Forms 211: OTC Markets’ New Role – Quotation, Trading Suspensions and Listing

We’ve written several times about the Securities and Exchange Commission’s (“SEC”) amendments to Rule 15c2-11, first proposed in September 2019 and adopted in September 2020. The amended rule will finally become effective on September 28, 2021. That is important because no stock that trades over-the-counter can trade at all unless it’s compliant with the relevant provisions of the rule. 

The Financial Industry Regulatory Authority (“FINRA”) has always played a significant role in the practical application of Rule 15c2-11. It once administered and operated the OTC Bulletin Board (“OTCBB”) and dealt with the issuers that traded on it. Just before the turn of the new century, the SEC decided that all OTCBB companies had to register stock with the Commission or be dumped to the lowly Pink Sheets. The Pinks had recently been purchased by a group of investors who believed they could make a go of them, and they went on to do just that, eventually changing the name to OTC Markets Group. The OTCBB died a slow death, largely due to FINRA’s lack of interest and failure to innovate; on September 17, FINRA announced it would “retire” the OTC Bulletin Board entirely at a date not yet fixed, but probably in the fourth quarter of this year. (That announcement has been made several times in the past five years; the OTCBB seems always to be on its way out but not quite gone.)

FINRA continues to process corporate action requests by OTC issuers and to process Forms 211. When an issuer wants to initiate or resume quotation until now, it’s needed to find a sponsoring market maker willing to file a Form 211. In order to do so, he needed to obtain information from the company, including financial statements that needed to be accurate but not audited, and send the completed form to FINRA. If anything in the documentation is incorrect, the sponsoring market maker could be found liable. He was not permitted to charge for preparing and submitting a Form 211. 

The SEC proposed its changes to Rule 15c2-11 because the rule hadn’t been amended since 1991. Much had happened in 30 years. Perhaps the most important developments were the rise of the internet and, by 1996, the growing importance of discount brokerage firms for the OTC market. The new firms had easy-to-use interfaces and charged far lower commissions than traditional full-service brokers. That meant the entry of large numbers of new players, many of them fascinated by what they saw as penny stocks’ potential for quick and easy profits. 

The SEC, concerned about what it saw as increasing fraud in the penny market, decided it was time to amend Rule 15c2-11. Two new versions of the rule were proposed in 1998 and 1999, but in the end, neither was adopted. It was not until 20 years later that the regulator decided to try again. The Commission’s focus was, as before, on the potential for fraud, especially in shell companies and other issuers that provided no “current information” of any kind.

When we covered the subject in early August, we discussed FINRA’s role. During the comment period, which ran from late September 2020 into the early months of 2021, FINRA had had little to say publicly. It was not until May 28, 2021, that it made a move, filing its own proposed rule change to members’ (i.e., broker-dealers’) requirements under FINRA Rule 6432 (Compliance with the Information Requirements of SEA Rule 15c2-11). It posted its proposal on its own website; the SEC did the same on June 9. Only two comments were submitted. The first was from OTC Link LLC, written by Dan Zinn and Cass Sanford; the second was from FINRA itself, written by the regulator’s associate general counsel Robert McNamee and submitted on August 4.

OTC Link, part of OTC Markets Group, was involved because it, as a Qualified Interdealer Quotation System (“IDQS”), would now be playing an expanded role. Since its website is a repository of various kinds of disclosures posted by the OTC issuers that use its services, who better to determine whether those issuers offered “current information.” Going forward, it—or any other IDQS capable of performing the task, could decide which issuers were seeking to initiate quotation or to resume it, were qualified to do so.

While FINRA approves of the idea of a qualified IDQS making determinations about an issuer’s compliance with Rule 15c2-11’s current information requirement, it points out that: 

Under FINRA Rule 6432, no member may quote a non-exchange-listed security in a quotation medium unless the member has demonstrated compliance with FINRA Rule 6432 and the applicable requirements for information maintenance under Rule 15c2-11 by making a filing with, and in the form required by, FINRA (i.e., the Form 211). The Form 211 is designed to gather pertinent information regarding the subject issuer and security, the members knowledge of and relationship with the issuer, and the member’s intended quotation activities with respect to the security. FINRA uses the Form 211 in connection with its oversight of member compliance with Rule 15c2-11. 

FINRA wants to make three amendments to its own Rule 6432. First, the IDQS would be required to submit a modified Form 211 in connection with each initial information review it conducts; second, that the IDQS be obliged to submit a daily security file to FINRA containing summary information for all securities quoted on its system, and finally, “other changes” to Rule 6432 and the Form 211 would be proposed to clarify the new elements of both. 

It asks that on the day following the IDQS’s determination of an issuer’s compliance with Rule 15c2-11, it file a modified Form 211 by 6:30 p.m. Eastern time. It seems that as a good way to guarantee that trading will begin as quickly as possible. That means that once the IDQS has made its determination about the issuer’s compliance with the rule, it could begin quotation of the stock in question, but by the close of business on the following day, a modified Form 211 must be in FINRA’s hands. If, however, a broker-dealer submits a Form 211 for the issuer, as in the past, he would use the standard version of the form, and once it was submitted, he’d have to await notification from FINRA that the form had been processed before initiating quotes.

The IDQS must also “have a reasonable basis under the circumstances to believe that the… information is accurate in all material respects and obtained from a reliable source,” and that he “should be alert to any red flags (i.e., information under the circumstances that reasonably indicates that one or more of the required items of information may be materially inaccurate or from an unreliable source).” And so it, like ordinary sponsoring market makers, could be held liable should the information it submits on the modified Form 211 by FINRA to be problematic.

In a footnote, FINRA adds a bombshell: “…the modified Form 211 must be reviewed and signed by a principal of the Qualified IDQS and the principal must certify, among other things, that neither the firm nor its associated persons have accepted or will accept any payment or other consideration for filing the Form 211.” That has always been the case for broker-dealers filing a Form 211, but as we shall see, OTC Markets believed it should not apply to itself.

For the daily security file submission, FINRA wants: 

• Security symbol; 
• Issuer name; 
• If the non-exchange-listed equity security is being quoted pursuant to a processed Form 211 under FINRA Rule 6432(a); 
• If applicable, the type of publicly available determination made by the Qualified IDQS (e.g., an initial review pursuant to Rule 15c2-11(a)(2), that the required information is current and publicly available under Rule 15c2-11 (f)(2)(iii)(B) or (f)(3)(ii)(A), or an exception under Rule 15c2-11(f)(7)) and the date on which such publicly available determination was made by the Qualified IDQS;
• With respect to a non-exchange-listed equity security for which the Qualified IDQS has made a publicly available determination under Rule 15c2-11(f)(7) relating to the availability of the piggyback exception under Rule 15c2-11(f)(3), whether the issuer is a shell company and, if a shell company, the number of days remaining in the applicable 18-month period under Rule 15c-2-11(f)(3)(i)(B)(2); 
• If applicable, that the security is being quoted pursuant to an exception that does not rely on the Qualified IDQS’s publicly available determination and, if so, identify the exception relied upon by the subscriber; and 
• Such other information as specified by FINRA in a Regulatory Notice (or similar communication). 

Perhaps such a list could be generated automatically and therefore present no difficulties for OTC Markets, but it seems it would have to be reviewed for accuracy, at least occasionally. Even so, it doesn’t seem to be problematic. The “other amendments” are less substantive and should present no problems for OTC Markets. 

The text of the amended Rule 6432 begins on page 35 of FINRA’s submission. 

Zinn and Sanford posted their comment to the SEC on July 6. Their chief interest is in demonstrating that OTC Markets, as an IDQS, ought to be allowed to charge for its services. While they “do not expect the existing application of Rule 5250 to have a significant impact on our ability to perform initial information reviews, …we believe the modernized interpretation and application of Rule 5250 that we propose here would benefit issuers, investors and regulators alike.” 

The thrust of Zinn and Sanford’s argument is that the prohibition on compensation for initial information reviews shouldn’t be applied to an IDQS because an IDQS isn’t a broker-dealer. Further, according to FINRA itself, a potential conflict only arises because for a market maker: “Accepting such prohibited payments compromises the independence of a firm’s decision regarding its quoting and market making activities and, among other things, harms investor confidence in the overall marketplace because investors are unable to ascertain which quotations are based on actual interest and while are supported by issuers or promoters.” But an IDQS does not publish quotations or act as a market maker. It merely facilitates market maker quotations, and so the prohibition on accepting compensation should not extend to a “neutral market operator conducting initial information reviews or filing Form 211s [sic] with FINRA.” 

No comment on the daily security file is offered.  

McNamee of FINRA did not agree with OTC Markets’ interpretation. He notes that:

FINRA does not believe that comments regarding the application of Rule 5250 are germane to the Proposal, which provides, among other things, that members are not required to separately file a Form 211 with FINRA when relying on the publicly available determination of a Qualified IDQS (and instead requires the Qualified IDQS to submit the Form 211 within a prescribed period of time). While Rule 5250 certifications are currently required by Rule 6432, Rule 5250’s prohibition of payments for market making is not part of this proposed rule change and thus not a pertinent subject for comment.

He adds that FINRA Rule 5250, including the prohibition payment for the submission of a Form 211, “is designed to further investor protection and market integrity” by ensuring that members (of FINRA, of which OTC Link is one) will act independently. FINRA believes that as far as the submission of a Form 211 is concerned, a Qualified IDQS is no different from a sponsoring market maker.

FINRA ultimately adopted its amendments to Rule 6432 as originally written; The amended rule was adopted by the SEC on September 10 and was published in the Federal Register on the same day. The new version will become effective on September 28, the day the amended Rule 15c2-11 becomes effective. FINRA will also publish its modified Form 211 on the FINRA Gateway on September 28.

It seems the suspense will continue until September 28 is nearly upon us. In early summer, OTC Markets did its best to encourage non-compliant issuers to submit current information by June 30, noting that early submissions would guarantee compliance by the critical day in September. It says it’s working through applications now and will handle as many as it can, in the order in which they’re received. 

Some, inevitably, will arrive too late. At a webinar on the proposal in July, Zinn was asked what issuers should do if they end up without published quotations but want to return to normal trading. He replied that they’d have to apply for an Initial Information Review, which is a “higher standard” than the “ongoing information standard” that is being applied during this pre-September 28 period. He added casually that “things like audited financial statements are likely to be required.” 

There was no further discussion of that astonishing suggestion. At some time in the future, will OTC Pink Current Information issuers be required to produce audited financials? OTC Markets could do that: it’s a private company and can ask anything it wishes of the issuers that want to be quoted on its trading platform. But many issuers would be displeased and might well seek out a different IDQS. There are others. One is Global OTC, operated by a wholly-owned subsidiary of NYSE Group, Inc. It describes itself as “the longest serving Alternative Trading System (ATS) and only fully automated ATS for trading global blue chip and US emerging growth Over-The-Counter (OTC) equity securities.”

For now, however, it appears OTC Markets will have a great deal of new work to do. While to its disappointment, it cannot charge for doing it, nothing in FINRA Rule 5250’s prohibition against accepting payment for market making or submitting Forms 211 prevents it from charging companies to post disclosure at its website or move up to a more prestigious tier. It will continue to be the only game in town for OTC issuers.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email [email protected] or visit www.securitieslawyer101.com.  This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

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