Document ID: SEC-2021-0046-0001
Agency: sec
Document Type: Proposed Rule
Title: Proposed Conditional Exemptive Order: Granting a Conditional Exemption from the Information Review Requirement and the Recordkeeping Requirement under the Securities Exchange Act of 1934 for Certain Publications or Submissions of Broker-Dealer Quotations on an Expert Market
Posted Date: 2021-01-12T05:00Z

[Federal Register Volume 86, Number 7 (Tuesday, January 12, 2021)]
[Proposed Rules]
[Pages 2311-2318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28700]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-90769; File No. S7-23-20]

Notice of Proposed Conditional Exemptive Order Granting a 
Conditional Exemption From the Information Review Requirement and the 
Recordkeeping Requirement Under the Securities Exchange Act of 1934 for 
Certain Publications or Submissions of Broker-Dealer Quotations on an 
Expert Market

AGENCY: Securities and Exchange Commission.

ACTION: Notice of proposed conditional exemptive order; request for 
comment.

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SUMMARY: Pursuant to Section 36(a)(1) of the Securities Exchange Act of 
1934 (the ``Exchange Act'') and Rule 15c2-11 under the Exchange Act (as 
published in the Federal Register on October 27, 2020, ``Amended Rule 
15c2-11'' or the ``Amended Rule''), the Securities and Exchange 
Commission (the ``SEC'' or the ``Commission'') is proposing to grant 
exemptive relief, subject to certain conditions, to permit broker-
dealers to publish or submit proprietary quotations for securities, on 
a continuous basis, in a market where the distribution of such 
quotations is restricted to sophisticated or professional investors, 
without complying with the information review and recordkeeping 
requirements of Amended Rule 15c2-11(a)(1)(i) and (d)(1)(i)(A), 
respectively.

DATES: Comments should be received on or before February 11, 2021.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/exorders.shtml); or
     Send an email to rule-comments@sec.gov.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

[[Page 2312]]

All submissions should refer to File Number S7-23-20. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
internet website (https://www.sec.gov/rules/exorders.shtml). Comments 
are also available for website viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE, Washington, DC 20549-1090 on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
All comments received will be posted without change. Persons submitting 
comments are cautioned that the Commission does not redact or edit 
personal identifying information from comment submissions. Commenters 
should submit only information that they wish to make available 
publicly.

FOR FURTHER INFORMATION CONTACT: John Guidroz, Branch Chief, James 
Curley, Laura Gold, Theresa Hajost, Patrice Pitts, Special Counsels, 
Elizabeth Sandoe, Senior Special Counsel, Josephine Tao, Assistant 
Director, or Mark Wolfe, Associate Director, at (202) 551-5777, in the 
Division of Trading and Markets, Securities and Exchange Commission, 
100 F Street NE, Washington, DC 20549-1090.

SUPPLEMENTARY INFORMATION:

I. Background

A. Adoption of Amendments to Rule 15c2-11

    Rule 15c2-11 specifies key, basic issuer information that must be 
obtained and reviewed before a broker-dealer may initiate (or resume) 
quotations for a security in a market other than a national securities 
exchange, subject to certain exceptions.\1\ The Amended Rule becomes 
effective on December 28, 2020. Except for paragraph (b)(5)(i)(M) of 
the Amended Rule, compliance is required nine months following the 
effective date, on September 28, 2021 (the ``Compliance Date'').\2\
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    \1\ The ``information review requirement'' refers to the Amended 
Rule's requirement to obtain and review specified issuer 
information, and to have a reasonable basis under the circumstances 
for believing, based on a review of such information, together with 
any applicable supplemental information also specified under the 
Amended Rule, that the issuer information is accurate in all 
material respects and is from reliable sources, before a broker-
dealer may publish or submit a quotation to initiate or resume a 
quoted market in the issuer's security.
    \2\ See Publication or Submission of Quotations Without 
Specified Information, Exchange Act Release No. 89891 (Sept. 16, 
2020), 85 FR 68124, 68172 (Oct. 27, 2020) (``Adopting Release''). 
The compliance date that is nine months after the effective date of 
the Rule is referred to herein as the ``Compliance Date.'' Between 
the effective date and the Compliance Date, broker-dealers must 
comply with the provisions of Rule 15c2-11 prior to amendment. The 
compliance date for paragraph (b)(5)(i)(M) of the Amended Rule is 
two years after the effective date of the Amended Rule.
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    Under the Amended Rule, certain applicable issuer information must 
be ``current'' and ``publicly available,'' as those terms are defined 
in the Amended Rule,\3\ for a broker-dealer to initiate (or resume) a 
quoted market in the issuer's security after complying with the 
information review requirement.\4\ Further, with respect to the 
``piggyback'' exception, which allows a broker-dealer to rely on the 
quotations of the broker-dealer that initially complied with the 
information review requirement to maintain continuous quotations for 
the security in an interdealer quotation system (an ``IDQS''), the 
amendments require that applicable issuer information also must be 
current and publicly available, timely filed, or filed within 180 
calendar days from the end of the issuer's most recent fiscal year or 
any quarterly reporting period that is covered by a report required by 
Section 13 or 15(d) of the Exchange Act, as applicable.\5\ As a result, 
on the Compliance Date, broker-dealers may not rely on the piggyback 
exception to maintain a quoted market in the securities of issuers for 
which information is not current and publicly available.
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    \3\ See Amended Rule 15c2-11(e)(2) (defining the term 
``current''), (e)(5) (defining the term ``publicly available'').
    \4\ See Amended Rule 15c2-11(a)(1)(i)(B). The Rule's 
recordkeeping requirement is unchanged under the amendments, except 
broker-dealers no longer have to preserve documents that are 
available on the Commission's Electronic Data Gathering, Analysis 
and Retrieval System (``EDGAR''). See Amended Rule 15c2-
11(d)(1)(i)(A).
    \5\ See Amended Rule 15c2-11(f)(3)(i)(C) (requiring an issuer's 
specified information to be, depending on the regulatory status of 
the issuer, one of the following: (1) Current and publicly 
available; (2) timely filed (i.e., filed by the prescribed due date 
for a report or statement as required by an Exchange Act or 
Securities Act of 1933 (the ``Securities Act'') reporting 
obligation); or (3) filed within 180 calendar days from a specified 
period); see also Amended Rule 15c2-11(e)(3) (defining the term 
``interdealer quotation system''). For purposes of this proposed 
exemptive order, these requirements with respect to the piggyback 
exception are referred to as the requirement to be ``current and 
publicly available.'' The amendments also (1) modify the piggyback 
exception's frequency-of-quotation requirement by eliminating both 
the 12-business-day requirement and the 30-calendar-day window while 
still requiring that no more than four business days in succession 
elapse without a quotation, see Amended Rule 15c2-11(f)(3)(i)(A), 
and (2) limit the amount of time during which broker-dealers may 
rely on the exception to quote securities of issuers that they have 
a reasonable basis under the circumstances for believing are shell 
companies, see Amended Rule 15c2-11(f)(3)(B)(2).
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    The Commission received comments on the proposed amendments to Rule 
15c2-11 that expressed interest in the formation of an ``expert 
market'' for certain securities that become ineligible for quotation 
after the Compliance Date because the information required by the Rule 
is not current and publicly available for the issuers of those 
securities.\6\ In response to comments, the Commission stated that, 
under certain conditions and circumstances, an ``expert market'' could 
enhance liquidity for sophisticated or professional investors in grey 
market securities,\7\ as well as for small companies seeking growth 
opportunities that might prefer to be quoted in a market that is 
limited to such persons.\8\ The Commission stated that it 
``preliminarily believes that any such expert market must not have the 
potential to develop into a parallel market for which quotations are 
accessible by retail investors and the general public.'' \9\
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    \6\ Comments are available on the Commission's website at 
https://www.sec.gov/comments/s7/14/19/s71419.htm.
    \7\ Grey market securities are securities that trade over-the-
counter but for which no quoted prices are published or submitted in 
a quotation medium for buyers and sellers to access.
    \8\ See Adopting Release at 68145.
    \9\ Id.
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    The Commission stated that it has the authority to issue exemptive 
relief by order, under Section 36 of the Exchange Act and under the 
Amended Rule,\10\ to facilitate the formation and implementation of 
such an expert market. The Commission also stated that, in doing so, it 
may consider certain safeguards to protect retail investors, such as 
(1) the types of investors who may access quotations in this market 
(e.g., sophisticated investors that have the ability to assess an 
investment opportunity, including the ability to analyze its risks and 
rewards), and (2) the types of securities that may be quoted in such a 
market (e.g., those that were quoted in reliance on the piggyback 
exception on the business day preceding the initial quotation that is 
published or submitted in any such market).\11\
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    \10\ The exemptive authority provision of Rule 15c2-11 has been 
re-lettered from paragraph (h) to paragraph (g) under the Amended 
Rule. In addition, the standard for exemptive authority under the 
Amended Rule conforms to the provision for exemptive authority in 
Section 36 of the Exchange Act. See id. at 68167.
    \11\ See id. at 68145.
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B. Request for Exemptive Relief by OTC Link LLC

    In response to the Commission's discussion, OTC Link[supreg] LLC 
(``OTC Link LLC''), a wholly owned subsidiary of OTC Markets Group Inc. 
(``OTC Markets Group''), has submitted a request on

[[Page 2313]]

behalf of certain broker-dealers for an exemption from the Amended 
Rule's information review requirement and recordkeeping requirement to 
permit such broker-dealers to publish or submit, on a continuous basis, 
proprietary quotations for certain securities of issuers for which 
there is no current and publicly available information, and in other 
specified circumstances, on one of its electronic platforms where the 
distribution of such quotations is limited to sophisticated or 
professional investors.
    OTC Link LLC operates trading platforms on which broker-dealers 
provide liquidity and execution services for over 11,000 U.S. and 
global securities. One such platform is OTC Link ATS, an alternative 
trading system (``ATS'') that meets the definition of a ``qualified 
interdealer quotation system'' under paragraph (e)(6) of the Amended 
Rule. The securities that are quoted on OTC Link ATS are organized into 
market tiers based on several factors, including the public 
availability of current issuer information and whether an issuer meets 
minimum financial thresholds. These market tiers include the 
OTCQX[supreg] Best Market, the OTCQB[supreg] Venture Market, the Pink 
Open Market, and the Expert Market. The Expert Market is a distinct 
market tier on which OTC Link LLC's broker-dealer subscribers (each, a 
``Subscriber'' and collectively, the ``Subscribers'') \12\ can, among 
other things, find price transparency in certain securities that may 
not be eligible or suitable for retail investors. Currently, the 
distribution of quotations for securities that are published or 
submitted on the Expert Market is limited to broker-dealers, and OTC 
Link ATS does not make such quotations available to the general public. 
In requesting exemptive relief on behalf of the Subscribers, OTC Link 
LLC plans to modify the Expert Market to include the safeguards 
described below.\13\
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    \12\ All Subscribers to OTC Link ATS are required to be broker-
dealer members of the Financial Industry Regulatory Authority 
(``FINRA'') and must enter into a subscription agreement with OTC 
Link LLC that outlines the terms and conditions of their use of OTC 
Link ATS. All OTC Link ATS Subscribers can access all market tiers, 
including the Expert Market. Under the proposed conditional 
exemptive order, all quotations published or submitted on the Expert 
Market would be attributable to Subscribers at prices at which such 
Subscribers are prepared to trade. See, e.g., FINRA Rule 5220.
    \13\ Although OTC Link LLC is requesting relief on behalf of its 
Subscribers using the Expert Market on OTC Link ATS, OTC Link LLC is 
not requesting the same relief for OTC Link ATS, as a quotation 
medium, because OTC Link ATS does not publish or submit quotations 
on the Expert Market and, thus, does not engage in activity that is 
subject to the provisions of Amended Rule 15c2-11.
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    The Commission is proposing to grant OTC Link LLC's request for 
exemptive relief and issue a conditional exemptive order as outlined 
below.
1. Distribution of Expert Market Quotes and Data
    Quotations published or submitted on the Expert Market are clearly 
identified in a data feed to which OTC Markets Group controls which 
Subscribers, market data distributors, and users have access. OTC 
Markets Group currently limits the distribution of quotations published 
or submitted on the Expert Market solely to broker-dealers. Under the 
proposed conditional exemptive order, OTC Markets Group would authorize 
market data distributors, including Subscribers, to be eligible to 
receive quotations published or submitted on the Expert Market and to 
distribute such data to Subscribers who comply with certain obligations 
and restrictions on data access. As Expert Market quotations are 
clearly identified in the data feed, recipients would be able to 
control their distribution and display.
    Under the proposed exemptive relief, all entities that distribute 
OTC Markets Group's market data, including Subscribers, would be 
required to enter into a Market Data Distribution Agreement (``MDDA'') 
directly with OTC Markets Group. OTC Markets Group would control which 
market data distributors are permitted to receive market data, and the 
MDDA would require each such market data distributor to report all end-
users to OTC Markets Group. OTC Markets Group would distribute 
quotations published or submitted on the Expert Market to market data 
distributors that agree to the MDDA's contractual and data access 
restrictions that limit the distribution and display of quotations to 
certain eligible investors, as described below. Accordingly, real-time 
and delayed quotations \14\ published or submitted on the Expert Market 
would not be permitted to be distributed or displayed to the general 
public. Further, pursuant to the MDDA, market data distributors must 
require any person to whom they distribute quotations published or 
submitted on the Expert Market that is not party to the MDDA to agree, 
by contract, not to distribute such quotations to any person that is 
not a permitted recipient as described herein.
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    \14\ ``Delayed'' quotations, for the purpose of this proposal, 
do not include ``end-of-day'' quotation information, which is 
defined in the MDDA, and is generally understood to mean information 
consisting of a snapshot of the best bid price and size and the best 
ask price and size for a security, taken at the close of regular 
trading hours. End-of-day quotation information does not include the 
identity of the broker-dealer(s) that published or submitted the 
quotation(s) that make up the ``end-of-day'' quotation. End-of-day 
information is used by broker-dealers, custodian banks, clearing 
firms, prime brokers and service bureaus for valuation, settlement, 
accounting, clearing and custody purposes because it can be more 
accurate, than last transaction information. Thus, end-of-day 
quotation information that is used by broker-dealers in providing 
valuation, settlement, accounting, clearing, and custody information 
to its customers may be viewed by retail investors and the general 
public; however, it is not actionable for the purposes of effecting 
transactions.
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    In operating the Expert Market under the proposed exemptive relief, 
OTC Link LLC would establish, maintain, and enforce written policies 
and procedures that are reasonably designed to allow only permitted 
recipients to view, and to prevent the general public from viewing, 
quotations published or submitted on the Expert Market. OTC Link LLC 
also would establish, maintain, and enforce policies and procedures to 
regularly surveil the use of the Expert Market data feed. Further, 
under its written policies and procedures, OTC Link LLC would determine 
whether market data distributors, including Subscribers, are complying 
with the terms of the MDDA. OTC Link LLC would regularly review 
activity on the Expert Market and would establish, maintain, and 
enforce policies and procedures that provide for further review and 
escalation of issues, including irregular quotation activities that may 
indicate fraudulent behavior (e.g., unusually high volumes) and non-
compliance with the MDDA. Escalation of issues may include a 
determination of whether any market data distributor or Subscriber 
should be denied further access to the Expert Market or whether a 
detailed referral should be made to FINRA or Commission staff, or both.
2. Permitted Recipients of Quotations Published or Submitted on the 
Expert Market
    As described above, the distribution of real-time and delayed 
quotations published or submitted on the Expert Market would be limited 
exclusively to market data distributors, including Subscribers, and 
certain types of sophisticated or professional investors, specifically, 
the following categories of market participants (each, a ``Qualified 
Expert'' and collectively, the ``Qualified Experts''): (1) Any 
qualified institutional buyer, as defined in Rule 144(A)(a)(1) under 
the Securities Act; and (2) any accredited investor, as defined in Rule 
501(a) of Regulation D; \15\ and (3) any

[[Page 2314]]

qualified purchaser, as defined in Section 2(a)(51)(A) of the 
Investment Company Act of 1940 (the ``Investment Company Act'') and the 
rules thereunder.\16\ Qualified Experts may receive quotations 
published or submitted on the Expert Market directly from OTC Markets 
Group, from any market data distributor or Subscriber that has entered 
into the MDDA with OTC Markets Group, or from both.\17\
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    \15\ The term ``accredited investor'' includes, among other 
things, any bank as defined in Section 3(a)(2) of the Securities 
Act, broker or dealer registered pursuant to Section 15 of the 
Exchange Act, investment adviser registered pursuant to Section 203 
of the Investment Advisers Act of 1940, and investment company 
registered under the Investment Company Act of 1940. See Rule 
501(a)(1) of Regulation D. The term ``accredited investor'' also 
includes any entity of a type not listed in Rule 501(a)(1), that is 
not formed for the specific purpose of acquiring the securities 
offered, that own investments in excess of $5,000,000, which could 
include a foreign bank or other non-U.S. financial institution. See 
Rule 501(a)(9) of Regulation D.
    \16\ OTC Link LLC has requested that foreign broker-dealers, as 
defined in Exchange Act Rule 15a-6(b)(3), be included in the list of 
Qualified Experts. The Commission is seeking comment, below, 
regarding whether foreign broker-dealers, as defined in Exchange Act 
Rule 15a-6(b)(3), should be included in the list of Qualified 
Experts.
    \17\ Qualified Experts that receive Expert Market data directly 
from OTC Markets Group would be subject to a subscriber agreement 
that contractually limits any further distribution.
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    OTC Markets Group would also distribute quotations for an issuer's 
security published or submitted on the Expert Market to the issuer of 
any such security if the issuer contractually agrees not to distribute 
such quotations, directly or indirectly, to any person that is not a 
current officer, director, or employee of the issuer.\18\
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    \18\ As described above in Part I.B.1, market data distributors, 
including Subscribers, would be contractually required to ensure 
that the recipients of quotations published or submitted on the 
Expert Market meet the definition of a Qualified Expert.
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3. Categories of Expert Market Securities
    The subject of Subscribers' proprietary quotations that can be 
published or submitted on the Expert Market would be restricted to the 
following categories of securities: (1) Any security that is quoted in 
reliance on the piggyback exception prior to the Compliance Date and 
loses such eligibility upon the Compliance Date due to a lack of 
current and publicly available information about the issuer of the 
security; \19\ (2) any security that is quoted in reliance on the 
piggyback exception following the Compliance Date and subsequently 
loses such eligibility due to a lack of current and publicly available 
information about the issuer of the security, the issuer's status as a 
shell company, or a failure to meet the frequency-of-quotation 
requirement; \20\ and (3) any security that is issued in conjunction 
with a Chapter 11 bankruptcy plan confirmed pursuant to Section 1129 of 
the U.S. Bankruptcy Code (the ``Code'') \21\ and is exempt from 
registration in accordance with Section 1145 of the Code.\22\
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    \19\ A quoted market on the Expert Market for such security 
would have to commence within the first four business days from the 
date on which it loses eligibility to be quoted in reliance on the 
piggyback exception.
    \20\ A quoted market on the Expert Market for such security 
would have to commence within the first four business days from the 
date on which it loses eligibility to be quoted in reliance on the 
piggyback exception.
    \21\ The issuers of such securities would be subject to 
oversight of the bankruptcy court. After confirmation of the 
bankruptcy plan, the bankruptcy courts may direct the company and 
others to carry out the plan. See 28 U.S.C. 1142.
    \22\ A quoted market on the Expert Market for such security must 
commence within 90 calendar days from the date on which it is 
issued.
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    In addition, OTC Link LLC would remove from the Expert Market 
quotations for any security that fits within the following two 
categories: (1) Any security of an issuer that is the subject of a 
registration revocation or trading suspension order issued by the 
Commission pursuant to Section 12(j) or 12(k) of the Exchange Act, 
respectively; and (2) any security of an issuer that OTC Link LLC has 
identified as ``defunct'' (i.e., it has ceased operations, ceased to 
exist, or has failed to respond to inquiries by OTC Link LLC). Once the 
applicable Section 12(k) trading suspension order terminates or the 
subject security is re-registered with the Commission following an 
applicable Section 12(j) revocation order, in order to be quoted on the 
Expert Market, the subject security must either (1) gain and then lose 
eligibility to be quoted in reliance on the piggyback exception or (2) 
be issued in conjunction with a Chapter 11 bankruptcy plan and be 
quoted on the Expert Market in accordance with the timing requirements 
discussed above.\23\
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    \23\ See supra notes 19 and 20.
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    In addition, OTC Link LLC would flag on its website any 
``formerly'' suspended security for such period of time as set forth in 
OTC Link LLC's policies and procedures, which OTC Link LLC represents 
would be for two years following the applicable trading suspension.\24\
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    \24\ OTC Link LLC would remove any such flag if it becomes aware 
of a Commission or court order finding for the successful challenge 
of the applicable trading suspension.
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II. Discussion of Proposed Relief

    As a result of the amendments to Rule 15c2-11, after the Compliance 
Date, broker-dealers must withdraw from publishing or submitting 
quotations in a quotation medium for securities of issuers for which 
information is not current and publicly available, and such securities 
may migrate to the grey market, where no quoted prices are published in 
a quotation medium for buyers and sellers to access and transact. As 
the Commission stated in the Adopting Release, this may impose costs on 
potential and existing investors by reducing liquidity for these 
securities and potentially resulting in less efficient pricing. 
Further, the loss of a quoted market and the information embedded in 
share prices may adversely impact an issuer's ability to raise capital 
through stock issuances or through other channels of finance, such as 
debt. The Commission also noted that investors in securities in the 
grey market may be more susceptible to fraud.\25\
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    \25\ See Adopting Release at 68145, 68198.
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    As described above, the Commission also stated in the Adopting 
Release that it could be beneficial to establish an ``expert market'' 
that would enhance liquidity for sophisticated or professional 
investors and promote growth opportunities for certain small companies, 
although the comments received on the proposal provided insufficient 
detail as to how that market would function, safeguard retail investors 
from fraud and manipulation, and facilitate regulatory oversight.\26\ 
In its December 21, 2020 request, OTC Link LLC made certain 
representations regarding how the Expert Market would function with 
safeguards to reduce the potential for certain retail investors to be 
harmed by fraud and manipulation, as well as representations regarding 
how OTC Link LLC would establish, maintain, and enforce written 
policies and procedures reasonably designed to facilitate the integrity 
and Commission oversight of the Expert Market. Based on these and other 
facts and representations made in OTC Link LLC's December 21, 2020 
request, the Commission preliminarily believes that it is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors, to grant, subject to the conditions described 
below, exemptive relief pursuant to Section 36(a)(1) of the Exchange 
Act and Rule 15c2-11 to permit Subscribers to publish or submit 
proprietary quotations on the Expert Market, on a continuous basis, 
without complying with the requirements of Amended Rule 15c2-
11(a)(1)(i) and (d)(1)(i)(A). The Commission notes that OTC Link LLC 
may implement additional conditions, criteria, or noticing mechanisms 
for certain quotations on its platform by Subscribers as it may find 
appropriate, including as to whether additional

[[Page 2315]]

quotations for securities of certain issuers should be transferred to 
the Expert Market because they may present more risk to certain retail 
investors.
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    \26\ Id. at 68145.
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    The proposed conditional exemptive relief would allow the Expert 
Market to serve as a centralized location for published quotations in 
certain securities--that otherwise would migrate to the grey market 
following the Compliance Date--to be viewed exclusively by specified 
categories of sophisticated or professional investors. Such relief, 
therefore, could help to advance opportunities for more efficient 
pricing in such securities, enhance liquidity for sophisticated or 
professional investors in such securities, and promote capital 
formation for companies seeking growth opportunities that might prefer 
to be quoted in a market limited to such persons.

A. Permitted Recipients of Quotations Published or Submitted on the 
Expert Market

    The Commission is proposing to limit the universe of market 
participants to whom real-time and delayed quotations published or 
submitted on the Expert Market are distributed. Accordingly, with one 
exception discussed below, real-time or delayed quotations published or 
submitted on the Expert Market may not be distributed, whether directly 
or indirectly from another source,\27\ to any person that is not a 
Qualified Expert. The Commission preliminarily believes that the 
inability of the general public to view real-time and delayed 
quotations published or submitted on the Expert Market should help 
protect investors from incidents of fraud and manipulation in OTC 
securities for which no or limited publicly available information about 
the issuers exists to help counteract misinformation, while also 
allowing Subscribers to maintain a market in certain securities for 
certain qualified investors to interact.\28\
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    \27\ As discussed above in Part I.B, quotations published or 
submitted on the Expert Market would be accessible to market data 
distributors, including Subscribers, that have contractually agreed 
to not distribute quotations published or submitted on the Expert 
Market to persons who are ineligible to access such information 
(i.e., non-Qualified Experts), including to the general public.
    \28\ See, e.g., Adopting Release at 68145.
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    The Commission preliminarily believes that including in the list of 
Qualified Experts (1) any qualified institutional buyer, as defined in 
Rule 144(A)(a)(1) under the Securities Act, and (2) any accredited 
investor, as defined in Rule 501(a) of Regulation D, would 
appropriately capture the types of investors who have, among other 
things, demonstrated the ability to assess an investment opportunity 
(including the ability to analyze risks and rewards), or the ability to 
gain access to information about an issuer or about an investment 
opportunity.\29\ Such persons should be able to view quotations 
published or submitted on the Expert Market because they may not need 
the same investor protections that are afforded, in part, by current 
and publicly available issuer information in the same way that the 
general public may need it to analyze an investment opportunity or to 
counteract misinformation. In addition, the Commission preliminarily 
believes that it is appropriate to include qualified purchasers, as 
defined in Section 2(a)(51)(A) of the Investment Company Act and the 
rules thereunder, in the list of Qualified Experts because qualified 
purchasers are investors that have a high degree of financial 
sophistication who are in a position to appreciate the risks associated 
with investing in securities that would be quoted on the Expert Market 
without the protections afforded by the Amended Rule.
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    \29\ See, e.g., Amending the ``Accredited Investor'' Definition, 
Securities Act Release No. 10824 (Aug. 26, 2020), 85 FR 64234 (Oct. 
9, 2020) (``Accredited Investor Release'').
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    Notably, this list of Qualified Experts would exclude customers of 
broker-dealers and investment advisers (that do not fit into any of the 
three categories of Qualified Experts) because this market is not 
available to the general public.\30\
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    \30\ Any Subscriber that distributes quotations published or 
submitted on the Expert Market to any person that is not a Qualified 
Expert would not be eligible for the relief proposed herein and may 
violate Rule 15c2-11.
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    In addition, as an exception to the Qualified Expert requirement, 
the Commission preliminarily believes that it is appropriate for an 
issuer to be able to view quotations published or submitted on the 
Expert Market for its own security, if the issuer agrees not to 
distribute such quotations, directly or indirectly, to any person that 
is not a current officer, director, or employee of the issuer, as 
described above. This is because such information could inform the 
issuer about the liquidity and market price of the security and allow 
the issuer to make informed decisions regarding future offerings to 
raise capital. In order for an issuer to view these quotations, the 
issuer would need to contractually agree not to distribute such 
quotations, directly or indirectly, to any person that is not a current 
officer, director, or employee of the issuer.

B. Expert Market Securities

    The Commission preliminarily believes that it is appropriate for 
the following categories of securities to be eligible to be the subject 
of Subscribers' proprietary quotations on the Expert Market.
    The first category is securities that lose eligibility to be quoted 
in reliance on the piggyback exception--either (1) upon the Compliance 
Date due to a lack of current and publicly available information about 
an issuer, or (2) following the Compliance Date due to (i) a lack of 
current and publicly available information about the issuer, (ii) the 
issuer's status as a shell company, or (iii) a failure to meet the 
frequency-of-quotation requirement--so long as quotations on the Expert 
Market commence within four business days of such loss of 
eligibility.\31\ As stated in the Adopting Release, the Commission 
recognizes that holders of such securities may incur costs related to a 
loss of liquidity when broker-dealers cannot rely on the piggyback 
exception.\32\ The ability of broker-dealers (i.e., Subscribers) to 
publish or submit proprietary quotations for those securities on the 
Expert Market could help to facilitate liquidity for such securities 
because the availability of quotations could reduce trading costs and 
facilitate pricing efficiency. This is because investors that are 
Qualified Experts would be able to view those quotations and use such 
information in the mix of information (e.g., in addition to their own 
due diligence or issuer disclosures that might not be publicly 
available but to which they otherwise have access) that they take into 
account as part of a meaningful investment analysis when making 
investment decisions.\33\ Without the proposed exemption, as discussed 
above, these securities may migrate to the grey market, to which retail 
investors and the general public have access, without access to 
information embedded in prices published in a quotation medium. The 
ability of Subscribers to publish or submit quotations in a quotation 
medium for such securities could help protect retail investors and

[[Page 2316]]

the general public from potential incidents of fraud and manipulation 
in the grey market and facilitate liquidity for such securities.
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    \31\ This four-business-day window mirrors the time frame 
provided in the piggyback exception that quotations occur with no 
more than four business days in succession without a priced 
quotation. See Amended Rule 15c2-11(f)(3)(i). As an example, if 
eligibility to be quoted in reliance on the piggyback exception were 
lost on Monday, January 4, 2021, a Subscriber's quotations on the 
Expert Market must commence no later than Friday, January 8, 2021 to 
be eligible for this proposed exemption.
    \32\ Adopting Release at 68141.
    \33\ See, e.g., Accredited Investor Release at 64269-70.
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    The second category captures securities issued in conjunction with 
a Chapter 11 bankruptcy plan that is confirmed pursuant to Section 1129 
of the Code and are exempt from registration in accordance with Section 
1145 of the Code, so long as quotations on the Expert Market commence 
within 90 calendar days from the date on which any such security is 
issued.\34\ A bankruptcy proceeding is a significant event involving an 
issuer that a broker-dealer should carefully consider before it 
publishes or submits a quotation for the issuer's security in a 
quotation medium.\35\ But, the Commission preliminarily believes that 
the inclusion of this category of securities as eligible to be the 
subject of Subscribers' quotations published or submitted on the Expert 
Market is appropriate given that Qualified Experts are more likely than 
the general public to possess the ability to evaluate the merits and 
risks of a prospective investment opportunity and, therefore, it would 
provide an efficient means to liquidate positions acquired through a 
bankruptcy proceeding. The inclusion of this second category could help 
promote capital formation opportunities for certain companies in 
limited circumstances while ensuring, for investor protection, that the 
distribution of quotations for the securities of such companies is 
limited to investors that have a demonstrated ability to assess such an 
investment opportunity.
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    \34\ This 90-calendar-day window is consistent with the Amended 
Rule's requirement for the information of prospectus issuers (i.e., 
issuers that filed a registration statement under the Securities 
Act) to be ``current'' for broker-dealers to commence a quoted 
market in these issuers' securities in a quotation medium. See 
Amended Rule 15c2-11(b)(1). The Commission preliminarily believes 
that it is appropriate to use a measurement of time that is 
consistent with the Amended Rule's requirement for prospectus 
issuers' information because both requirements pertain to the 
commencement of a quoted market in securities of an issuer with 
which the market is unfamiliar and are designed to ensure that the 
Amended Rule's specified information about the issuers of these 
securities is not stale or outdated with respect to such issuance.
    \35\ See Adopting Release at 68171.
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    The Commission believes that it would be appropriate for OTC Link 
LLC to remove from the Expert Market quotations published or submitted 
for any security of an issuer that is the subject of a registration 
revocation or trading suspension order issued by the Commission 
pursuant to Section 12(j) or 12(k) of the Exchange Act, respectively. 
Pursuant to any such registration revocation or trading suspension 
order and the Commission's finding that it is in the public interest 
and for the protection of investors,\36\ Subscribers would not be able 
to effect transactions in such securities. Therefore, such quotations 
must be removed.
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    \36\ See Exchange Act Section 12(j) (``The Commission is 
authorized, by order, as it deems necessary or appropriate for the 
protection of investors to . . . revoke the registration of a 
security, if the Commission finds . . . that the issuer of such 
security has failed to comply with any provision of this chapter or 
the rules and regulations thereunder.''); Exchange Act Section 
12(k)(1)(A) (``If in its opinion the public interest and the 
protection of investors so require, the Commission is authorized by 
order--summarily to suspend trading in any security . . . for a 
period not exceeding 10 business days . . . .'').
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    In addition, the Commission preliminarily believes that it is 
appropriate for OTC Link LLC to remove from the Expert Market 
quotations published or submitted for any security of an issuer that 
OTC Link LLC has identified as ``defunct,'' to prevent the publication 
or submission of quotations for securities of issuers that have ceased 
operations, ceased to exist, or have failed to respond to inquiries by 
OTC Link LLC. Furthermore, the issuer of such security may not have a 
transfer agent to allow investors to receive or transfer their stock 
certificates. Thus, the quotations for such securities should be 
removed from the Expert Market to help prevent such securities from 
becoming vehicles for fraud and manipulation.
    Further, the Commission preliminarily believes that requiring OTC 
Link LLC to flag on its website any ``formerly suspended'' security for 
such period of time as set forth in OTC Link LLC's policies and 
procedures (which would be for two years following the applicable 
trading suspension) would help to promote investor protection.\37\ Such 
a flag would serve as a notice to market participants that there was, 
in the recent past, the presence of any number of factors (such as 
uncertainty about the accuracy of publicly available issuer information 
or questions about trading in the issuer's security) that led the 
Commission to conclude that it was in the public interest and for the 
protection of investors to suspend trading in the security.\38\ 
Accordingly, the Commission preliminarily believes that this flag 
requirement would improve the overall mix of information about issuers 
and their securities and would help investors make better-informed 
investment decisions.\39\
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    \37\ As discussed above in Part I.B.3, this period of time would 
be for two years following the applicable trading suspension, unless 
the trading suspension is successfully challenged.
    \38\ See, e.g., Adopting Release at 68151.
    \39\ See id. at 68144.
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C. Policies and Procedures

    The Commission is proposing to condition the exemptive relief upon 
OTC Link LLC establishing, maintaining, and enforcing reasonably 
designed written policies and procedures to operate the Expert Market 
in a manner that is consistent with how the Expert Market is described 
herein. Such policies and procedures would account for the following: 
(1) The manner in which the distribution of real-time and delayed 
quotations on the Expert Market is limited, directly and indirectly, 
only to Qualified Experts and, as applicable, issuers of securities for 
which quotations are published or submitted on the Expert Market with 
respect to their own securities; (2) specific actions that will be 
taken if OTC Link LLC becomes aware that any Subscriber or market data 
distributor or user has violated the contractual obligations described 
above, and specific actions that will be taken if OTC Link LLC becomes 
aware that an issuer has violated its contractual obligation not to 
distribute, directly or indirectly, quotations published or submitted 
on the Expert Market for its security to any person that is not a 
current officer, director, or employee of the issuer; and (3) the 
regular surveillance of the Expert Market data feed and quotation 
activity on the Expert Market to determine whether a Subscriber or 
market data distributor or user has facilitated access, directly or 
indirectly, to quotations published or submitted on the Expert Market 
to any person that is not a Qualified Expert or, as applicable, an 
issuer of a security for which quotations are published or submitted on 
the Expert Market with respect to its own security.
    The Commission preliminarily believes that the obligation to 
establish, maintain, and enforce such written policies and procedures 
as part of the proposed exemptive relief would help to prevent the 
general public from accessing quote information, promote the integrity 
of the Expert Market, and facilitate Commission oversight of the Expert 
Market. In particular, OTC Link LLC's reasonably designed written 
policies and procedures would provide transparency of, and set 
expectations for, the manner in which OTC Link LLC operates the Expert 
Market; would encompass compliance considerations relevant to the 
operations of the Expert Market; and would assist Commission staff in 
examining the Expert Market.

[[Page 2317]]

D. Recordkeeping Requirement

    Finally, the Commission is proposing to require as part of the 
exemptive relief that OTC Link LLC preserve, for a period of not less 
than three years, the first two years in an easily accessible place, 
the following records:
    1. Documents and information regarding OTC Link LLC's written 
policies and procedures related to the Expert Market, including records 
related to the implementation of such written policies and procedures;
    2. Documents and information regarding any processes undertaken by 
OTC Link LLC that analyze information over time to identify whether the 
distribution of quotations published or submitted on the Expert Market 
is limited only to Qualified Experts and, as applicable, issuers of 
securities for which quotations are published or submitted on the 
Expert Market with respect to their own securities; and
    3. Documents and information regarding OTC Link LLC's ongoing 
surveillance of the quoting activity and distribution of quotations 
published or submitted on the Expert Market, including any reports that 
identify exceptions to compliance with the written policies and 
procedures and the resolution of such exceptions.
    The Commission preliminarily believes that this recordkeeping 
condition will help facilitate the Commission's oversight of the Expert 
Market, including of Subscribers that publish or submit quotations on 
the Expert Market and the distribution of such quotations. In 
particular, the documents and information that would be required to be 
maintained will provide the Commission with a record of how OTC Link 
LLC has (1) implemented its reasonably designed written policies and 
procedures described above; (2) conducted its ongoing maintenance of 
such written policies and procedures in response to analysis of whether 
quotations published or submitted on the Expert Market are distributed 
only to market data distributors (including Subscribers), Qualified 
Experts, and, as applicable, issuers of securities for which quotations 
are published or submitted on the Expert Market with respect to their 
own securities; and (3) enforced such written policies and procedures 
as part of its ongoing surveillance of exceptions to compliance with 
those written policies and procedures. The Commission also 
preliminarily believes that these proposed recordkeeping conditions 
would aid the Commission's oversight of OTC Link LLC's limitation on 
the distribution of quotations published or submitted on the Expert 
Market only to Qualified Experts (and, as applicable, issuers of 
securities for which quotations are published or submitted on the 
Expert Market with respect to their own securities).

E. Additional Considerations for Market Participants Relying on the 
Proposed Exemption

    In addition, Subscribers that publish or submit quotations in 
compliance with this proposed exemption remain subject to liability 
under the antifraud provisions of the federal securities laws. Further, 
the proposed exemption would not create an exemption or change existing 
exemptions from the registration requirements or any other requirements 
under the federal securities laws, including the Securities Act, for 
any party. Accordingly, for example, if a Subscriber were to publish or 
submit a quotation on the Expert Market in reliance on the proposed 
exemption, the Subscriber would need to determine whether the security, 
or any offer or sale of such security, is registered in accordance with 
any applicable requirement under federal securities laws or whether an 
exemption from any such registration requirement exists.

III. Request for Comments

    The Commission is seeking comment on all aspects of the proposed 
exemption. In particular, the Commission requests comment on the 
following questions about the proposed exemption. When responding to 
the request for comment, please explain your reasoning. Additionally, 
the Commission requests that commenters identify sources of data and 
information as well as provide data and information to assist the 
Commission in analyzing the impact of the proposed relief.
    1. Are there any other categories of securities that should be 
eligible for Subscribers' proprietary quotations on the Expert Market? 
Are there any other categories of securities that should be excluded 
from Subscribers' proprietary quotations on the Expert Market? For 
example, should only those securities that meet certain reported trade 
thresholds be eligible for quoting? Please explain, including how this 
suggestion would be necessary or appropriate in the public interest and 
consistent with the protection of investors.
    2. Are there categories of investors included in the proposed list 
of Qualified Experts who should be excluded? For example, should all 
accredited investors, as defined in Rule 501(a) of Regulation D, be 
considered Qualified Experts, or should the list be limited to a 
narrower set of sophisticated investors? What steps should broker-
dealers and investment advisers be required to take, if any, to verify 
the accredited investor status of customers before providing them 
access to quotations published or submitted on the Expert Market? 
Should all employees of an issuer, including those who would not 
otherwise qualify as Qualified Experts, be allowed to view quotations 
published or submitted on the Expert Market? Please explain, including 
how this suggestion would be necessary or appropriate in the public 
interest and consistent with the protection of investors.
    3. Are there any other categories of persons or entities that 
should be eligible to view real-time or delayed quotations published or 
submitted on the Expert Market? The Commission understands that foreign 
broker-dealers, as defined in Exchange Act Rule 15a-6(b)(3), similar to 
broker-dealers registered under Section 15 of the Exchange Act--an 
entity included in the definition of ``accredited investor''--may 
demonstrate the ability to assess an investment opportunity, the 
capacity to allocate investments in such a way as to mitigate or avoid 
risks of unsustainable loss, the ability to gain access to information 
about an issuer or about an investment opportunity, or the ability to 
bear the risk of a loss. OTC Link LLC has requested that such foreign 
broker-dealers be included in the list of Qualified Experts. Should 
foreign broker-dealers, as defined in Exchange Act Rule 15a-6(b)(3), be 
added to the list of Qualified Experts? Please explain why or why not, 
including how this suggestion would be necessary or appropriate in the 
public interest and consistent with the protection of investors.
    4. What costs would be associated with the proposed Expert Market 
exemption? Please specify the market participant(s) that would incur 
such costs (e.g., issuers, broker-dealers, etc.), if any. Would the 
cost of the proposed policies and procedures and recordkeeping 
conditions prevent the formation of an ``expert market'' for any 
eligible securities? Would the ability for issuers' securities to be 
quoted on the Expert Market reduce incentives for relevant issuers to 
provide public information?
    5. How active would quotations in these securities likely be if the 
proposed exemptive relief were granted? What degree of liquidity and 
price discovery would likely be facilitated by the ability of 
Subscribers to publish or submit

[[Page 2318]]

quotations on the Expert Market? Where possible, please provide data or 
identify sources of information the Commission could use to analyze the 
impact of the relief on liquidity and price discovery.
    6. Does the proposed policies and procedures condition provide 
appropriate assurance that real-time and delayed quotations published 
or submitted on the Expert Market would not be accessible to the 
general public, including retail investors, other than the Qualified 
Experts? Please explain why or why not. If not, please explain how the 
condition should be modified, including the minimum requirements that 
should be included in OTC Link's policies and procedures to (1) ensure 
that only Qualified Experts can view quotations published or submitted 
on the Expert Market and (2) address concerns about fraud and 
manipulation?
    7. Does the proposed recordkeeping condition for OTC Link LLC 
provide appropriate means to facilitate the Commission's oversight of 
the Expert Market, including of Subscribers that publish or submit 
quotations on the Expert Market and the distribution of such 
quotations? Please explain why or why not. If not, please explain how 
the condition should be modified.
    8. Are the proposed safeguards appropriate to ensure that only 
investors who are able to assess the risks and merits of investment in 
the categories of securities proposed to be included in the Expert 
Market are able to access quotations? Are the proposed conditions of 
this exemptive order (in conjunction with FINRA rules that govern this 
market) sufficient to prevent the general public from accessing 
quotations published or submitted in the Expert Market, or should the 
Commission impose additional conditions? Are there any other safeguards 
that should be implemented in the Expert Market to protect investors?
    9. Are there additional conditions that the exemptive order 
providing the relief proposed herein should include to help prevent 
persons who are not Qualified Experts from accessing quotations 
published or submitted on the Expert Market? If yes, please specify 
such condition and explain how this suggestion would be necessary or 
appropriate in the public interest and consistent with the protection 
of investors.
    10. Should the exemptive order providing the relief proposed herein 
include a sunset provision so that the relief would expire on a 
particular date? If yes, what would be an appropriate date on which the 
relief should expire (e.g., one year after the issuance of the 
exemptive order, etc.) and why? Please discuss the costs and benefits 
of including such a sunset provision in the exemptive order. 
Additionally, please explain why such a sunset provision would be 
necessary or appropriate in the public interest and consistent with the 
protection of investors. Alternatively, please explain why the 
exemptive order should omit a sunset provision, including a discussion 
of the benefits and costs of such omission or any distortive effects on 
the market. Lastly, please discuss whether there are alternative means 
of achieving any benefits of a sunset provision.

    By the Commission.

    Dated: December 22, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-28700 Filed 1-11-21; 8:45 am]
BILLING CODE 8011-01-P