OTC Markets Group Inc. (“OTC Markets Group”) operates the OTCQX® Best, OTCQB® Venture and Pink® Open markets for 10,000 securities. Our wholly-owned subsidiary, OTC Link LLC, operates OTC Link® ATS, an SEC regulated alternative trading system that directly links a diverse network of broker-dealers providing liquidity and execution services.
We appreciate Morrison & Foerster raising the topic of Exchange Act Rule 15c2-11 in the context of changes to the regulatory framework that governs capital raising under the JOBS Act, such as the recent SEC amendments to Regulation A. This post clarifies some of the points raised in Morrison & Foerster’s earlier commentary, and provides our additional insight and commentary as the operator of the primary markets for OTC equity securities.
How Rule 15c2-11 Works
The prior Morrison & Foerster post described the regulatory obligations of a broker-dealer under Rule 15c2-11. Here’s how it works in practice:
In a Regulation A offering, for example, after the SEC approves a company’s offering statement and investors are able to buy the issued shares, Rule 15c2-11 plays a vital role in providing those investors access to the public trading markets. As Morrison & Foerster noted, in connection with the amendments to Regulation A, Rule 15c2-11 was amended to specifically state that an issuer’s disclosure under Regulation A is sufficient to meet the requirements of the Rule. However, in order for the shares held by the Regulation A investors to be publicly quoted on a market such as ours, a broker-dealer must file a Form 211 with FINRA under FINRA Rule 6432, indicating that the broker has the required Regulation A information. Rule 6432 only requires that brokers provide three days notice to FINRA prior to quoting the security. However, in practice FINRA conducts a review of the Form 211, which often takes longer than three days and as much as several weeks or more. During FINRA’s review, they may request more information from the broker, and based on all of the information provided will ultimately determine whether to “clear” the Form 211 and allow the security to be publicly quoted. FINRA’s regulatory oversight in this area is already far greater than was contemplated by its own rules.
For 30 days after the Form 211 has been cleared, only the broker-dealer that filed the Form 211 may publicly quote the security.  After 30 days, the piggyback exception may allow additional broker-dealers to enter quotes, thereby creating a larger public market for the securities. Exchange Act Rule 15c2-11 and FINRA Rule 6432 can be time-consuming and require significant broker-dealer resources. However, in providing broker-dealers with a mechanism by which to quote OTC securities, these rules help give effect to the Congressional intent of the JOBS Act to promote capital formation for the innovative, entrepreneurial companies that fuel the American economy.
A Few Clarifications
First, the prior post makes reference to earlier evaluations of Rule 15c2-11, specifically SEC proposals in 1991, 1998 and 1999, but does not provide the full story. In each of these evaluative periods, industry commenters overwhelmingly noted several flaws with the concept of 15c2-11 reform, and in particular with proposals calling for the elimination of the piggyback exception. A 1999 comment letter by the Securities Industry Association (SIA)  detailed the many relevant issues, and we updated the discussion in a 2014 comment letter to FINRA.
Second, the prior post uses the term “Pink Sheets” in reference to our markets. That term only refers to the old, paper-based books printed on pink paper that included broker-dealer quotes in OTC securities and were physically mailed to broker-dealers. Much has changed in the past 20 years. Our markets are fully electronic, and we provide real-time quote information for free to the public on our website at www.otcmarkets.com. The evolution of our markets is just one example of the power of technology to provide better, faster and more transparent information to a vast group of market participants.
We again thank Morrison & Foerster for bringing Rule 15c2-11 to the forefront, and for giving us an opportunity to contribute to the discussion.
About OTC Markets Group Inc.
OTC Markets Group Inc. (OTCQX: OTCM) operates Open, Transparent and Connected financial markets for 10,000 U.S. and global securities. Through our OTC Link® ATS, we directly link a diverse network of broker-dealers that provide liquidity and execution services for a wide spectrum of securities. We organize these securities into markets to inform investors of opportunities and risks: the OTCQX® Best Market; the OTCQB® Venture Market; and the Pink® Open Market. Our data-driven platform enables investors to easily trade through the broker of their choice at the best possible price and empowers a broad range of companies to improve the quality and availability of information for their investors. To learn more about how we create better informed and more efficient financial markets, visit www.otcmarkets.com.
OTC Link ATS is operated by OTC Link LLC, member FINRA/SIPC and SEC regulated ATS.
Daniel Zinn is General Counsel of OTC Markets Group Inc.
 Subject to certain exemptions as described in the Morrison & Foerster post.
 SIA is a predecessor to what is known today as SIFMA, or the Securities Industry and Financial Markets Association.