15g-6 justification (2011) (3)

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission
“Rule 15g-6”

A.

Justification
(1)

Necessity for Information Collection

The term "penny stock" generally refers to low-priced, speculative securities that are traded
in the over-the-counter market. The great majority of securities that are eligible for trading in the
United States are not traded on an established national securities exchange or the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"). Most of these nonNASDAQ, over-the-counter securities are not actively traded in any forum, and frequently there is
little public information available with respect to their issuers.
Beginning in the mid-1980s, penny stock transactions and associated abuses grew
geographically and in volume. Technological advances related to interstate telecommunications
contributed substantially to this growth. This period also witnessed a dramatic growth in the
number of broker-dealers that concentrated their activities primarily or entirely in penny stock
transactions. In 1989, the Commission identified a corresponding increase in the number of
investor complaints concerning these broker-dealers. Government officials and commentators
have stressed the threat posed by penny stock fraud to economic progress and the legitimate
securities industry. Penny stock fraud remains a serious national concern.
In its report concerning the Securities Enforcement Remedies and Penny Stock
Enforcement Act of 1990 (the "Penny Stock Act"), the House Committee on Energy and
Commerce (the "Committee") identified two primary factors spurring the growth of penny stock
fraud: (i) a lack of public information concerning penny stocks, which facilitates price
manipulation and deprives investors of a basis on which to make investment decisions, and (ii) the
presence of a large number of individuals acting as promoters or associated with penny stock
issuers or broker-dealers "who are repeat offenders of state or federal securities laws, other
convicted felons, and persons having strong ties to organized crime."1 With respect to recidivist
offenders, the Committee noted the limited classes of persons that the Commission had authority to
bar from association with broker-dealers.
Many of the abusive practices identified in the penny stock market can be attributed to the
communication by broker-dealers to their customers of false or misleading information as to the
value or market price of securities in order to induce transactions in those securities. These
practices are more likely to flourish where there is a paucity of price, quotation, and other market
information concerning a security. Where such information is available to investors, they have a
greater ability to judge the veracity of sales agent claims. Most penny stocks are not actively
traded in any secondary market, and dealer quotations, if they exist at all, traditionally have been
1

House Committee on Energy and Commerce, Penny Stock Reform Act of 1990, H.R. Rep. No. 617, 101st
Cong., 2d Sess. (July 23, 1990) (reporting H.R. 4497) ("House Report"), at 21.

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confined to the "pink sheets." Moreover, pink sheet quotations generally do not serve as a reliable
indication of the price at which a public customer could effect a purchase or sale transaction.
The large-scale and persistent pattern of abuse described above represents a continuing
threat to individual investors in particular and to investor confidence generally. Moreover, issuers
themselves may in some cases be deceived by promoters who make unfounded promises of easy
and efficient access to new capital.
To help address these concerns, Rule 15g-6 was adopted by the Commission pursuant to
the provisions of Section 15(g) of the Securities Exchange Act of 1934 (the "Exchange Act"). This
section, which was added to the Exchange Act by Section 505 of the Penny Stock Act, mandates
specific measures to increase the level of disclosure to investors concerning penny stocks generally
and specific penny stock transactions.
Section 503 of the Penny Stock Act added Section 3(a)(51) to the Exchange Act, which
generally defines the term "penny stock" to include equity securities other than securities that are
traded on exchanges or automated quotation systems meeting criteria established by the
Commission, issued by registered investment companies, or otherwise excluded or exempted by
the Commission based on price, net tangible assets, or other relevant criteria. Section 3(a)(51) also
grants to the Commission certain additional authority to classify or exempt securities as penny
stocks. Rule 3a51-1 would further exclude from the term "penny stock" securities traded on an
exchange or automated quotation system that meets certain requirements, transactions in which are
reported pursuant to a consolidated transaction reporting plan, or that are priced at five dollars per
share or more.
Under Section 15(g)(1), it is unlawful for a broker or dealer to use the mails or other means
of interstate commerce to effect, induce, or attempt to induce customer transactions in penny stocks
except in accordance with the requirements of Section 15(g) and the rules promulgated thereunder.
In general, Section 15(g): (i) requires broker-dealers, prior to effecting a penny stock transaction,
to provide to the customer a risk disclosure document that contains certain information describing
the nature and level of risk in the penny stock market, the broker-dealer's duties to the customer,
and the customer's rights and remedies for violations, as well as a narrative description of certain
aspects of a dealer market generally, all in such form and containing such additional information as
the Commission may require by rule; (ii) mandates that the Commission adopt rules relating to the
disclosure, prior to each penny stock transaction and in the customer confirmation, of information
concerning (A) price data, including bid and ask quotations, and the depth and liquidity of the
market for particular securities and (B) the amount and a description of the compensation received
by broker-dealers and their associated persons; (iii) calls for Commission rulemaking to require
broker-dealers to provide for customers’ monthly account statements indicating the market value of
the penny stocks in their accounts or indicating that the market value can not be determined
because of the unavailability of firm quotes; and (iv) provides the Commission with authority to
adopt additional rules regarding disclosure by broker-dealers to their customers of information
related to penny stock transactions.

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Rule 15g-6 makes it unlawful for a broker-dealer that has effected a penny stock sale to a
customer to fail to provide the customer a monthly statement disclosing certain price and quotation
information regarding the shares in the customer's account.
The scope of the rule is limited by operation of Rule 3a51-1 and Rule 15g-1, which
exempts certain transactions from certain rules adopted under Section 15(g). Specifically, the rule
does not apply to transactions: (i) by a broker-dealer that does less than five percent of its securities
business in penny stocks and that has not been a market maker, during the past year, in the penny
stock that is the subject of the transaction; (ii) in securities the issuer of which has net tangible
assets in excess of $2 million, if that issuer has been in continuous operation for at least three
years, or $5 million, if the issuer has been in continuous operation for less than three years; (iii)
where the purchaser is an institutional accredited investor; or (iv) that are not recommended by the
broker-dealer; or (v) in securities registered or approved for registration, and executed on, a
national securities exchange that makes transaction reports available pursuant to an effective
transaction reporting plan, or authorized, or approved for authorization, for quotation in the
NASDAQ system, where the transaction is executed with or by a dealer registered as a NASDAQ
market maker in the penny stock, a broker crossing two customer orders on an agency basis, or an
underwriter or any syndicate or selling group member that is participating in a distribution of the
penny stock that is the subject of the transaction.
(2)

Purpose and Use of the Information Collection

The information is required to be provided to customers of broker-dealers that effect penny
stock transactions in order to provide those customers with information that is not otherwise
publicly available. Without this information, investors would be less able to protect themselves
from fraud and to make informed investment decisions.
(3)

Consideration given to Information Technology

The Commission's electronic filing project, called EDGAR for Electronic Data Gathering,
Analysis & Retrieval, is designed to automate the filing, processing, and dissemination of full
disclosure filings. Such automation will increase the speed, accuracy, and availability of
information, generating benefits to investors and financial markets. This improved information
technology is not applicable to this rule, because the information is sent to individual investors and
is meant to be contained in written form.
Broker-dealers that already provide account statements generally generate these statements
through automated means through information systems that contain updated information
concerning securities held in each customer's account. It is anticipated that broker-dealers
furnishing account statements under the rule would also be able to generate account statements
through automated means and that automated processing would limit the burden imposed by the
requirement.

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(4)

Duplication

Broker-dealers are not otherwise required to provide the information required by the rule.
Investors would have no assurance of receiving the information, or comparable information, in the
absence of the rule.
(5)

Effect on Small Entities

Some of the broker-dealers that are subject to the rule are small businesses. However, the
additional cost of complying with the rule is minimal, because the information will already be
known by or readily available to the broker-dealer. Broker-dealers are required to provide the
information in writing following a trade, but because trade confirmations are already required, the
additional burden relates to incorporating this information in the trade confirmations that are now
provided.
(6)

Consequences of Not Conducting Collection

The rule provides investors with periodic information concerning the value of their
holdings of penny stocks over time, where the information is available. Because market value may
vary significantly over a short period of time, the information would be much less useful to
investors as a means of monitoring their investments if it were provided less frequently than on a
monthly basis. However, for accounts that are inactive, and the need for frequent updating of the
information is less important, the rule allows statements to be provided on a quarterly basis. There
is no comparable information already available to investors. The information is available to
broker-dealer firms but would not generally be provided to customers of those firms in the absence
of the requirement imposed by the rule.
(7)

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

The collection is consistent with all guidelines in 5 CFR 1320.5(d)(2).
(8)

Consultations Outside the Agency

The required Federal Register notice with a 60-day comment period soliciting comments on
this collection of information was published as required. No public comments were received.
(9)

Payment or Gift
Not applicable.

(10)

Confidentiality

Though the information is not now generally available to public investors, it is not
considered confidential and no assurances of confidentiality are provided.

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(11)

Sensitive Questions

Questions of a sensitive nature are not asked.
(12)

Burden of Information Collection

The staff estimates that there presently are approximately 209 broker-dealers that are
subject to the rule. The information required to be contained in the account statement is already
known to the broker-dealer. The burden imposed by the rule would relate to compiling this
information in a comprehensible format, through automated or other means. The staff estimates
that the firms affected by the rule will, at any one time, have approximately 130 new customers
with whom they have effected transactions in penny stocks, each of whom would receive a
maximum of 12 account statements per year, for a total of 1,560 account statements annually for
each firm and a total of 326,040 account statements annually for all firms. Because these
statements generally will be provided by automated means, the staff estimates that a broker-dealer
would expend approximately three minutes in processing the information required for each account
statement. Accordingly, the estimated average annual burden would equal 78 hours, and the
estimated average total burden would equal 16,302 hours.
(13)

Costs to Respondent

Not applicable; (a) it is not anticipated that respondents will have to incur any capital and
start up cost to comply with the rule; (b) it is not anticipated that the respondents will have to incur
any additional operational or maintenance cost (other than provided for in item no. 12) to comply
with the rule.
(14)

Costs to Federal Government

Cost to the federal government results from appropriate regulatory agency staff time and
related overhead cost devoted to assuring compliance by broker-dealers with the requirements of
the rule. The staff estimates that approximately 50 hours of staff time per year will be devoted to
assuring that broker-dealers comply with the rule at a cost of $1,500 per year.
(15)

Changes in Burden

We previously estimated that 240 broker-dealers were subject to the penny stock rules. We
now estimate that there are approximately 209 penny stock dealers subject to the penny stock rules.
Since the identities of penny stock dealers are not readily available, the staff of the Commission
developed a methodology to identify them.
(16)

Information Collection Planned for Statistical Purposes

Not applicable because the information will not be used for statistical purposes.

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(17)

Display of OMB Approval Date

The Commission is not seeking approval to not display the expiration date for OMB
approval.
(18)

Exceptions to Certification for Paperwork Reduction Act Submissions

This collection complies with the requirements in 5 CFR 1320.9.
B.

Collection of Information Employing Statistical Methods
This collection does not include statistical methods.