|
Proposed Rule:
|
1 | The term "microcap securities" is not defined under the federal securities laws or regulations. The use of the term "microcap securities" in this release, however, should be distinguished from its use in the mutual fund context. For example, Lipper Analytical Services, a mutual fund rating organization, generally categorizes microcap companies as companies with market capitalization of less than $300 million. Lipper-Directors' Analytical Data, Investment Objective Key, 2d ed. 1997. |
2 | Microcap securities can also be listed on securities exchanges or Nasdaq or quoted in alternative trading systems. |
3 | For a summary of these cases, see Fight Against Microcap Fraud "Paying Dividends" , Press Release No. 98-92 (September 24, 1998), available through our Internet website at <http://www.sec.gov/news/micronew.htm>. |
4 | For a summary of these cases, see Purveyors of Fraudulent Spam, Online Newsletters, Message Board Postings, and Websites Caught , Press Release No. 98-117 (October 28, 1998), available through our Internet website at <http://www.sec.gov/news/netfraud.htm>. |
5 | See , e.g. , "Microcap Stock: A Guide for Investors" (providing a variety of tips on how to detect and avoid microcap fraud); "Cold Calling Alert" (describing the cold calling rules and instructing investors how to avoid telephone scams); "Internet Fraud" (describing common frauds including on-line newsletter and bulletin board posting scams); and "Ask Questions" (listing questions that investors should ask about their investments and their investment professionals). All of these publications are available for free from our toll-free publications line at (800) 732-0330 and can be downloaded through our Internet website at <http://www.sec.gov>. |
6 | Securities Exchange Act Release No. 40878 (January 4, 1999), 64 FR 1255 (OTC Bulletin Board Release). |
7 | Securities Act Release No. 7646 (February 25, 1999). The amendments to Form S-8 restrict the use of Form S-8 for the sale of securities to consultants and advisors, among other things. |
8 | 15 U.S.C. 77a et seq . |
9 | Securities Act Release No. 7644 (February 25, 1999). The amendments limit the circumstances where freely tradable securities may be issued in reliance on, and general solicitation is permitted under, Rule 504 of Regulation D. |
10 | 17 CFR 240.15c2-11. |
11 | 15 U.S.C. 78a et seq. |
12 | In this release, "OTC stocks" or "OTC securities" refers to securities that are not listed on a national securities exchange or Nasdaq. "Covered OTC securities" refers to those OTC securities that are subject to Rule 15c2-11. The Rule applies to securities quoted on the OTC Bulletin Board operated by the NASD, the Pink Sheets operated by the NQB, and similar quotation mediums. For further discussion of quotation mediums, see Part III.F. below. |
13 | 17 CFR 240.10b-5. |
14 | Rule 15c2-11 defines "quotation" as any bid or offer at a specified price with respect to a security, or any indication of interest by a broker or dealer in receiving bids or offers from others for a security, or any indication by a broker or dealer that advertises its general interest in buying or selling a particular security. For the purposes of this release, a "priced quotation" is a bid or offer at a specified price. |
15 | See Part III.C. below for a description of the required issuer and supplemental information. |
16 | An "interdealer quotation system" is a quotation medium of general circulation to brokers or dealers which regularly disseminates quotations of identified brokers or dealers. 17 CFR 240.15c2-11(e)(2). Under the proposed amendments, the definition of interdealer quotation system" would be incorporated into the definition of "quotation medium." See Part III.F. below for a discussion of the term "quotation medium." |
17 | Securities Exchange Act Release No. 39670 (February 17, 1998), 63 FR 9661 (Proposing Release). |
18 | This total includes virtually identical comment letters from 68 issuers. All comment letters are available in File No. S7-3-98 at our Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Comment letters that were submitted electronically are available through our Internet website at <http://www.sec.gov/rules/s7398.htm>. |
19 | The amendments, however, will prohibit the first broker-dealer from publishing a priced or unpriced quotation for a covered OTC security unless it complies with the Rule. For a discussion of the requirements concerning the initial quotation for a covered OTC security, see Part III.B.1. below. |
20 | 15 U.S.C. 78 l (k). |
21 | However, we are narrowing the scope of the requirement contained in the Proposing Release that broker-dealers provide the Rule 15c2-11 information to others upon their request. See Part III.D. below. |
22 | 17 CFR 240.17a-4. |
23 | See , e.g. , Letter from Securities Industry Association (April 28, 1998) (SIA Comment Letter). |
24 | Of course the general antifraud provisions of the federal securities laws, including Rule 10b-5 (17 CFR 240.10b-5), apply to transactions in all securities, whether or not excluded from Rule 15c2-11. |
25 | We estimate that at least 10% of covered OTC securities will be excluded from the Rule under these tests. We estimate that approximately 5% of the OTC securities of U.S. companies, 10% of the OTC securities of foreign issuers (excluding ADRs), and 66% of OTC American Depositary Receipts (ADRs) will satisfy any one of these three alternative tests. |
26 | We have used an ADTV value of $100,000 in another, but related, context. Rules 101 and 102 of Regulation M, 17 CFR 242.101 and 102, provide for a one business day restricted period for securities with an ADTV value of at least $100,000 (as measured over a 60 day period), if the issuer has a public float value of at least $25 million. These rules are intended to prevent manipulative activities during a distribution. |
27 | A broker-dealer will be able to rely on trading volume as reported by SROs or comparable entities, or any other source believed to be reliable. Electronic information systems that provide information regarding securities in markets around the world could provide an easy means to determine worldwide trading volume in a particular security. Worldwide trading volume includes all markets, domestic or foreign, where an OTC security is traded. |
28 | This is comparable to the calculation of value of ADTV under Regulation M. See Securities Exchange Act Release No. 38067 (December 20, 1996), 62 FR 520, 537. |
29 | See id . |
30 | Most of the Commission's recent trading suspension orders issued under Section 12(k) of the Exchange Act, 15 U.S.C. 78 l (k), have involved securities quoted on the OTC Bulletin Board or the Pink Sheets. Our staff's analysis of these trading suspension orders, issued between April 1, 1994 and January 1, 1998, showed that the suspended OTC securities had an average bid price of approximately $5, with a median bid price of approximately $3. These securities had bid prices that ranged from a low of approximately $0.50 to a high of approximately $18. |
31 | This is comparable to the provisions excluding equity securities priced at $5 or more from the definition of "penny stock" contained in 17 CFR 240.3a51-1(d)(2). |
32 | An analysis of OTC securities that were the subject of recent Commission-ordered trading suspensions showed that the issuers on average had approximately $3,500,000 in net tangible assets, with a median of approximately $225,000 in such assets. |
33 | 17 CFR 210.2-02. |
34 | These financial statements may be found in filings with the Commission on Forms 20-F or 6-K, or in submissions under Rule 12g3-2(b) under the Exchange Act (17 CFR 240.12g3-2(b)), or elsewhere. |
35 | 17 CFR 240.3a51-1. |
36 | See proposed NASD Rule 2315, which the Commission recently issued for public comment. Securities Exchange Act Release No. 41075 (February 19, 1999). The proposed rule will be available through the NASD Regulation Internet website at <http://www.nasdr.com> and our Internet website at <http://www.sec.gov>. |
37 | IASC's accounting standards are summarized on, and may be ordered through, the IASC's Internet website at <http://www.iasc.org.uk>. |
38 | Non-participatory preferred stock means non-convertible capital stock, the holders of which are entitled to a preference in payment of dividends and in distribution of assets on liquidation, dissolution, or winding up of the issuer, but are not entitled to participate in residual earnings or assets of the issuer. See paragraph (j)(8) of the Rule proposal, which is based upon a definition contained in Rule 902(a)(1) of Regulation S (17 CFR 230.902(a)(1)). |
39 | 17 CFR 240.15c3-1 (net capital requirements for broker-dealers). |
40 | The Commission's staff is engaged in a project to consider the development of disclosure and registration requirements specifically related to asset-backed securities. As part of that project, the staff intends to examine further the role of ratings with respect to asset-backed securities. Therefore, we consider it appropriate to limit the proposed exclusion to investment grade asset-backed securities at this time. |
41 | Proposing Release, 63 FR at 9669. Also, we are combining into a single provision the current exceptions for exchange-listed and Nasdaq securities. |
42 | For a discussion of the requirements under the reproposed amendments concerning the submission of information to the NASD, see Part III.I. below. |
43 | 15 U.S.C. 78 l (k). |
44 | The initial proposal would have permitted a broker-dealer to conduct the annual review as of the anniversary date of the initial quotation. |
45 | See Letter from A.G. Edwards & Sons, Inc., (April 27, 1998) (A.G. Edwards Comment Letter); and Letter from National Quotation Bureau, LLC, (April 27, 1998) (NQB Comment Letter). |
46 | See , e.g. , A.G. Edwards Comment Letter. |
47 | See , e.g. , NQB Comment Letter. |
48 | See Letter from NASD Regulation, Inc., (July 17, 1998) (NASD Comment Letter); Letter from North American Securities Administrators Association, Inc., (April 27, 1998) (NASAA Comment Letter); and SIA Comment Letter. |
49 | 15 U.S.C. 78m and 78 o (d). |
50 | 15 U.S.C. 78 l (g)(2)(G). |
51 | In response to the 78 comment letters that we received from issuers of securities quoted on the OTC Bulletin Board who were concerned about continued liquidity for their securities, we note that 33 of these issuers are reporting companies. Also, under recently approved amendments to NASD Rules 6530 and 6540, all of these issuers ultimately will need to be reporting companies current in their reporting obligations in order for their securities to remain on the OTC Bulletin Board. See note 6 above and accompanying text. There should be no burdens on reporting issuers to provide information to broker-dealers wishing to publish quotations because the issuer information should be available on EDGAR, as long as the issuers are current in their reporting obligations. |
52 | See Part II.A.4. of the Proposing Release at 63 FR 9661, 9664-9669. |
53 | See , e.g. , NASAA Comment Letter. |
54 | See , e.g. , Letter from Daniel J. Demers (March 27, 1998) (Demers Comment Letter); Letter from Robotti & Company, Inc., (April 27, 1998) (Robotti Comment Letter); and NQB Comment Letter. In 1989, we sought comment on whether there were situations, such as bankruptcy, that should be addressed if the piggyback provision were revised. See Securities Exchange Act Release No. 27247 (September 14, 1989), 54 FR 39194 (1989 Release). Commenters on the 1989 Release argued that it was appropriate to permit broker-dealers to continue quoting the securities of issuers that had filed for bankruptcy because it provided liquidity for these securities and suggested that issuers in bankruptcy be identified in the quotation system by using a special indicator. |
55 | 11 U.S.C. 1101 et seq . |
56 | Demers Comment Letter; see also 11 U.S.C. 1125. The disclosure statement includes, among other things, a description of the issuer's business plan, a description of any securities to be issued, and financial information. |
57 | Broker-dealers would be able to continue to publish unpriced quotations. |
58 | See Federal Rule of Bankruptcy Procedure 2015 (Rule 2015 bankruptcy reports). |
59 | See Staff Legal Bulletin No. 2 (April 15, 1997)(CF)(Staff Legal Bulletin No. 2), which is available through our Internet website at <http://www.sec.gov/rules/othern/slbcf2.txt>. Under Staff Legal Bulletin No. 2, our Division of Corporation Finance has granted no-action relief permitting an issuer in Chapter 11 reorganization to satisfy its Exchange Act reporting obligations by filing the Rule 2015 bankruptcy reports on Exchange Act Form 8-K. See 17 CFR 249.308. Under Staff Legal Bulletin No. 2, the staff has allowed a company to substitute its Rule 2015 bankruptcy reports for its Exchange Act periodic reports when there is little or no trading in the debtor's securities. |
60 | See Staff Legal Bulletin No. 2. |
61 | See 11 U.S.C. 1125. The disclosure statement includes, among other things, a description of the issuer's business plan, a description of any securities to be issued, and financial information. |
62 | See Letter from Florida Division of Securities (April 27, 1998) (Florida Comment Letter); NQB Comment Letter; Demers Comment Letter; and Robotti Comment Letter. Mr. Demers suggested that the required financial information for non-reporting issuers emerging from bankruptcy be from the "effective date" of the plan, instead of the "confirmation date" of the plan. We are retaining this amendment from the confirmation date because adequate information is available about the non-reporting issuer at this point for Rule 15c2-11 purposes. |
63 | 15 U.S.C. 78 l (g). |
64 | 17 CFR § 240.12g3-2(b). |
65 | Some of the paragraph (c)(6) information that broker-dealers will have to obtain and review may be present in the foreign issuer's Rule 12g3-2(b) materials. |
66 | See Part III.C.4. below. |
67 | For example, some commenters stated that we should delete the reference to Rule 12g3-2(b) and require broker-dealers to review the same information as required for all other foreign non-reporting issuers whose securities are subject to Rule 15c2-11. See , e.g. , Florida Comment Letter. Other commenters, however, indicated that we should continue to require broker-dealers to review only the home country information that certain foreign issuers submit to the Commission under Rule 12g3-2(b). See , e.g. , SIA Comment Letter. |
68 | See NASAA Comment Letter. |
69 | See , e.g. , Letter from David B. Schneider (April 21, 1998). |
70 | This provision is a presumption that financial information that is less than 15 months old is current. However, if the broker-dealer has other information that indicates that the issuer's financial condition has materially changed from that shown in the financial statements, this presumption may not apply, and the broker-dealer should determine whether more recent financial information is available. Financial information older than 15 months is not current and does not satisfy the Rule's requirements. The presumption for non-financial information is that this information is considered current if it is as of a date within 12 months of publication of the quotation. |
71 | This presumption will operate in the same manner as for domestic issuers. See footnote 70 above. |
72 | See , e.g. , Letter from Security Traders Association (April 28, 1998) (STA Comment Letter). We originally proposed that the information be made available to anyone upon request. |
73 | See , e.g. , Letter from Richard P. Ryder, Esq. (May 12, 1998). |
74 | See , e.g. , Letter from The Bond Market Association Comment Letter (April 27, 1998); NQB Comment Letter; and Florida Comment Letter. |
75 | A broker-dealer may charge for the reasonable expenses it incurs in producing and forwarding copies of the Rule 15c2-11 information. |
76 | We note that, for reporting issuers, information repositories already exist. Broker-dealers are able to access and review the required information on our EDGAR system, available through our Internet website at <http://www.sec.gov>. In addition, broker-dealers may consult federal or state electronic information systems for information about issuers of covered OTC securities. |
77 | See , e.g. , Letter from Singer Frumento Sichenzia, LLP, (April 13, 1998). |
78 | This authority will be delegated to the Director of the Commission's Division of Market Regulation. We propose to amend Rule 200.30-3, which provides for delegation of authority to the Director, to include the designation of information repositories. See 17 CFR 200.30-3. |
79 | See , e.g. , STA Comment Letter. |
80 | Under the current Rule, "interdealer quotation system" is defined as any system of general circulation to brokers or dealers which regularly disseminates quotations of identified brokers or dealers. A separate definition of "interdealer quotation system" is no longer necessary because of the proposed elimination of the piggyback provision and the revision that the information be furnished to the NASD in accordance with NASD rules, rather than to interdealer quotation systems. |
81 | We are using the term "alternative trading system," which encompasses the term "electronic communications network." See Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844. |
82 | See , e.g. , Letter from Instinet (April 22, 1998). |
83 | For example, some broker-dealers have claimed to submit customer "orders" in quotation mediums following the termination of a Commission trading suspension issued under Exchange Act Section 12(k). |
84 | To rely on the exception for an unsolicited customer order, the order must represent an unsolicited indication of interest of a customer (other than a person acting as or for a dealer) of the broker-dealer submitting the order to the ATS. |
85 | We have previously interpreted the Rule to require a broker-dealer that was publishing quotations in a particular interdealer quotation system to review issuer information before publishing quotations in another interdealer quotation system unless it relied upon an exemption. See Letter re: OTC Bulletin Board Display Service (December 20, 1993) (conditional exemption permitting broker-dealers that are currently publishing quotations in an interdealer quotation system to publish quotations in the OTC Bulletin Board without reviewing issuer information under the Rule); and Letter re: OTC Bulletin Board; Modification of Exemption (December 1, 1998) (modifying the exemption granted in 1993). Upon adoption of the reproposed amendments, we will rescind this interpretation and related exemptions. |
86 | 17 CFR 240.17a-4. We will add new paragraph (b)(11). |
87 | This proposed recordkeeping requirement was discussed by few commenters and generally was viewed favorably. See , e.g. , NASAA Comment Letter. |
88 | Broker-dealers publishing quotes for securities of exempt financial institutions may obtain the regulatory reports from the financial institution by contacting their primary bank regulatory agency. Broker-dealers can access the Federal Reserve System's National Information Center of Banking Information Internet website at <http://www.ffiec.gov/NIC>, the Office of the Comptroller of the Currency's Internet website at <http://www.occ.treas.gov>, which has information about individual nationally chartered banks, or the Federal Deposit Insurance Corporation's (FDIC) Internet website at <http://www.fdic.gov>, which provides the most recent Call Reports for all FDIC insured banks. Broker-dealers that access exempt financial institution information through these websites would be able to satisfy the Rule's requirements by recording their review and preserving the information in the same manner as for EDGAR information discussed above. |
89 | The reproposal would provide the Commission with the authority to grant an exemption from the Rule for any quotation for a security or any class of security. |
90 | See , e.g. , Florida Comment Letter. |
91 | 15 U.S.C. 78w(a)(2). |
92 | 15 U.S.C. 78c. |
93 | See , e.g. , SEC v. Global Financial Traders, Ltd. , Litigation Release Nos. 15291 (March 14, 1997), and 15338 (April 17, 1997). |
94 | NASD Manual , Marketplace Rules, Rule 6740. |
95 | We computed these cost estimates after reviewing, among other sources, responses to a survey of broker-dealers conducted by the NQB about issues raised in the Proposing Release. The results of the NQB's survey are available in File No. S7-3-98 at the Commission's Public Reference Room, 450 Fifth Street N.W., Washington, D.C. 20549. |
96 | The cost estimate assumes that clerical staff are paid at an average rate of $15 per hour and supervisory compliance staff are paid at an average rate of $100 per hour. The blended compensation rate assumes that 70% of the time is clerical and 30% is supervisory compliance [(0.7 x $15) + (0.3 x $100) = $40]. |
97 | See OTC Bulletin Board Release. |
98 | See 5 U.S.C. 603. |
99 | For purposes of the regulatory flexibility analysis, a broker-dealer is considered "small" if its total capital is less than $500,000, and it is not affiliated with a broker-dealer that has $500,000 or more in total capital. |
100 | See Securities Exchange Act Release No. 40122 (June 24, 1998), 63 FR 35508 (adopting amendments to the definitions of "small business" or "small organization" under the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Exchange Act of 1934, and the Securities Act of 1933). |
101 | 44 U.S.C. 3501 et seq . |
102 | The Commission notes that a separate PRA filing was not prepared to reflect the proposed companion changes to Rule 17a-4. The burden hours and costs described for the Rule include and account for the anticipated burdens that may arise as a result of the proposed change to Rule 17a-4. |
103 | The NASD has a rule requiring broker-dealers that initiate or resume quotations for covered equity securities to submit verification that they have collected the information necessary to comply with NASD requirements, as well as Rule 15c2-11. See NASD Manual , Marketplace Rules, Rule 6740. |
104 | We recognize that there may be covered OTC securities quoted in other quotation mediums, but at this time we do not have the empirical data to include them in our estimations. |
105 | This estimate is based on the assumption that the NASD will, in the first year after the reproposal becomes effective, approve 10% fewer Form 211 filings than the 1,400 applications approved in 1998. |
106 | Some securities have priced quotations published in both of these quotation systems. To avoid double counting, such securities are counted as OTC Bulletin Board securities. |
[Note: This Appendix to the Preamble will not appear in the Code of Federal Regulations.]
Appendix
Guidance on the Scope of a Broker-Dealer's Review Under Current Rule 15c2-11 and the Amendments
I. Introduction
1 | 17 CFR 240.15c2-11.
|
2 | 15 U.S.C. 78a
et seq.
|
3 | This appendix sets forth guidance on a broker-dealer's review obligations under the Rule as it currently exists and under the proposed amendments. If the Commission takes final action on the proposed amendments, the Appendix will be revised to delete references to the proposal and to reflect the final rule. We expect that the Appendix will provide useful guidance to broker-dealers in conducting the document review required by the Rule.
|
4 | Securities Exchange Act Release No. 39670 (February 17, 1998), 63 FR 9661 (Proposing Release).
|
5 | A quotation is broadly defined as any indication that a broker-dealer is willing to buy or sell a particular security. The reproposed Rule, however, applies most directly to priced quotations. Rule 15c2-11 applies to broker-dealers that publish quotations for securities traded in the OTC markets. In this appendix, "OTC stocks" or "OTC securities" refers to securities that are not listed on a national securities exchange or Nasdaq. "Covered OTC securities" refers to those OTC securities that are subject to Rule 15c2-11. Rule 15c2-11 applies to securities quoted on the OTC Bulletin Board, operated by the National Association of Securities Dealers, Inc. (NASD); the Pink Sheets operated by the National Quotation Bureau, Inc. (NQB); and similar quotation systems.
|
6 |
See
footnote 14 below for a description of "supplemental information."
|
7 | This discussion confirms and supplements earlier guidance on Rule 15c2-11 issues.
See
Securities Exchange Act Release No. 29094 (April 17, 1991), 56 FR 19148 (1991 Adopting Release); Securities Exchange Act Release No. 27247 (September 14, 1989), 54 FR 39194 (1989 Proposing Release).
|
8 | 17 CFR 240.15c2-11(f)(3). The security must have been the subject of quotations on at least 12 business days during the previous 30 calendar days, with no more than 4 consecutive business days elapsing without a quotation. Effectively, the Rule applies only to those market makers publishing quotations during the first 30 days of a security's trading. The ability to piggyback on one's own quotations is referred to as "self-piggybacking."
|
9 | The piggyback exception would be eliminated under the proposed amendments.
|
10 | The current Rule applies to an "interdealer quotation system," which is a quotation medium of general circulation to brokers or dealers which regularly disseminates quotations of identified brokers or dealers. 17 CFR 240.15c2-11(e)(2). Under the proposed amendments, the definition of interdealer quotation system" would be incorporated into the definition of "quotation medium." Under the amendments, a "quotation medium" will be a system of general circulation to brokers or dealers that regularly disseminates quotations of identified brokers or dealers; or publication, alternative trading system, or other device that is used by brokers or dealers to disseminate quotations to others.
|
11 |
15 U.S.C. 78
l
(k).
|
12 |
17 CFR 240.17a-4.
|
13 | Currently, a broker-dealer must review and maintain in its records certain issuer information, which, depending on the issuer, may include prospectuses or offering circulars; certain Exchange Act reports; other regulatory filings; information furnished to the Commission pursuant to Section 12(g)(2(G)(i) of the Exchange Act; or certain financial information for non-reporting issuers. The amendments expand the information required for issuers that do not file periodic reports with the Commission (
e.g.
,
non-reporting issuers). In addition, broker-dealers would be required to make the issuer information available to anyone who requested it.
|
14 | In addition to a copy of any trading suspension order issued by the Commission pursuant to Exchange Act Section 12(k), the broker-dealer must record and consider any other material information (including adverse information) regarding the issuer that comes to its knowledge or possession before publishing a quotation under the Rule. Paragraph (b) [reproposed paragraph (d)] does not require a broker-dealer to maintain trivial information or information from an uncertain source. Also, the broker-dealer is not required to affirmatively seek out information about the issuer beyond that specifically required by the Rule. However, if material information about the issuer comes to its knowledge or possession (orally or in writing), the broker-dealer must take that information into account in assessing whether the issuer information is accurate and is from a reliable source.
See
footnote 35 below regarding how to obtain information about Commission trading suspensions.
|
15 | 17 CFR 230.251-230.263.
|
16 | Under the reproposal, the broker-dealer can look to filings made with other federal or state regulatory authorities for certain types of issuers,
e.g.
, financial institutions.
|
17 |
See
text of reproposed Rule 15c2-11(b)(3)(iv).
|
18 | 17 CFR 240.10b-5.
|
19 | Because of recent microcap fraud cases involving promoters, a broker-dealer should not presume a promoter is a reliable source of issuer information.
See SEC Charges 44 Stock Promoters in First Internet Securities Fraud Sweep
, Press Release 98-117 (October 28, 1998) available at <http://www.sec.gov/news/press/98-117.txt>.
|
20 | Examples of an "independent retrieval service" would be the SEC's Public Reference Room or a document retrieval service.
|
21 | Examples of "standard research sources" include publications such as Standard & Poor's Standard Corporation Manual and Moody's Investors Service Manuals.
|
22 | The proposed Rule will require a broker-dealer to provide the information to another broker-dealer upon request.
|
23 |
See Bunker Securities, Inc.
, 48 S.E.C. 859 (1987),
aff'd without opinion
, 833 F.2d 303 (3d Cir. 1987).
|
24 | 50 S.E.C. 489 (1991). The Laser Arms Report was issued pursuant to the investigative authority granted to the Commission under Section 21(a) of the Exchange Act (15 U.S.C. 78u(a)).
|
25 | Laser Arms Report at 501,
citing
Securities Exchange Act Release No. 29095 (April 17, 1991), 56 FR 19158 (1991 Proposing Release).
|
26 | The Laser Arms Memorandum misrepresented Laser Arms as a high technology weapons manufacturer and the developer of a self-chilling beverage can. The memorandum also included forged certificates of incorporation, fictitious balance sheets, and auditor's report on which the signature of the accountant had been forged.
|
27 | Another broker-dealer who attempted to call Laser Arms learned there was no telephone listing for the company. This broker-dealer nevertheless initiated a market in Laser Arms' securities.
|
28 |
See also Bunker Securities, Inc.
, 48 S.E.C. 859 (1987),
aff'd without opinion
, 833 F.2d 303 (3d Cir. 1987).
|
29 |
See
footnote 14 above for a definition of supplemental information.
|
30 |
See
Sections 11 and 27 of the Securities Act, 15 U.S.C. 77k and 77x, and Sections 18 and 32 of the Exchange Act, 15 U.S.C. 78r and 78ff.
See
1991 Adopting Release, 56 FR 19148, 19150 (1991).
|
31 | If the issuer's registration statement, pursuant to Item 401 of Regulation S-K, describes criminal or other disciplinary proceedings involving a reporting issuer's officer, director, general partner, promoter, or control person, this would be a red flag. Reproposed Rule 15c2-11(c)(6)(xi) will require broker-dealers to inquire about these types of criminal or other disciplinary proceedings involving a non-reporting issuer's officer, director, general partner, promoter, or control person. Under the current Rule, however, a broker-dealer's knowledge of criminal or other disciplinary proceedings involving a reporting or non-reporting issuer's officer, director, general partner, promoter, or control person would be a red flag.
|
32 | 17 CFR 249.308.
|
33 | 17 CFR 249.308.
|
34 | Even though the criminal and securities law violations specified in reproposed paragraph (c)(6)(xi) are not specified in paragraph (a)(5) of the current Rule, a broker-dealer's knowledge of such information would be material adverse information under the current Rule, and such violations would be a red flag.
|
35 |
See
Section 12(k) of the Exchange Act. Information regarding recent trading suspension orders can be obtained by calling 800-SEC-0330. The broker-dealer must obtain a copy of the trading suspension order or a copy of the Commission release announcing the trading suspension. Copies of Commission releases may be obtained through our Internet website at <http://www.sec.gov/enforce/tsuspend.htm> or from the Commission's Public Reference Room in Washington, D.C. and in regional Commission offices. Also, Commission releases are available from information databases (
e.g.
, LEXIS), and also are published in the SEC Docket, which is available from publication services (
e.g.
, Commerce Clearing House, Inc.).
|
36 | The reproposal contains a presumption that the financial information of both reporting issuers and domestic and foreign non-reporting issuers is current if it is less than 15 months old. However, if the broker-dealer has other information that indicates that the issuer's financial condition has materially changed from that shown in the financial statements, this presumption may not apply, and the broker-dealer should determine whether more recent financial information is available. Financial information older than 15 months is not current and does not satisfy the Rule's requirements.
|
37 |
General Bond & Share Co.
, 51 S.E.C. 411 (1993)(Commission opinion),
rev'd on other grounds
,
General Bond & Share Co. v. SEC
, 39 F.3d 1451 (10th Cir. 1994);
see also Robin Rushing and Harold Gallison, Jr
., Securities Exchange Act Release No. 36910 (February 29, 1996).
|
38 |
Robin Rushing and Harold Gallison, Jr
., Securities Exchange Act Release No. 36910 (February 29, 1996);
see also Bagley Securities, Inc.
, Securities Exchange Act Release No. 27673 (February 5, 1990);
William V. Frankel & Company
, Securities Exchange Act Release No. 27649 (January 26, 1990);
Richfield Securities, Inc.
, Securities Exchange Act Release No. 26129 (September 29, 1988).
|
39 |
See New Allied Development Corporation,
Securities Exchange Act Release No. 37990 (November 26, 1996)(New Allied's control persons had substantial stock interest in nominee accounts);
Douglass and Co., Inc.
, 46 S.E.C. 1189 (1978);
Gotham Securities Corporation
, 46 S.E.C. 723 (1976). Paragraph (c)(6)(x) of the reproposed Rule will require disclosure of the beneficial ownership of the issuer's stock by its executive officers, directors, general partners, promoters, or control persons.
|
40 | Emshwiller, "Reverse Stock Splits At Many Firms Spark Outcry,"
The Wall Street Journal
, November 20, 1998, at C1;
SEC v. Magna Technologies, Inc.
, Litigation Release No. 12227 (August 21, 1989)(insiders of Magna effected a 4-for-1 reverse stock split, concentrated ownership in themselves, and then manipulated the price of Magna's stock by disseminating false and misleading information).
|
41 |
New Allied Development Corporation
, Securities Exchange Act Release No. 37990 (November 26, 1996).
|
42 |
See In the Matter of Rom N. De Guzman
, Securities Exchange Act Release No. 37747 (September 30, 1996).
|
43 |
See New Allied Development Corporation
, Securities Exchange Act Release No. 37990 (November 26, 1996);
Stylex Homes, Inc.
, Securities Exchange Act Release No. 36299 (September 29, 1995);
Bunker Securities, Inc.
, 48 S.E.C. 859 (1987),
aff'd without opinion
, 833 F. 2d 303 (3d Cir. 1987);
Butcher & Singer, Inc.,
48 S.E.C. 640,
aff'd without opinion
, 833 F.2d 303 (3d Cir. 1987);
Douglass and Co., Inc.
, 46 S.E.C. 1189 (1978);
A. J. Carno Co.
, 1976 SEC LEXIS 2764 (February 23, 1976)(initial decision),
order dismissing proceeding and withdrawing broker-dealer registration
, Securities Exchange Act Release No. 14647 (April 10, 1978);
Gotham Securities Corporation
, 46 S.E.C. 723 (1976).
|
44 |
See example #6, above.
|
45 |
See
Securities Act Release No. 7644 (February 25, 1999) in which we adopted amendments to Rule 504 of Regulation D that limit the circumstances where general solicitation is permitted and "freely tradable" securities may be issued in reliance on Rule 504 to transactions (1) registered under state law requiring public filing and delivery of a disclosure document to investors before sale, or (2) exempted under state law permitting general solicitation and general advertising so long as sales are made only to "accredited investors."
|
46 | Emshwiller, "NASD Quietly Takes Aim At IPO Bridge-Loan Trend,"
The Wall Street Journal
, January 20, 1998, at C1.
|
47 |
See Memory Metals, Inc.
, Securities Act Release No. 6820 (February 22, 1989).
|
48 |
New Allied Development Corporation
, Securities Exchange Act Release No. 37990 (November 26, 1996);
see also Frederick R. Grant
, Securities Exchange Release No. 38239 (February 5, 1997);
Atlantis Group, Inc.
, Securities Exchange Act Release No. 37932 (November 8, 1996);
Eli Buchalter
, Securities Exchange Act Release No. 37702 (September 19, 1996);
Milton Mermelstein
, Securities Exchange Act Release No. 37222 (May 16, 1996).
|
49 |
See New Allied Development Corporation
, Securities Exchange Act Release No. 37990 (November 26, 1996)(the respondents obtained New Allied, a public shell, which was a dormant uranium mining company with no assets, in a transaction which resulted in insiders controlling 52.4% of New Allied's stock; New Allied then acquired an interest in real estate associated with worthless gambling concerns in exchange for New Allied stock);
Douglass and Co., Inc.
, 46 S.E.C. 1189 (1978).
|
50 |
See New Allied Development Corporation
, Securities Exchange Act Release No. 37990 (November 26, 1996)(the respondents disseminated materially false documents to market makers, including unaudited financial statements, that valued New Allied's medical and consumer products at $2,150,000, although their historical costs were approximately $17,000);
A. J. Carno Co.,
1976 SEC LEXIS 2764 (February 23, 1976)(Initial Decision),
order dismissing proceeding and withdrawing broker-dealer registration
, Securities Exchange Act Release No. 14647 (April 10, 1978)( Management Dynamics, Inc.'s (MD) founding officer and director wrote MD shareholders to recommend the acquisition of the assets of a real estate developer. Press releases and shareholder letters reinforced the misleading impression that the transaction was certain to generate substantial income for MD).
|
51 | When two companies merge, compliance with Generally Accepted Accounting Principles requires that the combination be accounted for as either the "pooling method" or "purchase method." With the pooling method, the historical costs of the two companies are added together. With purchase method accounting, the company being acquired writes up its assets to fair market value, which generally are greater than the historical costs.
|
52 |
Ronald Effren
, Securities Act Release No. 7256, Securities Exchange Act Release No. 36713 (January 16, 1996);
see also Martin Halpern
, Securities Exchange Act Release No. 34727 (September 27, 1994).
|
53 |
See
Securities Exchange Act Form 8-K, Item 4;
Merle S. Finkel
, Securities Act Release No. 7401 (March 12, 1997)(original auditors notified Systems of Excellence that purported registration statement on Form S-8 had not been filed and that other irregularities exist in connection with issuance of this stock; thereafter, Systems of Excellence retained new auditor who issued materially false or inaccurate audit reports).
|
54 |
See Robin Rushing and Harold Gallison, Jr.
, Securities Exchange Act Release No. 36910 (February 29, 1996). In this case, the SEC also had entered a trading suspension for lack of accurate financial information.
|
55 |
See Ronald Effren
, Securities Exchange Act Release No. 36713 (January 16, 1996).
|
56 |
Douglass and Co., Inc.
, 46 S.E.C. 1189 (1978).
|
57 |
See also Butcher & Singer, Inc.,
48 S.E.C. 640,
aff'd without opinion
, 833 F.2d 303 (3d Cir. 1987)(a salesman and later an officer of Butcher & Singer apparently obtained some blank stock certificates and forged former officers' signatures as well as the certificates' amounts and purported dates of issuance to himself and his family members; the broker-dealer, Butcher & Singer, failed to review the Rule's required information; Butcher & Singer might have noticed red flags that would have led to the discovery of the underlying fraud if it had reviewed the Rule's required information).
|
58 |
See United States v. Marshall Zolp
, Litigation Release Nos. 11494 (July 23, 1987) and 11236 (October 2, 1986)(fictitious certificates of incorporation and fictitious financial statements on which the name of another company had been whited out and the name of Laser Arms filled in).
|
59 |
See, e.g
.,
A. J. Carno Co.
, 1976 SEC LEXIS 2764 (February 23, 1976)(Initial Decision),
order dismissing proceedings and withdrawing broker-dealer registration
, Securities Exchange Act Release No. 14647 (April 10, 1978).
|
60 |
See Combined Companies International Corp.
, Securities Exchange Act Release No. 38653 (May 19, 1997);
Robin Rushing and Harold Gallison, Jr.
, Securities Exchange Act Release No. 36910 (February 29, 1996).
|
61 |
Stylex Homes, Inc.
, Securities Exchange Act Release No. 36299 (September 29, 1995).
|
62 |
The reproposed text of Rule 15c2-11(c)(6)(xi)(A)(
2
) requires the broker-dealer to review these factors for non-reporting issuers. Otherwise, under the reproposed text of Rule 15c2-11(c)(6)(xi)(B) or (C), the broker-dealer must obtain a statement from the issuer that none of these events has occurred or must record the steps taken to obtain this information and that the issuer refused or failed to provide it. Even though the current Rule does not require the broker-dealer to obtain and review this information, we consider such information to be red flags under the Rule if it comes to the broker-dealer's attention.
|
63 |
See SEC v. I-Net Providers
, Litigation Release No. 15219 (January 17, 1997);
New Allied Development Corporation
, Securities Exchange Act Release No. 37990 (November 26, 1996).
|
64 |
See
Exchange Act Form 8-K, Item 1.
|
65 |
See
Exchange Act Form 8-K, Item 2.
|
66 |
See
Exchange Act Form 8-K, Item 3.
|
67 |
The proposed text of Rule 15c2-11(c)(6)(xii)(A) requires the broker-dealer to review these factors. Otherwise, under the proposed text of Rule 15c2-11(c)(6)(xii)(B) or (C), the broker-dealer must obtain a statement from the issuer that none of these events has occurred or must record the steps taken to obtain this information and that the issuer refused or failed to provide it. Even though the current Rule does not require the broker-dealer to obtain and review this information, we consider such information to be red flags under the Rule if it comes to the broker-dealer's attention.
|
68 |
See New Allied Development Corporation
, Securities Exchange Act Release No. 37990 (November 26, 1996);
A. J. Carno Co.
, 1976 SEC LEXIS 2764 (February 23, 1976)(Initial Decision)
,
order dismissing proceedings and withdrawing broker-dealer registration
, Securities Exchange Act Release No. 14647 (April 10, 1978);
see also Bion Environmental Technologies, Inc.
, Securities Exchange Act Release No. 36111 (August 16, 1995).
|
69 |
See B.J. Thomas
, Securities Exchange Act Release No. 38727 (June 10, 1997);
SEC v. Magna Technologies, Inc.
, Litigation Release No. 12227 (August 21, 1989);
see e.g.
,
Milton Mermelstein
, Securities Exchange Act Release No. 37222 (May 16, 1996).
|
70 |
Alessandrini & Co., Inc.
, 45 S.E.C. 399 (1971),
citing D.H. Blair & Co.
, 44 S.E.C. 320 (1970).
|
71 |
Butcher & Singer, Inc.
, 48 SEC 640,
aff'd without opinion
, 833 F.2d 303 (3d Cir. 1987)(a salesman received 400,000 shares of an obscure penny stock for helping to develop and maintain a market in the stock);
see Brent Duane Green
, Securities Exchange Act Release No. 39210 (October 7, 1997);
Steven Ira Wertman
, Securities Exchange Act Release No. 38751 (June 20, 1997);
Christopher D. Jennings
, Securities Exchange Act Release No. 38696 (May 30, 1997).
|
72 | NASD Rule 2460, Payments for Market Making, prohibits any payment by an issuer or the issuer's affiliates and promoters, directly or indirectly, to a member for publishing a quotation, acting as a market maker, or submitting an application.
|
73 |
See
reproposed Rule 15c2-11(e);
see also
current Rule 15c2-11(a)(5)(xvi).
|
74 |
Douglass and Co., Inc.
, 46 S.E.C. 1189 (1978);
see also See Robin Rushing and Harold Gallison, Jr
., Securities Exchange Act Release No. 36910 (February 29, 1996);
General Bond & Share Co.
, 51 S.E.C. 411 (1993)(Commission opinion),
rev'd on other grounds
,
General Bond & Share Co. v. SEC
, 39 F.3d 1451 (10th Cir. 1994).
|
75 | 17 CFR 230.901-230.905 and Preliminary Notes.
|
76 | Securities Act Release No. 7505 (February 17, 1998), 63 FR 9632. We also adopted amendments that would affect applicable reporting requirements along with other amendments intended to prevent abuses of Regulation S. Since January 1, 1999, Regulation S transactions are required to be reported quarterly on Forms 10-Q and 10-K.
|
77 |
See Frederick R. Grant
, Securities Exchange Release No. 38239 (February 5, 1997);
S.E.C. v. Enviromint Holdings, Inc.
, Litigation Release No. 14683 (October 6, 1995).
|
78 | Form S-8 under the Securities Act of 1933 (15 U.S.C. 77a
et seq
.).
|
79 |
See S.E.C. v. Enviromint Holdings, Inc.
, Litigation Release No. 14683 (October 6, 1995).
|
80 |
See, e.g.
,
Spectrum Information Technologies, Inc.
, Securities Act Release No. 7426 (June 25, 1997);
SEC v. Hollywood Trenz, Inc.
, Litigation Release No. 15730.
|
81 |
See S.E.C. v. Charles O. Huttoe
, Litigation Release Nos. 15153 (November 7, 1996); 15185 (December 12, 1996)(unregistered public offering purporting to use Form S-8).
|
82 | Securities Act Release No. 7646 (February 25, 1999).
|
83 | Securities Act Release No. 7647 (February 25, 1999).
|
84 |
See Douglass and Co., Inc.
, 46 S.E.C. 1189 (1978) (November 26, 1996)(mining operation);
see also S.E.C. v. Bradley J. Simmons and American Energy Group, Ltd
, Litigation Release No. 15353 (April 29, 1997)(oil and gas company).
|
85 | Laser Arms Report, 50 S.E.C. 489, 503;
see also Butcher & Singer, Inc.,
48 S.E.C. 640,
aff'd without opinion
, 833 F.2d 303 (3d Cir. 1987);
Gotham Securities Corporation
, 46 S.E.C. 723 (1976) (the family of the broker-dealer's principal owned a significant amount of the stock of Marcon Electronics Corp., which was a shell corporation with no assets; the family benefited when the broker-dealer manipulated upward the price of the Marcon stock).
|
86 |
Merle S. Finkel
, Securities Act Release No. 7401 (March 12, 1997).
|
87 | New Allied Development Corporation , Securities Exchange Act Release No. 37990 (November 26, 1996). |
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