SEC Rules Seek to Force OTC Companies to Provide Greater Disclosure

Securities Update

Date: September 18, 2020

SEC Rule Amendments Regarding Broker Quotations of OTC Securities

On September 16, 2020, the Securities and Exchange Commission (“SEC”) adopted amendments to Exchange Act Rule 15c2-11, which contains requirements for brokers to comply with before they publish quotations for securities in the over-the-counter (“OTC”) market. The amendments remove and/or limit certain exemptions on which many brokers frequently rely when providing quotations for smaller companies (such as the “piggyback exemption,” which in many cases allows a broker to rely on the quotations of another broker that initially complied with the information review requirements even when there is no longer current public information about the company). In particular, subject to narrow exceptions, the amendments provide that brokers cannot publish quotations of a company’s securities on the OTC Markets if adequate current financial and other information about the company is not provided publicly.

Impact of SEC Amendments on OTC Companies with “Limited Information” or “No Information”

In short, these amendments could cause trades in a company’s stock to no longer be quoted on the OTC Markets. Once these amendments become effective, smaller companies quoted on the OTC Markets that do not currently provide any information about the company, provide only financial statements or otherwise limited information about the company, or are not current in their disclosures will most likely lose the ability for their securities to be quoted by brokers on the OTC Markets, making it difficult for investors to buy and sell their stock.

Effective Date

The amendments become effective 60 days following their publication in the Federal Register. The general compliance date is nine months after the effective date, with an exception for certain historical information. In an effort to prevent the retroactive application of the new amendments, the SEC has delayed for two years the requirement that a company’s financial statements for the two preceding fiscal years be current and publicly available.

Many OTC companies that report below “Pink Current” level, or do not report at all, may face significantly curtailed broker ability to quote their stock, potentially with no public quote available.

Next Steps

OTC companies that provide limited or no public information about the company, or are not timely in their disclosures, should consider whether to update and enhance their public disclosure on the OTC Markets. Companies may also want to consider potentially changing from the OTC Pink to the OTCQX “premier” tier of the OTC Markets or, perhaps, uplisting to a stock exchange such as the Nasdaq, NYSE or NYSE American, if the exchange listing standards can be met.

The OTC Markets publishes the Pink Basic Disclosure Guidelines for OTC Pink Current companies, which set out the requirements for the OTC reports that are essentially simplified versions of SEC periodic reports. The Pink Basic Disclosure Guidelines are designed to prescribe the information necessary to satisfy the current public information requirements under Rule 15c2-11.

The amendments should lead to some new market practices, including potential development of new limited markets for certain companies and certain investors, and to some changes in OTC requirements. However, given what is at stake, waiting is not advisable.

Boards of directors of OTC companies should promptly evaluate the potential effect of these amendments and make a determination as to current public information. To the extent they are not current, OTC companies should act quickly in providing these additional disclosures.

Our team can assist you with evaluating the impact of these amendments and the implementation of enhanced disclosure.


For more information, please contact:

Derek D. Bork

Jurgita Ashley