companies with market 
capitalization of less than $300 million. Lipper-Directors' 
Analytical Data, Investment Objective Key, 2d ed. 1997.
    \9\ Microcap securities can also be listed on securities 
exchanges or Nasdaq.
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    Microcap fraud frequently involves issuers for which public 
information is limited, especially when issuers are not subject to 
reporting requirements.\10\ Without information, it is difficult for 
investors, securities professionals, and others to evaluate the risks 
presented by microcap securities. Investors consequently can fall prey 
to persons who make false representations and unrealistic predictions 
about these securities.
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    \10\ See e.g., SEC v. Global Financial Traders, Ltd., Litigation 
Release Nos. 15291 (March 14, 1997) and 15338 (April 17, 1997); see 
also infra note 73.
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    As part of their manipulative schemes, unscrupulous retail brokers, 
operating out of ``boiler rooms,'' frequently use high pressure sales 
tactics to stimulate investors to buy these securities. These brokers 
often publicly disseminate false press releases or make false 
statements about issuers (including through the Internet) to promote 
sales. To further the manipulative scheme, retail broker-dealers often 
also act as market makers or, either on their own or through the 
issuers' promoters, induce other firms to act as market makers in the 
securities.
    Market makers' quotations are important to the success of microcap 
fraud schemes. By publishing quotations in the Bulletin Board, in the 
Pink Sheets, or in similar quotation mediums, broker-dealers give the 
market for the securities an aura of credibility. This can occur even 
if the market maker is not intentionally participating in improper 
activities, but is publishing quotes in response to escalating demand 
for the securities resulting from increasing retail sales. Trading 
volume for the security skyrockets and quotations and sales prices 
escalate (often at prices artificially set by the manipulators).
    Eventually, broker-dealers and promoters stop stimulating interest 
in the security and its price drops. Too often the result is the same: 
innocent investors lose money. To address this microcap fraud problem, 
the Commission is pursuing a strategy of investor education, focused 
broker-dealer inspections, increased enforcement, and regulatory 
initiatives.\11\
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    \11\ In addition, the NASD recently published for comment 
several proposed rules aimed at microcap stock abuses. These 
proposals would limit quotations on the OTC Bulletin Board to the 
securities of issuers that file reports with the Commission or other 
regulatory authority, and would require NASD members to review 
current issuer financial statements prior to recommending a 
transaction to a customer in an OTC equity security (other than 
securities listed on Nasdaq or an exchange) and to deliver a 
disclosure statement to a customer prior to an initial purchase of 
an OTC equity security. NASD Notices to Members 98-14 and 98-15 
(January 1998).
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    The proposed amendments to Rule 15c2-11 would place greater 
information review and recording requirements, and thus greater 
accountability, on broker-dealers publishing quotations for securities 
in a quotation medium other than a national securities exchange or 
Nasdaq (``covered OTC securities''). These proposed amendments also 
would provide greater investor access to information about these 
securities. In particular, the proposed amendments would:

     Eliminate the Rule's ``piggyback'' provision, which 
currently permits broker-dealers (other than the initial broker-
dealer) to quote the security without having current issuer 
information;
     Require broker-dealers that publish priced quotations 
for a security to obtain and review updated information about the 
issuer at least annually;
     Expand the information required about issuers that do 
not file periodic reports with the Commission;
     Require documentation of the broker-dealer's compliance 
with Rule 15c2-11; and
     Enhance investor access to the information required by 
Rule 15c2-11.

The proposed amendments apply to all securities covered by Rule 15c2-
11, not just microcap securities. The Commission believes that the 
scope of the amendments is appropriate to preserve the general 
integrity of quotations in the OTC market and to foster greater 
information transparency in a marketplace where issuers often are 
relatively unknown and their securities are traded infrequently.

B. Operation of Current Rule 15c2-11

    Rule 15c2-11 regulates the initiation and resumption of quotations 
in a quotation medium by a broker-dealer for certain OTC securities. 
The Commission adopted Rule 15c2-11 in 1971 to prevent fraudulent and 
manipulative trading schemes that had arisen in connection with the 
distribution and trading of unregistered securities issued by ``shell'' 
companies, or other issuers of infrequently-traded securities (about 
which there was little public information).\12\ The Rule prevents 
broker-dealers from publishing quotations for covered OTC securities 
without reviewing basic information about the issuer.\13\ Specifically, 
the Rule applies to broker-dealers publishing quotations in a 
``quotation medium,'' \14\ but it does not apply to broker-dealers 
publishing quotations for securities listed and traded on an exchange 
or quoted on Nasdaq.
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    \12\ Securities Exchange Act Release No. 9310 (September 13, 
1971), 36 FR 18641.
    \13\ See Securities Exchange Act Release No. 29094 (April 17, 
1991), 56 FR 19148 (``1991 Adopting Release''); Securities Exchange 
Act Release No. 29095 (April 17, 1991), 56 FR 19158 (``1991 
Proposing Release'').
    \14\ See 17 CFR 240.15c2-11(e)(1) (defining quotation medium as 
any interdealer quotation system or any publication or electronic 
communications network or other device that is used by brokers or 
dealers to make known to others their interest in transactions in 
any security, including offers to buy or sell at a stated price or 
otherwise, or invitations of offers to buy or sell).
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    Subject to certain exceptions, the Rule prohibits a broker-dealer 
from publishing a quotation for a security (or submitting a quotation 
for publication) in a quotation medium unless it has obtained and 
reviewed specified information about the issuer and the security. The 
broker-dealer also must have a reasonable basis for believing that the 
issuer information is accurate and that it was obtained from a reliable 
source.
    Currently, a broker-dealer must review and maintain in its records 
the following issuer information:

     For an issuer that has conducted a recent public 
offering either registered under the Securities Act of 1933 
(``Securities Act'') \15\ or effected pursuant to Regulation A under 
the Securities Act, a copy of the prospectus or offering circular;
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    \15\ 15 U.S.C. 77a et seq.
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     For an issuer that files reports with the Commission 
pursuant to Sections 13 or 15(d) of the Exchange Act (``reporting 
issuer'') or is an insurance company of the kind specified in 
Section 12(g)(2)(G) of the Exchange Act, the issuer's most recent 
annual report and any quarterly or current reports filed thereafter;
     For foreign issuers that claim the registration 
exemption under Exchange Act Rule 12g3-2(b), the information 
furnished to the Commission pursuant to that rule; or
     For any other issuer, the information, including 
certain financial information, specified in paragraph (a)(5) of the 
Rule, which must be reasonably current in relation to the day a 
quotation is submitted.

In addition, paragraph (c) of the Rule requires a broker-dealer to 
review any other information about the issuer that comes to its 
knowledge or possession before the publication or submission for 
publication of a quotation.
    Under the Rule's ``piggyback'' exception, the information 
requirements do not apply when a broker-dealer publishes, in an 
interdealer quotation system,\16\ a quotation for a covered OTC

[[Page 9663]]

security that already has been the subject of regular and frequent 
quotations.\17\ A broker-dealer can``piggyback'' on either its own or 
other broker-dealers' previously published quotations. The exception is 
grounded on the assumption that regular and frequent quotations for a 
security generally reflect market supply and demand forces based on 
independent, informed pricing decisions.
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    \16\ An interdealer quotation system is a quotation medium of 
general circulation to brokers or dealers which regularly 
disseminates quotations of identified brokers or dealers. 17 CFR 
240.15c2-11(e)(2).
    \17\ 17 CFR 240.15c2-11(f)(3). The security must have been the 
subject of quotations on at least 12 business days during the 
previous 30 calendar days, with no more than 4 consecutive business 
days elapsing without a quotation. Once this quotation frequency is 
established, a broker-dealer may publish a quotation for a covered 
security without having the required information if the 12 and 4 day 
tests are satisfied.
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C. 1991 Proposing Release

    In 1991, the Commission proposed amendments to Rule 15c2-11 that 
would have eliminated the piggyback provision. At the time, the 
Commission believed that the underlying assumption of the piggyback 
provision (i.e., that regular and frequent quotations for a security 
generally reflect supply and demand forces based on independent pricing 
decisions) were no longer valid in the non-Nasdaq OTC market.\18\
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    \18\ 1991 Proposing Release, 56 FR at 19161.
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    The Commission observed that the Rule's coverage is limited to non-
Nasdaq OTC securities, which usually are low-priced, speculative stocks 
of relatively unknown issuers, and that the market for these securities 
is characterized by an absence of both market making and retail 
competition. As a result, the Commission proposed amendments that would 
have required every broker-dealer to review issuer information prior to 
initiating or resuming quotations in a covered OTC security. These 
amendments would have retained a ``self-piggybacking'' provision for 
broker-dealers that quoted these securities with the required 
frequency.\19\
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    \19\ See 1991 Proposing Release. Self-piggybacking refers to the 
ability of a broker-dealer to continue publishing quotations without 
reviewing the Rule's required information, as long as that broker-
dealer satisfies the quotation frequency tests of the piggyback 
provision.
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    The Commission received 75 comment letters from 74 commenters in 
response to the 1991 Proposing Release. The vast majority of commenters 
opposed the Commission's proposal. These commenters believed that the 
proposal would discourage, or even eliminate, market making for many 
non-Nasdaq OTC securities. They claimed that the proposed amendments 
would have impaired liquidity, reduced market value, and harmed the 
capital-raising process. Several commenters believed that the proposed 
changes would have hurt the market for the securities of many 
substantial and legitimate companies, but would have little effect on 
fraud in worthless stocks. For several reasons, including the adoption 
of other measures aimed at curbing then-existing abuses in low-priced 
stocks,\20\ the Commission did not take further action on this 
initiative.\21\
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    \20\ See Securities Exchange Act Release No. 30608 (April 20, 
1992), 57 FR 18004 (adopting the Commission's Penny Stock Disclosure 
Rules (17 CFR 240.3a51-1, 240.15g-1 through 240.15g-6, 240.15g-8, 
and 240.15g-100)); see also Securities Exchange Act Release No. 
32576 (July 2, 1993), 58 FR 37413 (redesignating Rule 15c2-6 under 
the Exchange Act as Rule 15g-9 under the Exchange Act (17 CFR 
240.15g-9)).
    \21\ In light of the present proposals, the Commission is 
withdrawing the 1991 proposals.
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II. Proposed Amendments

A. Proposed Revisions to Rule 15c2-11

1. Activities Prohibited by the Rule
    The proposed amendments restructure Rule 15c2-11 to set forth more 
clearly the activities prohibited by the Rule and the requirements of 
the Rule. The Rule would state that it is unlawful for a broker-dealer, 
directly or indirectly, to publish or to submit for publication any 
quotation for a security in any quotation medium unless the broker-
dealer complies with the Rule's provisions.\22\
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    \22\ Rule 15c2-11 generally applies to the publication or 
submission for publication of quotations for OTC securities that do 
not satisfy any of the exceptions under the Rule. The exceptions are 
discussed in Section A.5, infra.
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    The Rule further would provide that, prior to publishing or 
submitting for publication an initial quotation for a security in a 
quotation medium, or upon the occurrence of enumerated events, a 
broker-dealer must:

     Obtain and review the Rule's information;
     Determine that it has a reasonable basis for believing 
that the information is accurate and current in all material 
respects and is obtained from reliable sources; and
     Record the date it reviewed the specified information, 
the sources of the information, and the person at the firm 
responsible for the broker-dealer's compliance with the Rule.\23\
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    \23\ See 1991 Adopting Release, 56 at 19150 (discussing of the 
nature of the review that a broker-dealer must conduct to satisfy 
its obligations under Rule 15c2-11 and the determination of whether 
the source of the information is reliable).

    By restructuring the Rule in this manner, the Commission believes 
that the obligations of broker-dealers under the Rule are more clearly 
set out. Moreover, by imposing a recordation requirement, broker-
dealers' accountability for compliance with the Rule should be 
enhanced.
    Q1. Do the Rule's core requirements remain appropriate or should 
they be amended?
    Q2. Are there other compliance items that should be recorded?
    Q3. Should the Rule expressly require the firm's compliance officer 
to review the Rule 15c2-11 information before the quote is submitted?
    Q4. What type of review do broker-dealers currently undertake? What 
is the appropriate scope of review by a broker-dealer to comply with 
the Rule, as proposed to be amended? Commenters should consider the 
duties of a broker-dealer under Rule 15c2-11 as discussed in the 1991 
Adopting Release.\24\
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    \24\ Id.
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2. Elimination of the Piggyback Provision
    The Commission proposes to eliminate the piggyback provision. As 
discussed above, the piggyback provision currently permits broker-
dealers to publish quotations for a security without complying with the 
Rule's requirements if any other broker-dealer has published regular 
and frequent quotations for that security. In the Commission's view, 
microcap fraud is facilitated by broker-dealers that publish quotations 
for a security without reviewing any issuer information.\25\ Even if 
they are not participating in the fraud, these other broker-dealers 
give the security a measure of credibility through their quotations. 
Some broker-dealers claim that they ``trade by the numbers'' (i.e., 
they trade solely on the basis of supply and demand factors and without 
regard to fundamental information about the issuer).\26\ The Commission 
believes that eliminating the piggyback provision is an essential step 
to preventing microcap fraud. In the Commission's view,

[[Page 9664]]

responsible broker-dealers would be deterred from publishing quotations 
if they were aware of basic information about the issuer that suggested 
a possible fraud.
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    \25\ See General Bond & Share Co., 51 S.E.C. 411 (1993) aff'g 
Market Surveillance Committee v. General Bond & Share Co., 1992 NASD 
Discip. Lexis 99 (January 30, 1992), affirmed in part, vacated in 
part, and remanded, 39 F.3d 1451 (10th Cir. 1994). In this case, the 
Commission affirmed a decision of the NASD's National Business 
Conduct Committee Securities Dealers (``NBCC''), which found that 
General Bond & Share Co. (``General Bond''), a registered broker-
dealer, violated Article III, Section 1 of the NASD's Rules of Fair 
Practice by accepting issuer-paid compensation for listing itself as 
a market maker in the Pink Sheets for the securities of numerous 
issuers. The NBCC also found that General Bond's Pink Sheet entries 
paved the way for other market makers to piggyback onto those 
quotations without complying with the requirements of Rule 15c2-11.
    \26\ See D.H. Blair & Co., 44 S.E.C. 320, 332 (1970) (trading by 
the numbers cannot be completely separated from the investment value 
of the security or the need for supervision with a view to detecting 
possible signs of manipulation).
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    Under the proposal, each broker-dealer that publishes a quotation 
for a covered OTC security for the first time in a particular quotation 
medium \27\ other than the exchanges or Nasdaq would be required to 
review fundamental information about the issuer and have a reasonable 
basis for believing that the information is accurate, current, and from 
reliable sources. The Commission recognizes that many commenters on the 
1991 Proposing Release raised issues about the perceived costs of 
compliance and the possible resulting loss of liquidity for some 
securities if the piggyback provision were eliminated and annual 
information updating were required. As discussed below, the 
availability of the EDGAR system should reduce the information 
gathering and recordkeeping costs for those broker-dealers that publish 
quotes for the securities of reporting issuers. Also, the Commission 
encourages the development of central repositories of information about 
issuers that are not participating in its public disclosure system.\28\
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    \27\ See Section C, infra, for a discussion of the definition of 
quotation medium.
    \28\ See Section D, infra.
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    Q5. Are there any circumstances in which it would be appropriate to 
retain a piggyback provision? If so, how should such a provision be 
structured?
3. The Occurrence of Events Requiring Actions under the Rule
    After a broker-dealer publishes its first quotation \29\ in 
compliance with the Rule for a security in a particular quotation 
medium it can continue to publish quotations (either priced or 
unpriced) for the security in that medium without reviewing updated 
information until the occurrence of either of the following events:

    \29\ The term quotation is defined as any bid or offer at a 
specified price with respect to a security, or any indication of 
interest by a broker or dealer in receiving bids or offers from 
others for a security, or any indication by a broker or dealer that 
advertises its general interest in buying or selling a particular 
security. For the purposes of this release, a ``priced quotation'' 
is a bid or offer at a specified price and an ``unpriced quotation'' 
is any indication by a broker or dealer in receiving bids or offers 
from others or any indication by a broker or dealer that advertises 
its general interest in buying or selling a particular security.
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     A period of five or more consecutive business days in 
which the broker-dealer does not publish quotations for the 
security; or
     The Commission has ordered a trading suspension 
pursuant to Section 12(k) \30\ of the Exchange Act for any of the 
issuer's securities.

    \30\ 15 U.S.C. 78l(k).

Following one of these events, a broker-dealer must gather and review 
the information required by the Rule before publishing quotations. In 
the Commission's view, if a broker-dealer has not quoted the security 
for five or more consecutive business days, that fact may reflect the 
broker-dealer's nominal interest in publishing quotations for the 
security, and thus the broker-dealer may not be aware of significant 
events involving the issuer.
    The Rule also would require a broker-dealer to gather and review 
the specified information annually if the broker-dealer publishes 
priced quotations for the security. The purpose of this requirement is 
to make sure that a broker-dealer publishing priced quotations 
periodically reviews fundamental information about the issuer. A 
broker-dealer should know if there is no current information about the 
issuer or if the current information reflects a significant change in 
the issuer's ownership, operations, or financial condition.
    The annual update requirement would apply only to broker-dealers 
publishing priced quotations. The Commission believes that priced 
quotations have been used in microcap fraud and manipulation schemes, 
(e.g., when a broker-dealer publishes quotations at increasing prices 
to obtain bank loans or to value customer securities' positions). In 
addition, priced quotations are used as indicia of value for a variety 
of purposes (e.g., pledges of securities). The Commission will 
reconsider its position, however, if it discovers that unpriced entries 
are also used to facilitate unlawful schemes.
    The broker-dealer would have two optional dates as measuring points 
for conducting the annual review: the anniversary date of its initial 
quotation for the security; or the date that is four months after the 
end of the issuer's fiscal year (or, for a foreign private issuer, the 
date that is seven months after the end of the issuer's fiscal year). 
The annual review must be conducted before the broker-dealer publishes 
a priced quotation following the review date option that it selects. 
The Commission believes that four months (or seven months for foreign 
private issuers) would give a broker-dealer sufficient time to obtain 
and review updated issuer information about reporting and non-reporting 
issuers.
    Q6. Should the annual update requirement apply to unpriced 
quotations?
    Q7. Should the annual update requirement be eased or eliminated 
when a reporting issuer is current in its Exchange Act reporting 
obligations?
    Q8. Should the provision triggering the review of updated 
information following a break in quotations provide for a period of 
more or less than five consecutive business days?
    Q9. In addition to a trading suspension, should any other 
significant events involving the issuer (e.g., a merger or acquisition, 
significant offering, name change, change of business, resignation of 
accountants, or bankruptcy proceeding) trigger the Rule's obligations 
to obtain, review, and document updated information?
    Q10. Should the Rule include other optional dates triggering the 
annual review requirement for priced quotations (e.g., by January 1 of 
each year)?
    Q11. For domestic issuers, should the period within which a broker-
dealer must conduct an annual review be longer than four months after 
an issuer's fiscal year end (for example, five or six months) or 
shorter than four months (for example, three months, or 14 weeks)?
    Q12. For foreign issuers, should the period within which a broker-
dealer must conduct an annual review be longer than seven months after 
an issuer's fiscal year end (for example, as long as nine months) or 
shorter than seven months (for example, four or six months)?
    Q13. For foreign issuers, should the annual updating requirement 
apply if trading is suspended on any exchange or organized market on 
which its securities trade?
    Q14. Would either the requirement to review updated information 
after a five-day lapse or the annual update requirement adversely 
affect the liquidity of covered OTC securities? Commenters responding 
to this question are urged to provide data and analysis.
4. Information Required by the Rule
    a. Issuer Information. Current Rule 15c2-11 specifies the 
information that a broker-dealer must review before publishing 
quotations for five categories of issuers: (1) Issuers that had a 
recent registered offering; (2) issuers that had a recent offering 
under Regulation A under the Securities Act;\31\ (3) reporting issuers 
and insurance companies

[[Page 9665]]

exempted from Section 12(g) of the Exchange Act \32\ by reason of 
Section 12(g)(2)(G) (``exempt insurance companies'');\33\ (4) foreign 
private issuers that are exempt from Section 12(g) of the Exchange Act 
by reason of compliance with Rule 12g3-2(b) thereunder;\34\ and (5) 
other issuers. The proposals would revise the Rule's information 
requirements with respect to reporting issuers and would enhance the 
requirements for non-reporting issuers. In addition, the proposals 
would add an information provision that covers certain non-reporting 
financial institutions.
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    \31\ Regulation A provides an exemption from registration under 
the Securities Act for offerings not exceeding $5 million, less the 
aggregate offering price of any other Regulation A offering during 
the prior 12 months. 17 CFR 230.251-230.263.
    \32\ 15 U.S.C. 78l(g).
    \33\ 15 U.S.C. 78l(g)(2)(G).
    \34\ 17 CFR 240.12g3-2(b).
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    i. Reporting issuers and exempt insurance companies. Currently, a 
broker-dealer publishing quotations for the securities of a reporting 
issuer (or exempt insurance company) must review the issuer's most 
recent annual report, together with any subsequently filed quarterly or 
current reports. The proposed amendments retain this requirement and 
clarify that the issuer must be current in its reporting obligations. 
Therefore, broker-dealers publishing quotations for the securities of 
any issuer delinquent in its reporting obligations (``delinquent 
issuer'') no longer would be able to rely on the Rule's provision 
containing the information requirements designed for non-reporting 
issuers.\35\
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    \35\ Currently, a broker-dealer can rely on paragraph (a)(5) of 
the Rule pertaining to non-reporting issuers when a report or 
statement of a reporting issuer or exempt insurance company is not 
``reasonably available'' (i.e., not on file with the Commission). 17 
CFR 240.15c2-11(a)(5). See e.g., Robin Rushing, [1995-1996] Fed. 
Sec. L. Rep. (CCH) para. 85,731 (Initial Decision), Securities 
Exchange Act Release No. 36910 (February 29, 1996) (Finality Order) 
(where the company was delinquent in Exchange Act filing, the market 
maker was required to obtain paragraph (a)(5) information to comply 
with Rule 15c2-11).
---------------------------------------------------------------------------

    For reporting issuers, broker-dealers would be able to access and 
review the required information on the Commission's EDGAR system, 
available through the Commission's Internet website (http://
www.sec.gov). Broker-dealers using this method would have to document 
the date of their review and satisfy the Rule's information retention 
requirements, discussed later in this release.
    Under the proposals, a broker-dealer could not publish its initial 
quote without reviewing the Rule's required information, nor could it 
continue to publish priced quotations without updating that information 
annually. This means that, in the case of a delinquent issuer, a 
broker-dealer would not be permitted to publish an initial quotation or 
continue to publish priced quotations after the annual review date 
because it would not be able to obtain current reports. Broker-dealers 
that initiated a quotation in compliance with the Rule prior to the 
issuer's delinquency could continue to publish unpriced quotations 
after the annual review date.
    While the market for a delinquent issuer's securities may be 
somewhat constrained by this proposal, this requirement furthers the 
Rule's purpose of limiting the fraudulent and manipulative potential of 
priced quotations in the absence of accurate and current information 
about the issuer. The Commission recently brought several enforcement 
actions against issuers for failure to file timely reports.\36\ In many 
of these actions, an active trading market for the issuer's securities 
existed even though adequate and current issuer information was not 
available to broker-dealers or investors. In these circumstances, 
priced quotations have a substantial potential to facilitate improper 
retail sales practices where broker-dealers recommend securities to 
investors, without adequate information to support the recommendation, 
and refer investors to the market price (i.e., priced quotes) as an 
indication of value.
---------------------------------------------------------------------------

    \36\ SEC v. Wincanton, No. 96-CV-02152 (D.D.C. September 17, 
1996) (Litigation Release No. 15052 (D.D.C. September 17, 1996)); 
SEC v. Equity AU, Inc., 96-CV-01775 (D.D.C. July 30, 
1996)(Litigation Release No. 14993 (July 30, 1996)); SEC v. Cayman 
Resources, 96-CV-00968 (D.D.C. July 24, 1996) (Litigation Release 
No. 14996 (D.C.C. July 31, 1996; SEC v. American Cascade, 96-CV-
00626 (D.D.C. March 29, 1996) (Litigation Release No. 14857 (March 
29, 1996)); SEC v. Parallel Technologies, Inc., 96-CV00545 (D.D.C. 
March 19, 1996) (Litigation Release No. 14848 (March 20, 1996)).
---------------------------------------------------------------------------

    In the past, commenters have suggested marking the quotation with a 
designator to indicate that issuer information was not available.\37\ 
The Commission does not view this alternative as responding adequately 
to the problem of active trading facilitated by priced quotations 
without current information. Moreover, that approach would remove an 
incentive that delinquent issuers may have to provide current 
information to their shareholders and the marketplace.
---------------------------------------------------------------------------

    \37\ In response to the 1991 Proposing Release, 17 commenters 
suggested some form of special designation indicating the broker-
dealers's lack of required information. See, e.g., Letter dated 
February 24, 1992, from Stephen D. Hickman, Secretary, NASD, to 
Jonathan G. Katz, Secretary, SEC (``1992 NASD Letter''), p.7.
---------------------------------------------------------------------------

    Q15. Under what circumstances, if any, should broker-dealers be 
able to initiate quotations, or continue publishing priced quotations, 
for the securities of delinquent issuers?
    ii. Other issuers. Rule 15c2-11(a)(5) \38\ specifies the 
information that broker-dealers must obtain and review for issuers 
other than those covered by paragraphs (a)(1) through (a)(4). For the 
most part, this provision covers the securities of U.S. non-reporting 
issuers. Currently, a broker-dealer is required to review basic 
information about these issuers, including: the issuer's most recent 
balance sheet, profit and loss, and retained earnings statements; a 
description of the issuer's business, products or services offered, and 
facilities; and a description of any relationship between the broker-
dealer and the issuer's insiders.
---------------------------------------------------------------------------

    \38\ 17 CFR 240.15c2-11(a)(5).
---------------------------------------------------------------------------

    Based on recent experience, broker-dealer review of additional 
items of information should reduce the potential for fraud in this 
segment of the capital market.
    Therefore, the Commission proposes to expand the information that 
broker-dealers must review before publishing a quotation for a non-
reporting issuer's securities and to make that information more readily 
available to the marketplace.
    The proposed amendments would require broker-dealers to review more 
information about the issuer's outstanding securities, its officers and 
directors, its financial condition, and certain significant events, 
among other items. This enhanced information would give a broker-dealer 
that is considering whether to publish quotations a greater 
understanding of the issuer's operations and a better indication of 
whether potential or actual fraud or manipulation may be present.
    Securities Information. The Rule would require a broker-dealer to 
obtain and review information regarding each class of the non-reporting 
issuer's outstanding securities, including the number of securities 
outstanding, the number of securities issuable upon exercise or 
conversion of outstanding derivative securities of the issuer, and the 
total number of securityholders of record as of the end of the issuer's 
most recent fiscal year (or a more recent date if the data is 
available). The Commission believes that this information is relevant 
because it provides broker-dealers with a greater awareness of the 
issuer's equity structure, particularly as recent incidents of fraud 
have involved transactions in derivative securities,

[[Page 9666]]

such as warrants.\39\ This enhanced information requirement would 
indicate to the broker-dealer whether any persons had access to large 
quantities of securities that could dilute the value of the public 
float.
---------------------------------------------------------------------------

    \39\ See Michael J. Markowski, Securities Exchange Act Release 
No. 38424 (March 20, 1997) (instituting an administrative proceeding 
alleging manipulation in connection with the initial public offering 
of units made up of common stock and warrants of three different 
issuers); Securities Exchange Act Release No. 38425 (March 20, 1997) 
(order of settlement).
---------------------------------------------------------------------------

    Q16. Are there other items of information regarding the issuer's 
outstanding securities that would be helpful to broker-dealers 
publishing quotations of covered OTC securities?
    Control Person Information. For non-reporting issuers, the Rule 
would require broker-dealers to obtain the names, addresses, and 
holdings in the issuer's securities of the issuer's insiders (including 
promoters and control persons), and information about the disciplinary 
histories of the issuer's insiders (including promoters and control 
persons). Specifically, the broker-dealer must review information about 
the following events involving persons related to the issuer in: Any 
criminal charges or convictions; any court-issued injunctions, bars or 
other limitations involving any type of business, securities, 
commodities, or banking activities; any violation of federal or state 
securities or commodities law; or any bars or suspensions by a self-
regulatory organization (``SRO''). This information must be provided if 
the events occurred during the five-year period preceding the 
publication of the quotation. Reviewing these items of information 
should help broker-dealers evaluate the degree of control over the 
issuer exerted by insiders and alert the broker-dealer to possible 
``red flags'' regarding the issuer's insiders and control persons.
    Two alternative options for the broker-dealer to satisfy this 
requirement are proposed. The broker-dealer could obtain a statement 
from the issuer that none of the specified actions had occurred; or the 
broker-dealer could document the steps taken to obtain the required 
information and the issuer's response, including whether the issuer 
refused to cooperate. The second alternative would allow the broker-
dealer to publish quotations when it has difficulty obtaining the 
information. However, the broker-dealer should consider the issuer's 
refusal to supply this information when the broker-dealer ascertains 
whether it has a reasonable basis for believing that the other Rule 
15c2-11 information it obtained and reviewed is accurate and the 
sources are reliable.
    Q17. Is it appropriate to allow a broker-dealer to publish 
quotations if the issuer refuses to supply disciplinary history 
information regarding its insiders, control persons, or promoters?
    Q18. Should any other disciplinary history or other background 
information about the issuer's insiders, control persons, or promoters 
be required? Would this information be helpful to broker-dealers in 
determining whether to publish quotations?
    Financial Information. The Commission is proposing to expand the 
financial information that a broker-dealer must gather and review about 
a non-reporting issuer. The proposal includes different requirements 
with respect to domestic and foreign private issuers. Currently, 
paragraph (a)(5)(xii) requires a broker-dealer to obtain and review an 
issuer's most recent balance sheet and profit and loss and retained 
earnings statements. The Rule does not require this financial 
information to be audited or presented in a particular format.
    Domestic non-reporting issuers. The proposed amendments would 
require a broker-dealer to obtain and review the issuer's most recent 
balance sheet, statement of operations (income), statement of cash 
flows, statement of shareholders' equity, and statement of 
comprehensive income. It also would require these items to be prepared 
in accordance with U.S. generally accepted accounting principles 
(``U.S. GAAP''). This requirement for the financial statements to be 
prepared in accordance with a comprehensive body of generally accepting 
accounting principles would create greater uniformity for these 
financial statements. This uniformity would assist the review by 
broker-dealers and surveillance by regulators.
    The Commission understands that in the case of non-reporting U.S. 
issuers, the financial statements submitted on NASD Form 211 to the 
NASD pursuant to NASD Marketplace Rule 6740 typically are prepared in 
accordance with U.S. GAAP and some, but not all, are audited.\40\ 
Accordingly, the Commission's preliminary view is that the proposed 
U.S. GAAP standard would not impose substantial costs on issuers.
---------------------------------------------------------------------------

    \40\ See NASD Manual, Marketplace Rules, Rule 6740.
---------------------------------------------------------------------------

    Q19. Do most domestic non-reporting issuers already prepare their 
financial statements in accordance with U.S. GAAP?
    Q20. Should the Rule require that these financial statements be 
audited?
    Foreign non-reporting issuers. The proposals would require a 
broker-dealer to obtain and review the following information for a 
foreign private issuer (other than an issuer furnishing information to 
the Commission pursuant to Rule 12g3-2(b)): the issuer's most recent 
balance sheet and statement of operations (income) and, to the extent 
prepared by the issuer, statements of cash flows, comprehensive income 
and changes in shareholders' equity. These statements must be prepared 
in accordance with a comprehensive body of accounting principles. This 
proposal would provide broker-dealers with financial information about 
issuers that do not participate in the Exchange Act reporting programs. 
Preparation of U.S. GAAP financial statements would be permitted but 
not required.
    The proposal would permit broker-dealers to obtain information 
prepared using a number of different comprehensive bodies of accounting 
which will limit the uniformity of the information reviewed. Although 
the Commission has not included specific amendments to address this 
concern, the Commission is seeking comments on possible alternative 
measures that could be adopted to improve the level of financial 
information relied upon by broker-dealers when submitting priced 
quotations for foreign non-reporting issuers' securities.
    Q21. The proposal requires a broker-dealer to obtain and review 
statements of cash flows, comprehensive income and changes in 
shareholders' equity only to the extent prepared by the issuer. Should 
broker-dealers be prohibited from publishing quotations if certain of 
those financial statements are not available? If so, which ones should 
be required?
    Q22. Do most foreign non-reporting issuers already prepare their 
financial statements in accordance with a comprehensive body of 
accounting principles?
    Q23. Should broker-dealers be required to obtain and review 
financial statements for foreign non-reporting issuers prepared in 
accordance with or that are reconciled to U.S. GAAP? \41\
---------------------------------------------------------------------------

    \41\ Requirements for quantitative and qualitative 
reconciliations of non-U.S. GAAP financial information to U.S. GAAP 
are specified in Items 17 and 18 of Form 20-F. 17 CFR 249.220F.
---------------------------------------------------------------------------

    Q24. Should broker-dealers be required to obtain and review 
financial statements for foreign non-reporting issuers prepared in 
accordance with or reconciled to U.S. GAAP \42\ only when the principal 
market for their securities is the United States?
---------------------------------------------------------------------------

    \42\ Id.

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[[Page 9667]]

    Q25. Should the Rule require that these financial statements be 
audited? If so, should they be required to be audited in accordance 
with U.S. generally accepted auditing standards?
    Significant Events. In addition, the proposals would require a 
description of significant events regarding the issuer during the last 
two years, including: A change in control; a 10% or more increase in an 
outstanding class of equity securities; a merger or acquisition; an 
acquisition or disposition of significant assets; bankruptcy 
proceedings; or delistings by a securities exchange or Nasdaq. This 
information seems relevant because broker-dealers would be made aware 
of information about significant events involving the issuer. The 
Commission is also proposing to add a provision, similar to the 
disciplinary history requirement, that would give broker-dealers the 
alternative of either obtaining a statement from the issuer that none 
of these events had occurred or providing its own statement of the 
steps it took to obtain the significant event information in cases 
where the issuer failed or refused to provide it.
    Q26. Are there other significant events involving the issuer that a 
broker-dealer should review before publishing a quotation?
    Q27. Is it appropriate to allow a broker-dealer to publish 
quotations if the issuer refuses to provide information regarding a 
significant event?
    iii. Certain foreign issuers. Rule 15c2-11 \43\ currently permits a 
broker-dealer to obtain and review the information submitted to the 
Commission by a foreign private issuer pursuant to Rule 12g3-2(b) under 
the Exchange Act.\44\ Rule 12g3-2(b) exempts securities of any foreign 
private issuer from registration pursuant to Section 12(g) of the 
Exchange Act if the issuer furnishes to the Commission information that 
the issuer has: Made or is required to make public pursuant to the law 
of the country in which the foreign private issuer is domiciled or 
incorporated; filed or is required to file with a stock exchange on 
which the securities are traded and which the exchange made public; or 
distributed or is required to distribute to its securityholders.\45\
---------------------------------------------------------------------------

    \43\ 17 CFR 240.15c2-11(a)(3).
    \44\ 17 CFR 240.12g3-2(b).
    \45\ The information may be submitted by a government official 
or agency of the country of the issuer's domicile or in which it is 
incorporated or organized.
---------------------------------------------------------------------------

    The Commission has not included a specific proposal to change the 
Rule's requirements for Rule 12g3-2(b) issuers.\46\ This is consistent 
with the general incorporation of Section 12 issuer information 
requirements and exemptions into the Rule. The Commission notes, 
however, that Rule 12g3-2(b) has no specific information requirements. 
As a result, there is no assurance that broker-dealers will have the 
same types of information for foreign private issuers that claim the 
Rule 12g3-2(b) exemption as broker-dealers will be required to have 
with respect to other issuers. In addition, many of the companies that 
claim the Rule 12g3-2(b) exemption are foreign microcap companies that 
can be subject to the same type of abusive practices as U.S. microcap 
companies.\47\ Accordingly, the Commission is considering whether to 
limit a broker-dealer's reliance under Rule 15c2-11 on an issuer's 
12g3-2(b) exempt status at least with respect to priced quotations.
---------------------------------------------------------------------------

    \46\ See proposed paragraph (d)(5) of the Rule. Broker-dealers 
publishing quotations for the securities of Rule 12g3-2(b) issuers 
would be subject to the updating requirements of proposed paragraph 
(b). Accordingly, broker-dealers would have to review updated 
information about these foreign private issuers following a 
Commission trading suspension or a five-day lapse in quotations. 
Broker-dealers also would have to review the issuer information on 
an annual basis in order to publish priced quotations. The 
Commission staff is considering whether Rule 12g3-2(b) continues to 
serve its original purpose and will evaluate whether changes to that 
rule should be proposed. If Rule 12g3-2(b) is amended, the 
interaction if that exemption with the requirements of Rule 15c2-11 
could be affected.
    \47\ See SEC v. Chelekis, Litigation Release No. 15264 (February 
25, 1997) (over half of the companies involved claimed the Rule 
12g3-2(b) exemption).
---------------------------------------------------------------------------

    Q28. Should the reference to Rule 12g3-2(b) be deleted from Rule 
15c2-11? This would mean that broker-dealers publishing quotations for 
Rule 12g3-2(b) issuers' securities would be required to obtain and 
review the same information as required for all other foreign non-
reporting issuers whose securities are subject to Rule 15c2-11. Comment 
is specifically requested with respect to Question 23 in the context of 
the requirements of Rule 15c2-11 as applied to Rule 12g3-2(b) issuers. 
Should a distinction in this respect be made depending upon whether the 
quotation is priced or unpriced?
    Q29. Should reliance under Rule 15c2-11 on the Rule 12g3-2(b) 
exception not be permitted for those issuers whose principal market is 
the United States? If so, how should the principal market be 
determined? \48\
---------------------------------------------------------------------------

    \48\ See, e.g., definition of ``principal market'' contained in 
Rule 100 of Regulation M. 17 CFR 242.100.
---------------------------------------------------------------------------

    Q30. What difficulty, if any, would broker-dealers encounter in 
obtaining the information specified in proposed paragraph (d)(6) for a 
Rule 12g3-2(b) issuer?
    Q31. Should the exception for Rule 12g3-2(b) issuers apply only to 
larger foreign private issuers, so that quotations for smaller issuers 
would require the information specified in proposed paragraph (d)(6)? 
If so, how should such distinction be measured? For example, if market 
value of public float is used, what would be the appropriate threshold 
(e.g., $25 million, $75 million, $150 million, or some other amount)? 
If dollar value of average daily trading volume is used, what would be 
the appropriate threshold (e.g., $100,000, $1 million, $5 million, or 
some other amount)?
    Q32. Should the Rule 12g3-2(b) exception be available only for 
foreign private issuers that satisfy Nasdaq SmallCap quantitative 
listing standards (i.e., at least $4 million in net tangible assets, or 
a market capitalization of at least $50 million, or net income in two 
of the last three fiscal years of at least $750,000, and a market value 
of public float of at least $5 million)?
    Q33. Should there be a separate Commission rule requiring broker-
dealers, whether or not they recommend a transaction in a security, to 
inform customers about available information regarding the issuer of 
the foreign security?
    Q34. Should there be a separate Commission rule requiring broker-
dealers, before recommending a transaction in a foreign security, to 
review financial information about the foreign issuer that is the basis 
of the recommendation and to document that review?
    iv. Exempt financial institutions. Proposed paragraph (d)(4) would 
apply to financial institutions that are exempt from Exchange Act 
reporting requirements,\49\ but file reports with other governmental 
agencies (``exempt financial institutions'').\50\ The Commission has 
determined that,

[[Page 9668]]

because the reports filed with federal or state bank supervisory 
agencies are readily available and contain information analogous to 
Exchange Act reports, broker-dealers should be required to obtain and 
review that information rather than the information required under 
proposed paragraph (d)(6) for other non-reporting issuers. Broker-
dealers that quote the securities of financial institutions that file 
periodic reports with the Commission would have to obtain and review 
the information specified in proposed paragraph (c)(3) of the Rule.\51\
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 77(c)(a)(2), 78l(i).
    \50\ See e.g., 12 CFR 363.4 (requiring insured banks to file 
annual reports with their respective bank supervisory agencies); 12 
CFR 208.16 (requiring state member banks to file periodic reports 
with the Federal Reserve); 12 CFR 18.3 through .5 (requiring 
national banks to file annual disclosure statements with the Office 
of the Comptroller of the Currency (``OCC'')); FFIEC Forms 031-034 
(requiring national banks to file annual call reports with the OCC 
and Federal Deposit Insurance Corporation); 12 CFR 562.2 (requiring 
federally chartered savings associations to file annual regulatory 
reports with the Office of Thrift Supervision (``OTS'')); NY Bank 
Section 37 and NY ADC Sec. 24.1 (requiring all New York state 
chartered banks to file annual reports with the New York Banking 
Department); and Ca Fin Section 689 (requiring California state 
chartered banks to file annual reports with the California 
Department of Banking).
    \51\ Broker-dealers publishing quotes for securities of exempt 
financial institutions may obtain the regulatory reports from the 
financial institution by contracting their primary bank regulatory 
agency. Broker-dealers can access the Federal Reserve System's 
National Information Center of Banking Information website, 
www.ffiec.gov/NIC, the Federal Deposit Insurance Corporation's 
(``FDIC'') website, www.fdic.gov, which provides the most recent 
Call Reports for all FDIC insurance banks, or the OCC's website, 
www.occ.treas.gov, which has information about individual nationally 
chartered banks. Broker-dealers that access exempt financial 
institution information through these websites would be able to 
satisfy the Rule's requirements by recording their review and 
preserving the information in the same manner as for EDGAR 
information discussed above.
---------------------------------------------------------------------------

    Q35. Should the Rule contain a separate provision relating to 
exempt financial institutions?
    Q36. Would broker-dealers face any difficulties in obtaining 
information about exempt financial institutions that is filed with the 
appropriate regulatory authority?
    v. Bankruptcy situations. Issuers in Bankruptcy. When the 
Commission issued a release in 1989 seeking comment on the piggyback 
provision (among other things), it inquired whether there were 
situations, such as issuer bankruptcies, that should be addressed if 
the piggyback provision were eliminated.\52\ Many commenters on the 
1989 Release argued that it was appropriate to permit broker-dealers to 
continue quoting the securities of issuers that had filed for 
bankruptcy because it provided liquidity for these securities. 
Commenters, including the NASD,\53\ suggested that issuers in 
bankruptcy be designated as such in the quotation system by affixing a 
special indicator to the security's symbol. The NASD also recommended 
that this indicator be required on all confirmations of transactions 
involving the bankrupt issuer's securities and that broker-dealers 
publishing quotations for these securities be required to obtain, at a 
minimum, the most recent financial statements on file with the 
bankruptcy court.
---------------------------------------------------------------------------

    \52\ Securities Exchange Act Release No. 27247 (September 14, 
1989), 54 FR 39194 (``1989 Release'').
    \53\ See 1992 NASD Letter, supra note 37.
---------------------------------------------------------------------------

    The Commission disagreed with these views and stated that the 
initiation of any quotations, or indefinite continuation of priced 
quotations, for securities where the basic information required by the 
Rule is not available to the marketplace would undercut the 
prophylactic purposes of the Rule and might even encourage the abuses 
sought to be prevented.\54\
---------------------------------------------------------------------------

    \54\ 1991 Proposing Release, 56 FR at 19158.
---------------------------------------------------------------------------

    Commenters also suggested that broker-dealers could satisfy the 
Rule's requirements by reviewing court filings for an issuer in 
reorganization pursuant to Chapter 11 of the Bankruptcy Code.\55\ 
However, these Chapter 11 filings generally are periodic reports that 
ordinarily contain only receipts and disbursements.\56\ These periodic 
reports do not provide the type of issuer financial information 
contemplated by the Rule. In particular, where a bankrupt issuer meets 
the criteria for Exchange Act reporting, it would be inconsistent with 
the public interest and protection of investors to permit broker-
dealers to facilitate trading by publishing quotations without 
reviewing Exchange Act information. Therefore, under the proposals, 
broker-dealers would not be able to initiate or resume quotations for 
the securities of issuers in bankruptcy and could not publish priced 
quotations for those securities as of the annual update requirement, 
unless they have obtained and reviewed the Rule's required information.
---------------------------------------------------------------------------

    \55\ 11 U.S.C. 1101 et seq.
    \56\ See Federal Rule of Bankruptcy Procedure 2015.
---------------------------------------------------------------------------

    Q37. What difficulties does this position present for broker-
dealers quoting securities of issuers that file for bankruptcy?
    Issuers Emerging from Bankruptcy. The Commission recently received 
a petition for rulemaking seeking a revision of the financial statement 
requirements for non-reporting issuers emerging from bankruptcy.\57\ In 
addition to the issuer's most recent financial statements, the Rule 
currently requires that a broker-dealer review similar financial 
information for the two preceding years. This requirement could result 
in a review of pre-bankruptcy financial information that has little 
bearing on the financial condition of the issuer emerging from a 
Chapter 11 reorganization. The Commission agrees with the suggestion 
made in the petition and proposes to amend Rule 15c2-11 to limit a 
broker-dealer's review to the court-approved disclosure statement \58\ 
for the issuer's plan of reorganization and the issuer's financial 
information from the date the bankruptcy court confirms the 
reorganization plan.
---------------------------------------------------------------------------

    \57\ See Letter from Daniel J. Demers to Nancy J. Sanow, 
Assistant Director, Division of Market Regulation, SEC (November 14, 
1997). This petition for rulemaking is available in File No. 4-405 
in the Commission's Pubic Reference Room, 450 Fifth Street, N.W., 
Washington, D.C. 20549.
    \58\ 11 U.S.C. 1125. The disclosure statement includes, among 
other things, a description of the issuer's business plan, a 
description of any securities to be issued, and financial 
information.
---------------------------------------------------------------------------

    Q38. Does the proposed amendment deal appropriately with issuers 
emerging from bankruptcy?
    b. Supplemental Information. Rule 15c2-11(b)(2) currently requires 
a broker-dealer to maintain in its records a copy of any trading 
suspension order issued in the 12 months preceding the publication or 
submission of the quotation.\59\ In addition, Rule 15c2-11(b)(3) 
requires a broker-dealer to preserve material information regarding the 
issuer which comes to the broker-dealer's attention before publishing 
the quotation or submitting the quotation for publication.\60\ The 
Commission is proposing to retain these provisions. As under the 
current Rule, a broker-dealer would be required to consider this 
supplemental information, along with the issuer information, when it 
determines whether it has a reasonable basis for believing that both 
the issuer information and supplemental information are accurate, 
current, and from reliable sources.\61\
---------------------------------------------------------------------------

    \59\ 17 CFR 240.15c2-11(b)(2). Information regarding recent 
trading suspension orders can be obtained by calling (800) SEC-0330.
    \60\ 17 CFR 240.15c2-11(b)(3).
    \61\ Cf. Robin Rushing, supra note 35.
---------------------------------------------------------------------------

    c. Significant Relationship Information. Currently, Rule 15c2-11 
requires a broker-dealer to record information regarding the broker-
dealer's relationship with those non-reporting issuers whose securities 
are being quoted. Specifically, broker-dealers must document whether:

     The broker-dealer or any associated person is 
affiliated with the issuer;
     The quotation is being entered on behalf of another 
broker-dealer and, if so, its name; and
     Whether the quote is being submitted on behalf of an 
insider or control person of the issuer, the name of the person, and 
the basis for any exemption from the federal securities laws for 
sales by such person.

The purpose of this information is to alert regulators and others of 
possible ``red flags,'' such as potential violations of the 
registration provisions of the Securities Act.
    The proposed amendments would retain these requirements and apply

[[Page 9669]]

them to all covered OTC securities, not just those of non-reporting 
issuers. In addition, the proposals would require the broker-dealer to 
record whether it had any arrangement to receive any compensation for 
publishing the quotation and, if so, a description of the compensation 
and the name of the person providing it.
    Microcap fraud often involves payments by the issuer (or insiders 
or promoters of the issuer) or other broker-dealers to the broker-
dealer to create a market in the issuer's stock.\62\ The Commission 
believes that the records created by the broker-dealer under the 
proposals would help expose improper arrangements, which can mislead 
market participants as to the quality of a broker-dealer's 
quotations.\63\ Moreover, this information also would assist regulators 
in identifying broker-dealers that may be acting as ``fronts'' for 
other broker-dealers or the issuer by publishing ostensibly independent 
quotes.
---------------------------------------------------------------------------

    \62\ See Butcher & Singer, Inc., 48 S.E.C. 640 (1987); Douglass 
and Co., Inc., 14 S.E.C. 537 (1978); Gotham Securities Corporation, 
46 S.E.C. 723 (1976). See also NASD Rule 2460 (prohibiting broker-
dealers from receiving payment from an issuer or a promoter for 
publishing a quotation or acting as a market marker).
    \63\ See General Bond & Share Co., 51 S.E.C. at 413-414.
---------------------------------------------------------------------------

    Q39. Is there a better way to identify when compensation has been 
paid to broker-dealers for publishing quotations?
5. Exceptions to the Rule
    Under the proposed amendments, the current exceptions relating to 
quotations representing a customer's indication of interest and not 
involving the solicitation of a customer's interest, quotations for 
municipal securities, and quotations representing a security listed and 
traded on a national securities exchange or authorized for quotation on 
Nasdaq remain substantively the same.
    Q40. Is there any reason to continue the requirement in the 
exception regarding exchange-listed securities that the security be 
traded on the exchange in proximity to the day the OTC quotation is 
published?
    The Commission is concerned that the proposed changes may result in 
misuse of the exception covering unsolicited customer orders, 
particularly if a broker-dealer wants to publish quotations for a 
security but cannot obtain the requisite issuer information. The 
unsolicited status of the underlying customer orders would be called 
into question if a broker-dealer repeatedly publishes quotations on the 
basis of this exception.\64\ In that circumstance, the broker-dealer's 
activities would suggest that it is acting as a market maker, rather 
than a broker or dealer attempting to fill unsolicited customer orders.
---------------------------------------------------------------------------

    \64\ Cf. D.H. Blair & Co., 44 S.E.C. 320, (1970) (noting that 
insertion of both bid and ask quotations in the Pink Sheets for a 
customer is a highly unusual practice).
---------------------------------------------------------------------------

    Q41. How frequently and under what circumstances do broker-dealers 
rely on the unsolicited customer order exception?
    Q42. Is it appropriate for the Rule to retain an exception for 
unsolicited customer orders?
    Q43. Should unsolicited customer orders be required to be 
identified as such in the quotation medium? \65\
---------------------------------------------------------------------------

    \65\ Currently the exception for unsolicited customer orders is 
not available for customer orders representing both a bid and an 
offer at specified prices, unless the quotation medium identifies 
the quotations as customer orders.
---------------------------------------------------------------------------

    Q44. Should there be a limited exception for a quotation reflecting 
isolated proprietary transactions by the broker-dealer? What should be 
the parameters of any such exception?
    Debt Securities. Rule 15c2-11 covers debt securities, although the 
Commission recognizes that broker-dealers publishing quotations for 
debt securities may not have focused on this aspect of the Rule. Debt 
securities frequently are held by institutional investors, and it does 
not appear that they have been the subject of the abuses that the Rule 
is intended to address.
    Q45. In light of these considerations, should the Rule continue to 
apply to debt securities? Should the Rule except all non-convertible 
debt securities or just non-convertible investment grade debt 
securities?
6. Information Available upon Request
    Rule 15c2-11(a)(5) currently provides that the information 
described in that paragraph must be made available upon request to any 
person expressing an interest in a transaction in that security with 
the broker-dealer.\66\ This requirement may have little practical 
effect because only the first broker-dealer to publish quotations must 
have the information, and an investor might find it difficult to 
identify that broker-dealer.\67\ In fact, that broker-dealer may no 
longer be publishing quotations. The proposed amendments would require 
every broker-dealer that publishes quotations for covered OTC 
securities to obtain, review, and preserve the specified information. 
The Commission believes that some microcap fraud could be prevented if 
there were greater investor access to information about these 
securities and their issuers. Accordingly, the Commission is proposing 
to enhance the accessibility of this information by requiring a broker-
dealer publishing quotations for any covered OTC security to make the 
information promptly available upon request by any person.
---------------------------------------------------------------------------

    \66\ See 17 CFR 240.15c2-11(a)(5).
    \67\ As discussed above, this is a consequence of the current 
piggyback exception.
---------------------------------------------------------------------------

    The Commission believes that the cost of requiring broker-dealers 
to make the information available (including to other broker-dealers) 
upon request is minimal. Also, the requirement to provide the requested 
information would prevent a broker-dealer from arranging with the 
issuer to have exclusive access to the issuer's information and thereby 
have sole access to Rule 15c2-11 information. This result would be 
anti-competitive and detrimental to the marketplace.
    The proposed amendments would retain in substantial form the 
current clause that providing information to others does not constitute 
a representation by the broker-dealer that the information is accurate. 
Providing the information to others instead would constitute a 
representation that the information is current in relation to the date 
the information was reviewed, and that the broker-dealer has a 
reasonable basis for believing that the information is accurate and 
from reliable sources.
    Q46. Under what circumstances do broker-dealers currently provide 
Rule 15c2-11 information to others?
    Q47. Should the proposed rule specifically permit broker-dealers to 
charge a reasonable fee to offset their costs of providing the 
information?
    Q48. Should the scope of this provision be limited to non-reporting 
issuers because information about reporting issuers is available to 
investors, such as on EDGAR through the Internet? If this requirement 
should be limited to non-reporting issuer information, should broker-
dealers be required to furnish the supplemental and significant 
relationship information about reporting issuers?
7. Preservation of Documents and Information
    To facilitate compliance with the Rule's recordkeeping 
requirements, the Commission believes that it is appropriate to codify 
the Rule's record preservation requirements in Rule 17a-4,\68\ rather 
than in Rule 15c2-11.
---------------------------------------------------------------------------

    \68\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

    Rule 17a-4 obligates broker-dealers to preserve documents and 
information that they must compile pursuant to Commission rules for the 
time period and in the manner specified in the

[[Page 9670]]

various provisions of Rule 17a-4. The Commission therefore is proposing 
to amend Rule 17a-4 to add the information specified in proposed 
paragraphs (d), (e), and (f) of Rule 15c2-11 to the other information 
that broker-dealers are already required to preserve under Rule 17a-4. 
Rule 15c2-11, as proposed to be amended, also would cross reference 
this proposed requirement.
    With regard to issuer information that is accessible to broker-
dealers through the Commission's EDGAR system, the proposed revisions 
would provide that if broker-dealers satisfied the Rule's requirements 
by obtaining and reviewing the information contained on EDGAR, they 
would not need to preserve such information independently, as long as 
they document the review and the information is accessible on EDGAR for 
the same period of time that the broker-dealers are obligated to 
preserve such information pursuant to Rule 17a-4. For example, if a 
broker-dealer is required by Rule 15c2-11 to obtain and review an 
issuer's Annual Report on Form 10-K and to preserve that information 
for three years, then as long as the broker-dealer can electronically 
access the Form 10-K for that three-year period, it does not have to 
preserve the document independently in a separate location. Broker-
dealers still would need to preserve information about reporting 
issuers that is not available on EDGAR, e.g., other information that 
comes to their attention before entering a quotation.
    Q49. Are there other ways to ease the Rule's recordkeeping 
requirements for broker-dealers?
    8. Information Provided to the NASD
    Rule 15c2-11 currently requires any broker-dealer covered by the 
Rule to submit the information required under paragraph (a)(5) (i.e., 
for non-reporting issuers) to the interdealer quotation system, in the 
form prescribed by the system, at least three business days before 
submitting a quotation for publication. The Commission is proposing to 
amend this obligation by requiring broker-dealers to submit the 
information that they must obtain and review pursuant to Rule 15c2-11 
to the NASD only, in accordance with the NASD's rules. Previously, this 
information was not obtained by an SRO (a substantial proportion of the 
documents were submitted to the National Quotation Bureau, Inc., the 
publisher of the Pink Sheets). Presently, NASD Marketplace Rule 6740 
requires broker-dealers to submit the Rule 15c2-11 information to the 
NASD before they can publish a quotation for a covered OTC equity 
security in any quotation medium. The proposed amendment would 
recognize broker-dealers' obligation under NASD rules and avoid any 
possible need to make multiple submissions of the same information 
(e.g., to the NASD and to one or more interdealer quotation systems). 
The NASD uses this information for surveillance and enforcement 
purposes and routinely provides copies of this information to the 
Commission.
    Q50. Does there continue to be any need for the Rule to require 
that the information be supplied to the operator of each interdealer 
quotation system?

B. Central Information Repository

    The elimination of the piggyback provision and the increased costs 
of compliance that may result suggest the desirability of having a 
central data base of information, particularly for the securities of 
non-reporting issuers. Such a data base also would enhance the 
availability of information about little known issuers to investors, 
other professionals, and regulators. For these reasons, the Commission 
encourages the development of one or more repositories for Rule 15c2-11 
information.
    In the 1991 Proposing Release, the Commission contemplated that a 
Rule 15c2-11 repository would:
    (1) collect information about a substantial segment of issuers of 
securities subject to the Rule;
    (2) maintain current and accurate information about such issuers;
    (3) use effective acquisition, retrieval, and dissemination 
systems;
    (4) charge reasonable fees; and
    (5) operate in a manner that would permit it reasonably to carry 
out the purposes of the Rule.\69\ The Commission seeks comments 
concerning the features and the feasibility of a central information 
repository.
---------------------------------------------------------------------------

    \69\ 56 FR at 19163.
---------------------------------------------------------------------------

    Q51. Should the Rule incorporate the standards above? Are there 
other standards that should be included? \70\
---------------------------------------------------------------------------

    \70\ Commenters may also wish to consider the need for a process 
to recognize repositories that meet such standards. Cf. Securities 
Exchange Act Release No. 39457 (December 17, 1997), 62 FR 68018 
(proposing the process for designating ``nationally recognized 
statistical rating organizations'' for purposes of the New Capital 
Rule, 17 CFR 240.15c3-1).
---------------------------------------------------------------------------

    Q52. Should the Commission promote the development of central 
information repositories through other means?

C. Definitions

    The proposals would revise or eliminate several definitions now 
contained in Rule 15c2-11 and add a few new definitions. The current 
definitions of ``issuer'' and ``quotation'' would be retained.
    Q53. Are the proposed definitions appropriate in light of the 
Rule's purposes?
    Quotation Medium. The definition of ``interdealer quotation 
system'' would be incorporated into the definition of ``quotation 
medium.'' \71\ This definition is quite inclusive: it covers any 
publication or electronic communications network, or other device that 
is used by brokers or dealers to make known to others their interest in 
transactions in any security, including offers to buy or sell at a 
stated price or otherwise, or invitations of offers to buy or sell. The 
Commission has been advised by the NASD that almost all Forms 211 that 
it receives are filed for quotations to be published in the OTC 
Bulletin Board or the Pink Sheets. Transaction data indicates, however, 
that there is significant trading in OTC securities that are not quoted 
in these quotation mediums. While there can be many explanations for 
this phenomenon, it is possible that broker-dealers view Rule 15c2-11 
as applying only to quotations published in the Bulletin Board or the 
Pink Sheets. In fact, the Rule applies to quotations published in any 
quotation medium.
---------------------------------------------------------------------------

    \71\ A separate definition of ``interdealer quotation system'' 
no longer would be necessary because of the elimination of the 
piggyback provision and the revision that the information be 
furnished to the NASD in accordance with NASD rules, rather than to 
interdealer quotation systems.
---------------------------------------------------------------------------

    Q54. What is the experience of broker-dealers under the Rule when 
publishing quotations in quotation mediums other than the Bulletin 
Board or the Pink Sheets?
    Q55. Is the scope of the definition of quotation medium too broad?
    Q56. Should the Rule except mediums that do not identify broker-
dealers publishing quotations (i.e., where quotations are anonymous) 
and/or that do not provide automatic execution facilities? Why would 
this be appropriate or inappropriate?
    Q57. Should the definition draw any distinction between 
``quotations'' and ``orders''?
    Q58. Should the Rule apply to quotation systems devoted exclusively 
to a single issuer's securities? If so, would an aggregation of such 
systems be a quotation medium?
    Q59. Should the Rule apply to quotation systems devoted exclusively 
to a single broker-dealer's quotations? If so, would an aggregation of 
such systems be a quotation medium?
    Q60. Should the definition of ``interdealer quotation system'' be 
retained?

[[Page 9671]]

D. Transition Provision

    The Commission is proposing a transition provision covering 
quotations by broker-dealers that were initiated prior to the effective 
date of the proposed amendments. Broker-dealers could continue their 
market-making activities until the occurrence of one of the events set 
forth in the Rule, as proposed to be amended. The Commission believes 
that this proposed transition provision would be necessary to maintain 
liquidity in covered OTC securities while broker-dealers adjust to the 
amended requirements. Broker-dealers initiating quotations for these 
securities, however, would need to obtain and review the requisite 
information.
    Q61. Does the proposed transition provision adequately address 
securities that broker-dealers may have been quoting for significant 
periods of time, and for which they may be unable to obtain current 
information from the issuer?
    Q62. Under what circumstances should the Rule accommodate those 
broker-dealers that would like to initiate quotations for securities 
covered by the transition paragraph but for which they cannot obtain 
the requisite issuer information?

III. General Request for Comments

    The Commission solicits comment on all aspects of its proposed 
amendments to Rule 15c2-11, as well as on any other matter that might 
have an impact on the proposals discussed above. In particular, the 
Commission seeks comment on whether the proposals would help promote 
information transparency in the OTC market and help curb abuses in the 
trading of microcap securities. Commenters are asked to consider 
whether the proposed revisions would have any adverse impact on the 
liquidity of covered OTC securities and should provide data and 
analysis to support their views. Commenters are invited to address 
whether the Rule's text is sufficiently clear and understandable. In 
addition, commenters are asked to discuss whether the Rule and/or 
proposed amendments should apply to quotations for all securities 
covered by Rule 15c2-11, or whether certain amendments (e.g., 
disciplinary histories of an issuer's insiders and promoters) should be 
limited to quotations for microcap securities.
    Persons submitting written comments should send three copies of 
their comments to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and should 
refer to File No. S7-3-98. Comments also may be sent electronically to 
the following e-mail address: [email protected] and should include 
the file number on the subject line of the e-mail.

IV. Costs and Benefits of the Proposed Amendments

    The Commission requests commenters to evaluate the costs and 
benefits associated with the proposed amendments to Rule 15c2-11. The 
Commission has identified certain costs and benefits relating to the 
proposals, which are discussed below, and encourages commenters to 
discuss any additional costs or benefits.\72\ In particular, the 
Commission requests comment on the potential costs for any necessary 
modifications to information gathering, management, and recordkeeping 
systems or procedures that would be necessary to implement the 
proposals, as well as any potential benefits resulting from the 
proposals for issuers, investors, broker-dealers, securities industry 
professionals, regulators or others. Commenters should provide analysis 
and data to support their views on the costs and benefits associated 
with the proposals.
---------------------------------------------------------------------------

    \72\ In 1985, the Commission issued a release for the purpose of 
seeking comment on the costs and benefits associated with Rule 15c2-
11. Securities Exchange Act Release No. 21914 (April 1, 1985), 50 FR 
14111. The comment letters are available in File No. S7-14-85. 
Generally, the commenters failed to provide data to support costs or 
benefits.
---------------------------------------------------------------------------

A. Benefits

    The Commission believes that the proposed amendments generally 
would help improve the quality of the markets for securities subject to 
Rule 15c2-11 and would help protect investors from fraudulent schemes 
involving these securities. Traders of the securities of legitimate 
microcap issuers also would benefit if the integrity of this market 
sector is improved. The Commission believes that the specific benefits 
set forth below would flow from the proposed amendments.
    The Commission does not routinely collect, as part of its 
examinations or investigations, data for the dollar value of fraudulent 
activity and therefore cannot quantify investor losses due to recent 
microcap frauds. However, from its enforcement investigations and 
interactions with other regulators, and review of investor complaints, 
the Commission believes microcap trading abuses are on the rise and 
overall involve significant dollar amounts.
    Microcap fraud frequently involves issuers for which public 
information is limited.\73\ Without information, it is difficult for 
investors, securities professionals, and others to evaluate the risks 
presented by these securities. Many investors consequently fall prey to 
persons who make false representations and unrealistic predictions 
about these securities. The publication of quotations by broker-dealers 
can facilitate the fraudulent promotion of microcap securities. 
Currently, not all broker-dealers are required to review certain basic 
information about an issuer before initiating quotations.
---------------------------------------------------------------------------

    \73\ See, e.g., SEC v. Global Financial Traders, Ltd., 
Litigation Release Nos. 15291 (March 14, 1997), and 15338 (April 17, 
1997); see also supra note 10.
---------------------------------------------------------------------------

    To reduce the potential for fraud in the OTC market, the proposed 
amendments require every broker-dealer, before initiating a quotation 
for a covered OTC security in a quotation medium, to gather and review 
the issuer information and to update that information annually when it 
publishes priced quotations. The proposed amendments would require more 
information than the Rule currently requires about the issuer's 
outstanding securities, its officers and directors, and its financial 
condition. In particular, by requiring that all broker-dealers obtain 
and review issuer information and update it annually, the proposed 
amendments should substantially assist a broker-dealer in its 
consideration of whether to publish quotations for an issuer's 
securities. Provided with this additional information, the broker-
dealer would gain a greater understanding of the issuer's business and 
a better indication of whether potential or actual fraud or 
manipulation may be present.
    After reviewing the information, responsible broker-dealers should 
refrain from publishing quotations for questionable securities. This 
will prevent responsible broker-dealers from becoming unwitting 
participants in manipulative or fraudulent schemes of unscrupulous 
broker-dealers and/or promoters. Because all broker-dealers must have 
issuer information before initiating quotations for covered OTC 
securities, issuer information would be more widely available to market 
professionals. Additionally, broker-dealers must provide this 
information to any person upon request.
    The proposals, if adopted, would serve an important surveillance 
function. Currently, only the first broker-dealer quoting a security 
must gather, review, and preserve the information. The proposed 
amendments would require all broker-dealers

[[Page 9672]]

initiating quotations to satisfy the Rule's current requirements and 
would add a recordation requirement. Moreover, under NASD Marketplace 
Rule 6740, the broker-dealer demonstrates its compliance with that rule 
by filing the Rule 15c2-11 information with the NASD. Recently, the 
review of Forms 211 filed with the NASD has resulted in a number of 
Commission trading suspensions and other enforcement actions.
    The proposed amendments would ease significantly the Rule's 
recordkeeping requirement when broker-dealers have access to reporting 
issuer information on the Commission's EDGAR system. Access to EDGAR is 
free on the Internet. Given that approximately 42% of securities on the 
OTC Bulletin Board (``OTCBB'') and Pink Sheets are issued by reporting 
companies, whose reports are included on EDGAR, a significant 
recordkeeping cost savings to broker-dealers should result.
    The Commission does not have data to quantify the value of the 
benefits described above. The Commission seeks comments on the value of 
these benefits and on any benefits, not already identified, that may 
result from the adoption of these proposed amendments.

B. Costs

    The Commission has identified various costs that may result if the 
proposals are adopted. The proposals would eliminate the piggyback 
provision, which now effectively limits the Rule's application to those 
broker-dealers that publish quotations during the first 30 days of the 
security's trading. Under the proposals, each broker-dealer would need 
to obtain and review the Rule's required information when it initiates 
quotations for the security or initiates or resumes quotations 
following specified events. Moreover, an annual update requirement 
would apply to all broker-dealers that publish priced quotations. As a 
result of these proposals, each broker-dealer publishing quotations for 
a security would have to obtain issuer information and possibly incur 
costs when it first publishes a quotation and when it conducts the 
required update. To the extent a broker-dealer does not already have 
this information, it would incur costs for the collection and review of 
this information. Moreover, a broker-dealer also would incur costs 
associated with creating the records required by the Rule and retaining 
the Rule's required information for the specified period of time 
pursuant to the proposed amendment to Rule 17a-4.
    The Commission estimates that it would cost a broker-dealer $35 per 
hour to comply with the requirements of the Rule based on a blended 
compensation rate of $35 per hour for clerical and supervisory 
compliance staff. As identified in the Paperwork Reduction Act section 
of this release, the Commission estimates that the additional annual 
burden hours to broker-dealers in the aggregate would be approximately 
127,000 hours. The Commission, therefore, estimates that the cost to 
broker-dealers in the aggregate to obtain and review the required 
information if the proposed amendments are adopted would be 
approximately $4,445,000. The Commission seeks comments on the 
reasonableness of its estimates for the additional annual hourly and 
dollar costs to broker-dealers.
    The Commission believes that any additional costs to broker-dealers 
should be offset, however, by the fact that those broker-dealers 
conducting a retail business already may have the information required 
to satisfy their obligations under the federal securities laws and the 
rules of the SROs when they recommend a security to an investor.
    Although Rule 15c2-11 does not regulate issuers, there may be some 
indirect costs imposed on issuers, particularly non-reporting issuers, 
because they may be contacted by broker-dealers to provide the 
information specified in the Rule. Non-reporting issuers would incur 
the cost of having to collect and provide the requested information to 
each requesting broker-dealer. In addition, the proposals would expand 
the scope of the information required for quotations of non-reporting 
issuers' securities. However, the Commission is assuming that non-
reporting issuers maintain their financial information in compliance 
with prevailing accounting standards and, in most instances, would have 
available updated financial information prepared in accordance with 
GAAP. The NASD has informed us that the financial statements filed with 
the Form 211 generally are prepared in accordance with GAAP, and many 
are audited.
    The Commission assumes that for non-reporting issuers, it will cost 
approximately $15 per hour for clerical staff to obtain and provide the 
information required if the proposed amendments are adopted.\74\ As 
identified in the PRA section of this release, the Commission estimates 
that the additional annual reporting burden hours to non-reporting 
issuers in the aggregate would be approximately 50,000 hours, or 
approximately $750,000 per year. The Commission seeks comments on the 
reasonableness of its estimates for the additional annual hourly and 
dollar costs to issuers.
---------------------------------------------------------------------------

    \74\ The Commission assumes that because the required 
information should be available in house, someone in a clerical 
position should be able to copy and forward the information in 
response to a request. Accordingly, the Commission believes that $15 
per hour is a reasonable estimate of this cost.
---------------------------------------------------------------------------

    Regarding start-up, operating, and maintenance costs, the 
Commission believes that broker-dealers that now collect, review, and 
retain the information required by the current Rule would incur only 
marginal start-up, operating, and maintenance costs (i.e., to expand 
systems already in place). Further, some broker-dealers may be 
collecting the information required by the proposals for other 
purposes. However, the Commission believes some broker-dealers may not 
have adequate systems in place to retain issuer information and would, 
therefore, incur start-up, operating, and maintenance costs in order to 
comply with the requirements of the proposed amendments.
    As discussed in the PRA section of this release, the Commission 
estimates that an average of 4.3 broker-dealers provide quotations for 
each of the 7,038 covered OTC securities that would be affected if the 
proposed amendments are adopted. The Commission estimates that broker-
dealers would incur start-up, operating, and maintenance costs of 
approximately $17,736 associated with reporting issuer information, and 
approximately $97,968 associated with non-reporting issuer information. 
The total start-up, operating and maintenance cost burden for broker-
dealers is estimated to be $115,704 ($17,736+$97,968). The Commission 
seeks comments on the reasonableness of its estimates for the total 
start-up, operating and maintenance cost burdens to broker-dealers.
    Finally, the Rule could affect the liquidity of some securities. If 
broker-dealers are unable to obtain the required issuer information, 
they would have to refrain from publishing priced quotations in that 
security. This could make it more difficult for investors to determine 
what prices other market participants are willing to bid or offer for 
the security. However, broker-dealers may still publish unpriced quotes 
and publish priced quotes representing unsolicited customer interest in 
buying or selling securities. It should also be possible for some 
broker-dealers to continue to make

[[Page 9673]]

markets without publishing quotations in a quotation medium. Thus, 
while investors are still able to obtain price information, the cost of 
obtaining this information may increase. Any effect on liquidity must 
be weighed against the benefit of stopping potential fraud or 
manipulation. Greater investor access to information should result in 
more informed investor decisions and potentially could result in 
additional trading and thus liquidity for covered OTC securities. The 
Commission's preliminary view is that the benefits of the proposed rule 
changes should justify any adverse impact on liquidity.
    The Commission seeks comments on the cost estimates identified in 
this section and comments on any cost, not already identified, should 
the amendments be adopted as proposed. Commenters are requested to 
supply specific data and analysis.

V. Effects on Efficiency, Competition, and Capital Formation

    In adopting rules under the Exchange Act, Section 23(a)(2) requires 
the Commission to consider the impact any rule would have on 
competition and to not adopt any rule that would impose a burden on 
competition not necessary or appropriate in the public interest. 
Section 3(f) of the Exchange Act requires the Commission, when engaged 
in rulemaking, to consider or determine whether an action is necessary 
or appropriate in the public interest, and whether the action would 
promote efficiency, competition, and capital formation.\75\ The 
proposed amendments are intended to protect investors by requiring 
broker-dealers that initiate or resume quotations for a covered OTC 
security in a quotation medium, and that are publishing priced 
quotations as of the annual update requirement, to have fundamental 
information about the issuer.
---------------------------------------------------------------------------

    \75\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    When reports of fraud and manipulation in a particular market 
sector are common, legitimate participants in that marketplace are 
adversely affected. For example, legitimate small issuers seeking 
capital in the public markets may find that their costs of raising 
capital are increased because of underwriters' and, ultimately, 
investors' reluctance to participate in these transactions. Measures to 
reduce microcap fraud should result in enhanced capital formation by 
legitimate small issuers.
    The Commission believes that the requirement to obtain and review 
issuer information should improve the level of competition among 
broker-dealers because all broker-dealers would be affected equally. 
With the elimination of the piggyback provision, every broker-dealer 
must obtain and review the information in connection with a decision to 
publish quotations. Absent these requirements, the Commission believes 
that some broker-dealers would submit quotations without regard to 
basic information about relatively unknown issuers, and therefore, 
would be more likely to cause investors to fall prey to fraudulent and 
manipulative pricing schemes. Because all broker-dealers would now be 
subjected to the same requirements to gather and review the information 
before publishing quotations, fairness and competition in this segment 
of the industry should improve.
    The Commission's preliminary view is that the proposed amendments 
to the Rule would not have any anticompetitive effects that are not 
necessary or appropriate in the public interest. There may be isolated 
cases where some broker-dealers can continue to publish unpriced 
quotations for a security because issuer information was available when 
they initiated quotations or the security qualifies for the transition 
provision covering quotations occurring prior to the amendment's 
effective date, yet other broker-dealers later cannot initiate or 
resume quotations because current issuer information is no longer 
available. Because of the proposed annual updating requirement, the 
broker-dealer would only be able to publish unpriced quotations after 
the updating period (if current issuer information was not available). 
Although in such cases some broker-dealers may be precluded from 
publishing quotations in a quotation medium, the Commission 
preliminarily considers this possible burden on competition to be 
justified by the benefits to investors of broker-dealers having 
accurate and current issuer information before they initiate or resume 
publication of quotations in a quotation medium.
    The Commission requests comments on the competitive benefits that 
may result to broker-dealers under the proposed amendments to the Rule 
and also is requesting comments on any anticompetitive effects that may 
result if the Rule is adopted as proposed. The Commission is aware that 
requiring broker-dealers to collect information more regularly may 
cause some broker-dealers to stop publishing quotations, thus reducing 
the liquidity of some securities. The Commission requests data and 
analysis on what effect the proposed changes may have on the liquidity 
of this market. Finally, the Commission seeks comment on what impact 
the proposals, if adopted, would have on efficiency and capital 
formation.

VI. Initial Regulatory Flexibility Act

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA'') \76\ regarding the proposed amendments to Rule 
15c2-11 and the companion amendment to Rule 17a-4 under the Exchange 
Act. The following summarizes the IRFA.
---------------------------------------------------------------------------

    \76\ 5 U.S.C. 603.
---------------------------------------------------------------------------

    As discussed in the IRFA, the Rule specifies the information that a 
broker-dealer must gather and review before publishing quotations for 
covered OTC securities. The Rule is intended to prevent broker-dealers 
from publishing quotations for covered OTC securities in a quotation 
medium without obtaining, reviewing, and retaining current information 
about the issuer. The Commission is proposing these amendments because 
of increased incidence of fraud and manipulation in securities subject 
to Rule.
    The amendments to the Rule would affect all broker-dealers, 
including a number of small broker-dealers, seeking to publish 
quotations for covered OTC securities. The Commission's Office of 
Economic Analysis (``OEA'') estimated that as of December 31, 1996, 
there were 3,444 small public broker-dealers. Based on Exchange Act 
Rule 0-10(c)(1), OEA considered a small broker-dealer as a broker-
dealer reporting total capital of less than $500,000 at year-end 1996. 
The number of these small broker-dealers that submit quotations for 
covered OTC securities to quotation mediums is unknown. However, the 
Commission believes that, at any given time, there are approximately 
400 broker-dealers, including small broker-dealers, that submit 
quotations for covered OTC securities. The Commission seeks comments on 
the number of small broker-dealers that quote covered OTC securities in 
quotation mediums.
    The proposed amendments would indirectly affect those small issuers 
that may be requested to provide the information required by the 
proposed amendments to broker-dealers publishing quotations in those 
issuers' securities. Based on Exchange Act Rule 0-10(a), a small issuer 
is one that on the last day of its most recent fiscal year had total 
assets of $5,000,000 or less. The total number of small issuers of 
covered OTC securities is not known at this time. The Commission seeks 
comment on the total number of issuers of covered OTC securities; the 
number (or

[[Page 9674]]

percentage) of these issuers that are small issuers; and the total 
number (or percentage) of small issuers of covered OTC securities that 
are reporting and non-reporting issuers, respectively.
    As discussed above in this release, the proposed amendments would 
eliminate the piggyback provision and would specify that every broker-
dealer must gather and review the required information when it 
initiates or resumes publishing quotations for a covered OTC security. 
At least once a year thereafter in the case of priced quotations, or 
following a break in quotations of five or more business days or upon 
the termination of a Commission trading suspension order, a broker-
dealer would have to gather and review the information required by the 
Rule.
    In addition, a broker-dealer would be required to maintain 
information concerning its compliance with the Rule, including whether: 
the broker-dealer is affiliated with the issuer; a quotation is being 
submitted on behalf of another broker-dealer or associated person 
(including the name of such broker-dealer); the quotation is being 
submitted on behalf of the issuer or persons affiliated with the 
issuer; and the broker-dealer has received any monetary or other 
compensation to publish the quotation.
    The Commission is also proposing to require broker-dealers to 
acquire and review the annual and other periodic reports that financial 
institutions file with their respective regulatory agencies other than 
the Commission. The Commission believes that because non-reporting 
financial institutions file periodic reports containing information 
similar or identical to information that reporting financial 
institutions file with the Commission, a broker-dealer quoting such 
financial institutions' securities should obtain these reports in order 
to achieve the informational goals of the Rule.
    The possible addition of recordkeeping costs for broker-dealers as 
a result of eliminating the piggyback provision and enhancing the 
required issuer information further highlights the desirability of 
creating a central data base for information on covered issuers and 
their securities. In that regard, the Commission encourages the 
development in the private sector of one or more central repositories 
for Rule 15c2-11 information. Such repositories may provide a more 
efficient vehicle for meeting the record-assembly needs of brokers and 
dealers, including firms seeking to comply not only with the Rule, but 
also with other applicable investor protection requirements, such as 
general anti-fraud and suitability rules of the Commission and SROs.
    The IRFA notes that the availability of the Commission's EDGAR 
system for broker-dealers to collect and review the reports required by 
the Rule should lessen the costs and burdens associated with compliance 
with any expanded information gathering, review, and updating 
requirements. In addition, the prevalent use of computers and the 
Internet, on which access to EDGAR is free, should also reduce the 
recordkeeping and compliance costs for all broker-dealers by automating 
the information collection and retention process.
    The IRFA recognizes that the proposed amendments indirectly affect 
certain issuers, particularly non-reporting issuers. The proposed 
amendments would require all broker-dealers, before initiating or 
resuming publication of a quotation, to obtain, review, and retain more 
issuer information than is currently required under Rule 15c2-11 and, 
when publishing priced quotations, to update that information annually. 
Consequently, non-reporting issuers must collect and provide the 
required information for each requesting broker-dealer. The Commission 
assumes that non-reporting issuers maintain their financial information 
in compliance with prevailing accounting standards and that the cost 
incurred by non-reporting issuers to prepare the necessary information 
in response to broker-dealers' requests would be minimal.
    The IRFA discusses the kinds of possible alternative proposals that 
the Commission has considered. These include, among others, creating 
differing compliance or reporting requirements or timetables that take 
into account the resources available to small entities, and whether 
such entities could be exempted from any of the proposed rules, or any 
part thereof. Therefore, having considered the foregoing alternatives 
in the context of the proposed amendments, the Commission does not 
believe they would accomplish the stated objectives of the proposal.
    The Commission encourages the submission of written comments 
regarding any aspect of the IRFA. In particular, the Commission seeks 
comments on: (i) The number of small entities that would be affected by 
the amended Rule, including the number of small broker-dealers and 
issuers; (ii) the number of small entities that are issuers of covered 
OTC securities; and (iii) the number of small entities that are 
reporting and non-reporting issuers of covered OTC securities, 
respectively. Comments should also specify the costs of compliance with 
the proposed amendments, and suggest alternatives that would provide 
the OTC market with more information about the issuers of these 
securities. In describing the nature of any impact that the proposals 
would have, empirical data supporting these views should be provided.
    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, the Commission is also requesting information regarding 
the potential impact of the proposed amendments on the economy on an 
annual basis. In particular, comments should address whether the 
proposed changes, if adopted, would have a $100,000,000 annual effect 
on the economy, cause a major increase in costs or prices, or have a 
significant adverse effect on competition, investment, or innovations. 
Commenters should provide empirical data to support their views.
    Comments should be submitted in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Comments also may be submitted electronically 
at the following E-mail address: [email protected]. All comment 
letters should refer to File No. S7-3-98; this file number should be 
included on the subject line if E-mail is used. Comment letters will be 
available for public inspection and copying in the Commission's Public 
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Electronically submitted comment letters will also be posted on the 
Commission's Internet web site (httpp://www.sec.gov).
    A copy of the Initial Regulatory Flexibility Analysis may be 
obtained by contacting Chester A. McPherson, Office of Risk Management 
and Control, Division of Market Regulation, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at (202) 
942-0772.

VII. Paperwork Reduction Act

    Certain provisions of the proposed amendments contain ``collection 
of information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA''); \77\ the Commission has submitted them 
to the Office of Management and Budget for review in accordance with 44 
U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection of 
information is: ``Publication or submission of quotations without 
specified information.'' This collection of

[[Page 9675]]

information has previously been assigned OMB Control No. 3235-0202.
---------------------------------------------------------------------------

    \77\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Collection of Information Under the Proposed Amendments

    Rule 15c2-11 under the Exchange Act currently requires the very 
first broker-dealer publishing a quotation for certain over-the-counter 
(''OTC'') securities in a quotation medium to obtain and review the 
information specified in the Rule. Generally, the Rule applies to 
securities that are not listed and traded on a national securities 
exchange or quoted on Nasdaq (``covered OTC securities''). Most covered 
OTC securities are quoted in the OTC Bulletin Board (``OTCBB''), which 
is operated by the National Association of Securities Dealers, Inc. 
(''NASD''), or in the Pink Sheets (containing quotations for equity 
securities) or Yellow Sheets (containing quotations for debt 
securities), which are published by the National Quotation Bureau, Inc. 
(''NQB'').
    The proposed amendments to Rule 15c2-11 would require every broker-
dealer to collect, review, and retain specific information about the 
security's issuer before initiating or resuming a quotation for a 
covered OTC security. Broker-dealers submitting priced quotations for 
the security would be required to collect, review, and retain the 
Rule's specified information annually. Broker-dealers would also have 
to record the sources of their information, the date their review 
occurred, and the person responsible for the review. Also, the 
proposals would require broker-dealers publishing quotations for a 
covered OTC security to collect, review, and retain more information 
than is required currently.
    Under Rule 15c2-11, the information that is collected pursuant to 
the Rule must be submitted to the NASD at least three business days 
before any quotation is published.\78\ Finally, the proposed amendments 
would require broker-dealers to provide the information specified to 
any member of the public that requests it.
---------------------------------------------------------------------------

    \78\ The NASD has a rule requiring broker-dealers that initiate 
or resume quotations for covered equity securities to submit 
verification that they have collected the information necessary to 
comply with NASD requirements, as well as Rule 15c2-11. See NASD 
Manual, Marketplace Rules, 6740.
---------------------------------------------------------------------------

B. Proposed Use of Information

    Broker-dealers must collect and review the information required 
under the proposed amendments before publishing a quotation. Moreover, 
the Rule requires that broker-dealers have a reasonable basis for 
believing that the information about the issuer and related persons is 
current, accurate, and from reliable sources. This information 
collection protects investors by deterring fraudulent or manipulative 
quotations for thinly-traded securities whose issuers are relatively 
unknown. Because information about these issuers is not widely 
disseminated and often is not current, fraudulent and manipulative 
schemes are easier to perpetrate. Moreover, this collection of 
information helps broker-dealers guard against becoming unwitting 
participants in fraudulent or manipulative schemes. The Rule 15c2-11 
information gathering requirements also serve an important surveillance 
function for both the Commission and the NASD. Recently, the Commission 
has used the Rule 15c2-11 information to suspend trading in the 
issuers' securities pursuant to Section 12(k) of the Exchange Act where 
publicly available information about the issuer raised questions about 
the accuracy and adequacy of the issuers' disclosures.

C. Respondents

    The proposed amendments would apply to those broker-dealers that 
initiate or resume publishing quotations for a covered OTC security in 
a quotation medium and that are publishing priced quotations as of the 
annual update requirement. The proposed amendments also indirectly 
affect issuers that are asked by broker-dealers to provide this 
information. Most of the Rule 15c2-11 information that would be 
required for issuers that publicly file periodic reports with the 
Commission (``reporting issuers'') is available electronically on EDGAR 
or through the Internet. Thus, the proposals are likely to have a 
greater paperwork burden when broker-dealers publish quotations for the 
securities of issuers that do not participate in the Commission's 
public reporting program (``non-reporting issuers'').

D. Total Annual Reporting and Recordkeeping Burden

    The proposed amendments would require broker-dealers to collect, 
review, retain, and record certain issuer and supplemental information 
when they initiate or resume publishing quotations of the issuer's 
securities or continue to publish priced quotations as of the annual 
anniversary date. The proposed amendments contain an initial 
information gathering and review requirement for broker-dealers and, in 
the case of priced quotations, a subsequent annual updating 
requirement. The discussion below estimates the collection of 
information burden one year after the anticipated date of effectiveness 
of the proposed amendments when broker-dealers that publish quotes for 
covered OTC securities qualifying for the proposed transition provision 
must fully comply with the Rule's information requirements. The 
discussion below also provides estimates for the same period for 
issuers that may be contacted to provide the information. In 
particular, the following analysis measures the cost to broker-dealers 
of: (1) collecting, reviewing, recording, and retaining the required 
issuer information and supplying it to the NASD; (2) responding to 
requests for issuer information from the public; and (3) starting-up or 
maintaining systems for the collection and retention of issuer 
information. The analysis below also addresses the indirect cost to 
issuers who must furnish information to requesting broker-dealers.
1. Burden-Hours for Broker-Dealers
    In 1997, the NASD reports receiving 1,576 applications from broker-
dealers to initiate or resume publication of quotations for covered 
equity securities in the OTCBB and/or the Pink Sheets, and 1,107 of 
these applications were cleared for publication of quotations. Although 
there are other OTC quotation mediums, the NASD reports that it 
generally does not receive any submissions from broker-dealers 
publishing quotations in these other systems. Data about quotations for 
covered OTC securities in these other systems is unavailable.
    Also, taking into account newly-published quotations in the Yellow 
Sheets, the Commission estimates that approximately 1,200 new covered 
OTC securities would be eligible for quotations in the year following 
the Rule's effective date. Based on information provided by the NASD 
and NQB, the Commission estimates that as of December 31, 1997, there 
were approximately 6,200 covered OTC securities quoted in the OTCBB; 
3,000 quoted in the Pink Sheets; and 2,000 quoted in the Yellow Sheets 
for a total of 11,200 covered OTC securities quoted in all three 
mediums.
    According to NASD and NQB estimates, the Commission believes that, 
on average, there are approximately 4.3 broker-dealers publishing 
quotations for each of these covered OTC securities, and that at any 
given time there are no more than 400 broker-dealers that submit 
quotations for covered OTC securities. Further, according to these 
estimates, priced quotations are published for approximately 89 percent 
of the 6,200 (5,518) OTCBB securities, 10 percent of the 3,000 (300) 
Pink Sheets securities, and 1 percent of the

[[Page 9676]]

2,000 (20) Yellow Sheets for a total of 5,838 issues with priced 
quotations. Because the proposed amendments would not require broker-
dealers to collect issuer information for priced quotations until the 
annual update requirement is triggered in the year after the date of 
the amendments' effectiveness, the Commission estimates that, as of the 
annual update, approximately 30,263 ((5,838+1,200) x 4.3) quotations 
would be subject to the Rule 15c2-11 proposed amendments.
    For purposes of developing a burden estimate, the Commission 
assumes that each of the 5,838 priced quotations and the 1,200 new 
applications represent a different issuer. The Commission, therefore, 
estimates, at most, 7,038 issuers of covered OTC securities will be 
affected by the proposals in the year following the effective date of 
the amendments.\79\
---------------------------------------------------------------------------

    \79\ This number overstates the number of affected issuers 
because some issuers have more than one security with priced quotes.
---------------------------------------------------------------------------

    Based on information from the NASD and NQB, the Commission 
estimates that of the 7,038 affected issuers of covered OTC securities, 
42 percent (2,956) are reporting issuers, and 58 percent (4,082) are 
non-reporting issuers. The Commission estimates that it will take a 
broker-dealer about three hours to collect, review, record, retain, and 
supply to the NASD the information pertaining to a reporting issuer, 
and five hours to collect, review, record, retain, and supply to the 
NASD the information pertaining to a non-reporting issuer. The 
Commission estimates that broker-dealers will annually require 38,132 
(2,956 x 3 x 4.3) hours or 95.33 (38,132/400) hours per broker-dealer 
to collect, review, record, retain, and supply to the NASD the 
information for the 2,956 affected reporting issuers. The Commission 
estimates that broker-dealers will annually require 87,763 
(4,082 x 5 x 4.3) hours or 219.41 (87,763/400) hours per broker-dealer 
to collect, review, record, retain, and supply to the NASD the 
information from the 4,082 affected non-reporting issuers. 
Additionally, the broker-dealers, upon request from the public, must 
provide the issuer information. Based on information from the NQB, the 
Commission estimates that broker-dealers will receive 1,000 requests 
from the public annually, which would take a broker-dealer 
approximately one-half hour per request to provide for an annual burden 
of 500 hours. Therefore, the Commission estimates the total annual 
burden hours to broker-dealers to be 126,395 (38,132+87,763+500), or an 
average of 316 (126,395/400) burden hours per broker-dealer.
2. Burden-Hours for Issuers
    Regarding the burden on issuers to provide broker-dealers with the 
required information, the Commission estimates that the 2,956 affected 
reporting issuers of covered OTC securities will not bear any 
additional hourly burdens under the proposed amendments because such 
issuers already report the required information to the Commission 
through periodic filings made pursuant to the federal securities laws. 
Further, reporting issuer information is widely available to broker-
dealers through a variety of media. However, non-reporting issuer 
information is not widely available, and consequently, these issuers 
must provide the information required by the proposed amendments to 
requesting broker-dealers before quotations in their securities can be 
published. The Commission estimates that the 4,082 affected non-
reporting issuers of covered OTC securities will spend an average of 
nine hours each to collect, prepare, and supply the information 
required by the proposals to the first broker-dealer that requests this 
information. Thereafter, the Commission estimates that it will take an 
average of one hour for an issuer to provide the same information to 
the remaining 3.3 broker-dealers that request the information. 
Accordingly, the Commission estimates the 4,082 non-reporting issuers 
annually will incur 36,738 (4,082 x 9 x 1) hours to comply with the 
first broker-dealer's request for information, and 13,471 
(4,082 x 1 x 3.3) hours to comply with the subsequent 3.3 broker-dealer 
requests for an annual total of 50,209 (36,738+13,471) burden hours. On 
average, therefore, each non-reporting issuer would spend approximately 
12 (50,209/4,082) burden hours per year to comply with these requests.
3. Total Burden-Hour Costs to Broker-Dealers and Issuers
    For both broker-dealers and issuers combined and in the aggregate, 
the Commission estimates the collection of information will require 
approximately 176,604 burden hours annually (126,395+50,209).
4. Capital Cost to Broker-Dealers and Issuers
    The Commission believes that broker-dealers that now collect, 
review, and retain the information required by the current Rule will 
not incur any significant start-up costs to expand systems already in 
place. Further, broker-dealers that are collecting the information 
required by the proposals for other purposes also will not incur 
significant start-up costs. However, the Commission believes some 
broker-dealers may not have adequate systems in place to retain issuer 
information and will incur start-up costs in order to comply with the 
requirements of the proposed amendments. The Commission assumes that of 
the 4.3 broker-dealers that provide quotations for each covered OTC 
security, on average one broker-dealer will incur additional start-up 
costs, while the remaining 3.3 broker-dealers will only incur 
incremental costs. Because the information for reporting issuers will 
be generally available on EDGAR and such availability satisfies the 
recordkeeping requirements of the proposals, the Commission is assuming 
that the start-up costs associated with retaining information on 
reporting issuers will be $6.00 per quotation, whereas the same costs 
will be $24.00 per quotation for non-reporting issuer information. The 
Commission estimates that broker-dealers in the aggregate will incur 
start-up costs of $17,736 (2,956 x $6 x 1) associated with reporting 
issuer information, and $97,968 (4,082 x $24 x 1) associated with non-
reporting issuer information. The total start-up, operating and 
maintenance cost burden for broker-dealers is estimated to be $115,704 
($17,736+$97,968) or an average of $289 ($115,704/400) per broker-
dealer.
    The Commission assumes that non-reporting issuers, because they 
maintain their financial information in compliance with prevailing 
accounting standards, will not incur any start-up costs to prepare the 
required information in response to broker-dealers' requests. The 
Commission also believes that reporting issuers of covered OTC 
securities will not incur start-up costs as a result of the proposed 
amendments since such issuers already provide the required information 
to the Commission under the federal securities laws.
    Therefore, the Commission believes issuers will not incur start-up 
costs as a consequence of the adoption of the Rule amendments, as 
proposed.

E. General Information About the Collection of Information

    The collection of information under the proposed amendments is 
mandatory and would be required before broker-dealers could initiate or 
resume publication of quotations in securities that are traded in a 
quotation medium other than an exchange or Nasdaq and before broker-
dealers could continue to

[[Page 9677]]

publish priced quotations when the annual review date occurs. Broker-
dealers would be required to retain the information they collect for a 
period of not less than three years. Information collected under the 
Rule would not be kept confidential. Any agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid control number.

F. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    (i) Evaluate whether the proposed collection of information is 
necessary for the proposed performance of the functions of the agency, 
including whether the information will have practical utility;
    (ii) Evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information;
    (iii) Enhance the quality, utility, and clarity of the information 
to be collected; and
    (iv) Minimize the burden of collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology. The Commission 
seeks data about quotations for covered OTC securities in OTC quotation 
mediums other than the OTC Bulletin Board, Pink Sheets and Yellow 
Sheets. The Commission asks for comments on its estimate of the number 
of issuers affected by the proposed Rule. The Commission also seeks 
comments on the time estimates made for broker-dealers and issuers to 
comply with the proposals' information collection requirements.
    Persons desiring to submit comments on the collection of 
information requirements should direct them to the Office of Management 
and Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Room 3208, 
New Executive Office Building, Washington, D.C. 20503, and should also 
send a copy of their comments to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549, and refer to File No. S7-3-98. OMB is required to make a 
decision concerning the collections of information between 30 and 60 
days after publication of this release in the Federal Register, so a 
comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of this publication.

VIII. Statutory Basis and Text of Proposed Amendments and Rule

    The rule amendments are being proposed pursuant to Sections 3, 
10(b), 15(c), 15(g), 17(a), and 23(a) of the Securities Exchange Act of 
1934, 15 U.S.C. 78c, 78j(b), 78o(c), 78o(g), 78q(a), and 78w(a).

List of Subjects in 17 CFR Part 240

    Broker-dealers, Fraud, Reporting and recordkeeping requirements, 
Securities.

Text of Proposed Rule

    In accordance with the foregoing, Title 17, chapter II, part 240 of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78k, 78k-1, 
78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 78mm, 
79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, and 80b-11, 
unless otherwise noted.
* * * * *
    2. Section 240.15c2-11 and the section heading are revised to read 
as follows:


Sec. 240.15c2-11.  Publication or submission of quotations without 
current information.

    (a) Unlawful activity. As a means reasonably designed to prevent 
fraudulent, deceptive, or manipulative acts or practices, it shall be 
unlawful for a broker or dealer, directly or indirectly, to publish or 
to submit for publication any quotation for a security in any quotation 
medium unless the broker or dealer complies with the provisions of this 
section.
    (b) Covered brokers or dealers. A broker or dealer shall satisfy 
the requirements of this section prior to publishing or submitting for 
publication any one of the following kinds of quotations for a security 
in a quotation medium:
    (1) An initial quotation;
    (2) An initial or resumed quotation following:
    (i) The lapse of five or more consecutive business days during 
which period the broker or dealer did not publish or submit for 
publication any quotations for the security in a quotation medium; or
    (ii) The termination of a Commission trading suspension ordered 
pursuant to section 12(k) of the Act (15 U.S.C. 78l(k)) in any 
securities of the issuer; or
    (3) A quotation at a specified price following:
    (i) The anniversary date of the initial quotation by the broker or 
dealer; or
    (ii) The date that is four months following the end of the issuer's 
fiscal year; or
    (iii) In the case of a foreign private issuer, the date that is 
seven months following the end of the issuer's fiscal year.
    (c) Requirements. A broker or dealer subject to paragraph (b) of 
this section shall:
    (1) Review the information described in paragraphs (d) and (e) of 
this section;
    (2) Determine that it has a reasonable basis under the 
circumstances for believing that the issuer information described in 
paragraph (d) of this section, when considered in conjunction with the 
supplemental information in paragraph (e) of this section, is accurate 
and current in all material respects, and that it is obtained from 
reliable sources; and
    (3) Make a record of:
    (i) The information required by paragraph (f) of this section;
    (ii) The sources from which it obtained the information described 
in paragraphs (d) and (e) of this section;
    (iii) The date that the broker or dealer reviewed the information 
required by this section; and
    (iv) The person responsible for the broker or dealer's compliance 
with the requirements of this section.
    (d) Issuer information. (1) Issuers with a recent public offering. 
For an issuer that has filed a registration statement under the 
Securities Act, other than a registration statement on Form F-6 (17 CFR 
239.36), which became effective less than 90 calendar days prior to the 
day on which such broker or dealer publishes or submits the quotation 
to the quotation medium, the prospectus specified by section 10(a) of 
the Securities Act of 1933 (15 U.S.C. 77j(a)): Provided, That such 
registration statement has not thereafter been the subject of a stop 
order that is still in effect when the quotation is published or 
submitted.
    (2) Issuers with a recent Regulation A offering. For an issuer that 
has filed a notification under Regulation A and was authorized to 
commence the offering less than 40 calendar days prior to the day on 
which such broker or dealer publishes or submits the quotation to the 
quotation medium, the offering circular provided for under Regulation A 
under the Securities Act (Secs. 230.251 through 230.263): Provided, 
That the offering circular provided for under Regulation A has not 
thereafter become the subject of a suspension order which

[[Page 9678]]

is still in effect when the quotation is published or submitted.
    (3) Certain reporting issuers or exempted insurance companies. For 
an issuer required to file reports pursuant to section 13 or 15(d) of 
the Act (15 U.S.C. 78m or 78o(d)) and that is current in filing such 
reports, or for an issuer of a security covered by section 12(g)(2) (B) 
or (G) of the Act (15 U.S.C. 78l(g)(2) (B) or (G)), the issuer's most 
recent annual report filed pursuant to section 13 or 15(d) of the Act 
or a copy of the annual statement referred to in section 12(g)(2)(G)(i) 
of the Act, together with any subsequent quarterly and current reports 
filed under the provisions of the Act by the issuer: Provided, That 
until such issuer has filed its first annual report pursuant to section 
13 or 15(d) of the Act or annual statement referred to in section 
12(g)(2)(G)(i) of the Act, the broker or dealer obtains and reviews a 
copy of the prospectus specified by section 10(a) of the Securities Act 
(15 U.S.C. 77j(a)) included in a registration statement filed by the 
issuer under the Securities Act that became effective within the prior 
16 months, or a copy of any registration statement filed by the issuer 
under section 12 of the Act that became effective within the prior 16 
months (other than a registration statement on Form F-6 (17 CFR 
239.36)), together with any quarterly and current reports filed 
thereafter under section 13 or 15(d) of the Act.
    (4) Certain financial institutions. For an issuer that is not 
required to file reports pursuant to section 13 or 15(d) of the Act (15 
U.S.C. 78m or 78o(d)) and that is a bank or savings association, as 
those terms are defined in 12 U.S.C. 1813, a copy of the issuer's most 
recent annual report and any subsequent reports filed with its 
``appropriate Federal banking agency'' or ``State bank supervisor,'' as 
those terms are defined in 12 U.S.C. 1813.
    (5) Certain foreign issuers. For an issuer exempt from section 
12(g) of the Act (15 U.S.C. 78l(g)) by reason of compliance with the 
provisions of Sec. 240.12g3-2(b), the information furnished by the 
issuer to the Commission pursuant to Sec. 240.12g3-2(b) since the 
beginning of the issuer's last fiscal year.
    (6) Other issuers. For an issuer that is not covered by paragraphs 
(d)(1) through (d)(5) of this section: Provided, That this paragraph 
(d)(6) shall not be available in the case of an issuer that is required 
to file reports pursuant to section 13 or 15(d) of the Act (15 U.S.C. 
78m or 78o(d)), the following information:
    (i) The exact name of the issuer and any predecessor;
    (ii) The address and telephone number of the issuer's principal 
executive offices;
    (iii) The state of incorporation of the issuer, if it is a 
corporation;
    (iv) The date on which the issuer's fiscal year ends;
    (v) A description of each class of the issuer's securities 
outstanding, including its exact title; the par or stated value of the 
security; the number of securities or total principal amount 
outstanding; the class and the number of securities issuable upon 
exercise, exchange or conversion of a class of the issuer's securities; 
and the total number of securityholders of record for each class of the 
issuer's securities as of the end of the issuer's most recent fiscal 
year or a more recent date;
    (vi) The exact title and class of the security that will be quoted;
    (vii) The name, address and telephone number of the transfer agent;
    (viii) A description of the issuer's business and facilities;
    (ix) A description of products or services offered by the issuer;
    (x) The full names and business addresses of the executive 
officers, directors, general partners, promoters, and control persons 
of the issuer, and the number of securities of each class of the 
issuer's securities that are beneficially owned by each such person as 
of the end of the issuer's last fiscal year or a more recent date;
    (xi) One of the following alternatives:
    (A) A description of any of the following events that occurred 
during the preceding five years involving any executive officer, 
director, general partner, promoter, or control person of the issuer:
    (1) Conviction in a criminal proceeding or being named as a 
defendant in a pending criminal proceeding (excluding traffic 
violations and other minor offenses);
    (2) Entry of an order, judgment, or decree, not subsequently 
reversed, suspended or vacated, by a court of competent jurisdiction, 
permanently or temporarily enjoining, barring, suspending or otherwise 
limiting involvement in any type of business, securities, commodities, 
or banking activities;
    (3) Being found by a court of competent jurisdiction (in a civil 
action), the Commission, the Commodity Futures Trading Commission, or a 
state securities regulator to have violated federal or state securities 
or commodities law, and the judgment or finding has not been reversed, 
suspended, or vacated; and
    (4) Entry of an order by a self-regulatory organization permanently 
or temporarily barring, suspending or otherwise limiting involvement in 
any type of business or securities activities;
    (B) A statement from the issuer that none of these has occurred, if 
none has occurred; or
    (C) A statement by the broker or dealer of the steps taken by it to 
obtain the information contained in paragraph (d)(6)(xi)(A) or (B) of 
this section from the issuer and that the issuer failed or refused to 
provide this information;
    (xii) The following financial information:
    (A) In the case of an issuer other than a foreign private issuer, 
the issuer's most recent balance sheet, statement of cash flows, 
statement of comprehensive income, and statement of operations 
(income), prepared in accordance with U.S. generally accepted 
accounting principles; or
    (B) In the case of a foreign private issuer, the issuer's most 
recent balance sheet and statement of operations (income), and to the 
extent prepared by the issuer, statement of cash flows, statement of 
comprehensive income, and statement of changes in shareholders' equity, 
prepared in accordance with a comprehensive body of accounting 
principles.
    (xiii) The same financial information required by paragraph 
(d)(6)(xii)(A) of this section for such part of the two preceding 
fiscal years as the issuer or any predecessor has been in existence, 
prepared in accordance with U.S. generally accepted accounting 
principles (except in the case of a foreign private issuer), Provided 
That in the case of an issuer that has emerged from reorganization 
pursuant to Chapter 11 of the Bankruptcy Code, the court-approved 
disclosure statement filed pursuant to 11 U.S.C. 1125 and the 
information required by this paragraph (d)(6)(xiii) from the date of 
the entry of the bankruptcy court order confirming the issuer's 
reorganization plan pursuant to 11 U.S.C. 1129, if the reorganization 
plan has been effective less than two years; and
    (xiv) One of the following alternatives:
    (A) A description of any of the following events involving the 
issuer or its predecessor, or any of its majority-owned subsidiaries, 
that have occurred in the two years preceding the publication or 
submission for publication of the quotation:
    (1) A change in control of the issuer;
    (2) Increase in equity securities involving 10% or more of the same 
class of securities outstanding at the time of the offering;
    (3) Any merger, acquisition, or business combination;

[[Page 9679]]

    (4) Acquisition or disposition of significant assets;
    (5) Bankruptcy proceedings;
    (6) Delisting by any securities exchange or the Nasdaq Stock 
Market; or
    (B) A statement from the issuer that none of these events has 
occurred, if none has occurred; or
    (C) A statement by the broker or dealer of the steps taken by it to 
obtain the information contained in paragraph (d)(6)(xi)(A) or (B) of 
this section from the issuer and that the issuer failed or refused to 
provide this information.
    (e) Supplemental information. (1) A copy of any trading suspension 
order issued by the Commission pursuant to section 12(k) of the Act (15 
U.S.C. 78l(k)) for any securities of the issuer or its predecessor (if 
any) during the 12 months preceding the date of the publication or 
submission of the quotation, or a copy of the public release issued by 
the Commission announcing such trading suspension order.
    (2) A copy or a written record of any other material information 
(including adverse information) regarding the issuer which comes to the 
broker's or dealer's knowledge or possession before the publication or 
submission of a quotation.
    (f) Significant relationship information. (1) A statement 
describing any direct or indirect affiliation between the issuer and 
the broker or dealer publishing or submitting the quotation for 
publication, or any of its associated persons.
    (2) A statement whether the quotation is being published or 
submitted on behalf of any other broker or dealer, or any of its 
associated persons, and, if so, the name of such broker or dealer, or 
the associated person, and the terms of the arrangement.
    (3) A statement whether the broker or dealer has received or has 
any arrangement to receive any monetary or other consideration from any 
person in connection with publishing the quotation and, if so, a 
description of the consideration and the name of the person providing 
the consideration.
    (4) A statement whether the quotation directly or indirectly is 
being published or submitted for publication on behalf of the issuer, 
or any executive officer, director, general partner, promoter, control 
person, or any person, directly or indirectly the beneficial owner of 
more than 10 percent of the outstanding units or shares of any equity 
security of the issuer, and, if so, the name of such person, and the 
basis for any exemption under the federal securities laws for any sales 
of such securities on behalf of such person.
    (g) Exceptions. The provisions of this section shall not apply to 
the publication or submission for publication of a quotation for:
    (1) A security admitted to trading on a national securities 
exchange and which is traded on such an exchange on the same day as, or 
on the business day next preceding, the day the quotation is published;
    (2) A security that is listed in the Nasdaq Stock Market, and such 
authorization is not suspended, terminated, or prohibited;
    (3) An exempted security, as defined in section 3(a)(12) of the Act 
(15 U.S.C. 78c(a)(12)), or a municipal security as defined in section 
3(a)(29) of the Act (15 U.S.C. 78c(a)(29)); or
    (4) A security, solely on behalf of a customer (other than a person 
acting as or for a dealer), that represents the customer's order or 
indication of interest and does not involve the solicitation of the 
customer's order or interest.
    (h) Preservation of documents and information. The broker or dealer 
shall preserve the information specified in paragraphs (d), (e), and 
(f) of this section in accordance with the provisions of Sec. 240.17a-
4(b)(11): Provided, however, That if the broker or dealer satisfied the 
requirements of paragraph (d) of this section by obtaining and 
reviewing such information on the EDGAR system, the broker or dealer 
shall be deemed to have preserved the information described in 
paragraph (d) of this section if the broker or dealer has the means to 
access such information electronically for the period described by 
Sec. 240.17a-4(b)(11).
    (i) Information submitted to the NASD. (1) At least three business 
days before the quotation is published, the broker or dealer shall 
submit to the NASD, in accordance with NASD rules, the information 
required in paragraphs (d), (e), and (f) of this section.
    (2) For any security of an issuer included in paragraph (d)(3) of 
this section:
    (i) A broker or dealer shall be in compliance with the requirement 
to obtain current reports filed by the issuer if the broker or dealer 
obtains all current reports filed with the Commission by the issuer as 
of a date up to three business days in advance of the earlier of the 
date of submission of the quotations to the quotation medium and the 
date of submission of information to the NASD pursuant to NASD rules; 
and
    (ii) A broker or dealer shall be in compliance with the requirement 
to obtain the annual, quarterly, and current reports filed by the 
issuer, if the broker or dealer has made arrangements to receive all 
such reports when filed by the issuer and it has regularly received 
reports from the issuer on a timely basis.
    (j) Information available upon request. A broker or dealer that 
publishes any quotation for a security pursuant to this section shall 
make the information specified in paragraphs (d), (e), and (f) of this 
section promptly available upon request to any person. Providing such 
information to others pursuant to this paragraph (j) shall not 
constitute a representation by such broker or dealer that the 
information is accurate, but it shall constitute a representation by 
such broker or dealer that the information is current in relation to 
the date recorded pursuant to paragraph (c)(3)(iii) of this section, 
that the broker or dealer has a reasonable basis under the 
circumstances for believing the information is accurate in all material 
respects, and that the information was obtained from sources which the 
broker or dealer has a reasonable basis for believing are reliable.
    (k) Definitions. For purposes of this section:
    (1) Initial quotation means the first quotation for a security 
published or submitted for publication in a quotation medium by the 
broker or dealer.
    (2) Issuer, in the case of quotations for American Depositary 
Receipts, means the issuer of the deposited shares represented by such 
American Depositary Receipts.
    (3) NASD means the National Association of Securities Dealers, 
Inc., including its wholly owned subsidiaries (including, but not 
limited to, NASD Regulation, Inc. and The Nasdaq Stock Market, Inc.).
    (4) Nasdaq Stock Market means the Nasdaq National Market and the 
Nasdaq SmallCap Market, both operated by the Nasdaq Stock Market, Inc.
    (5) Promoter has the same meaning contained in Sec. 230.405 of this 
chapter.
    (6) Quotation means any bid or offer at a specified price with 
respect to a security, or any indication of interest by a broker or 
dealer in receiving bids or offers from others for a security, or any 
indication by a broker or dealer that advertises its general interest 
in buying or selling a particular security.
    (7) Quotation medium means any:
    (i) System of general circulation to brokers or dealers that 
regularly disseminates quotations of identified brokers or dealers; or
    (ii) Publication or electronic communications network, or other 
device that is used by brokers or dealers to make known to others their 
interest in transactions in any security,

[[Page 9680]]

including offers to buy or sell at a stated price or otherwise, or 
invitations of offers to buy or sell.
    (8) Securities Act means the Securities Act of 1933 (15 U.S.C. 77a, 
et seq.).
    (l) Unless the broker or dealer knows or has reason to know that 
more current information is available, the information specified in 
paragraph (d)(6) of this section will be presumed to be current, if:
    (1) The balance sheet is as of a date less than 16 months before 
the publication or submission of the quotation, the statement of cash 
flows, statement of comprehensive income, and statement of operations 
(income) (and in the case of foreign issuers, the statement of changes 
in shareholders' equity) are for the 12 months preceding the date of 
such balance sheet; and if such balance sheet is not as of a date less 
than 6 months before the publication or submission of the quotation, it 
shall be accompanied by an additional statement of cash flows, 
statement of comprehensive income, and statement of operations (and in 
the case of foreign issuers, statement of changes in shareholders' 
equity) for the period from the date of such balance sheet to a date 
less than 6 months before the publication or submission of the 
quotation.
    (2) Other information regarding the issuer specified in paragraph 
(d)(6) of this section is as of a date within 12 months prior to the 
publication or submission of the quotation.
    (m) Transition provision. A broker or dealer that was publishing a 
quotation for a security on the business day immediately prior to 
[effective date of amendments in the final rule] may continue to 
publish quotations for such security without complying with paragraph 
(c) of this section until the occurrence of any of the events set forth 
in paragraphs (b)(2) or (b)(3) of this section.
    (n) This section shall not prohibit any publication or submission 
of any quotation if the Commission, upon written request or upon its 
own motion, exempts such quotation either unconditionally or on 
specified terms and conditions, as not constituting a fraudulent, 
manipulative or deceptive practice comprehended within the purpose of 
this section.
    3. Section 240.17a-4 is amended by adding paragraph (b)(11) to read 
as follows:


Sec. 240.17a-4.  Records to be preserved by certain exchange members, 
brokers and dealers.

* * * * *
    (b) * * *
    (11) The records required to be obtained pursuant to Sec.  
240.15c2-11.
* * * * *
    Dated: February 17, 1998.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-4460 Filed 2-24-98; 8:45 am]
BILLING CODE 8010-01-P