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FINRA Granted Oversight Of OTC Markets In The 211 Process

Clearly not completely pleased with the power bestowed on OTC Markets as part of the amended Rule 15c2-11, on June 9, 2021, FINRA filed a request for a rule change to increase its regulatory oversight and require OTC Markets to file a Form 211 as part of the new process. The SEC published the proposal on June 15 and sought comments.  Only one comment letter was received, and that was from OTC Markets itself.  On September 10, 2021, SEC approved the rule change with an effective date of September 28, 2021, the same day as the compliance date for the amended Rule 15c2-11.  On that date, any company that does not comply with the current publicly available information requirements in the amended 15c2-11 rules (see HERE and HERE for in-depth discussions on the new rules), will cease to trade and become what the industry refers to as “grey market.”

Amended Rule 6432 will: (i) require OTC Markets to submit a modified Form 211; (ii) require OTC Markets to make a daily security file submission with information on all securities quoted on its platform; and (iii) prohibit OTC Markets from receiving compensation in connection with the 211 process. FINRA is expected to file a notice to members any day now to include a copy of the form of the modified Form 211.

From a high level, FINRA Rule 6432 requires that all broker-dealers have and maintain certain information on a non-exchange-traded company security prior to resuming or initiating a quotation of that security.  Generally, a non-exchange-traded security is quoted on the OTC Markets.  The specific information required to be maintained by the broker-dealer when it initiates a quotation is delineated in Exchange Act Rule 15c2-11.  For a broker-dealer, compliance with the Rule is demonstrated by filing a Form 211 with FINRA.

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

In addition, a broker-dealer must have a reasonable basis under the circumstances to believe that the information is accurate in all material respects and from a reliable source.  This reasonable basis requirement has altered the initial quotation process dramatically over the last ten years.  In particular, FINRA uses this requirement to conduct a deep dive into the due diligence and background of a company when processing a 211 Application.

Effective September 28, 2021, Rule 15c2-11 allows a qualified IDQS (i.e., OTC Markets) to comply with the information review requirements, to publish an affirmative determination that it has conducted such review, and for the broker-dealer to rely on OTC Markets’ determination without conducting an independent review.  As long as OTC Markets makes known to the public that it has completed a review, a broker-dealer can quote or resume quoting the securities and be in compliance with Rule 15c2-11.  Likewise, OTC Markets can make a determination that a company qualifies for an exception to the 211 rule requirements and a broker-dealer can rely on that determination.

Importantly, as written the Rule specifically did not require that OTC Markets comply with FINRA Rule 6432 and did not require OTC Markets or broker-dealers relying on OTC Markets’ publicly available determination that an exception applies, to file a Form 211 with FINRA.  That changed on September 10 although a broker-dealer relying on OTC Markets publicly available determination of compliance with Rule 211 or the availability of an exception, will still not be required to file a separate Form 211.

Amended Rule 6432

Under FINRA Rule 6432, no member may publish quotations for 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).  As noted above, amended Rule 15c2-11 explicitly excluded OTC Markets from this requirement.  Amended Rule 6432 requires that (i) a qualified inter-dealer quotation system (“Qualified IDQS”) (i.e. OTC Markets) submit a modified Form 211 filing to FINRA in connection with each initial information review that it conducts; (ii) a Qualified IDQS (OTC Markets) that makes a certain publicly available determination under Rule 15c2-11 submit a daily security file to FINRA containing applicable summary information for all securities quoted on its system; and (iii) other changes to FINRA Rule 6432 and the Form 211 to further clarify the operation of the rule and conform it to amended Rule 15c2-11.

Although OTC Markets will now be required to file a modified Form 211, it may do so after the fact.  The modified Form 211 must be filed with FINRA no later than 6:30 pm EST on the business day following OTC Markets’ publicly available determination of compliance with Rule 211, as to a particular company.  FINRA also indicates it intends to conduct a focused review of the filing.  Broker-dealers that are not relying on OTC Markets review and determination, will continue to go through the same historical process with FINRA including what has been a lengthy comment and review process.

Like the standard Form 211, the modified Form 211 will contain requests for the items of information specified in Rule 15c2-11(b) with respect to the type of issuer involved.  In addition, the modified Form 211, like the standard Form 211, must be reviewed and signed by a principal of OTC Markets, who must certify, among other things, that neither the firm nor its associated persons have accepted or will accept any payment or other consideration prohibited by FINRA Rule 5250 for filing the Form 211.  In other words, OTC Markets cannot charge or receive compensation in connection with the 211 process.

Amended Rule 6432 also requires OTC Markets to submit a daily security file as to all companies quoted on its platform, including the following information:

  • Security symbol;
  • Issuer name;
  • If the company is being quoted pursuant to a processed Form 211;
  • If application, the type of publicly available determination – for example, that OTC Markets conducted an initial review or that an exception is available – and the date of such publicly available determination;
  • If the company is a shell company and if so, the number of days remaining in the applicable 18-month period to complete a business combination (or no longer be piggyback eligible);
  • If the security is not relying on OTC Markets publicly available determination of compliance (such as that a broker-dealer made its own determination); and
  • Such other information as FINRA may request.

Amended Rule 6432 also clarifies that a broker-dealer must receive notification from FINRA that a standard Form 211 has been processed (i) before initiating or resuming quotations in a quotation medium for a security; and before entering a priced quotation for the security.  In other words, FINRA confirms that the historical process is unchanged when a broker-dealer chooses to submit a Form 211 instead of relying on OTC Markets.

The SEC strongly supported the rule change, finding it appropriate for FINRA to oversee OTC Markets in relation to quotations.  The SEC found the rule change will protect investors and prevent fictitious or misleading quotations, and promote orderly procedures for collecting, distributing, and publishing quotations.

The Author

Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm

Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service.  The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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