15g-6 justification (2015) final DGL REVISED

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
RULE 15g-6

A.

Justification
(1)

Necessity of 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 non-NASDAQ, 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.

2
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 brokerdealer'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

3
transactions.
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 brokerdealers 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.

4

(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)

There are no special circumstances. This collection is consistent with the 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. No public comments were received.
(9)

Payment or Gift
No payments or gifts are provided to any respondents.

(10)

Confidentiality

5
Though the information is not now generally available to public investors, it is not
considered confidential and no assurances of confidentiality are provided.
(11)

Sensitive Questions

There are no questions of a sensitive nature asked. The information collection does not
collect any Personally Identifiable Information (PII).
(12)

Burden of Information Collection

The staff estimates that there presently are approximately 221 broker-dealers that are
subject to the rule. The staff estimates that approximately 5% of registered broker-dealers are
engaged in penny stock transactions, and thereby subject to the rule (5% x approximately 4,410
registered broker-dealers = 221 broker-dealers). 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
(130x12=1,560) account statements annually for each firm and a total of 344,760
(1,560x221=344,760) 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 17,238 hours.
(13)

Costs to Respondent

There are no capital, start-up or other external costs on respondents associated with the
rule.
(14)

Costs to Federal Government

There are no costs to the federal government associated with these rules.
(15)

Changes in Burden

The total annual hourly burden of compliance has increased from approximately 16,302
to 17,238 hours due to a change in methodology for estimating the number of broker-dealers
affected. Since the identities of penny stock dealers are not readily available, the staff of the
Commission developed a methodology to identify them. The change was made in order to be
consistent in methodology among the various penny stock rules. We previously estimated that
209 broker-dealers were subject to the penny stock rules. We now estimate that there are

6
approximately 221 penny stock dealers subject to the penny stock rules.
(16)

Information Collection Planned for Statistical Purposes

Not applicable because the information will not be used for statistical purposes.
(17)

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to omit the expiration date.
(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.