[Federal Register Volume 69, Number 11 (Friday, January 16, 2004)]
[Proposed Rules]
[Pages 2531-2552]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-881]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-49037; File No. S7-02-04]
RIN 3235-AI02


Amendments to the Penny Stock Rules

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is proposing to amend 
the definition of ``penny stock'' as well as the requirements for 
providing certain information to penny stock customers. The proposed 
amendments are designed to address market changes, evolving 
communications technology and recent legislative developments.

DATES: Comments must be submitted on or before March 16, 2004.

ADDRESSES: To help us process and review your comments more 
efficiently, comments should be sent by hard copy or electronic mail, 
but not by both methods. If comments are submitted in paper format, 
four copies should be addressed to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Comments in electronic format should be submitted to the 
following E-mail address: [email protected]. All comment letters 
should refer to File No. S7-02-04; this file number should be included 
on the subject line if E-mail is used. All comments received will be 
posted on the Commission's Internet Web site (http://www.sec.gov) and 
made available for public inspection and copying in the Commission's 
Public Reference Room, 450 Fifth Street, NW., Washington, DC 20549.\1\
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    \1\ We do not edit personal, identifying information such as 
names or e-mail addresses from electronic submissions. Submit only 
information you wish to make public.

FOR FURTHER INFORMATION CONTACT: Catherine McGuire, Chief Counsel, 
Paula R. Jenson, Deputy Chief Counsel, Brian A. Bussey, Assistant Chief 
Counsel, or Norman M. Reed, Special Counsel, at 202/942-0073, Office of 
Chief Counsel, Division of Market Regulation, Securities and Exchange 
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Commission, 450 Fifth Street, NW., Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') is requesting public comment on proposed amendments to 
Rule 3a51-1 [17 CFR 240.3a51-1], Rule 15g-2 [17 CFR 240.15g-2], Rule 
15g-9 [17 CFR 240.15g-9], and Rule 15g-100 [17 CFR 240.15g-100] under 
the Securities Exchange Act of 1934 (``Exchange Act'').

Table of Contents

I. Executive Summary
II. Introduction
III. Proposed Amendments to Rule 3a51-1
IV. Background Regarding the Proposed Amendments to Rules 15g-2 and 
15g-9
V. Proposed Amendments to Rules 15g-2 and 15g-9
VI. Revising Schedule 15G
VII. General Request for Comments
VIII. Paperwork Reduction Act Analysis
IX. Costs and Benefits of Proposed Rulemaking
X. Consideration of Burden on Promotion of Efficiency, Competition, 
and Capital Formation
XI. Initial Regulatory Flexibility Analysis
XII. Statutory Authority
XIII. Text of Proposed Rule Amendments

I. Executive Summary

    In light of changing market structures, new technology and 
legislative changes, we are proposing amendments to the definition of 
``penny stock,'' as well as amendments to rules requiring broker-
dealers to provide certain information to customers regarding penny 
stock transactions.
    Under the proposed amendments, the current exclusions from the 
definition of penny stock for reported securities and for certain other 
exchange-registered securities would be amended to require that these 
securities also satisfy one of the following new standards. First, an 
exchange-registered security could qualify if the exchange on which it 
is registered has been continuously registered since the Commission 
initially adopted the penny stock rules (as defined below) and if the 
exchange has maintained and continues to maintain quantitative listing 
standards substantially similar to those in place on January 8, 2004. 
Second, an exchange-registered security or a reported security listed 
on an automated quotation system sponsored by a registered national 
securities association (including The Nasdaq Stock Market, Inc. 
(``Nasdaq'')) could qualify if the exchange or automated quotation 
system on which it is registered or listed has quantitative listing 
standards that meet or exceed standards modeled on those currently 
required for inclusion in the Nasdaq SmallCap Market. In addition, the 
proposed amendments would exclude security futures products from the 
definition of penny stock, and eliminate an outdated exclusion for 
securities quoted on Nasdaq. We do not intend these proposals, if 
adopted, to disturb the status quo with respect to securities relying 
on the current exclusions from the definition of penny stock as of 
January 8, 2004.
    The proposed amendments would also provide an explicit ``cooling-
off period'' to replace the implicit period that customers 
traditionally have had when the disclosure required by the penny stock 
rules is provided by postal mail rather than electronically. Moreover, 
the proposed amendments would revise the penny stock disclosure 
document (as defined below) and the instructions to it set forth in 
Schedule 15G under the Exchange Act.\2\ The revisions would update the 
disclosure document, as well as streamline it to make it more readable.
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    \2\ 17 CFR 240.15g-100.
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    Taken as a whole, these proposed amendments are intended to ensure 
that investors continue to receive the protections of the penny stock 
rules, regardless of changing technology or market structures.

II. Introduction

    As Congress explicitly directed through the Securities Enforcement 
Remedies and Penny Stock Reform Act of 1990 (``Penny Stock Reform 
Act''),\3\ the Commission adopted a series of rules requiring broker-
dealers to provide customers with certain trade and market information 
prior to effecting a transaction in a penny stock for their 
customers.\4\ Rules 15g-1 through 15g-9 under the Exchange Act 
(collectively known as the ``penny stock rules'')

[[Page 2532]]

implement the Congressional directive to increase the level of 
disclosure to investors concerning penny stocks generally as well as 
the specific penny stock involved in a transaction.\5\ The scope of the 
penny stock rules is delineated by the definition of penny stock in 
Exchange Act Section 3(a)(51)\6\ and Rule 3a51-1\7\ thereunder.
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    \3\ Pub. L. 101-429, 104 Stat. 931 (1990); see Exchange Act Rel. 
No. 30608 (Apr. 20, 1992), 57 FR 18004 (Apr. 28, 1992) (``Adopting 
Release'').
    \4\ Among other things, the Penny Stock Reform Act added Section 
15(g) to the Exchange Act. See Pub. L. 101-429, at Sec. 502; see 
also Adopting Release, 57 FR at 18006.
    \5\ 15 U.S.C. 78o(g).
    \6\ 15 U.S.C. 78c(a)(51).
    \7\ 17 CFR 240.3a51-1.
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    The Commission believes that the penny stock rules have largely 
succeeded in providing first-time buyers of penny stocks with useful 
information as well as time to fully consider and reflect on their 
decision to purchase these often risky investments. We are, however, 
concerned that evolving technology, market changes and legislative 
developments could undermine these salutary rules and possibly subject 
penny stock investors to the abuses of the past. In light of these 
changes, the Commission proposes to update the definition of penny 
stock in Rule 3a51-1 as well as the procedural requirements of Rules 
15g-2 and 15g-9 so that the penny stock rules can better accommodate 
both recent and future changes, including the growth of new markets and 
new market structures. We also propose to update and make conforming 
amendments to Schedule 15G, entitled ``Information to be included in 
the document distributed pursuant to 17 CFR 240.15g-2.''\8\
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    \8\ 17 CFR 240.15g-100.
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    In proposing these rule amendments, we do not intend to create 
impediments to small companies' access to the capital markets or 
eliminate a viable secondary market for their securities. The 
Commission recognizes the important contributions that small companies 
make to the economy. We are mindful, however, that fraudulent sales 
practices, which have occurred and still occur in this area of the 
market, may not only harm investors financially but also undermine 
investor confidence.\9\ Indeed, the diversion of substantial capital to 
unscrupulous promoters and broker-dealers does more than cause the loss 
of the productive use of investor funds. It may also discourage further 
investment by those who have been defrauded. Moreover, issuers of penny 
stocks that are fraudulently traded may themselves be victimized by 
this activity.\10\
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    \9\ See SEC v. Hasho, 784 F. Supp. 1059; 1063 (S.D.N.Y. 1992) 
(``Defendants' contemptible conduct did more than harm their 
clients; their actions destroy investor confidence, pollute the 
environment for securities transactions, and bring disgrace and 
shame upon Wall Street.'').
    \10\ This characterization of the penny stock market reform 
initiative was embraced broadly in the Congress. For example, 
Congressman Wyden stated:
    Some said, for example, that this bill could retard the capital 
formation process, that somehow, by having some minimum basic 
standards to protect the small investor, this would retard capital 
formation. I just feel very strongly that that argument is off base. 
If anything, I think what has happened over the years, has been that 
capital which small investors have, scarce capital, has been 
diverted to these penny stock frauds. And if, with additional 
scrutiny and oversight, we can prevent penny stock fraud, I think 
that will free up more capital to be invested at this critical time, 
especially in the small business sector of our economy.
    136 Cong. Rec. H 8534, Vol. 136 No. 125 (Oct. 1, 1990) (remarks 
by Mr. Wyden on Securities Enforcement Remedies and Penny Stock 
Reform Act of 1990).
    In addition, Congressman Rinaldo stated:
    This bill ranks with the most important legislation we will 
consider this year. It will bring the longstanding national disgrace 
of an inadequately regulated penny stock market to a close. It 
mandates and authorizes the Securities and Exchange Commission to 
provide greater protection to investors in low priced securities. In 
developing this legislation my colleagues and I worked hard to 
identify the problems of the penny stock market, and we have 
proposed solutions that will increase investor protection and not 
interfere with the ability of small businesses to raise capital.
    136 Cong. Rec. H 8534, Vol. 136 No. 125 (Oct. 1, 1990) (remarks 
by Mr. Rinaldo on Securities Enforcement Remedies and Penny Stock 
Reform Act of 1990).
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III. Proposed Amendments to Rule 3a51-1

    We believe that the definition of the term ``penny stock,'' which 
we adopted in 1992, should be updated to take into account both market 
and legal developments. Among other things, the proposed amendments to 
Rule 3a51-1 would address an unintended consequence of national 
securities exchanges developing new markets or ``junior'' tiers of 
listed securities similar to, for example, Nasdaq's Over-the Counter 
Bulletin Board service (``OTC Bulletin Board'') or the American Stock 
Exchange LLC's now defunct Emerging Company Marketplace, that would not 
meet the more stringent listing standards of the primary exchange.\11\ 
Such new markets would be facilities of national securities exchanges. 
Thus, unless the definition of penny stock is modified to account for 
such developments, the securities trading on such facilities would be 
excluded from the definition of penny stock even though these 
securities would have the essential attributes of penny stocks and 
would, therefore, be exactly the sort of risky investments to which 
Congress intended the additional investor protections of the penny 
stock rules to apply.
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    \11\ The Emerging Company Marketplace consisted of a ``junior'' 
tier of listed securities that did not meet the listing standards of 
the American Stock Exchange LLC, but was otherwise subject to many 
of its regulatory requirements (e.g., last sale reporting, trading 
and specialist allocation rules, certain corporate governance 
requirements, and surveillance procedures). It was intended to 
provide small companies that would not otherwise qualify for an 
exchange listing with an opportunity to list their securities. See 
Exchange Act Rel. No. 30445 (Mar. 5, 1992), 57 FR 8693 (Mar. 11, 
1992).
    On June 9, 1995, the American Stock Exchange LLC submitted to 
us, pursuant to Section 19(b)(1) of the Exchange Act and Rule 19b-4, 
a proposed rule change to discontinue the listing of new companies 
on the Emerging Company Marketplace. See Exchange Act Rel. No. 36079 
(Aug. 9, 1995), 60 FR 42926 (Aug. 17, 1995) (approving the proposed 
rule change).
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    In considering how to adapt the penny stock rules to evolving 
market structures, however, we have also reassessed the definition of 
penny stock more broadly and are of the view that this definition has 
not kept pace with market developments. The past decade has seen a 
series of dynamic market changes, and we expect the process to 
continue. We have, therefore, developed a definition of the term penny 
stock that is designed to keep pace with this process. As markets 
evolve and exchanges and registered national securities associations 
continue to develop using different models, we believe this proposed 
framework will work better than a market-by-market analysis.

A. Proposed Amendments Regarding Reported Securities and Other 
Exchange-Registered Securities

    Congress explicitly gave the Commission the authority to prescribe 
the criteria national securities exchanges and automated quotation 
systems of registered national securities associations must meet in 
order to qualify their securities for an exclusion from the definition 
of penny stock.\12\ Our original penny stock rules reflected Congress's 
view that many of the abuses occurring in the penny stock market were 
caused by the lack of publicly available information about the market 
in general and about the price and trading volume of particular penny 
stocks.\13\ Many of the historically

[[Page 2533]]

abusive practices in the penny stock market arose from broker-dealers 
communicating to their customers false or misleading information as to 
the value or market price of securities in order to induce transactions 
in those securities.\14\ These practices were more likely to flourish 
where there was a paucity of price, quotation and other market 
information.\15\ We encouraged increased transparency in the market 
because we believed that this information would enable investors to 
better judge the veracity of the claims of sales agents.\16\
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    \12\ Sections 3(a)(51)(A)(i) and (ii) of the Exchange Act [15 
U.S.C. 78c(51)(A)(i) and (51)(A)(ii)] provide that the term ``penny 
stock'' means any equity security other than a security that is 
``registered or approved for registration and traded on a national 
securities exchange that meets such criteria as the Commission shall 
prescribe by rule or regulation for purposes of this paragraph'' or 
that is ``authorized for quotation on an automated quotation system 
sponsored by a registered securities association, if such a system 
(I) was established and in operation before January 1, 1990, and 
(II) meets such criteria as the Commission shall prescribe by rule 
or regulation for purposes of this paragraph.''
    \13\ See House Comm. on Energy and Commerce, Report to Accompany 
the Penny Stock Reform Act of 1990, H.R. Rep. No. 617, 101st Cong., 
2d Sess. 20 (July 23, 1990) (reporting H.R. 4497) (``House Report'') 
(``Because it is wrapped in secrecy and operates in relative 
obscurity, the penny stock market lends itself to manipulation far 
more easily than a market where information is readily available and 
circulated to investors.'').
    \14\ Exchange Act Rel. No. 29093 (Apr. 17, 1991), 56 FR 19165, 
19169 (Apr. 25, 1991) (``Proposing Release''), proposing certain of 
the penny stock rules.
    \15\ Id.
    \16\ See also Exchange Act Rel. No. 27160 (Aug. 22, 1989), 54 FR 
35468, 35470 (Aug. 28, 1989). (``[M]any low-priced securities are 
issued by smaller, little known companies that may attract little 
attention outside that generated by a boiler room sales campaign. * 
* *. The scarcity of information about the issuer is further 
aggravated by the lack of information on transactions in the 
issuers' securities.'').
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    The exclusions from the definition of penny stock for any security 
that is a reported security \17\ and for certain other securities that 
are registered, or approved for registration upon notice of issuance, 
on a national securities exchange \18\ are largely based on the 
transparency and oversight fostered by listing on such markets.\19\ As 
we noted when we proposed the penny stock rules, ``securities that are 
traded in a market that is subject to a comprehensive regulatory scheme 
requiring real-time transaction reporting and the extensive 
surveillance systems that this reporting supports, are less likely to 
be purchased or sold by means of manipulative sales tactics.''\20\
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    \17\ Under current Rule 3a51-1(a), equity securities that are 
reported securities as defined in 17 CFR 240.11Aa3-1(a) are not 
penny stocks. 17 CFR 240.11Aa3-1(a)(4) defines ``reported security'' 
as any exchange-listed equity security or Nasdaq security for which 
transaction reports are made available on a real-time basis pursuant 
to an effective transaction reporting plan. An ``effective 
transaction reporting plan'' refers to a transaction reporting plan 
that the Commission has approved pursuant to Rule 11Aa3-1. 17 CFR 
240.11Aa3-1(a)(3). See also Adopting Release, 57 FR at 18008 (``As 
adopted, Rule 3a51-1 excludes from the definition of penny stock any 
equity security that is a reported security--that is, any exchange-
listed or NASDAQ security for which transaction reports are required 
to be made on a real-time basis pursuant to an effective transaction 
reporting plan.'').
    \18\ Current Rule 3a51-1(e) provides an exclusion for any 
security ``that is registered, or approved for registration upon 
notice of issuance, on a national securities exchange that makes 
transaction reports available pursuant to 17 CFR 240.11Aa3-1 of this 
chapter, provided that: current price and volume information with 
respect to transactions in that security is required to be reported 
on a current and continuing basis and is made available to vendors 
of market information pursuant to the rules of the national 
securities exchange; and the security is purchased or sold in a 
transaction that is effected on or through the facilities of the 
national securities exchange, or that is part of a distribution of 
the security.'' 17 CFR 3a51-1(e).
    \19\ Adopting Release, 57 FR at 18008 (``In the Proposing 
Release, the Commission concluded that reported securities should be 
excluded from the penny stock rules because they are subject to the 
rules of self-regulatory organizations (``SROs'') that set specific 
standards for inclusion, promote efficient pricing and transaction 
execution procedures, and generate public price information for 
evaluation by professional securities analysts and the financial 
press.'').
    See also id. at 18010 (``For similar [transparency] reasons, 
Rule 3a51-1 as adopted provides an exclusion in paragraph (e) for 
any security that is registered, or approved for registration upon 
notice of issuance, on a national securities exchange, provided that 
current price and volume information with respect to transactions in 
that security is required to be reported and is made available to 
vendors pursuant to the rules of the national securities exchange. 
Securities that are listed on the regional exchanges also are 
subject to general reporting requirements under the rules of those 
exchanges. Investors therefore have a greater ability to evaluate 
and to monitor the market price of listed securities without having 
to rely exclusively on the representations of their broker-dealers. 
In addition, issuers of these securities are required to meet 
minimum qualification and maintenance standards for listing on the 
exchange. The Commission believes that these requirements, together 
with comprehensive exchange surveillance, also make the protection 
provided by the penny stock rules less necessary for securities 
listed and traded on the regional exchanges.'').
    \20\ Proposing Release, 56 FR at 19172.
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    During the decade since we adopted the penny stock rules, several 
developments have enhanced transparency with regard to trading in low-
priced securities. For example, securities trading on the OTC Bulletin 
Board are now subject to last sale transaction reporting within 90 
seconds after execution.\21\ In addition, quotation on the OTC Bulletin 
Board is now limited to the securities of companies that report their 
current financial information to the SEC, banking or insurance 
regulators and that are current in those reports.\22\ Moreover, Nasdaq 
now has the ability, in certain limited circumstances, to halt trading 
or quoting in an OTC Bulletin Board security when necessary to protect 
investors and the public interest.\23\
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    \21\ See NASD Rule 6550 (adopted in 1993); see also Exchange Act 
Rel. No. 32647 (July 16, 1993), 58 FR 39262 (July 22, 1993).
    \22\ See NASD Rule 6530; Exchange Act Rel. No. 40878 (Jan. 4, 
1999), 64 FR 1255 (Jan. 8, 1999); see also NASD Notice to Members 
99-15.
    \23\ See NASD Rule 6545 (adopted in 2000); see also Exchange Act 
Rel. No. 42806 (May 22, 2000), 65 FR 34518 (May 30, 2000).
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    Efforts to increase transparency can also be seen in the ``pink 
sheets,''\24\ where a significant number of penny stocks are also 
quoted. In the fall of 1999, the Electronic Quotation Service commenced 
an Internet-based, real-time quotation service that fostered increased 
transparency of securities quoted in the pink sheets.
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    \24\ See Proposing Release at n. 15, 56 FR at 19169. Since June 
of 2000, the ``pink sheets'' have been published and distributed 
nationally by Pink Sheets LLC and, with the exception of the OTC 
Bulletin Board, are the principal interdealer quotation system for 
equity securities that are not listed on an exchange or quoted on 
the Nasdaq system.
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    Despite these moves toward increased transparency in the markets 
where penny stocks are quoted and traded, a persistent pattern of abuse 
continues to exist with regard to the trading of these low-priced, 
thinly traded securities.\25\ Thus, increased transparency alone does 
not appear sufficient to provide investors with protection against the 
abusive practices often found in the penny stock market. As noted 
above, the Penny Stock Reform Act gave the Commission the authority to 
establish the criteria that national securities exchanges and automated 
quotation systems of registered national securities associations must 
meet in order to qualify securities for the exclusion from the term 
``penny stock.'' In light of the last decade's experience, we believe 
it is appropriate to take the measured step of providing an additional 
level of protection to investors in low-priced, thinly traded 
securities.
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    \25\ See; e.g.; SEC v. 800 America.com, Inc., et al., Litigation 
Rel. No. 17835 (Nov. 13, 2002); SEC v. Eagle Building Technologies, 
Inc., and Anthony Damato, Litigation Rel. No. 17803 (Oct. 23, 2002); 
SEC v. Las Vegas Entertainment Network, Inc., Joseph A. Corazzi, 
Carl A. Sambus, and Jay I. Goldberg, Litigation Rel. No. 17779 (Oct. 
9, 2002); SEC v. Camilo Pereira a/k/a Camilo Agasim-Pereira, 
Litigation Rel. No. 17616 (July 16, 2002); SEC v. Victor Industries, 
Inc., Ronald Pellett, Penny Sperry, and Xion, Inc., Litigation Rel. 
No. 17383 (Feb. 27, 2002); SEC v. Mark E. Rice D/B/A Primex Capital, 
Litigation Rel. No. 17377 (Feb. 25, 2002); SEC v. Max C. Tanner, et 
al., Litigation Rel. No. 17305 (Jan. 14, 2002); SEC v. Save The 
World Air, Inc., Litigation Rel. No. 17283 (Dec. 19, 2001); SEC v. 
Spectrum Brands Corp., Saverio (Sammy) Galasso III, David Hutter (a/
k/a David Green), Charlie Dilluvio and Michael Burns, Litigation 
Rel. No. 17265 (Dec. 11, 2001); SEC v. U.N. Dollars Corp., Harold F. 
Harris, Ronald E. Crews, Edward A. Durante (a/k/a/ Ed Simmons), 
Carib Securities Ltd., Berkshire Capital Partners, Inc., Galton 
Scott & Golett Inc., Dottenhoff Financial Ltd., Zimenn Importing and 
Exporting Inc., Prudential Overseas Company, Ltd., Commonwealth 
Associates, Ltd., Henry C. Weingarten, Defendants; and Exchange Bank 
& Trust, Inc., and VJV Inc., Relief Defendants, Litigation Rel No. 
17177 (Oct. 11, 2001).
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    We are, therefore, proposing to amend the current exclusion for 
reported securities in paragraph (a) of Rule 3a51-1\26\ to require that 
reported securities

[[Page 2534]]

satisfy one of the following standards in order to be excluded from the 
definition of penny stock. First, a reported security registered on a 
national securities exchange could qualify for the exclusion for 
reported securities if the national securities exchange on which it is 
registered has been continuously registered since April 20, 1992\27\ 
and has maintained quantitative listing standards, both initial and 
continued, that are substantially similar to those that are in place at 
that exchange on January 8, 2004.\28\ Second, a reported security 
registered on a national securities exchange could qualify for this 
exclusion, even if the national securities exchange on which it is 
registered has not been continuously registered since April 20, 1992, 
has not maintained the quantitative listing standards outlined above, 
or has established a ``junior'' tier, if the national securities 
exchange or ``junior'' tier has quantitative initial listing standards 
that meet or exceed the criteria set forth below and maintains 
continued listing standards reasonably related to its initial listing 
standards. Third, a reported security listed on an automated quotation 
system sponsored by a registered national securities association \29\ 
could qualify for this exclusion if the registered national securities 
association has quantitative initial listing standards for the 
automated quotation system that meet or exceed the criteria set forth 
below and maintains quantitative continued listing standards reasonably 
related to its initial listing standards.\30\ We are also proposing to 
eliminate the exception in paragraph (a) of Rule 3a51-1.\31\ Because 
the Emerging Company Marketplace no longer exists,\32\ this exception 
is no longer necessary.
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    \26\ 17 CFR 240.3a51-1(a).
    \27\ This is the date on which the Commission adopted Rule 3a51-
1.
    \28\ We refer to this provision as a ``grandfather'' provision. 
The concept of ``substantially similar'' tracks the language of 
Section 18 of the Securities Act of 1933 [15 U.S.C. 77r(b)(1)(B)], 
as amended by the National Securities Markets Improvement Act of 
1996, Pub. L. 104-290, 110 Stat. 3416 (1996). The Commission would 
interpret the phrase ``substantially similar'' in this context as it 
has in the context of Section 18. See, e.g., Exchange Act Rel. No. 
39542 (Jan. 13, 1998), 63 FR 3032 (Jan. 21, 1998) (in which the 
Commission concluded that the listing standards of the Chicago Board 
Options Exchange, Incorporated and Tier I of the Pacific Exchange, 
Incorporated and Tier I of the Philadelphia Stock Exchange, 
Incorporated were substantially similar to the listing standards of 
the New York Stock Exchange, Inc., the American Stock Exchange LLC 
and the Nasdaq/National Market System and adopted Rule 146(b) 
designating securities listed on these markets as ``covered 
securities'' for purposes of Section 18 of the Securities Act of 
1933). See 17 CFR 230.146(b).
    \29\ We are proposing to use the term ``automated quotation 
system,'' which is the term Congress used in the Penny Stock Reform 
Act, to avoid tying the exclusion in paragraph (a) to any specific 
market sponsored by a registered national securities association. As 
a result, we believe the exclusion in paragraph (a) will have 
sufficient flexibility to keep pace with the evolution of markets. 
The term includes Nasdaq.
    \30\ We believe that the securities now listed on Nasdaq do not 
need a ``grandfather'' provision because the proposed quantitative 
listing standards are modeled on those currently used by the Nasdaq 
SmallCap Market.
    \31\ This exception provides that any security that is listed on 
the American Stock Exchange LLC pursuant to the listing criteria of 
the Emerging Company Marketplace, but that does not satisfy the 
requirements of paragraphs (b), (c), or (d) of Rule 3a51-1, is a 
penny stock solely for purposes of the penny stock bar provisions of 
Exchange Act Section 15(b)(6).
    \32\ See note 11, above.
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    In addition, we are proposing to amend the exclusion for certain 
other exchange-registered securities provided by paragraph (e) of Rule 
3a51-1\33\ to require that these securities satisfy, in addition to the 
existing requirements of paragraph (e), one of the standards described 
above applicable to reported securities that are exchange-registered in 
order to be excluded from the definition of penny stock.\34\ We are 
also proposing to amend the exception in paragraph (e) of Rule 3a51-
1\35\ to make clear that a security that satisfies the requirements of 
paragraph (e) and also satisfies the requirements of paragraphs (a), 
(b), (c), (d), (f) or (g) of Rule 3a51-1 is not a penny stock for 
purposes of Section 15(b)(6) of the Exchange Act.\36\
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    \33\ 17 CFR 240.3a51-1(e). See note 18, above, for a description 
of paragraph (e).
    \34\ As a result of these proposed changes to paragraphs (a) and 
(e) of Rule 3a51-1, regardless of whether the OTC Bulletin Board or 
any successor to the OTC Bulletin Board is operated by a national 
securities exchange or a registered national securities association, 
the OTC Bulletin Board or any successor to it must satisfy the 
initial and continued listing standards that we are proposing in 
order to qualify for either exclusion from the definition of penny 
stock. We note, however, that in proposing these amendments, the 
Commission is not expressing a view regarding the pending 
application for registration of Nasdaq as a national securities 
exchange.
    \35\ This exception currently provides that a security that 
satisfies the requirements of paragraph (e), but that does not 
otherwise satisfy the requirements of paragraphs (a), (b), (c), or 
(d) of Rule 3a51-1, is a penny stock solely for purposes of the 
penny stock bar provisions of Exchange Act Section 15(b)(6).
    \36\ Proposed new paragraph (f), discussed below, would provide 
an exclusion for security futures products. We believe that it would 
be appropriate to treat this new exclusion in the same way as the 
exception to paragraph (e) treats the exclusion for securities that 
are put or call options issued by the Options Clearing Corporation. 
The proposed inclusion of paragraph (g) is intended to clarify a 
potential ambiguity in the current rule, and it is not intended to 
be a substantive change to the current rule.
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    In order to qualify for the exclusion for reported securities or 
the exclusion for certain other exchange-registered securities, we are 
proposing that a national securities exchange (other than a 
``grandfathered'' exchange) or an automated quotation system sponsored 
by a registered national securities association on which the security 
is registered or listed must have quantitative initial listing 
standards that require issuers to have (1) either stockholders' equity 
of at least $5 million, or a market value of listed securities of $50 
million, or net income from continuing operations (in the most recently 
completed fiscal year or two of the last three most recently completed 
fiscal years) of $750,000; and (2) an operating history of at least one 
year or a market value of listed securities of $50 million. In 
addition, for common and preferred stock the listing standards must 
require a minimum bid price of $4 per share. For common stock, the 
listing standards must also require at least 300 round lot holders, and 
at least 1,000,000 publicly held shares with a market value of at least 
$5 million. In the case of a convertible debt security, the initial 
listing standards would need to require a principal amount outstanding 
of at least $10 million. In the case of rights and warrants, the 
initial listing standards would also need to require that at least 
100,000 rights and warrants be issued and that the underlying security 
would be listed on a national securities exchange or on an automated 
quotation system sponsored by a registered national securities 
association. In the case of put warrants (that is, instruments that 
grant the holder the right to sell to the issuing company a specified 
number of shares of the company's common stock, at a specified price on 
or before a specified date), the initial listing standards would 
require there to be at least 100,000 put warrants issued and the 
underlying security to be listed on a national securities exchange or 
on an automated quotation system sponsored by a registered national 
securities association. In the case of units (that is, two or more 
securities traded together), the listing standards would require that 
all component securities meet the requirements for initial listing. 
Finally, the listing standards would require that all other equity 
securities listed on the national securities exchange or on the 
automated quotation system sponsored by a registered national 
securities association, e.g., hybrid securities and derivative 
securities products, meet initial listing standards that are 
substantially similar to those outlined above.
    These criteria are modeled on the quantitative criteria currently 
required by Nasdaq for inclusion in its SmallCap

[[Page 2535]]

Market,\37\ with the exception of the quantitative initial listing 
criteria for all other equity securities, including hybrid and 
derivative securities. This additional ``general'' initial listing 
standard is designed to ensure that all equity products listed on a 
qualifying exchange or on a qualifying automated quotation system 
sponsored by a registered national securities association, even those 
with features common to both equity and debt securities, would meet 
initial listing standards that are comparable to those applicable to 
more traditional equity securities.\38\
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    \37\ See NASD Rule 4310(c). Due to the continued development of 
new markets and exchanges, we are proposing to base the proposed 
rules on the listing standards of the SmallCap Market. We have 
chosen this particular market because we believe its quantitative 
listing standards are sufficient to exclude those companies that 
pose the most danger to unsophisticated investors--companies that 
are minimally capitalized and that do not possess the attributes of 
companies with general market followings such as, for example, 
substantial tangible assets, an operating history, a defined 
business plan, net income, and genuine public interest as 
demonstrated by a large number of public shareholders that are not 
affiliated with the company or a significant market value for the 
company's listed shares. The companies listed in note 25, above, for 
example, could not have complied with the listing standards we are 
proposing. At the same time, we believe that these standards are not 
so strict as to inhibit legitimate capital formation or to prevent 
bona fide companies from having their securities registered and 
traded on national securities exchanges.
    \38\ Specifically, if an exchange or an automated quotation 
system of a registered national securities association plans to list 
or to trade, pursuant to unlisted trading privileges, a new 
derivative securities product or other hybrid securities product, it 
would need to have quantitative listing standards that are 
appropriate to that product and address the concerns the penny stock 
rules are designed to address to have that securities product 
excluded from the definition of penny stock. Apart from the 
requirements of Rule 3a51-1, however, the listing standards for such 
derivative securities products and other hybrid securities products 
must also address surveillance and trading rules as well as other 
concerns applicable to derivative and hybrid products. See Exchange 
Act Rel. No. 40761 (Dec. 8, 1998), 63 FR 70952 (Dec. 22, 1998).
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    We believe that these proposed standards would create a more 
meaningful distinction between securities that should be subject to the 
penny stock rules and those of more substantially capitalized issuers. 
Listing standards serve as a means for national securities exchanges 
and registered national securities associations to screen issuers and 
provide listed status only to companies that meet standardized 
criteria. It is therefore appropriate that the exclusions from the 
definition of penny stock for reported securities and for certain other 
exchange-registered securities require exchanges and automated 
quotation systems sponsored by registered national securities 
associations to have minimum quantitative initial listing standards, as 
well as reasonably related continued listing standards.
    We request comment on patterning the proposed initial listing 
standards after those currently used by the SmallCap Market. Should 
other initial listing standards be used? If so, which ones and why? 
Should these proposed initial listing standards be extended to the 
exclusion for reported securities, or should they only be imposed on 
the exclusion contained in paragraph (e) for certain other exchange-
registered securities? Commenters should explain their views. We also 
solicit comment regarding the proposal to require a ``general'' listing 
standard applicable to all other equity products listed on a qualifying 
exchange or a qualifying automated quotation system sponsored by a 
registered national securities association, even those with features 
common to both equity and debt securities. Should the proposed rule 
have such a general standard or not? Please explain any answer provided 
to this question. In addition, we request comment regarding any 
possible negative impact on small business capital formation. If there 
is an unintended negative impact on small business capital formation, 
is there an alternative that would protect investors, issuers and 
markets while avoiding these consequences?
    We are also proposing that a national securities exchange (other 
than a ``grandfathered'' exchange) or an automated quotation system 
sponsored by a registered national securities association must 
establish quantitative continued listing standards that are reasonably 
related to the proposed initial listing standards discussed above and 
are consistent with the maintenance of fair and orderly markets \39\ in 
order to qualify for the exclusion for reported securities or for the 
exclusion for certain other exchange-registered securities.\40\ Once a 
security has been approved for initial listing, an exchange or an 
automated quotation system sponsored by a registered national 
securities association is required to monitor the status and trading 
characteristics of that issue to ensure it continues to satisfy the 
continued listing criteria. Because listed companies are on-going 
businesses that are subject to changing markets and changing economic 
circumstances, we recognize that the continued listing standards will 
not be identical to the initial listing standards. Nevertheless, to 
meet the proposed requirement that they be reasonably related to the 
initial listing standards, the continued listing standards should be 
similar enough to the initial listing standards so that the continued 
listing standards have sufficient substance and meaning to uphold the 
quality of particular markets.
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    \39\ The continued listing standards must also satisfy the 
requirement under Section 6(b)(5) or 15A(b)(6) of the Exchange Act 
[15 U.S.C. 78f(b)(5) or 78o-3(b)(6)] that an exchange or a 
registered national securities association have rules that are 
designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of, a free and open market 
and, in general, to protect investors and the public interest. See, 
e.g., Exchange Act Rel. No. 45898 (May 8, 2002), 67 FR 34502 (May 
14, 2002).
    \40\ See note 30, above.
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    The Commission believes that requiring national securities 
exchanges (other than ``grandfathered'' exchanges) and registered 
national securities associations to adopt continued listing standards 
that are reasonably related to the proposed initial listing standards 
would help to ensure the stability of their respective markets, as well 
as protect investors, by enabling the exchanges and the registered 
national securities associations to identify listed companies that may 
not have sufficient liquidity and financial resources to warrant 
continued listing.
    We solicit comment on the proposed continued listing standards 
discussed above. Commenters are encouraged to suggest alternative 
continued listing standards and criteria and to explain the advantages 
of their suggested alternative. Commenters are also encouraged to 
suggest appropriate modifications to these proposed amendments.
    Finally, we wish to emphasize that we do not intend these proposals 
to disturb the status quo with respect to securities relying on the 
current exclusions from the definition of penny stock. In addition, we 
note that any security that satisfies one of the other exclusions in 
Rule 3a51-1 will not be a penny stock even if it fails to satisfy any 
of the proposed conditions for reported securities or for other 
exchange-registered securities discussed above.\41\
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    \41\ For example, under paragraph (g) of the current rule, a 
security is not a penny stock if its issuer has net tangible assets 
(i.e., total assets less intangible assets and liabilities) in 
excess of $2,000,000, if the issuer has been in continuous operation 
for at least three years, or $5,000,000, if the issuer has been in 
continuous operation for less than three years; or has average 
annual revenues of at least $6,000,000. See Rule 3a51-1(g).
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B. Proposed Elimination of the Exclusion for Nasdaq Securities

    We are proposing to eliminate the current exclusion in paragraph 
(f) of Rule 3a51-1 for certain securities quoted or authorized for 
quotation upon notice of issuance on Nasdaq because

[[Page 2536]]

we believe it no longer serves any purpose. When the Commission adopted 
the penny stock rules, Nasdaq National Market System securities were 
reported securities.\42\ SmallCap Market securities, however, were not 
reported securities within the meaning of paragraph (a) of Rule 3a51-
1.\43\ Paragraph (f) of Rule 3a51-1 was intended to provide an 
exclusion for SmallCap Market securities. In 2001, the Commission 
issued an order that, among other things, explicitly recognized 
SmallCap Market securities as reported securities because they are 
securities reported pursuant to a transaction reporting plan approved 
by the Commission.\44\ As a result, all securities quoted on Nasdaq are 
reported securities within the meaning of paragraph (a) of Rule 3a51-1 
and are therefore excluded from the definition of penny stock on that 
basis. We request comment on the proposed deletion of this exclusion.
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    \42\ See Adopting Release, 57 FR at 18004.
    \43\ Id. at 57 FR at 18008.
    \44\ See Exchange Act Rel. No. 45081 at n. 36 (Nov. 19, 2001), 
66 FR 59273 (Nov. 27, 2001).
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C. Proposed New Exclusion for Security Futures Products

    We are also proposing to amend Rule 3a51-1 by adding proposed new 
paragraph (f), which would exclude from the definition of penny stock 
security futures products listed on a national securities exchange or 
an automated quotation system sponsored by a registered national 
securities association.\45\ This would be consistent with the treatment 
of options under the penny stock rules. In particular, the term ``penny 
stock'' currently does not include any put or call option issued by the 
Options Clearing Corporation (``OCC'').\46\ This exclusion recognizes 
that the put and call options issued by the OCC are subject to special 
disclosure requirements.\47\ Security futures products are subject to a 
similar disclosure regime. In particular, broker-dealers must provide 
their customers with a risk disclosure document before effecting 
transactions in security futures products for their customers.\48\ 
Subjecting security futures products to the additional disclosure 
requirements of the penny stock rules, therefore, would likely be 
duplicative and unnecessarily burdensome. We request comment on the 
proposed exclusion of security futures products from the definition of 
penny stock.
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    \45\ Section 6(h)(1) of the Exchange Act makes it unlawful for 
any person to effect transactions in security futures products that 
are not listed on a national securities exchange or a national 
securities association registered pursuant to section 15A(a). 15 
U.S.C. 78f(h)(1).
    \46\ 17 CFR 240.3a51-1(c).
    \47\ Adopting Release at n. 39, 57 FR at 18010 (``In addition, 
because put and call options issued by the OCC are already subject 
to special disclosure requirements, they are separately excluded 
from the definition of penny stock in paragraph (c) of Rule 3a51-
1.''). See also 17 CFR 240.9b-1; CBOE Rules 9.1-9.23; NASD Rule 
2860(b)(16).
    \48\ See Exchange Act Rel. No. 46862 (Nov. 20, 2002), 67 FR 
70993 (Nov. 27, 2002); Exchange Act Rel. No. 46614 (Oct. 7, 2002), 
67 FR 64162 (Oct. 17, 2002). See also NASD Rule 2865(b)(1) and NFA 
Compliance Rule 2-30(b).
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    We note that security futures products commenced trading on 
November 8, 2002.\49\ We are, therefore, issuing an order pursuant to 
Exchange Act Section 36\50\ temporarily exempting security futures 
products from the definition of penny stock until such time as the 
Commission takes any further action on this proposed amendment to Rule 
3a51-1.\51\ This exemptive period will allow the Commission to receive 
and consider comments while, at the same time, temporarily excluding 
security futures products from the penny stock rules.
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    \49\ Peter A. McKay, Single Stock Futures Arrive in the U.S. 
With Room to Grow, Wall Street Journal, Nov. 11, 2002, at B6.
    \50\ 15 U.S.C. 78mm(a)(1).
    \51\ See Exchange Act Rel. No. 34-49038 (January 8, 2004).
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IV. Background Regarding the Proposed Amendments to Rules 15g-2 and 
15g-9

    We also propose amending Exchange Act Rules 15g-2 and 15g-9.\52\ 
These rules essentially require that before a broker-dealer effects a 
transaction in a penny stock for a customer, the broker-dealer must 
provide the customer with certain disclosure documents and receive, in 
tangible form, both a signed acknowledgement of receipt of those 
documents and an agreement to the particular transaction. These 
requirements give customers the opportunity to carefully consider 
whether an investment in a penny stock that is recommended by a broker-
dealer is appropriate for them.
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    \52\ 17 CFR 240.15g-2 and 240.15g-9.
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    The Commission is concerned that this ``stop and think'' 
opportunity could be unintentionally eroded by changes in technology 
coupled with the effect of the Electronic Signatures in Global and 
National Commerce Act (``Electronic Signatures Act'').\53\ In relevant 
part, the Electronic Signatures Act, which was signed into law on June 
30, 2000, established that no signature, contract or other record 
relating to a transaction in interstate or foreign commerce may be 
denied legal effect, validity, or enforceability solely because it is 
in electronic form.\54\
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    \53\ Electronic Signatures in Global and National Commerce Act, 
Pub. L. 106-229, 114 Stat. 464 (2000) (codified at 15 U.S.C. 7001 et 
seq. (2001)).
    \54\ Electronic Signatures Act, Sec. 101(a)(1), 15 U.S.C. 
7001(a)(1).
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    Since the penny stock rules were adopted, electronic commerce has 
become commonplace. The Internet now allows investors to execute 
securities transactions virtually instantaneously. While this 
technology has provided investors with many benefits and opportunities, 
when considered in light of the Electronic Signatures Act, it has the 
potential to undermine the effectiveness of the penny stock rules. The 
amendments we are proposing to Rules 15g-2 and 15g-9 attempt to strike 
a balance by facilitating the use of electronic communications as 
contemplated by the Electronic Signatures Act while maintaining the 
important investor protections of the Penny Stock Reform Act. These 
amendments would explicitly retain the time for consideration that was 
inherent in the rules at the time they were adopted in light of then-
current technology. The proposed rule amendments would preserve 
investors' opportunity to consider their investment decisions to 
purchase penny stocks outside of a high-pressure environment, and thus 
are designed to ensure that evolving technological advances and the 
legislative response to these advances do not inadvertently erode these 
protections.
    The legislative history of the Electronic Signatures Act suggests 
that Congress expected the Commission to help ensure that the 
protections afforded under the penny stock rules remained intact after 
the Act went into effect.\55\ Moreover, the Electronic

[[Page 2537]]

Signatures Act permits Federal regulatory agencies, such as the 
Commission, to interpret and apply the Act in the context of their 
particular regulatory schemes.\56\ In addition, the Electronic 
Signatures Act provides Federal regulatory agencies with limited 
ability to require retention of a record in a tangible printed or paper 
form if (i) ``there is a compelling governmental interest relating to 
law enforcement or national security for imposing such requirement'' 
and (ii) ``imposing such requirement is essential to attaining such 
interest.'' \57\
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    \55\ The following colloquy took place on the floor of the House 
between Chairman Bliley and Representative Markey:
    Mr. MARKEY. Mr. Speaker, on another matter, with respect to 
penny stocks, would the gentleman from Virginia agree that 
conference reports preserve the ability of the SEC to require 
written customer statements with respect to a purchase of penny 
stocks, as was required in the House-passed version of this bill?
    Mr. BLILEY. Mr. Speaker, if the gentleman will yield, the 
gentleman from Massachusetts is correct. Following enactment of the 
Penny Stock Reform Act of 1990, the SEC has developed a cold call 
rule that requires brokers to obtain a signed customer statement 
regarding any penny stock to be purchased before any transaction 
takes place. In addition, customers are provided with important 
written disclosures involving risks of investing in penny stocks. 
Section 104 of the conference report specifically permits Federal 
regulatory agencies, such as the SEC, to interpret the law to 
require retention of written records in paper form if there is a 
compelling governmental interest in law enforcement for imposing 
such a requirement and if imposing such a requirement is essential 
to attaining such interest. The conferees expect the SEC would be 
able to use this provision to require brokers to keep written 
records of all disclosures and agreements required to be obtained by 
the SEC's penny stock rule.
    Mr. MARKEY. Mr. Speaker, without question, penny stocks are a 
very special category of extremely dangerous investments that I 
think will require that the SEC needs to be able to ensure 
additional disclosure and agreements to continue to be done in 
writing to help protect consumers against fraud and facilitate the 
SEC securities law enforcement mission. I thank the gentleman from 
Virginia (Mr. Bliley) very much for his assistance.
    146 Cong. Rec. H4360-61 (daily ed. June 14, 2000) (emphasis 
added).
    \56\ Electronic Signatures Act Sec. 104(b)(1)(A), 15 U.S.C. 
7004(b)(1)(A).
    \57\ Electronic Signatures Act, Sec. 104(b)(3)(B), 15 U.S.C. 
7004(b)(3)(B). The Commission is not addressing whether the 
documents required to be obtained from customers under the penny 
stock rules, if obtained electronically, must be maintained in a 
tangible printed or paper form for purposes of these proposed rule 
amendments.
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    As described below, the disclosures and customer signatures 
required in tangible form under current Rules 15g-2 and 15g-9 have 
proven to be an effective means to implement the intent of Congress in 
enacting the Penny Stock Reform Act and achieve the Commission's goal 
of protecting investors. The proposed rule amendments are intended to 
provide the same protections to penny stock customers regardless of how 
they communicate with their broker-dealers.

A. Current Requirements Under Rules 15g-2 and 15g-9

1. Rule 15g-2
    Rule 15g-2(a) \58\ makes it unlawful for a broker-dealer to effect 
a transaction in a penny stock with or for the account of a customer 
unless the broker-dealer distributes to the customer, prior to 
effecting a transaction in a penny stock, a document, as set forth in 
Schedule 15G,\59\ and receives a signed and dated acknowledgement of 
receipt of that document from the customer in tangible form.\60\ The 
document, which must contain the information set forth in Schedule 15G 
(``penny stock disclosure document''), gives several important warnings 
to investors concerning the penny stock market, and cautions investors 
against making a hurried investment decision. Among other things, the 
penny stock disclosure document points out that salespersons are not 
impartial advisers, that investors should compare information from the 
salesperson with other information on the penny stock, and that 
salespersons may not legally state that a stock will increase in value 
or guarantee against loss.\61\
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    \58\ Rule 15g-2 provides:
    (a)It shall be unlawful for a broker or dealer to effect a 
transaction in any penny stock for or with the account of a customer 
unless, prior to effecting such transaction, the broker or dealer 
has furnished to the customer a document containing the information 
set forth in Schedule 15G, 17 CFR 240.15g-100, and has obtained from 
the customer a manually signed and dated acknowledgement of receipt 
of the document.
    (b)The broker or dealer shall preserve, as part of its records, 
a copy of the written acknowledgment required by paragraph (a) of 
this section for the period specified in 17 CFR 240.17a-4(b) of this 
chapter.
    \59\ 17 CFR 240.15g-100 (``Information to be included in the 
document distributed pursuant to 17 CFR 240.15g-2''). This 
disclosure document provides the customer with information and 
warnings about the risky nature of penny stocks, details the 
disclosures that the broker-dealer is required to give to the 
customer, and contains information concerning brokers' duties and 
customers' rights and remedies.
    \60\ Rule 15g-2(a) [15 CFR 240.15g-2(a)] provides ``(a) It shall 
be unlawful for a broker or dealer to effect a transaction in any 
penny stock for or with the account of a customer unless, prior to 
effecting such transaction, the broker or dealer has furnished to 
the customer a document containing the information set forth in 
Schedule 15G, 17 CFR 240.15g-100, and has obtained from the customer 
a manually signed and dated written acknowledgement of receipt of 
the document.''
    \61\ Id. See also Adopting Release, 57 FR at 18018.
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    When we adopted Rule 15g-2, we requested comment on whether the 
penny stock disclosure document should be required to be executed and 
returned by the customer, prior to the customer's first transaction in 
a penny stock with the broker-dealer, in order to evidence compliance 
with the rule.\62\ In response to comments received, the Commission 
amended Rule 15g-2 in 1993 to require a broker-dealer to obtain an 
acknowledgement from the customer that he or she has received the penny 
stock disclosure document prior to effecting transactions for the 
customer in penny stocks.\63\ As we stated at the time, ``[t]he 
requirement to obtain the customer's signature is intended to emphasize 
to customers the importance of making an informed and deliberate 
investment decision.''\64\
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    \62\ Adopting Release, 57 FR at 18031. This would enable broker-
dealers to demonstrate compliance with the rule as well as enable 
regulators to examine for a broker-dealer's compliance with the 
rule.
    \63\ In addition, the broker-dealer must maintain that record 
for at least three years following the date on which the penny stock 
disclosure document was provided to the customer. See Rule 15g-2(b) 
[17 CFR 240.15g-2(b)]. During the first two years, the penny stock 
disclosure document must be in an accessible place.
    \64\ Exchange Act Rel. No. 32576 (July 2, 1993), 58 FR 37413, 
37416 (July 12, 1993). See also Schedule 15G to the penny stock 
rules, 17 CFR 240.15g-100. In fact, the Commission amended the penny 
stock disclosure document set forth in Schedule 15G to specifically 
urge investors to consider the warnings and other information in the 
document before providing the signed acknowledgement of receipt to 
their broker-dealers, as follows:
    ``Important Information on Penny Stocks
    This statement is required by the U.S. Securities and Exchange 
Commission (SEC) and contains important information on penny stocks. 
Your broker-dealer is required to obtain your signature to show that 
you have received this statement before your first trade in a penny 
stock. You are urged to read this statement before signing and 
before making a purchase or sale of a penny stock.''
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    It is important to note, however, that Rule 15g-2 is narrowly 
focused to protect retail investors against the types of abusive and 
fraudulent sales practices that Congress considered in enacting the 
Penny Stock Reform Act--``boiler room'' sales tactics and so-called 
``pump and dump'' schemes by penny stock market makers. For example, 
the obligation to provide the penny stock disclosure document does not 
apply when the broker-dealer has not been a market maker in the 
particular penny stock that it is recommending during the immediately 
preceding twelve months and has not received more than five percent of 
its commissions and certain other revenue from transactions in penny 
stocks during each of the preceding three months.\65\ Similarly, 
transactions with institutional accredited investors are not subject to 
many of the penny stock rules, including the requirement that the 
broker-dealer provide the penny stock disclosure document to a customer 
and receive a signed acknowledgement of receipt of that document from 
that customer under Rule 15g-2.\66\
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    \65\ Rule 15g-1(a) [17 CFR 240.15g-1(a)].
    \66\ See Rule 15g-1(b) [17 CFR 240.15g-1(b)].
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    In addition, the obligation to provide a penny stock disclosure 
document does not apply where the penny stock transaction was not 
recommended by the broker-dealer.\67\ Therefore, nothing in this rule 
precludes a broker or dealer in penny stocks from immediately executing 
an unsolicited transaction at a customer's request. Rather, it is 
focused on protecting unwary investors who may be faced with fraudulent 
and high-pressure sales tactics by brokers and dealers recommending and 
selling penny stocks in which they are making markets.
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    \67\ Rule 15g-1(e) [17 CFR 240.15g-1(e)].
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2. Rule 15g-9
    Rule 15g-9, which was originally adopted as Rule 15c2-6 under the

[[Page 2538]]

Exchange Act, was designed to address sales practice abuses involving 
certain speculative low-priced securities being traded in the non-
Nasdaq over-the-counter (``OTC'') market.\68\ As the Commission noted 
in adopting the Rule, ``[t]he target of the Rule is sales practice 
abuse and manipulation, not small issuers or speculative investment 
decisions per se. It is, however, in [penny stocks] that the Commission 
has found that a disproportionate number of such abuses occur, and it 
is for this reason that the Commission is adopting a prophylactic rule 
for recommended sales of such securities.''\69\ Rule 15g-9 generally 
prohibits a broker-dealer from selling to, or effecting the purchase of 
a penny stock by, any person unless the broker-dealer has approved the 
purchaser's account for transactions in penny stocks and received the 
purchaser's agreement in tangible form to the transaction.
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    \68\ Exchange Act Rel. No. 27160, 54 FR at 35468. The rule was 
redesignated as Rule 15g-9 in Exchange Act Rel. No. 32576. As we 
stated in adopting Rule 15c2-6, ``[t]he Commission is taking this 
action in response to the widespread incidence of misconduct by some 
broker-dealers in connection with transactions in low-priced 
securities.'' Exchange Act Rel. No. 27160, 54 FR at 35468. 
Furthermore, ``[c]ommenters supporting the proposed rule 
particularly noted the seriousness and extent of broker-dealer 
misconduct in the market for low-priced, non-NASDAQ OTC securities, 
and the need for effective regulatory tools with which to address 
such misconduct.'' Exchange Act Rel. No. 27160, 54 FR at 35469.
    \69\ Exchange Act Rel. No. 27160, 54 FR at 35479.
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    In approving an account for transactions in penny stocks, a broker-
dealer must obtain sufficient information from the customer to make an 
appropriate suitability determination, provide the customer with a 
statement setting forth the basis of the determination, and obtain a 
signed copy of the suitability statement from the customer in tangible 
form.\70\ By requiring the customer to agree in tangible form to 
purchases of penny stocks, Rule 15g-9(a)(2)(ii) was intended to provide 
the customer with an opportunity to make an investment decision outside 
of a high-pressure telephone conversation with a salesperson. It 
removes the pressure for an immediate decision.\71\ We believe this 
requirement is critical to the effectiveness of the Rule.\72\
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    \70\ Rule 15g-9 provides, in pertinent part:
    (a) As a means reasonably designed to prevent fraudulent, 
deceptive, or manipulative acts or practices, it shall be unlawful 
for a broker or dealer to sell a penny stock to, or to effect the 
purchase of a penny stock by, any person unless:
    (1) The transaction is exempt under paragraph (c) of this 
section; or
    (2) prior to the transaction:
    (i) the broker or dealer has approved the person's account for 
transactions in penny stocks in accordance with the procedures set 
forth in paragraph (b) of this section; and
    (ii) the broker or dealer has received from the person a written 
agreement to the transaction setting forth the identity and quantity 
of the penny stock to be purchased.
    (b) In order to approve a person's account for transactions in 
penny stocks, the broker or dealer must:
    (1) Obtain from the person information concerning the person's 
financial situation, investment experience, and investment 
objectives;
    (2) reasonably determine, based on the information required by 
paragraph (b)(1) of this section and any other information known by 
the broker-dealer, that transactions in penny stocks are suitable 
for the person, and that the person * * * reasonably may be expected 
to be capable of evaluating the risks of transactions in penny 
stocks;
    (3) deliver to the person a written statement:
    (i) setting forth the basis on which the broker or dealer made 
the determination required by paragraph (b)(2) of this section;
    (ii) stating in a highlighted format that it is unlawful for the 
broker or dealer to effect a transaction in a penny stock subject to 
the provisions of paragraph (a)(2) of this section unless the broker 
or dealer has received, prior to the transaction, a written 
agreement to the transaction from the person; and
    (iii) stating in a highlighted format immediately preceding the 
customer signature line that:
    (A) the broker or dealer is required by this section to provide 
the person with the written statement; and
    (B) the person should not sign and return the written statement 
to the broker or dealer if it does not accurately reflect the 
person's financial situation, investment experience, and investment 
objectives; and
    (4) obtain from the person a manually signed and dated copy of 
the written statement required by paragraph (b)(3).
    \71\ As the Commission noted when it adopted Rule 15c2-6:
    Most of the sales practice abuses involving low-priced 
securities are conducted over the telephone by broker-dealers 
engaging in ``boiler-room'' operations. Improved communications 
technology has enabled an increasing number of this type of broker-
dealer to engage in high-pressure sales campaigns on a nationwide 
basis. An essential aspect of a boiler-room operation is the use of 
numerous salespersons making hundreds of high-pressure cold calls 
each day to generate sales of low-priced securities to new 
customers. Cold calls are telephone calls made to persons whose 
names are drawn from a telephone directory or a membership list. 
Consequently, many of the persons called will have little investment 
experience and limited financial resources. The salespersons are 
trained in high-pressure sales tactics designed to elicit a buy 
decision during the course of a telephone call, and typically are 
compensated solely by commissions generated by sales of securities. 
Because many of the persons called are inexperienced investors, they 
are particularly vulnerable to deceptive sales pitches promising 
high profits made by salespersons willing to disregard the 
unsuitability of a security for the purchaser.
    Moreover, in a resolution supporting the adoption of the rule in 
1989, the North American Securities Administrators Association 
stated that ``penny stock manipulation schemes and fraudulent cold 
calling sales tactics are among the most prevalent fraudulent 
schemes being perpetrated on the investing public, resulting in 
millions of dollars of losses annually, damaging the efficient 
operation of the market and reducing the amount of capital available 
to legitimate business.''
    Exchange Act Rel. No. 27160, 54 FR at 35469.
    \72\ As the Commission stated when it adopted Rule 15c2-6:
    ``The written agreement requirement provides the Rule's most 
direct protection against high-pressure sales tactics by enhancing 
the ability of investors to guard themselves against such tactics. 
Broker-dealers involved in boiler room abuses typically use prepared 
scripts designed by marketing experts that try to elicit immediate 
buy decisions during the course of one or a series of telephone 
calls. * * * The written agreement requirement has the beneficial 
effect of ensuring that the customer's final decision will be made 
outside of a pressuring telephone call, and of providing objective 
evidence of whether a customer has agreed to a transaction.''
    Exchange Act Rel. No. 27160, 54 FR at 35480.
---------------------------------------------------------------------------

    In addition, the requirement that the broker-dealer provide a copy 
of its suitability determination to the customer prior to the 
customer's commitment to purchase a penny stock was intended to provide 
the customer with the opportunity to review that determination and 
decide whether the broker-dealer had made a good faith attempt to 
consider the customer's financial situation, investment experience and 
investment objectives.\73\ The requirement that the broker-dealer 
receive a signed copy of the suitability statement in tangible form is 
also intended ``to convey to the customer the importance of the 
suitability statement, and to prevent a salesperson from convincing the 
customer to sign the statement without a review for accuracy.''\74\
---------------------------------------------------------------------------

    \73\ Id.
    \74\ Id., 54 FR at 35479.
---------------------------------------------------------------------------

    Nevertheless, as with Rule 15g-2, these requirements under Rule 
15g-9 do not apply to all broker-dealers or in all cases involving 
transactions in penny stocks. Most notably, none of these provisions 
applies to broker-dealers that have not received more than five percent 
of their commissions and certain other revenue from transactions in 
penny stocks during each of the preceding three months and have not 
made a market in the penny stock to be purchased by the customer during 
the preceding twelve months. Moreover, they do not apply when the 
customer is an institutional accredited investor or when the broker-
dealer did not recommend to the customer the penny stock to be 
purchased.\75\ In addition, the provisions of Rule 15g-9 do not apply 
if the customer is an ``established customer'' of the broker-dealer; 
that is, if the customer has had an account with the broker-dealer in 
which the customer (1) has effected a securities transaction or 
deposited funds more than one year previously, or (2) has already made 
three purchases involving different penny stocks on different days.\76\
---------------------------------------------------------------------------

    \75\ See Rule 15g-9(c)(1) [17 CFR 240.15g-1], referencing Rules 
15g-1(b) and (e) [17 CFR 240.15g-1(b), (e)].
    \76\ See Rules 15g-9(c)(3) and 15g-9(d)(2) [17 CFR 240.15g-
9(c)(3) and 240.15g-9(c)(4)].

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[[Page 2539]]

    Thus, these disclosures are essentially required only in very 
narrow circumstances--when the customer is a relatively new customer of 
the penny stock market-making broker-dealer or has limited experience 
with penny stocks and is not an institutional accredited investor, and 
when the broker-dealer has solicited the customer to engage in a penny 
stock transaction. The investors whose transactions do not qualify for 
any of the exemptions to the application of the penny stock rules are 
the persons most in need of the protections afforded by the proposed 
rule amendments, including an opportunity for unpressured consideration 
of the risks inherent in penny stocks.

B. The Need To Maintain These Investor Protections

    The Commission has long worked to integrate the use of electronic 
media into the delivery and disclosure requirements under the federal 
securities laws. We first published our views on the use of electronic 
media to deliver information to investors in 1995.\77\ The 1995 Release 
focused on electronic delivery of prospectuses, annual reports to 
security holders and proxy solicitation materials under the Securities 
Act of 1933,\78\ the Exchange Act \79\ and the Investment Company Act 
of 1940.\80\ Our 1996 electronic media release \81\ focused on 
electronic delivery of required information by broker-dealers 
(including municipal securities dealers) and transfer agents under the 
Exchange Act and investment advisers under the Investment Advisers Act 
of 1940.\82\ In March 1998, we summarized our views about the reach of 
U.S. securities laws to offers and sales of securities and investment 
services by means of the Internet--particularly offers and sales that 
purport to be effected offshore.\83\ In April 2000, we provided 
guidance on the use of electronic media by securities issuers of all 
types, including operating companies, investment companies and 
municipal securities issuers, as well as market intermediaries.\84\ In 
addition, we have modified broker-dealer and investment adviser 
registration filing requirements to facilitate electronic filing, 
maintenance of and access to registration information over the 
Internet.\85\ We have also provided guidance regarding the electronic 
storage of broker-dealer records in light of the Electronic Signatures 
Act.\86\ We remain committed to adapting our regulations, as needed, to 
take into account technological advances in communications while 
seeking to ensure that investor protections are maintained.\87\
---------------------------------------------------------------------------

    \77\ Securities Act Rel. No. 7233 (Oct. 6, 1995), 60 FR 53458 
(Oct. 13, 1995) (the ``1995 Release'').
    \78\ 15 U.S.C. 77a, et seq.
    \79\ 15 U.S.C. 78a, et seq.
    \80\ 15 U.S.C. 80a-1, et seq.
    \81\ Exchange Act Rel. No. 37182 (May 9, 1996), 61 FR 24644 (May 
15, 1996) (the ``1996 Release''). The 1996 Release also provided 
additional examples supplementing the guidance in the 1995 Release. 
Since 1996, we have further addressed the use of electronic media in 
the context of offshore sales of securities and investment services, 
see Securities Act Rel. No. 7516 (Mar. 23, 1998), 63 FR 14806 (Mar. 
27, 1998) (the ``1998 Release''), and cross-border tender offers, 
see Securities Act Rel. No. 7759, (Oct. 22, 1999), 64 FR 61382 (Nov. 
10, 1999) (the ``1999 Release'').
    \82\ 15 U.S.C. 80b-1, et seq.
    \83\ 1998 Release.
    \84\ Exchange Act Rel. No. 42728 (Apr. 28, 2000), 65 FR 25843, 
25844 (May 4, 2000) (As we stated at that time, ``[t]he increased 
availability of information through the Internet has helped to 
promote transparency, liquidity and efficiency in our capital 
markets.'').
    \85\ See Exchange Act Rel. No. 41594 (July 2, 1999), 64 FR 37586 
(July 12, 1999), in which we amended Form BD, the uniform broker-
dealer registration form, and related rules under the Exchange Act 
to support electronic filing in the Internet-based Central 
Registration Depository system; and Investment Advisers Act Rel. No. 
1897 (Sept. 12, 2000), 65 FR 57438 (Sept. 22, 2000), in which we 
adopted new rules and rule amendments under the Investment Advisers 
Act of 1940 to require that advisers registered with the Commission 
make filings under the Act with the Commission electronically 
through the Investment Adviser Registration Depository, as well as 
amendments to Forms ADV and ADV-W.
    \86\ Exchange Act Rel. No. 44238 (May 1, 2001), 66 FR 22916 (May 
7, 2001).
    \87\ See Exchange Act Rel. No. 44227 (Apr. 27, 2001), 66 FR 
21648 (May 1, 2001) (amending the transfer agent record retention 
rule, Rule 17Ad-7, to allow registered transfer agents to use 
electronic, microfilm, and microfiche records maintenance systems to 
preserve records that they are required to retain under Rule 17Ad-
6); Investment Advisers Act Rel. No. 1945 (May 24, 1945), 66 FR 
30311 (June 6, 2001) (adopting rule amendments that expand the 
circumstances under which registered investment companies and 
registered investment advisers may keep records on electronic 
storage media). See also Securities Act Rel. No. 7877 (July 27, 
2000), 65 FR 47281 (Aug. 2, 2000) (adopting, at the explicit 
direction of Congress in Section 104(d)(2) of the Electronic 
Signatures Act, Securities Act Rule 160, which exempts from the 
consumer consent requirements contained in Section 101(c) of the 
Electronic Signatures Act prospectuses of registered investment 
companies that are used for the sole purpose of permitting 
supplemental sales literature to be provided to prospective 
investors).
---------------------------------------------------------------------------

    In our effort to integrate the use of electronic media into the 
federal securities laws, we addressed the penny stock rules in our 1996 
Release.\88\ Although the Commission allowed broker-dealers to meet 
their delivery obligations under the penny stock rules by electronic 
means, the Commission specifically determined that broker-dealers 
should continue to obtain from customers signatures and agreements in 
tangible form under the penny stock rules.\89\ We thus preserved the 
customer's ability to ``stop and think,'' maintaining an important 
component of the investor protections of the penny stock rules.
---------------------------------------------------------------------------

    \88\ See 1996 Release at n. 12 and n. 50, 61 FR at 24646 and 
24649.
    \89\ See 1996 Release at n. 12, 61 FR at 24646 (``[T]he 
Commission believes that in order to fulfill the purposes of the 
Securities Enforcement Remedies and Penny Stock Reform Act of 1990, 
broker-dealers should continue to have customers manually sign and 
return in paper form any documents that require a customer's 
signature or written agreement.'').
---------------------------------------------------------------------------

    As discussed above, the Electronic Signatures Act is intended to 
facilitate the use of electronic communications in interstate commerce. 
The Penny Stock Reform Act, on the other hand, was intended to provide 
protections to investors in penny stocks and address the fraudulent 
sales practices that had long characterized the markets for penny 
stocks. As mandated by Congress, the Commission adopted the penny stock 
rules in order to further the goals of the Penny Stock Reform Act. 
Implementation of the provisions of the Electronic Signatures Act in 
the context of the penny stock rules, however, requires us to harmonize 
the Congressional mandates.\90\ The proposed amendments to Exchange Act 
Rules 15g-2 and 15g-9 attempt to do so.
---------------------------------------------------------------------------

    \90\ We express no view regarding how the Electronic Signatures 
Act affects the federal securities laws other than with respect to 
the effect of Section 101(a) of the Act on the ability of broker-
dealers to obtain from customers signatures and agreements in 
electronic form to satisfy the requirements of Exchange Act Rule 
15g-9 that customers provide a signed and dated copy of the 
suitability statement and an agreement for a particular transaction, 
and the Rule 15g-2 requirement that customers provide a signed and 
dated acknowledgement of receipt of the penny stock disclosure 
document.
---------------------------------------------------------------------------

    The requirements that a customer provide, in tangible form, a 
signed copy of the suitability statement and an agreement for a 
particular transaction under Rule 15g-9, together with the requirement 
that customers provide, in tangible form, a signed copy of the penny 
stock disclosure document pursuant to Rule 15g-2, were designed to give 
investors time to reflect. This interval can be used by an investor to 
consider whether an investment in penny stocks, which is often a risky 
investment, is appropriate for him or her before the broker-dealer that 
actively solicited the investment effects a transaction. The proposed 
amendments to Rules 15g-2 and 15g-9 are intended to maintain an 
investor's ability to thoughtfully consider investment in penny 
stocks--even when communicating nearly instantaneously by means of 
electronic media--by imposing a two-business-day waiting period, as 
explained below. The two-

[[Page 2540]]

business-day waiting period is meant, as a practical matter, to 
replicate the interval investors had when we adopted the penny stock 
rules and that we maintained in the 1996 Release.
    As noted above, this opportunity for careful consideration 
continues to be necessary today.\91\ Although the efforts of Congress 
and the Commission, as well as other federal and state regulators, have 
targeted fraudulent activity in the market for penny stocks, penny 
stock fraud continues to victimize investors.\92\ The proposed 
amendments to Rules 15g-2 and 15g-9 are intended to give investors the 
time to carefully consider--and, perhaps reject--the overtures of high-
pressure broker-dealers, regardless of the media through which they 
transact business. As Congress recognized when it enacted the Penny 
Stock Reform Act, the defrauded victims of penny stock fraud activities 
are not the only ones harmed. Penny stock fraud is detrimental to the 
integrity of our nation's capital markets.
---------------------------------------------------------------------------

    \91\ Unfortunately, the types of abuses that the Penny Stock 
Reform Act and the penny stock rules are intended to combat have a 
long history in the securities markets. In 1697, the Parliament of 
England passed ``[a]n act to restrain the number and ill practice of 
brokers and stock jobbers.'' The statute was aimed at unlawful 
conspiracies by jobbers to manipulate prices, and it followed a 
report of a special commission that had complained:
    ``The pernicious Art of Stock-jobbing hath, of late, so wholly 
perverted the End and Design of Companies and Corporations, erected 
for the introducing, or carrying on, of Manufacturers, to the 
private Profit of the first Projectors, that Privileges granted to 
them have, commonly, been made no other Use of, by the First 
Procurers and Subscribers, but to sell again, with Advantage, to 
ignorant Men, drawn in by the Reputation, falsely raised, and 
artfully spread concerning the thriving State of their Stock.''--
Louis Loss and Joel Seligman, Securities Regulation, 3 (3d ed. 
1989).
    \92\ See discussion above at Section III, A.
---------------------------------------------------------------------------

V. Proposed Amendments to Rules 15g-2 and 15g-9

    The ongoing advances in technology, including widespread use of the 
Internet, e-mail and the ability to use electronic signatures may 
unintentionally weaken the investor protections intended by Congress in 
enacting the Penny Stock Reform Act and afforded under the penny stock 
rules. As discussed above, Section 101(a) of the Electronic Signatures 
Act enables customers to provide to broker-dealers in penny stocks 
electronic signatures in place of the signatures in tangible form 
required under Rules 15g-2(a) and 15g-9(b)(4), and permits customers to 
provide the agreement regarding particular penny stock transactions 
required under Rule 15g-9(a)(2)(ii) through electronic media.
    In the 1996 Release, while the Commission specifically determined 
that broker-dealers should continue to obtain signatures and agreements 
in tangible form under the penny stock rules instead of using 
electronic media to satisfy these requirements, the Commission also 
stated that it ``may be willing to consider a `cooling-off' period as 
an alternative to the requirement of a manual signature under Rules 
15g-2 and 15g-9'' when it next reviewed the penny stock rules,\93\ and 
requested comment on the ``cooling-off'' period approach.\94\ The one 
commentator addressing that aspect of the 1996 Release stated, without 
expressing a view as to investors' need for such protection, that ``a 
cooling off period would be a more appropriate means of regulation than 
withholding access to modern means of communication.'' \95\ In light of 
the intersection of the Electronic Signatures Act with the Penny Stock 
Reform Act and the penny stock rules, and the continued existence of 
fraudulent sales practices in the markets, we are proposing to 
implement such ``cooling off'' or waiting periods.
---------------------------------------------------------------------------

    \93\ Id. at n. 50, 61 FR at 24649.
    \94\ Id.
    \95\ Letter from Scucommittee on Disclosure Technology of the 
Federal Regulation of Securities Committee of the Section of 
Business Law of the American Bar Association, to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, dated June 27, 1996, 
Re: Release No. 33-7288, File No. S7-13-96.
---------------------------------------------------------------------------

    The proposed amendments would provide the method for compliance 
with current Rules 15g-2 and 15g-9(a) and (b) for brokers and dealers 
in penny stocks whose customers provide them with electronically signed 
or transmitted documents required under the Commission's penny stock 
rules. Our proposal takes into account that, although we previously 
have interpreted the penny stock rules to prohibit the use of 
electronic media to satisfy certain requirements, the Electronic 
Signatures Act allows these requirements to be satisfied through 
electronic means. Customers using electronic media, however, could 
effectively lose some of the protections afforded by the penny stock 
rules. We believe the proposed amendments are necessary so that all 
investors continue to receive the protections that the penny stock 
rules were designed to provide.
    In particular, we propose to impose a waiting period of two 
business days from the time the broker-dealer sends the required 
material to the customer regardless of whether these communications are 
paper-based or electronic. For example, as applied to Rule 15g-2(a), 
the proposed amendments would impose a uniform waiting period of two 
business days that could be satisfied by waiting two days after sending 
the penny stock disclosure document required by the rule electronically 
or by mail or some other paper-based means. Similar time periods also 
would apply to the suitability statement required by Rule 15g-9(b) and 
the agreement to a transaction in a penny stock required by Rule 15g-
9(a)(2)(ii). In other words, under the proposed amendments a broker-
dealer could not execute the relevant penny stock transaction until at 
least two business days after it had transmitted the documents 
electronically or placed them in the mail. The rule would continue to 
require that the broker-dealer receive these signed documents, in 
either electronic \96\ or paper form, back from the customer before 
executing the transaction.\97\ Thus, the proposed amendments establish 
a two-business-day waiting period for all penny stock transactions 
during which a broker-dealer cannot sell a penny stock to a customer he 
or she has solicited even if the customer, either electronically or on 
paper, has signed and returned the documents required by the penny 
stock rules. The proposed amendments essentially seek to preserve 
parity between electronic and paper communications in the context of 
the disclosure requirements of the penny stock rules.
---------------------------------------------------------------------------

    \96\ We note that an electronic acknowledgement of receipt 
generated automatically by certain e-mail programs when an e-mail 
message is delivered or opened would not satisfy any of these 
requirements.
    \97\ The proposed amendments would require that the broker-
dealer continue to receive (i) a signed and dated acknowledgement of 
the receipt of the penny stock penny stock disclosure document from 
a customer under Rule 15g-2(a); (ii) a signed and dated suitability 
statement as required under Rule 15g-9(b); and (iii) an agreement to 
a transaction in a penny stock as required by Rule 15g-9(a)(2)(ii).
---------------------------------------------------------------------------

    As discussed in detail below, we are also proposing to revise the 
penny stock disclosure document required by Rule 15g-2. As part of this 
revision, we are proposing to add the Internet address of that section 
of the Commission's Web site that provides investors with information 
regarding microcap securities, including penny stocks. New paragraph 
(d) of Rule 15g-2 would require broker-dealers to send a copy of this 
section of the Commission's Web site to any penny stock customer upon 
the customer's request.
    We solicit comment on the proposed amendments to Rules 15g-2 and 
15g-9. Because the proposed amendments would not differentiate between 
electronic and paper-based transactions, all broker-dealers subject to 
the penny

[[Page 2541]]

stock rules may be required to adjust the manner in which they 
currently comply with Rules 15g-2 and 15g-9. We therefore solicit 
comment on the costs, if any, broker-dealers would expect to incur in 
making these adjustments.
    We also solicit comment on whether the proposed amendments could 
create any competitive advantages or disadvantages to particular firms 
or types of firms in this segment of the market. If so, commenters 
should explain these advantages or disadvantages in detail, and, if 
possible, quantify any associated costs. We also request comment on 
whether commencing the two-business-day waiting period at the time the 
documents are sent is the optimal starting point, or whether another 
starting point should be used. For example, should the waiting period 
commence when the broker-dealer receives the document back from the 
customer? Should the waiting period be three business days instead of 
two business days? \98\ Should the waiting period be measured in 
calendar days instead of business days? Commenters should explain their 
answers.
---------------------------------------------------------------------------

    \98\ See, e.g., Rule Concerning Cooling-Off Period for Sales 
Made at Homes or at Certain Other Locations, 16 CFR 429 (The Federal 
Trade Commission's cooling-off rule gives a consumer three days to 
cancel purchases of $25 or more if the consumer buys an item at home 
or at a location that is not the seller's permanent place of 
business).
---------------------------------------------------------------------------

    We also request comment on how many broker-dealers making a market 
in penny stocks currently use, or would be likely to (if the proposed 
amendments were adopted) use electronic media to comply with the 
requirements of Rules 15g-2 and 15g-9.

VI. Revising Schedule 15G

    We are also proposing to revise the penny stock disclosure document 
and the instructions to it set forth in Schedule 15G under the Exchange 
Act. The penny stock disclosure document was developed in 1991 and 1992 
to provide penny stock investors with brief, standardized information 
identifying certain risks of investing in low-priced securities and 
explaining the basic concepts associated with the penny stock 
market.\99\ Some of the proposed revisions are designed to reflect the 
rule amendments discussed above. Other proposed revisions would 
streamline the document to make it more readable, and update certain 
contact information. Among other things, we would eliminate specific 
references to Nasdaq such as ``quoted on NASDAQ,'' ``quoted on the 
NASDAQ system'' or to ``the NASD's automated quotation system.'' In 
addition, revised Schedule 15G would inform penny stock customers of 
the procedures (including waiting periods) that would result from any 
amendments to the penny stock rules for a broker-dealer to effect a 
transaction in any penny stock for or with the account of one of its 
customers. The revised document would also state that penny stocks 
trade on foreign exchanges as well as on facilities of national 
securities exchanges.
---------------------------------------------------------------------------

    \99\ Proposing Release, 56 FR at 19180.
---------------------------------------------------------------------------

    The current document is divided into two parts. The first part of 
the penny stock disclosure document, entitled ``Important Information 
on Penny Stocks'' (the ``Summary Document''), sets forth on a single 
page the items required to be disclosed pursuant to Section 15(g)(2) of 
the Exchange Act.\100\ The first section of the Summary Document, 
entitled ``Penny stocks can be very risky,'' briefly defines ``penny 
stock'' and identifies certain risks of investing in penny stocks. The 
second section, entitled ``Information you should get,'' describes the 
penny stock market and terminology important to an understanding of 
that market. The final section of the Summary Document, entitled 
``Brokers' duties and customer's rights and remedies,'' informs 
customers who have questions or who have been defrauded that they may 
have rights or remedies under federal and state law, and provides a 
toll-free telephone number of the NASD and the central number of NASAA 
for information on the background and disciplinary history of the firms 
and salespersons with whom they are dealing, as well as the 
Commission's complaint number. The second part of the current document 
(the ``Explanatory Document'') supplements and explains in greater 
detail the information provided in the Summary Document.
---------------------------------------------------------------------------

    \100\ 15 U.S.C. 78o(g)(2).
---------------------------------------------------------------------------

    The revised document would simplify and update the Summary Document 
and replace the Explanatory Document with a hyperlink to (or in the 
case of a paper document, the Internet address of) the section of the 
Commission's Web site that provides investors with information 
regarding microcap securities, including penny stocks. The revised 
document is designed to be succinct and to catch the attention of 
readers by highlighting issues that call for investor caution. 
Moreover, we believe that the revised document would achieve the 
purposes of Section 15(g)(2) of the Exchange Act more effectively by 
providing investors with the information in a more accessible and 
understandable format.\101\
---------------------------------------------------------------------------

    \101\ See Adopting Release, 57 FR 18017-18 (discussing the penny 
stock disclosure document).
---------------------------------------------------------------------------

    We are also proposing to revise Schedule 15G to provide 
instructions regarding how to electronically provide the penny stock 
disclosure document.\102\ Under the proposed amendments, when broker-
dealers electronically send their customers a penny stock disclosure 
document, the e-mail containing the penny stock disclosure document 
would be required to have as a subject line: ``Important Information on 
Penny Stocks.'' If the penny stock disclosure document is reproduced in 
the text of the e-mail, it would need to be clear, easy to read, and 
where information is required to be printed in bold-face type, 
underlined, or capitalized, the amended rule would allow issuers to 
satisfy such requirements by presenting the information in any manner 
reasonably calculated to draw attention to it.\103\ If the penny stock 
disclosure document is sent electronically using a hyperlink to where 
the document is located on the Commission's Web site, the e-mail 
containing the hyperlink would also need to have as a subject line: 
``Important Information on Penny Stocks.'' Immediately before the 
hyperlink, the text of the e-mail would need to reproduce the following 
statement in clear, easy-to-read type that is reasonably calculated to 
draw attention to the words: ``We are required by the U.S. Securities 
and Exchange Commission to give you the following disclosure statement: 
http://www.sec.gov/investor/Schedule15G.htm. It explains some of the 
risks of investing in penny stocks.

[[Page 2542]]

Please read it carefully before you agree to purchase or sell a penny 
stock.''
---------------------------------------------------------------------------

    \102\ In addition to the proposed instructions, the use of 
electronic media to provide the document is subject to applicable 
legal requirements. As indicated in note 90, above, we express no 
view regarding how the Electronic Signatures Act affects the federal 
securities laws other than with respect to the effect of Section 
101(a) of the Act on certain requirements under Exchange Act Rules 
15g-2 and 15g-9.
    \103\ Rather than promulgating and enforcing exacting technical 
requirements about how the penny stock disclosure document must be 
presented electronically, we have decided to follow the approach we 
adopted in 1996. See Exchange Act Rel. No. 37183 (May 9, 1996), 61 
FR 24652 (May 15, 1996) (``As proposed, Commission rules that 
prescribe the physical appearance of a paper document, such as type 
size and font requirements, are being amended to provide that the 
issuer, when delivering an electronic version of a document, may 
comply with the requirements by presenting the information in a 
format readily communicated to investors. Where legends are required 
to be printed in red ink or bold-face type, or in a different font 
size, the amended rules will allow issuers to satisfy such 
requirements by presenting the legends in any manner reasonably 
calculated to draw attention to them.'').
---------------------------------------------------------------------------

    All e-mail messages transmitting the penny stock disclosure 
document or a hyperlink to the penny stock disclosure document found on 
the Commission's Web site would be required to provide the name, 
address, e-mail address and telephone number of the broker sending the 
message. Under the proposal, no other information could be included in 
this e-mail message, except any privacy or confidentiality information 
routinely included in e-mail messages sent to customers from that 
broker, as well as instructions on how to provide a signed and dated 
acknowledgement of receipt of the document.
    We would also update the penny stock disclosure document to add the 
Internet addresses for the Commission, the NASD, Inc. (``NASD''), and 
the North American Securities Administrators Association (``NASAA''). 
We would also revise the document to reduce repetition, make it easier 
to read, and make it more understandable to investors. The current 
penny stock disclosure document was written over a decade ago and 
reflects the market as it existed at that time. The proposed revisions 
to the penny stock disclosure document would bring it up to date, and 
make it more streamlined and understandable to investors. In 
particular, much of the detail in the document would be eliminated and 
replaced with a hyperlink to (or in the case of a paper document, the 
Internet address of) the section of the Commission's Web site that 
provides investors with information regarding microcap securities, 
including penny stocks. We believe that providing a hyperlink (or 
Internet address) would be an efficient method of alerting potential 
penny stock investors to the existence of the Commission's Web site and 
the useful information about investing in such securities that is 
posted on it. This approach would permit investors to better analyze 
the penny stock transaction being offered to them since they would have 
access not only to the portion of the Commission's Web site that deals 
with investing in penny stocks and microcap securities but to all of 
the other information posted on the Commission's Web site. An 
interested investor could, therefore, browse the entire Commission's 
Web site and, we hope, better educate him or herself before making an 
investment decision. If a customer requests, a broker-dealer would be 
required to provide him or her with a copy of the additional 
information regarding microcap securities, including penny stocks, from 
the Commission's Web site.
    We request comment regarding all of the proposed changes to the 
penny stock disclosure document. Commenters are encouraged to discuss 
not only the substance of the document, but also the presentation. For 
example, we request comment about using a hyperlink (or an Internet 
address) to inform potential penny stock investors about the risks 
inherent in investing in penny stocks and microcap securities. Would 
investors be more or less likely to read such information in a 
hyperlink than if this information was presented to them at the same 
time as the penny stock disclosure document? Please explain any 
comment. We also solicit comment regarding our proposal to permit 
broker-dealers electronically transmitting the penny stock disclosure 
document to present the information in the document that is required to 
be printed in bold-face type, underlined or capitalized in any manner 
reasonably calculated to draw attention to this information. Should we 
be more prescriptive and specify in detail how this document should 
appear electronically? Should the same approach be followed with regard 
to the required text when a hyperlink to the document on the 
Commission's Web site is sent to the customer? Moreover, if the penny 
stock disclosure document is provided to a customer in paper form, 
should the penny stock broker-dealer be required to provide additional 
information upon the customer's request? For example, should the penny 
stock broker-dealer be required to provide a printed version of the 
section of the Commission's Web site that provides investors with 
information regarding microcap securities, including penny stocks, or 
should it be required to provide a modified version of the current 
Explanatory Document? If the additional information is provided some 
time after the penny stock disclosure document, should the broker-
dealer be required to provide such information before it effects a 
transaction in that customer's account? Should the two-business-day 
waiting period begin to run after the customer has received this 
additional information from the broker-dealer?

VII. General Request for Comments

    In addition to the specific requests for comment above, we are 
soliciting comments on all aspects of the proposed amendments. 
Commenters should explain their view in as much detail as appropriate.

VIII. Paperwork Reduction Act Analysis

A. Rule 3a51-1 Analysis

    The proposed amendments to Rule 3a51-1 do not impose any 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\104\ Similarly, the proposed 
amendments to Rule 15g-100 do not impose any ``collection of 
information'' requirements with the meaning of the PRA. Accordingly, 
the PRA does not apply to these proposed amendments.
---------------------------------------------------------------------------

    \104\ 44 U.S.C. 3501, et seq.
---------------------------------------------------------------------------

B. Rule 15g-2 and Rule 15g-9 Analyses

    Certain provisions of the proposed amendments to Rules 15g-2 and 
15g-9 contain ``collection of information'' requirements within the 
meaning of the PRA. The Commission has submitted the proposed rule 
amendments to the Office of Management and Budget (``OMB'') for review 
in accordance with PRA requirements. An agency may not sponsor, 
conduct, or require response to an information collection unless a 
currently valid OMB control number is displayed.
    The Commission is proposing to amend the collections of information 
currently required under Rules 15g-2 and 15g-9 under the Exchange Act. 
The title for the collection of information under current Rule 15g-2, 
``Penny Stock Disclosure Rules,'' which the Commission is proposing to 
amend, contains a currently approved collection of information under 
OMB control number 3235-0434. The title for the collection of 
information under current Rule 15g-9, ``Sales Practice Requirements for 
Certain Low-Priced Securities,'' which the Commission is proposing to 
amend, contains a currently approved collection of information under 
OMB control number 3235-0385. The information received by a broker-
dealer pursuant to Rules 15g-2 and 15g-9 is mandatory, and is otherwise 
governed by Regulation S-P \105\ and the internal policies of the 
broker-dealer regarding confidentiality. In addition, the Commission or 
a self-regulatory organization (``SRO'') may review the information 
during the course of an examination.
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    \105\ See Title V of the Gramm-Leach-Bliley Act, Pub. L. 106-
102, 106th Cong., 1st Sess. (codified at 15 U.S.C. 6801 et seq. (the 
``Act''). Pursuant to Section 504 of the Act, the Commission adopted 
Regulation S-P on June 22, 2000. See 17 CFR Part 248, Privacy of 
Consumer Financial Information (Regulation S-P), Exchange Act Rel. 
No. 42974 (June 22, 2000), 65 FR 40334 (June 29, 2000).

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[[Page 2543]]

1. Summary of Collection of Information
    Current Rule 15g-2 requires broker-dealers to provide their 
customers with a penny stock disclosure document, as set forth in 
Schedule 15G under the Exchange Act, prior to each customer's first 
non-exempt transaction in a penny stock. The rule also requires a 
broker-dealer to obtain from its customer in tangible form a signed 
acknowledgement that he or she has received the required penny stock 
disclosure document. The broker-dealer must maintain a copy of the 
customer's acknowledgement for at least three years following the date 
on which the penny stock disclosure document was provided to the 
customer. During the first two years of this period, the document must 
be maintained in an accessible place.
    The substance of the collection of information required by Rule 
15g-2 would not change under the proposed amendments. The penny stock 
disclosure document would still have to be provided by a broker-dealer 
to a customer prior to a non-exempt transaction in a penny stock, and a 
signed copy of that document would still have to be received by the 
broker-dealer and maintained in its records for the required period of 
time. The means of sending and receiving those documents may change 
from paper copies to electronic versions of those documents or vice 
versa.
    Current Rule 15g-9 requires a broker-dealer to produce a 
suitability determination for its customers and to obtain from the 
customer in tangible form a signed copy of that document prior to 
executing certain recommended transactions in penny stocks. The broker-
dealer must also obtain, in tangible form, the customer's agreement to 
a particular recommended transaction in penny stocks, listing the 
issuer and number of shares of the particular penny stock to be 
purchased.
    Similarly, the substance of the collection of information required 
by Rule 15g-9 would not change under the proposed amendments. The 
suitability determination would still have to be provided by a broker-
dealer to a customer and a signed copy of that document would still 
have to be received by the broker-dealer prior to its effecting a non-
exempted transaction in penny stocks for that customer. The only 
potential change would be the media through which these documents may 
be sent and received.
    As discussed above, the proposed rule amendments respond to 
advances in technology and legislative developments governing expanded 
use of electronic communications. They are intended to maintain 
investor protections regardless of whether broker-dealers subject to 
the penny stock rules use paper copies or electronic communications to 
obtain the required documents and signatures under the Rules.
2. Proposed Use of the Information
    As discussed in more detail above, Rules 15g-2 and 15g-9 were 
adopted to provide important protections to investors solicited by 
broker-dealers to purchase penny stocks. These rules were intended to 
address some of the abusive and fraudulent sales practices (e.g., 
boiler room tactics and ``pump and dump'' schemes) that had 
characterized the market for penny stocks. The requirement in Rule 15g-
2 that a broker-dealer provide the Schedule 15G penny stock disclosure 
document to its customer prior to effecting a penny stock transaction 
recommended by the broker-dealer was intended to make the customer 
aware of the risky nature of investing in penny stocks and provide 
information about the customer's rights and remedies under the federal 
securities laws. The requirement in Rule 15g-2 that a broker-dealer 
obtain in tangible form a signed acknowledgement of receipt of the 
Schedule 15G penny stock disclosure document was designed to give 
customers the opportunity to carefully consider, outside of a high-
pressure sales call, whether an investment in a penny stock that is 
recommended by a broker-dealer is appropriate for them.
    Similarly, the requirement in Rule 15g-9 that a broker-dealer 
provide a copy of its suitability determination to the customer prior 
to the customer's commitment to purchase a penny stock was intended to 
provide the customer with the opportunity to review that determination 
and decide whether the broker-dealer has made a good faith attempt to 
consider the customer's financial situation, investment experience, and 
investment objectives. The requirement that a broker-dealer receive in 
tangible form a signed copy of the suitability statement is also 
intended to convey to the customer the importance of the suitability 
statement, and to prevent a salesperson from convincing the customer to 
sign the statement without a review for accuracy. The Rule 15g-9 
requirement that the customer provide in tangible form an agreement to 
a particular transaction is intended to protect investors from 
fraudulent sales practices by identifying the particular stock and 
number of shares the customer has agreed to purchase.
    The proposed amendments would apply to the means for the collection 
of information when broker-dealers send and receive the required 
documents electronically. The waiting period is designed to provide 
persons communicating electronically with their broker-dealers with 
protections that are comparable to those under the current rules.
    The information collected and maintained by broker-dealers pursuant 
to Rules 15g-2 and 15g-9, including documents obtained in electronic 
form pursuant to the proposed rule amendments, may be reviewed during 
the course of an examination by the Commission or an SRO for compliance 
with the provisions of the federal securities laws and applicable SRO 
rules.
3. Respondents
    Rule 15g-2 only applies to broker-dealers effecting transactions in 
penny stocks that are not otherwise exempt. It does not apply if the 
security involved is not a penny stock, or if the broker-dealer did not 
recommend the transaction to its customer.\106\ It also does not apply 
to a broker-dealer that has not been a market maker in the particular 
penny stock that it is recommending during the immediately preceding 
twelve months or has not received more than five percent of its 
commissions and certain other revenue from transactions in penny stocks 
during each of the preceding three months.\107\ Similarly, transactions 
with institutional accredited investors are not subject to the 
rule.\108\ The rule also does not apply to transactions that meet the 
requirements of Regulation D or transactions with an issuer not 
involving a public offering.\109\ A broker-dealer must provide the 
penny stock disclosure document to its customer only once, prior to the 
first penny stock transaction that is subject to the rule for that 
customer. Essentially, then, Rule 15g-2 only applies to broker-dealers 
making markets in the penny stocks they are recommending to non-
accredited investors when they enter into their first penny stock 
transactions.
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    \106\ Rule 15g-1(e) [17 CFR 240.15g-1(e)].
    \107\ Rule 15g-1(a) [17 CFR 240.15g-1(a)].
    \108\ See Rule 15g-1(b) [17 CFR 240.15g-1(b)].
    \109\ See Rule 15g-1(c) [17 CFR 240.15g-1(c)]. It also does not 
apply to transactions in which the customer is an issuer, or a 
director, officer, general partner, or direct or indirect beneficial 
owner of more than 5% of any class or equtiy security of the issuer 
of the penny stock that is the subject of the transaction. Rule 15g-
1(d) [17 CFR 240.15g-1(d)].

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[[Page 2544]]

    The same exemptions apply to Rule 15g-9 as Rule 15g-2,\110\ along 
with one additional exemption. The provisions of Rule 15g-9 do not 
apply if the customer is an ``established customer'' of the broker-
dealer; that is, if the customer has had an account with the broker-
dealer in which the customer (i) has effected a securities transaction 
or deposited funds more than one year previously, or (ii) has already 
made three purchases involving different penny stocks on different 
days.\111\ Thus, the requirements to provide a suitability 
determination and a transaction agreement under Rule 15g-9 only apply 
in limited circumstances--if the customer is a relatively new customer 
of the penny stock market-making broker-dealer or has limited 
experience with penny stocks and is not an institutional accredited 
investor, and if the broker-dealer has solicited the customer to engage 
in a penny stock transaction. While a broker-dealer must provide the 
suitability determination to its customer once prior to that customer's 
first penny stock transaction that is subject to the rule, the broker-
dealer may have to obtain more than a single transaction agreement 
under the rule, depending on the circumstances. The Commission 
estimates there are approximately 240 broker-dealers making markets in 
penny stocks that could, potentially, be subject to either Rule 15g-2 
or Rule 15g-9.\112\
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    \110\ Rule 15g-9(c) [17 CFR 240.15g-9(c)] provides that 
transactions exempt under Rules 15g-1(a) (non-market maker 
exemption), 15g-1(b) (institutional accredited investor exemption), 
15g-1(d) (issuer/officer/director/significant shareholder 
exemption), and 15g-1(e) (non-recommended transaction exemption) are 
not subject to the rule. While Rule 15g-9 does not specifically 
include the exemption found in Rule 15g-1(c), it nevertheless 
provides a somewhat similar exemption in that it exempts 
transactions that meet the requirements of 17 CFR 230.505 or 230.506 
(including, where applicable, the requirements of 17 CFR 230.501 
through 230.506, and 17 CFR 230.507 through 230.508), or 
transactions with an issuer not involving a public offering.
    \111\ See Rules 15g-9(c)(3) and 15g-9(d)(2) [17 CFR 240.15g-
9(c)(3) and 240.15g-9(c)(4)].
    \112\ The Commission estimates that there are approximately 120 
penny stock dealers potentially subject to the penny stock rules. 
Since the identities of penny stock dealers are not readily 
available, the staff of the Commission developed a methodology to 
identify them. The staff estimates that there might be as few as 60 
penny stock dealers, or as many as 240, potentially subject to the 
penny stock rules. We have used the upper bound of this range as a 
conservative estimate in order to decrease the likelihood that we 
understate the potential costs of these amendments. The staff 
identified penny stock dealers based on the ratio of their 
transaction activity in penny stocks to their trading in all stocks. 
Penny stocks were identified using company financial statements and 
information on stock prices.
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4. Total Annual Reporting and Recordkeeping Burden
    The proposed amendments are intended to adapt Rules 15g-2 and 15g-9 
to an electronic or Internet-based environment. Under the proposed 
amendments, all penny stock transactions that are not exempted would be 
subject to a waiting period of two business days from the time a 
broker-dealer sends the required documents to its penny stock customer. 
As discussed above, the current rules were designed to effectively 
provide a similar waiting period through the imposition of the 
obligation to obtain signatures and agreements in tangible form. 
Therefore, except for the imposition of a formal waiting period, the 
proposed rule amendments would not impose any significant additional 
recordkeeping, reporting or other compliance requirement on broker-
dealers.
    Under the proposed amendments, a broker-dealer that becomes subject 
to the waiting period by complying with the current rules' requirements 
through electronic communications may incur some additional costs 
associated with keeping track of the waiting period. Hence, under the 
proposed amendments, broker-dealers subject to the penny stock rules 
may need to develop a tracking method to ensure compliance with the 
waiting period after receipt of the required signatures and agreements 
under the rules. We would not expect this to result in more than a 
minimal increase in burden. Moreover, there should be no non-hour costs 
associated with the requirement.
    It should be noted, however, that only the transaction agreement 
required under Rule 15g-9(a)(2)(ii) is required for a particular 
transaction. Neither the suitability determination required under Rule 
15g-9(b) nor the penny stock disclosure document required to be given 
to a customer under Rule 15g-2 is transaction-specific. Rather these 
documents may be provided to the customer at any time prior to the 
broker-dealer effecting a recommended penny stock transaction for the 
customer.

a. Estimated Burden Hours

i. Burden Hours for Rule 15g-2
    The Commission estimates that there are approximately 240 broker-
dealers potentially subject to current Rule 15g-2, and the Commission 
has previously estimated that each one of these firms processes an 
average of three new customers for penny stocks per week. Thus, each 
respondent would process approximately 156 penny stock disclosure 
documents per year. Under current Rule 15g-2, the Commission calculated 
that (a) the copying and mailing of the penny stock disclosure document 
should take no more than two minutes per customer, and (b) each 
customer should take no more than eight minutes to review, sign and 
return the penny stock disclosure document. Thus, the total existing 
respondent burden is approximately 10 minutes per response, or an 
aggregate total of 1,560 minutes per respondent. Since there are 240 
respondents, the current annual burden is 374,400 minutes (1,560 
minutes per each of the 240 respondents) or 6,240 hours. In addition, 
broker-dealers could incur a recordkeeping burden of approximately two 
minutes per response. Since there are approximately 156 responses for 
each respondent, the respondents would incur an aggregate recordkeeping 
burden of 74,880 minutes (240 respondents x 156 responses for each x 2 
minutes per response), or, 1,248 hours, under current Rule 15g-2. 
Accordingly, the aggregate annual hour burden associated with current 
Rule 15g-2 (that is, if all respondents continue to provide paper 
copies and obtain paper-based signatures) is approximately 7,488 hours 
(6,240 response hours + 1,248 recordkeeping hours).
    Under the proposed amendments, the burden hours associated with 
Rule 15g-2 may be slightly reduced where the penny stock disclosure 
document required under the rule is provided through electronic means 
such as e-mail from the broker-dealer (e.g., the broker-dealer 
respondent may take only one minute instead of the two estimated above 
to provide the penny stock disclosure document by e-mail rather than 
regular mail to its customer) and return e-mail from the customer (the 
customer may take only seven minutes, to review, electronically sign 
and electronically return the disclosure document). In this regard, if 
each of the customer respondents estimated above communicates with his 
or her broker-dealer electronically, the total ongoing respondent 
burden would be approximately 8 minutes per response, or an aggregate 
total of 1,248 minutes (156 new customers x 8 minutes per respondent). 
Since there are 240 respondents, the annual burden would be, if 
electronic communications were used by all customers, 299,520 minutes 
(1,248 minutes per each of the 240 respondents), or, 4,992 hours. Based 
on information currently before us, we do not believe that 
recordkeeping burdens under Rule 15g-2 would increase where the 
required documents are sent or

[[Page 2545]]

received through means of electronic communication, so the 
recordkeeping burden would remain at 1,248 hours. Thus, if all broker-
dealer respondents would obtain and send the documents required under 
the rules electronically, the aggregate annual hour burden associated 
with Rule 15g-2 would be 6,240 (1,248 hours + 4,992 hours).
    In addition, if the penny stock customer requests a paper copy of 
the information on the Commission's Web site regarding microcap 
securities, including penny stocks, we estimate that the printing and 
mailing of the document containing this information should take no more 
than two minutes per customer. Because many investors will have access 
to the Commission's Web site via computers located in their homes or in 
easily accessible public places such as libraries, we estimate that at 
most a quarter of investors to whom Rule 15g-2 would apply will request 
their broker or dealer to provide them with the additional microcap and 
penny stock information posted on the Commission's Web site. Thus, each 
respondent would process approximately 39 requests for paper copies of 
this information per year or an aggregate total of 78 minutes per 
respondent (2 minutes per customer x 39 requests per respondent). Since 
there are 240 respondents, the estimated annual burden is 18,720 
minutes (78 minutes per each of the 240 respondents) or 312 hours.
    We have no way of knowing how many broker-dealers and customers 
would choose to communicate electronically. If we assume, however, that 
50% of respondents would continue to provide documents and obtain 
signatures in tangible form and 50% would choose to communicate 
electronically in satisfaction of the requirements of Rule 15g-2, the 
total aggregate burden hours would be 7,176 ((aggregate burden hours 
for documents and signatures in tangible form x 0.50 of the respondents 
= 3,744 hours) + (aggregate burden hours for electronically signed and 
transmitted documents x 0.50 of the respondents = 3,120 hours) + (312 
burden hours for those customers making requests for a copy of the 
information on the Commission's Web site)).
ii. Burden Hours for Rule 15g-9
    Likewise, there are approximately 240 broker-dealers potentially 
subject to current Rule 15g-9.\113\ Although the burden of the rule on 
a respondent varies depending on the frequency with which new customers 
are solicited, the Commission previously estimated that firms process 
an average of three new customers for penny stocks per week. Thus, each 
respondent would process approximately 156 new customer suitability 
determinations per year. The Commission estimates that a broker-dealer 
would expend approximately one-half hour per new customer in obtaining, 
reviewing, and processing (including mailing to the customer) the 
information required by the Rule, and each respondent would 
consequently spend 78 hours annually (156 customers x .5 hours) 
obtaining the information required in the Rule. Since there are 240 
broker-dealer respondents, the current annual burden is 18,720 hours 
(240 respondents x 78 hours).
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    \113\ See note 112, above.
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    In addition, as with Rule 15g-2, each customer should take (i) no 
more than eight minutes to review, sign and return the suitability 
determination document; and (ii) no more than two minutes to either 
read and return or produce the customer agreement to a particular 
recommended transaction in penny stocks, listing the issuer and number 
of shares of the particular penny stock to be purchased, and send it to 
the broker-dealer. Thus, the total current customer respondent burden 
is approximately 10 minutes per response, for an aggregate total of 
1,560 minutes for each broker-dealer respondent. Since there are 240 
respondents, the current annual burden for customer responses is 
374,400 minutes (1,560 customer minutes per each of the 240 
respondents), or 6,240 hours.
    In addition, broker-dealers incur a recordkeeping burden under Rule 
15g-9 of approximately two minutes per response. Since there are 240 
broker-dealer respondents and each respondent would have approximately 
156 responses annually, respondents would incur an aggregate 
recordkeeping burden of 74,880 minutes (240 respondents x 156 responses 
x 2 minutes per response), or 1,248 hours.
    Accordingly, the current aggregate annual hour burden associated 
with Rule 15g-9 is 26,208 hours (18,720 hours to prepare the 
suitability statement and agreement + 6,240 hours for customer review + 
1,248 recordkeeping hours).
    Under the proposed amendments, the burden hours under amended Rule 
15g-9 may be slightly reduced if the transaction agreement required 
under the rule is provided through electronic means such as e-mail from 
the customer to the broker-dealer (e.g., the customer may take only one 
minute instead of the two estimated above to provide the transaction 
agreement by e-mail rather than regular mail). If each of the customer 
respondents estimated above communicates with his or her broker-dealer 
electronically, the total burden hours on the customers would be 
reduced from 10 minutes to 9 minutes per response, or an aggregate 
total of 1,404 minutes per respondent (156 customers x 9 minutes for 
each customer). Since there are 240 respondents, the annual customer 
respondent burden, if electronic communications were used by all 
customers, would be approximately 336,960 minutes (240 respondents x 
1,404 minutes per each respondent), or 5,616 hours. We do not believe 
the hour burden on broker-dealers in obtaining, reviewing and 
processing the suitability determination would be changed through use 
of electronic communications. In addition, we do not believe, based on 
information currently available to us that recordkeeping burdens under 
Rule 15g-9 would change where the required documents were sent or 
received through means of electronic communication. Thus, if all 
broker-dealer respondents obtain and send the documents required under 
the Rule electronically, the aggregate annual hour burden associated 
with Rule 15g-9 would be 25,584 hours (18,720 hours to prepare the 
suitability statement and agreement + 5,616 hours for customer review + 
1,248 recordkeeping hours).
    We cannot estimate how many broker-dealers and customers would 
choose to communicate electronically. If we assume, however, that 50% 
of respondents would continue to provide documents and obtain 
signatures in tangible form and 50% would choose to communicate 
electronically in satisfaction of the requirements of Rule 15g-9, the 
total aggregate hour burden would be 25,896 burden hours ((26,208 
aggregate burden hours for documents and signatures in tangible form x 
0.50 of the respondents = 13,104 hours) + (25,584 aggregate burden 
hours for electronically signed and transmitted documents x 0.50 of the 
respondents = 12,792 hours)).
iii. Aggregate Burden Hours for the Proposed Rule Amendments
    Under the proposed amendments the burden hours required for 
compliance with Rule 15g-2, in light of the potential use of electronic 
communications would be an estimated 7,176 burden hours. The burden 
hours required for compliance with Rule 15g-9, in light of the option 
of using electronic means of communications would be an estimated 
25,896 hours. Thus, under the proposed amendments, the total aggregate 
burden hours for complying with the requirements of Rules 15g-2 and 
15g-9,

[[Page 2546]]

in light of the available means of communication would be 33,072 hours 
(7,176 hours + 25,896 hours).

b. Estimate of Total Annualized Paperwork Cost Burden

i. Cost Burden of Rule 15g-2
    The paperwork costs of complying with the signature and document 
requirements of current Rule 15g-2 in tangible form entail the costs of 
mailing the Schedule 15G disclosure document to the customer and 
providing a means to return the signed document (such as by return 
postage pre-paid envelopes). Postage costs (at $0.37 each, $0.74 for 
both the outgoing and prepaid incoming documents) related to providing 
the Schedule 15G and receiving the signed copy from the customer as 
required by the rule would be approximately $27,706 (240 respondents x 
156 new customers annually x $0.74 for each document). The staff time 
required to send the document to a customer is estimated at an average 
compensation rate of $24.10/hour. \114\ A broker-dealer's copying, 
sending and recordkeeping hour burden under the current rule, as noted 
above, is 4 minutes (\1/15\ of an hour). Staff time would therefore 
cost approximately $1.61 for each Schedule 15G provided to a customer 
under the rule. The total paperwork cost burden for staff time to 
comply with current Rule 15g-2 would be approximately $60,278 (240 
respondents x 156 new customers annually x $1.61 for each document). 
Thus, the total paperwork annual cost burden to the industry to comply 
with current Rule 15g-2 is approximately $87,984 ($27,706 for postage x 
$60,278 for staff time).
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    \114\ A compliance clerk working in New York makes $26.33 an 
hour. A compliance clerk working outside New York makes $21.88 an 
hour. The average hourly salary of these two positions is $24.10 an 
hour. See Report on Office Salaries in the Securities Industry 2002, 
published by the Securities Industry Association. The same rate is 
being used below to estimate recordkeeping staff costs for 
compliance with Rule 15g-9.
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    Electronic communication of the Schedule 15G document would reduce 
the costs of compliance with Rule 15g-2. There would be no postage 
costs for electronically transmitted documents, and staff time for e-
mailing the disclosure document to the customer may be reduced (e.g., 
the broker-dealer respondent may take only 1 minute instead of the two 
estimated burden minutes to provide the penny stock disclosure document 
by e-mail rather than regular mail to its customer). Recordkeeping 
costs would likely remain the same. If all of the respondents estimated 
above send the Schedule 15G electronically, the total ongoing burden on 
broker-dealers would decrease from four minutes to three minutes per 
document disseminated, for an aggregate total of 112,320 minutes (240 
respondents x 156 responses x 3 minutes for each response), or 1,872 
hours. At a staff time rate of $24.10/hour total staff costs for 
compliance with the rule if all communication is electronic would be 
$45,115 (1,872 hours x $24.10/hour). Thus, if all broker-dealer 
respondents would obtain and send the documents required under the 
rules electronically, the total annual paperwork cost burden to the 
industry to comply with Rule 15g-2 would be approximately $45,115 
($0.00 postage + $45,115 staff time).
    Moreover, the broker or dealer would incur additional postage costs 
under the proposed amendments when a customer requested a paper copy of 
the information found on the Commission's Web site regarding microcap 
securities, including penny stocks. As discussed above, we believe that 
such a request would be made at most in only a quarter of these 
transactions. Because there will be no return postage, each such 
request would result in a postage cost to the broker or dealer of 
$0.37. Thus, the aggregate annual postage cost for mailing documents 
containing the additional information will be $3,463 (240 respondents x 
39 new customers annually x $0.37).
    We cannot estimate how many broker-dealers and customers would 
choose to communicate electronically. If we assume, however, that 50% 
of respondents would continue to provide documents and obtain 
signatures in tangible form and 50% would choose to communicate 
electronically in satisfaction of the requirements of Rule 15g-2, the 
total aggregate cost burden to the industry to comply with amended Rule 
15g-2 would be approximately $70,013 (($87,984 aggregate cost for 
documents and signatures in tangible form under the current rule x 0.50 
of the respondents = $43,992) + ($45,115 aggregate cost burden for 
electronically signed and transmitted documents x 0.50 of the 
respondents = $22,558) + ($3,463 in postage for customers requesting 
tangible copies of the additional information on microcap and penny 
stocks on the Commission's Web site)).
ii. Cost Burden of Rule 15g-9
    The Commission believes that, generally, a registered 
representative of a registered broker-dealer obtains the information 
required by current Rule 15g-9 and makes the suitability determination. 
The branch operations manager of the firm and the compliance officer 
reviews the information before it is mailed to the customer. The 
Commission has estimated that the average blended cost to the firm for 
these personnel is $75 per hour,\115\ and the annualized cost for 
compliance with this portion of the current Rule is $1,404,000 (18,720 
hours x $75/hour personnel costs).
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    \115\ Branch Operations Managers in New York City make $99.60 an 
hour, including overhead. Compliance managers working in New York 
City make $111.75 an hour, including overhead. A senior branch 
operations supervisor outside of New York City makes $37.05 an hour, 
including overhead. While a compliance manager outside New York City 
makes $52/hour, including overhead. Hence, the blended rate of these 
four positions is approximately $75 an hour. See Report On 
Management & Professional Earnings In The Securities Industry 2002.
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    In addition to the costs of preparing the suitability determination 
under the rule, broker-dealers also incur the cost of delivering that 
suitability statement to their customers, and of receiving both the 
signed acknowledgement of receiving the statement from the customers as 
well as the transaction agreement required by the rule (such as by 
return postage pre-paid envelopes). Postage costs (at $0.37 each, $0.74 
for both the outgoing and prepaid incoming documents) related to 
providing the suitability statement and receiving the signed copy from 
the customer and the transaction agreement is approximately $27,706 
(240 respondents x 156 new customers annually x $0.74 for each 
document).
    In addition, broker-dealers incur a recordkeeping burden under 
current Rule 15g-9 of approximately two minutes per response. As noted 
above, the aggregate recordkeeping burden for compliance with current 
Rule 15g-9 is 1,248 hours. Using a $24.10/hour average for 
recordkeeping staff time, the aggregate annual recordkeeping cost 
burden associated with Rule 15g-9 is $30,077 (1,248 hours x $24.10/hour 
staff costs). Thus, the total aggregate annual cost burden to broker-
dealers under current Rule 15g-9 is approximately $1,461,783 
($1,404,000 staff costs to prepare and send the suitability statement 
and agreement + $27,706 postage + $30,077 recordkeeping personnel 
costs).
    The cost burden under Rule 15g-9 may be reduced where the 
suitability statement and transaction agreement required under the rule 
are communicated between the broker-dealer and the customer through 
electronic means. If each of the customer respondents estimated above 
communicates with his or her broker-dealer electronically, the costs of

[[Page 2547]]

postage for delivery of the required documents would be $0.00. We do 
not believe that the personnel cost burden on broker-dealers and their 
personnel in obtaining, reviewing and processing the suitability 
determination would change through use of electronic communications. In 
addition, we do not believe, based on the information currently 
available, that recordkeeping burdens under Rule 15g-9 would change 
where the required documents were sent or received through means of 
electronic communication. Thus, if all broker-dealer respondents were 
to obtain and send the documents required under Rule 15g-9 
electronically, the aggregate annual cost burden associated with Rule 
15g-9 would be approximately $1,434,077 ($14,040,000 staff costs 
relating to the suitability statement and agreement + $0.00 postage 
costs + $30,077 recordkeeping personnel costs).
    We cannot estimate how many broker-dealers and customers would 
choose to communicate electronically. If we assume, however, that 50% 
of respondents would continue to provide documents and obtain 
signatures in tangible form and 50% would choose to communicate 
electronically in satisfaction of the requirements of Rule 15g-9, the 
total aggregate paperwork cost burden to the industry to comply with 
amended Rule 15g-9 would be approximately $1,447,930 (($1,461,783 
aggregate cost burden for documents and signatures in tangible form x 
0.50 of the respondents = $730,891) + ($1,434,077 aggregate cost burden 
for electronically signed and transmitted documents x 0.50 of the 
respondents = $717,039)).
iii. Aggregate Paperwork Cost Burden for the Proposed Rule Amendments 
to 15g-2 and 15g-9
    As noted above, the annual paperwork cost burden required for 
compliance with amended Rule 15g-2, in light of the available means of 
communication would be an estimated $70,013. The annual cost burden 
required for compliance with amended Rule 15g-9, in light of the 
available means of communication would be an estimated $1,447,930. 
Thus, the estimated total aggregate cost burden for complying with the 
proposed amendments to Rules 15g-2 and 15g-9, in light of the available 
means of communication, would be $1,517,943 ($70,013 for Rule 15g-2 + 
$1,447,930 for Rule 15g-9).
    We note that the proposed rule amendments may not significantly 
alter the current burden on broker-dealers because those broker-dealers 
must provide the required documents to their customers and obtain from 
their customers the requisite documents and signatures regardless of 
whether they communicate with their customers electronically or by more 
traditional means.
    It should also be noted that, for purposes of the PRA, the annual 
reporting and recordkeeping cost burden must exclude the cost of hour 
burden.\116\ Therefore, the reported annual cost burden required for 
compliance with amended Rules 15g-2 and 15g-9 would include only the 
postage costs detailed above, and would exclude costs for staff. We are 
assuming that 50% of respondents would use electronic means to comply 
with the amended rule and 50% of respondents would use traditional 
means of communication. Hence, the estimated cost burden for compliance 
with amended Rule 15g-2 would be approximately $17,316 (($27,706 for 
postage x .50 of the respondents) + (3,463 for postage for those 
customers requesting a tangible copy of the information on the 
Commission's Web site regarding microcap securities, including penny 
stocks)), and the estimated cost burden for compliance with amended 
Rule 15g-9 would also be estimated at $13,853 ($27,706 for postage x 
.50 of respondents).
---------------------------------------------------------------------------

    \116\ See OMB Form 83-1, Instructions to Item 14.
---------------------------------------------------------------------------

5. General Information About the Collection of Information
    Any collection of information pursuant to Rules 15g-2 and 15g-9 is 
mandatory. For all non-exempt transactions in penny stocks, broker-
dealers must provide the penny stock disclosure document required under 
Rule 15g-2 and the suitability determination required under Rule 15g-9 
to their customers. Broker-dealers must maintain a copy of the 
customer's acknowledgement for at least three years following the date 
on which the penny stock disclosure document and the suitability 
determination were provided to the customer. During the first two years 
of this period, these documents must be maintained in an easily 
accessible place.\117\ The information collected and maintained by 
broker-dealers pursuant to the proposed rule amendments may be reviewed 
during the course of an examination by the Commission or the SROs for 
compliance with the provisions of the federal securities laws and 
applicable SRO rules. The Commission and SROs would obtain possession 
of the information only upon request.
---------------------------------------------------------------------------

    \117\ See Rule 15g-2(b) and Rule 17a-4 [17 CFR 240.17a-4].
---------------------------------------------------------------------------

6. Request for Comment
    We request comment in order to: (a) Evaluate whether the proposed 
information collection is necessary for the proper performance of the 
functions of the Commission, including whether the information will 
have practical utility; (b) evaluate the accuracy of our estimate of 
the burden of the proposed rules; (c) determine whether there are ways 
to enhance the quality, utility and clarity of the information to be 
collected; (d) evaluate whether there are ways to minimize the burden 
of the proposed rules on those who respond, including through the use 
of automated collection techniques or other forms of information 
technology; and (e) evaluate whether the proposed amendments would have 
any effects on any other collection of information not previously 
identified in this section.\118\ We are particularly interested in 
receiving comment regarding the number of broker-dealers that currently 
make a market in penny stocks. Moreover, we also request comment on how 
many of these broker-dealers plan to use electronic media to comply 
with the requirements of Rules 15g-2 and 15g-9.
---------------------------------------------------------------------------

    \118\ Comments are requested purusant to 44 U.S.C. 
3506(c)(2)(B).
---------------------------------------------------------------------------

    Any member of the public may direct to us any comments concerning 
the accuracy of these burden estimates and any suggestions for reducing 
the burdens. Persons who desire to submit comments on the proposed 
collection of information requirement should direct their comments to 
the OMB, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC 20503, and send a copy of the comments to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609, with reference to File No. S7-02-04. 
Requests for materials submitted to the OMB by us with regard to this 
collection of information should be in writing, refer to File No. S7-
02-04 and be submitted to the Securities and Exchange Commission, 
Records Management, Office of Filings and Information Services, 450 
Fifth Street, NW., Washington, DC 20549. Because the OMB is required to 
make a decision concerning the collection of information between 30 and 
60 days after publication, your comments are best assured of having 
their full effect if the OMB receives them within 30 days of 
publication.

[[Page 2548]]

IX. Costs and Benefits of Proposed Rulemaking

    The Commission is considering the costs and benefits of the 
proposed amendments to Rule 3a51-1 and Rules 15g-2, 15g-9 and 15g-100. 
We are sensitive to the costs and benefits that might arise from 
compliance with our rules and amendments.

A. Rule 3a51-1

    The Commission believes that the costs of the proposed amendments 
to the Rule 3a51-1 should be minimal. The changes we are proposing 
would have only a limited impact on the penny stock market. For 
example, we are proposing to amend the current exclusions from the 
definition of penny stock for reported securities and for certain other 
exchange-registered securities to require that these securities also 
satisfy one of the following new standards. First, an exchange-
registered security could qualify if the exchange on which it is 
registered has been continuously registered since the Commission 
initially adopted the penny stock rules and if the exchange has 
maintained and continues to maintain quantitative listing standards 
substantially similar to those in place on January 8, 2004. Second, an 
exchange-registered security or a reported security listed on an 
automated quotation system sponsored by a registered national 
securities association such as Nasdaq could qualify if the exchange or 
the automated quotation system on which it is registered or listed has 
quantitative listing standards that meet or exceed standards modeled on 
those currently required for inclusion in the Nasdaq SmallCap Market. 
These amendments, however, would be wholly prospective, and are not 
intended to change the status quo. We believe that securities currently 
listed and traded on national securities exchanges and on Nasdaq would 
continue to be excluded from the definition of penny stock. Moreover, 
all national securities exchanges have initial listing and continued 
listing standards,\119\ which have been reviewed and approved by the 
Commission.\120\ Any cost associated with the proposed rule amendments 
are further mitigated because the listing standards in the amendments 
have been patterned after those currently used by the Nasdaq SmallCap 
Market. Thus all securities now traded on Nasdaq, both National Market 
System securities and Smallcap Market securities, should meet the 
proposed new listing standards.
---------------------------------------------------------------------------

    \119\ See e.g., NASD Rule 4310.
    \120\ Section 19(b)(1) of the Exchange Act [15 U.S.C. 
78s(b)(1)].
---------------------------------------------------------------------------

    Moreover, we expect the proposed amendments to benefit both the 
securities markets and the investing public. Investors would benefit 
because the revised definition of penny stock would better ensure that 
they receive the extra protection of the penny stock rules when needed. 
The proposed amendments to the rule would prevent securities that have 
all the risky characteristics of penny stocks from being excluded from 
the definition of penny stock. These benefits, however, are difficult 
to quantify.
    The proposed amendments would also reduce duplicative regulation 
with respect to security futures products and would also enhance legal 
certainty by deleting outdated and possibly confusing sections of the 
rule. Given the incremental change to the costs associated with the 
rule, we believe the benefits of the proposed amendments will justify 
the costs.

B. Rules 15g-2 and 15g-9

    We do not expect the proposed amendments to Rules 15g-2 and 15g-9 
to impose any new regulatory costs on broker-dealers. The proposed 
amendments merely impose an explicit, rather than implicit, waiting 
period on broker-dealers prior to their effecting a penny stock 
transaction for a customer after receipt of a signed acknowledgement of 
a penny stock disclosure document, or suitability statement or 
agreement for a penny stock transaction. Because the penny stock rules, 
as they operate today, essentially impose a waiting period before 
certain penny stock transactions may be effected when non-electronic 
methods of transmittal are used, we do not believe that the proposed 
rule amendments would produce any significant new costs.\121\ We have 
set forth above many of the costs we believe are involved in complying 
with both the current rules and the proposed rule amendments in our 
discussion of the Paperwork Reduction Act.
---------------------------------------------------------------------------

    \121\ Practically speaking, broker-dealers in penny stocks today 
that are subject to current Rules 15g-2 and 15g-9 are essentially 
required to wait a minimum of 2 days before executing a penny stock 
transaction they solicited if they use non-electronic methods. As 
noted above, unless a person walked into a penny stock broker-
dealer's offices and executed the required documents on-the-spot, a 
broker would have to wait at least two business days before 
executing a penny stock trade for a new customer under current rules 
using non-electronic methods.
---------------------------------------------------------------------------

    There also may be lost opportunity costs due to the imposition of 
an explicit two-business-day waiting period for transactions 
recommended by a market-making penny stock broker-dealer that 
communicates electronically with its customers. We believe, however, 
that the effect of the waiting periods set forth above on investors 
would be minimal in light of the fact that the scope of the rules is 
quite narrow. As noted above, the effect of the operation of these 
proposed rule amendments would strongly resemble the operation of 
current Rule 15g-2 and 15g-9 with respect to broker-dealers who satisfy 
their obligations using non-electronic methods. For example, only those 
transactions recommended by a market-making broker-dealer in penny 
stocks are subject to the rules. In addition, the requirements of Rule 
15g-9 do not apply to recommended transactions with ``established 
customers'' as defined in that rule. On the other hand, providing and 
receiving the required customer protection documents under the rules 
through electronic means may save penny stock broker-dealers subject to 
the rules the out-of-pocket costs of postage or other delivery methods.
    Failure to adopt rule amendments that address electronic 
communications could, however, ultimately foster an increase in high-
pressure sales tactics by some penny stock dealers through electronic 
means, leading to potential investor losses. If the market for penny 
stocks once again becomes characterized by abusive and fraudulent sales 
practices, investment in the stocks of legitimate penny stock issuers 
could diminish. We believe that any costs associated with the proposed 
amendments to the Rules 15g-2 and 15g-9 are justified by the benefits 
of reducing fraud.\122\
---------------------------------------------------------------------------

    \122\ When it adopted Rule 15g-9, the Commission stated that 
``we continue to believe that any additional costs imposed by the 
Rule are outweighed by the benefits of reducing fraud through more 
effective regulation of the sales practices of broker-dealers active 
in the market for penny stocks.'' Exchange Act Rel. No. 27160, 54 FR 
at 35480-81.
---------------------------------------------------------------------------

C. Rule 15g-100

    The Commission believes that the costs of the proposed amendments 
to the penny stock disclosure document set forth in Schedule 15G should 
be minimal. The changes we are proposing would have only a limited 
impact on those broker-dealers making markets in penny stocks because 
of the narrow circumstances in which this document is required. The 
proposed changes to this document would not effect the frequency with 
which it is sent to customers. In addition, we believe that these 
changes would help reduce fraud by making the document more

[[Page 2549]]

accessible and understandable to investors.
    We request that commentators address the costs and benefits of the 
proposed amendments to Rule 3a51-1 and to Rules 15g-2, 15g-9 and 15g-
100, and provide supporting empirical data for any positions advanced. 
Specifically, we seek comment on whether, and to what extent, the 
proposed rule amendments would impose costs in addition to those 
already imposed under the current rules.

X. Consideration of Burden on Promotion of Efficiency, Competition, and 
Capital Formation

    Section 3(f) of the Exchange Act requires the Commission, when 
engaging in a rulemaking, to consider or determine whether an action is 
necessary or appropriate in the public interest, to also consider 
whether the action would promote efficiency, competition and capital 
formation.\123\ Section 23(a)(2) of the Exchange Act requires us to 
consider the anticompetitive effects of any rules that we adopt under 
the Exchange Act.\124\ Section 23(a)(2) prohibits us from adopting any 
rules that would impose a burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. We 
believe that the proposed amendments to Rules 3a51-1, 15g-2, 15g-9 and 
15g-100 are consistent with the public interest and would promote 
efficiency, competition and capital formation by providing greater 
protections for investors, thus increasing investor confidence and 
involvement in the securities of small businesses.\125\
---------------------------------------------------------------------------

    \123\ 15 U.S.C. 78c(f).
    \124\ 15 U.S.C. 78w(a)(2).
    \125\ See Adopting Release, 57 FR at 18007 (``[T]he Commission 
also recognizes that fraudulent sales practices, which have occurred 
disproportionately in this market, may themselves hinder economic 
growth, because they cause the loss of the productive use of 
investor funds, and discourage further investment by those who have 
been defrauded. Legitimate small business is thus harmed by the 
diversion of substantial capital to unscrupulous promoters and 
broker-dealers. Moreover, the issuers of penny stocks that are 
fraudulently traded may themselves be victimized by this 
activity.'').
---------------------------------------------------------------------------

    We do not believe that the amendments we are proposing to Rules 
3a51-1, 15g-2, 15g-9, and 15g-100 will result in any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Exchange Act. As discussed above, the proposed 
amendments to Rule 3a51-1 are prospective only and not intended to 
affect the status quo. Conceivably, however, the proposed amendments 
might impose some competitive burdens on wholly new markets or wholly 
new facilities or ``junior tiers'' of markets. We believe that such 
future competitive burdens would be more than justified by the future 
benefits of the proposed amendments. These amendments to Rule 3a51-1 
would prevent securities that have all the risky characteristics of 
penny stocks from being excluded from the definition of penny stock. As 
a result, investors buying and purchasing these securities would 
continue to receive the increased protection that Congress intended 
they enjoy in Penny Stock Reform Act. Similarly, the proposed 
amendments to Rule 3a51-1 would also promote capital formation by 
encouraging investment because of increased investor confidence. 
Moreover, these proposed rule amendments would apply equally to all 
broker-dealers making markets in penny stocks.
    The other changes being proposed to Rule 3a51-1 would encourage 
efficiency by updating the definition of penny stock. For example, we 
are proposing to amend the Rule 3a51-1 to exclude security future 
products from this definition.
    Moreover, we do not believe that the explicit waiting periods 
imposed under the proposed rule amendments to Rules 15g-2 and 15g-9 
would increase the already-existent burdens under the penny stock 
rules. Indeed, the current rules already effectively impose a similar 
waiting period on non-electronic efforts to satisfy the rules. As 
discussed in detail above, we believe that prospective investors in 
penny stocks should have the opportunity to carefully consider, outside 
of a high-pressure environment, whether an investment in penny stocks 
is appropriate for them. The proposed rule amendments would merely 
ensure that all investors in penny stocks, whether they communicate 
through traditional means or electronically, would retain the 
opportunity for careful consideration.
    We do not believe that the proposed amendments to Rules 15g-2 and 
15g-9 would adversely affect capital formation. As we said when we 
first adopted the penny stock rules, without these rules, sales 
practice abuses in the market may lead investors to bypass the penny 
stock market in favor of other types of securities. By operating to 
curb sales practice abuses in the markets for penny stocks, the 
proposed rule amendments should continue to benefit legitimate penny 
stock issuers and the broker-dealers making markets in those issuers' 
securities.
    In addition, because these rule amendments would only apply to 
broker-dealers soliciting customers for recommended transactions in 
penny stocks in which they make a market (along with the other 
exceptions to the rules), any potential adverse effect on efficiency, 
competition, or capital formation should be limited.
    Similarly, we do not believe that the waiting period that would be 
imposed by the proposed amendments to Rules 15g-2 and 15g-9 would 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. The 
proposed rule amendments essentially translate the implicit waiting 
periods present under operation of the current rules to the electronic 
communications arena. Therefore, these proposed rule amendments do not 
impose any additional competitive burdens on penny stock brokers and 
dealers. We believe the proposed amendments also would promote 
competition by redesigning this necessary regulatory scheme to permit 
broker-dealers and customers to take advantage of rapidly evolving 
technology.
    Finally, we believe that the changes we are proposing to the penny 
stock disclosure document set forth in Schedule 15G [Rule 15g-100] 
would not impose any burden on competition. On the contrary, we believe 
that by streamlining the document, making it more readable, and 
generally adapting it to electronic media, we are promoting efficiency, 
competition and capital formation.
    The Commission requests comments regarding the impact of the 
proposed amendments to Rules 3a51-1, 15g-2, 15g-9 and 15g-100 on 
efficiency, competition and capital formation. Likewise, for purposes 
of the Small Business Regulatory Enforcement Fairness Act of 1996,\126\ 
the Commission is interested in receiving information regarding the 
potential effect of the proposals on the U.S. economy on an annual 
basis. Commentators are requested to provide empirical data to support 
their views.
---------------------------------------------------------------------------

    \126\ Pub. L. 104-21, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

XI. Initial Regulatory Flexibility Analysis

    Section 3(a) of the Regulatory Flexibility Act \127\ requires the 
Commission to undertake an initial regulatory flexibility analysis of 
the effects of proposed rules and rule amendments on small entities, 
unless the Commission certifies that the rules and rule amendments, if 
adopted, would not have a significant economic

[[Page 2550]]

impact on a substantial number of small entities.\128\
---------------------------------------------------------------------------

    \127\ 5 U.S.C. 603(a).
    \128\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    The Commission hereby certifies, pursuant to 5 U.S.C. 605(b), that 
the proposed amendments to Rules 3a51-1, 15g-2, 15g-9 and Rule 15g-100 
contained in this release, if adopted, would not have a significant 
economic impact on a substantial number of small entities. With respect 
to the proposed changes to Rule 3a51-1, the scope of the penny stock 
rules is not being expanded. We believe that securities currently 
excluded from the definition of penny stock because they are listed on 
a national securities exchange or quoted on Nasdaq would continue to be 
excluded. Moreover, we are proposing to exclude security futures 
products from the definition of penny stock. We therefore believe that 
the proposed amendments to Rule 3a51-1 should not have a significant 
impact on a substantial number of small entities.
    Similarly, the proposed amendments to Rules 15g-2 and 15g-9 should 
also not have a significant impact on a substantial number of small 
entities. The two-business-day waiting period being proposed does not 
significantly alter the status quo. The signatures and agreements in 
tangible form under the current rules were intended to provide 
customers with an opportunity to consider, outside of a high-pressure 
sales situation, the advisability of investing in the risky penny stock 
market. The practical effect of these requirements, due to the delay 
inherent in postal communications, was to impose a waiting period 
between a broker-dealer's first communication with a customer 
concerning penny stocks and the broker-dealer's ability to execute a 
penny stock transaction for that customer. The proposed amendments to 
Rules 15g-2 and 15g-9 simply attempt to preserve the status quo in the 
wake of Electronic Signatures Act. The proposed amendments are intended 
to provide customers using electronic media with protections similar to 
those given all other investors in penny stocks whose transactions are 
subject to the penny stock rules--the opportunity for careful 
consideration inherent in investing in penny stocks.
    Finally, we believe that the changes we are proposing to the penny 
stock disclosure document set forth in Schedule 15G [Rule 15g-100] 
would not have any significant economic impact on a substantial number 
of small entities because they represent edits that simplify and 
shorten an existing disclosure document.
    We encourage written comments regarding this certification. We 
solicit comment as to whether the proposed amendments could have an 
effect that we have not considered. We request that commenters describe 
the nature of any impact on small entities and provide empirical data 
to support the extent of the impact.

XII. Statutory Authority

    The Commission is proposing amendments to 240.3a51-1, 240.15g-2, 
240.15g-9 and 240.15g-100 of Title 17, Chapter II of the Code of 
Federal Regulations pursuant to authority set forth in Sections 3(b), 
15(c), 15(g) and 23(a) of the Exchange Act [15 U.S.C. 78c(b), 78o(c), 
78o(g), and 78w(a)].

XIII. Text of Proposed Rule Amendments

List of Subjects in 17 CFR Part 240

    Broker-dealers, Reporting and recordkeeping requirements, 
Securities.

    For the reasons set forth in the preamble, Title 17, Chapter II 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, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 
78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 
78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 
and 80b-11, unless otherwise noted.

* * * * *
    2. Section 240.3a51-1 is amended by revising paragraphs (a), (e) 
and (f) to read as follows:


Sec.  240.3a51-1  Definition of ``penny stock''.

* * * * *
    (a) That is a reported security, as defined in 17 CFR 240.11Aa3-
1(a) of this chapter, provided that:
    (1) The security is registered, or approved for registration upon 
notice of issuance, on a national securities exchange that has been 
continuously registered as a national securities exchange since April 
20, 1992 (the date of the adoption of Rule 3a51-1 (17 CFR 240.3a51-1) 
by the Commission); and the national securities exchange has maintained 
quantitative listing standards that are substantially similar to or 
stricter than those listing standards that were in place on that 
exchange on January 8, 2004; or
    (2) The security is registered, or approved for registration upon 
notice of issuance, on a national securities exchange, or is listed, or 
approved for listing upon notice of issuance on, an automated quotation 
system sponsored by a registered national securities association, that:
    (i) Has established initial listing standards that meet or exceed 
the following criteria:
    (A) The issuer shall have:
    (1) Stockholders' equity of $5,000,000;
    (2) Market value of listed securities of $50 million for 90 
consecutive days prior to applying for the listing (market value means 
the closing bid price multiplied by the number of securities listed); 
or
    (3) Net income of $750,000 (excluding extraordinary or non-
recurring items) in the most recently completed fiscal year or in two 
of the last three most recently completed fiscal years;
    (B) The issuer shall have an operating history of at least one year 
or a market value of listed securities of $50 million (market value 
means the closing bid price multiplied by the number of securities 
listed);
    (C) The issuer's stock, common or preferred, shall have a minimum 
bid price of $4 per share;
    (D) In the case of common stock, there shall be at least 300 round 
lot holders of the security (a round lot holder means a holder of a 
normal unit of trading);
    (E) In the case of common stock, there shall be at least 1,000,000 
publicly held shares and such shares shall have a market value of at 
least $5 million (market value means the closing bid price multiplied 
by number of publicly held shares, and shares held directly or 
indirectly by an officer or director of the issuer and by any person 
who is the beneficial owner of more than 10 percent of the total shares 
outstanding are not considered to be publicly held);
    (F) In the case of a convertible debt security, there shall be a 
principal amount outstanding of at least $10 million;
    (G) In the case of rights and warrants, there shall be at least 
100,000 issued and the underlying security shall be registered on a 
national securities exchange or listed on an automated quotation system 
sponsored by a registered national securities association and shall 
satisfy the requirements of paragraphs (a) or (e) of this section;
    (H) In the case of put warrants (that is, instruments that grant 
the holder the right to sell to the issuing company a specified number 
of shares of the company's common stock, at a specified price until a 
specified period of time), there shall be at least 100,000 issued and 
the underlying security shall be

[[Page 2551]]

registered on an automated quotation system sponsored by a registered 
national securities exchange or listed on and shall satisfy the 
requirements of paragraphs (a) or (e) of this section;
    (I) In the case of units (that is, two or more securities traded 
together), all component parts shall be registered on a national 
securities exchange or listed on an automated quotation system 
sponsored by a registered national securities association and shall 
satisfy the requirements of paragraphs (a) or (e) of this section; and
    (J) In the case of equity securities (other than common and 
preferred stock, convertible debt securities, rights and warrants, put 
warrants, or units), including hybrid products and derivative 
securities products, the national securities exchange or registered 
national securities association shall establish quantitative listing 
standards that are substantially similar to those found in paragraphs 
(a)(2)(i)(A) through (a)(2)(i)(I); and
    (ii) Has established quantitative continued listing standards that 
are reasonably related to the initial listing standards set forth above 
in paragraph (a)(2)(i) of this section, and that are consistent with 
the maintenance of fair and orderly markets.
* * * * *
    (e) That is registered, or approved for registration upon notice of 
issuance, on a national securities exchange that makes transaction 
reports available pursuant to 17 CFR 240.11Aa3-1, provided that:
    (1) Price and volume information with respect to transactions in 
that security is required to be reported on a current and continuing 
basis and is made available to vendors of market information pursuant 
to the rules of the national securities exchange;
    (2) The security is purchased or sold in a transaction that is 
effected on or through the facilities of the national securities 
exchange, or that is part of the distribution of the security; and
    (3) The security satisfies the requirements of paragraphs (a)(1) or 
(a)(2) of this section; except that a security that satisfies the 
requirements of this paragraph (e), but does not otherwise satisfy the 
requirements of paragraph (a), (b), (c), (d), (f), or (g) of this 
section, shall be a penny stock for purposes of Section 15(b)(6) of the 
Act;
    (f) That is a security futures product listed on a national 
securities exchange or an automated quotation system sponsored by a 
registered national securities association;
* * * * *
    3. Section 240.15g-2 is revised t0 read as follows:
    The revisions and additions read as follows:


Sec.  240.15g-2  Penny stock disclosure document relating to the penny 
stock market.

    (a) It shall be unlawful for a broker or dealer to effect a 
transaction in any penny stock for or with the account of a customer 
unless, prior to effecting such transaction, the broker or dealer has 
furnished to the customer a document containing the information set 
forth in Schedule 15G, 17 CFR 240.15g-100, and has obtained from the 
customer a signed and dated acknowledgement of receipt of the document.
    (b) Regardless of the form of acknowledgement used to satisfy the 
requirements of paragraph (a) of this section, it shall be unlawful for 
a broker or dealer to effect a transaction in any penny stock for or 
with the account of a customer less than two business days after the 
broker or dealer sends such document.
    (c) The broker or dealer shall preserve, as part of its records, a 
copy of the acknowledgement required by paragraph (a) of this section 
for the period specified in 17 CFR 240.17a-4(b).
    (d) Upon request of the customer, the broker or dealer shall 
furnish the customer with a copy of the information set forth on the 
Commission's Web site at http://www.sec.gov/investor/pubs/microcapstock.htm.
    4. Section 240.15g-9 is amended by revising paragraphs (a)(2)(ii) 
and (b)(4) to read as follows:


Sec.  240.15g-9  Sales practice requirements for certain low-priced 
securities.

    (a) * * *
    (2) * * *
    (ii)(A) The broker or dealer has received from the person an 
agreement to the transaction setting forth the identity and quantity of 
the penny stock to be purchased; and
    (B) Regardless of the form of agreement used to satisfy the 
requirements of paragraph (A) of this section, it shall be unlawful for 
such broker or dealer to sell a penny stock to, or to effect the 
purchase of a penny stock by, for or with the account of a customer 
less than two business days after the broker or dealer sends such 
agreement.
    (b) * * *
    (4)(i) Obtain from the person a signed and dated copy of the 
statement required by paragraph (b)(3) of this section; and
    (ii) Regardless of the form of statement used to satisfy the 
requirements of paragraph (b)(4)(i) of this section, it shall be 
unlawful for such broker or dealer to sell a penny stock to, or to 
effect the purchase of a penny stock by, for or with the account of a 
customer less than two business days after the broker or dealer sends 
such statement.
* * * * *
    5. Section 240.15g-100 is revised to read as follows:


Sec.  240.15g-100  Schedule 15G--Information to be included in the 
document distributed pursuant to 17 CFR 240.15g-2.

Securities and Exchange Commission, Washington, DC 20549

Schedule 15G

Under the Securities Exchange Act of 1934

Instructions to Schedule 15G
    A. Schedule 15G (Schedule) may be provided to customers in its 
entirety either on paper or electronically. It may also be provided to 
customers electronically through a link to the SEC's Web site.
    1. If the Schedule is sent in paper form, the format and typeface 
of the Schedule must be reproduced exactly as presented. For example, 
words that are capitalized must remain capitalized, and words that are 
underlined or bold must remain underlined or bold. The typeface must be 
clear, easy to read, and in 12-point type. The Schedule may be 
reproduced either by photocopy or by printing.
    2. If the Schedule is sent electronically, the e-mail containing 
the Schedule must have as a subject line ``Important Information on 
Penny Stocks.'' The Schedule reproduced in the text of the e-mail must 
be clear, easy to read, type presented in a manner reasonably 
calculated to draw the customer's attention to the language in the 
document, especially words that are capitalized, underlined or in bold.
    3. If the Schedule is sent electronically using a hyperlink to the 
SEC Web site, the e-mail containing the hyperlink must have as a 
subject line: ``Important Information on Penny Stocks.'' Immediately 
before the hyperlink, the text of the e-mail must reproduce the 
following statement in clear, easy-to-read type presented in a manner 
reasonably calculated to draw the customer's attention to the words: 
``We are required by the U.S. Securities and Exchange Commission to 
give you the following disclosure statement: http://www.sec.gov/investor/Schedule15G.htm. It explains some of the risks of investing in 
penny stocks.

[[Page 2552]]

Please read it carefully before you agree to purchase or sell a penny 
stock.''
    B. Regardless of how the Schedule is provided to the customer, the 
communication must also provide the name, address, telephone number and 
e-mail address of the broker. E-mail messages may also include any 
privacy or confidentiality information that the broker routinely 
includes in e-mail messages sent to customers. No other information may 
be included in these communications, other than instructions on how to 
provide a signed and dated acknowledgement of receipt of the Schedule.
    C. The document entitled ``Important Information on Penny Stocks'' 
must be distributed as Schedule 15G and must be no more than two pages 
in length if provided in paper form.
    D. The disclosures made through the Schedule are in addition to any 
other disclosures that are required under the federal securities laws.
    E. Recipients of the document must not be charged any fee for the 
document.
    F. The content of the Schedule is as follows:


[next page]

Important Information on Penny Stocks

    The U.S. Securities and Exchange Commission (SEC) requires your 
broker to give this statement to you, and to obtain your signature to 
show that you have received it, before your first trade in a penny 
stock. This statement contains important information--and you should 
read it carefully before you sign it, and before you decide to purchase 
or sell a penny stock.
    In addition to obtaining your signature, the SEC requires your 
broker to wait at least two business days after sending you this 
statement before executing your first trade to give you time to 
carefully consider your trade.

Penny Stocks Can Be Very Risky

    Penny stocks are low-priced shares of small companies. Penny stocks 
may trade infrequently--which means that it may be difficult to sell 
penny stock shares once you have them. Because it may also be difficult 
to find quotations for penny stocks, they may be impossible to 
accurately price. Investors in penny stock should be prepared for the 
possibility that they may lose their whole investment.
    While penny stocks generally trade over-the-counter, they may also 
trade on U.S. securities exchanges, facilities of U.S. exchanges, or 
foreign exchanges. You should learn about the market in which the penny 
stock trades to determine how much demand there is for this stock and 
how difficult it will be to sell. Be especially careful if your broker 
is offering to sell you newly issued penny stock that has no 
established trading market.
    The securities you are considering have not been approved or 
disapproved by the SEC. Moreover, the SEC has not passed upon the 
fairness or the merits of this transaction nor upon the accuracy or 
adequacy of the information contained in any prospectus or any other 
information provided by an issuer or a broker or dealer.

Information You Should Get

    In addition to this statement, your broker is required to give you 
a statement of your financial situation and investment goals explaining 
why his or her firm has determined that penny stocks are a suitable 
investment for you. In addition, your broker is required to obtain your 
agreement to the proposed penny stock transaction.
    Before you buy penny stock, federal law requires your salesperson 
to tell you the ``offer'' and the ``bid'' on the stock, and the 
``compensation'' the salesperson and the firm receive for the trade. 
The firm also must send a confirmation of these prices to you after the 
trade. You will need this price information to determine what profit or 
loss, if any, you will have when you sell your stock.
    The offer price is the wholesale price at which the dealer is 
willing to sell stock to other dealers. The bid price is the wholesale 
price at which the dealer is willing to buy the stock from other 
dealers. In its trade with you, the dealer may add a retail charge to 
these wholesale prices as compensation (called a ``markup'' or 
``markdown'').
    The difference between the bid and the offer price is the dealer's 
``spread.'' A spread that is large compared with the purchase price can 
make a resale of a stock very costly. To be profitable when you sell, 
the bid price of your stock must rise above the amount of this spread 
and the compensation charged by both your selling and purchasing 
dealers. Remember that if the dealer has no bid price, you may not be 
able to sell the stock after you buy it, and may lose your whole 
investment.
    After you buy penny stock, your brokerage firm must send you a 
monthly account statement that gives an estimate of the value of each 
penny stock in your account, if there is enough information to make an 
estimate. If the firm has not bought or sold any penny stocks for your 
account for six months, it can provide these statements every three 
months.
    Additional information about low-priced securities--including penny 
stocks--is available on the SEC's Web site at http://www.sec.gov/investor/pubs/microcapstock.htm. In addition, your broker will send you 
a copy of this information upon request. The SEC encourages you to 
learn all you can before making this investment.

Brokers' Duties and Customer's Rights and Remedies

    Remember that your salesperson is not an impartial advisor--he or 
she is being paid to sell you stock. Do not rely only on the 
salesperson, but seek outside advice before you buy any stock. You can 
get the disciplinary history of a salesperson or firm from NASD at 1-
800-289-9999 or contact NASD via the Internet at www.nasd.com. You can 
also get additional information from your state securities official. 
The North American Securities Administrators Association can give you 
contact information for your state. You can reach NASAA at (202) 737-
0900 or via the Internet at www.nasaa.org.
    If you have problems with a salesperson, contact the firm's 
compliance officer. You can also contact the securities regulators 
listed above. Finally, if you are a victim of fraud, you may have 
rights and remedies under state and federal law. In addition to the 
regulators listed above, you also may contact the SEC with complaints 
at (800) SEC-0330 or via the Internet at [email protected].
* * * * *

    Dated: January 8, 2004.

    By the Commission.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-881 Filed 1-15-04; 8:45 am]
BILLING CODE 8010-01-U