2011 15g-9 supporting statement

SUPPORTING STATEMENT
for the Paperwork Reduction Act
Information Collection Submission for
“Rule 15g-9”
A.

Justification
1.

Necessity of Information Collection

The Commission adopted Rule 15g-9 (17 CFR 240.15g-9) (“the Rule”) in 1989
pursuant to Section 15(c)(2) of the Securities Exchange Act of 1934 (“Exchange Act”),
which authorizes the Commission to promulgate rules that prescribe means reasonably
designed to prevent fraudulent, deceptive, or manipulative practices in connection with
over-the-counter (“OTC”) transactions. Rule 15g-9 requires broker-dealers to produce a
written suitability determination for, and to obtain a written customer agreement to,
certain recommended transactions in penny stocks as that term is defined in Section
3(a)(51) of the Exchange Act and Rule 3a51-1 thereunder. The Rule is necessary to
prevent the indiscriminate use by broker-dealers of fraudulent, high pressure telephone
sales campaigns to sell penny stocks to unsophisticated customers.
The scope of the Rule is limited in order to exclude transactions that are less
likely to be subject to abusive, high-pressure sales practices. Application of the Rule is
limited to transactions in penny stocks, which generally refer to non-exchange listed OTC
equity securities whose issuers do not meet certain financial standards described below.
In addition, exemptions are provided for: (1) transactions in which the price of the
security is five dollars or more; (2) transactions in which the purchaser is an accredited
investor or an established customer of the broker-dealer; (3) transactions that are not
recommended by the broker-dealer; and (4) transactions by a broker-dealer who is not a
market maker in the penny stock that is the subject of the transaction, and whose salesrelated revenue from transactions in penny stocks does not exceed five percent of its total
sales-related revenue from transactions in securities.
2.

Purpose and Use of the Information Collection

The Commission recognizes that only comprehensive action will successfully
reduce fraud in the sale penny stocks, and therefore has undertaken a broad-based
program in this area that includes expanded enforcement efforts, a public education
program, and regulatory initiatives. In adopting Rule 15g-9, the Commission sought to
combat the unscrupulous, high-pressure sales tactics of certain broker-dealers by
imposing objective and readily reviewable requirements that discipline the process by
which new customers are induced to purchase penny stocks. The requirements were
intended to assist investors in protecting themselves from fraudulent sales practices, and
also to reinforce a broker-dealer’s suitability obligations, which are long-standing
obligations under self-regulatory organization (“SRO”) rules.

An essential aspect of high-pressure “boiler-room” operations is the constant
solicitation of new, and often unsophisticated, customers. The Rule reigns in this process
by establishing account opening procedures that must be followed before penny stocks
are recommended to unsophisticated new customers. The procedures are intended to
increase the likelihood that the broker-dealer will make an appropriate suitability
determination by requiring the broker-dealer to obtain sufficient information concerning
the customer, and to consider the customer's previous investment experience, investment
objectives, and financial situation.
In addition, the Rule protects investors from fraudulent sales practices in penny
stocks in two ways. First, the requirement that the customer agree in writing to penny
stock purchases provides the customer with an opportunity to make an investment
decision outside of a pressured telephone conversation with a salesperson. Second, the
account opening procedures require the broker-dealer to provide a copy of the brokerdealer’s suitability determination to the customer prior to the customer’s commitment to
purchase a penny stock. As a result, the customer has an opportunity to review the
determination and decide whether the broker-dealer has made a good faith attempt to
consider the customer’s financial situation, investment experience and investment
objectives.
The consequences of not requiring the information specified in the Rule would be
a substantial weakening of the Rule’s effectiveness. The Commission believes that
certain broker-dealers engaging in abusive sales practices in connection with penny
stocks may choose to ignore the requirements of the Rule. The Rule therefore requires
records to be kept that indicate their compliance with each of its provisions. This
documentation enables regulatory authorities to review a broker-dealer’s compliance with
the Rule, and provides the basis for simple and direct enforcement actions against brokerdealers that fail to comply.
3.

Consideration Given to Information Technology

No consideration was given to using information technology to reduce this
burden.
4.

Duplication

Broker-dealers are not otherwise required to obtain the written agreement to
purchases required by the Rule. As discussed in item (5), however, responsible brokerdealers currently obtain information of substantially the same type that is required by the
Rule to comply with SRO suitability rules. Although the information currently obtained
by responsible broker-dealers also can be used to satisfy the Rule’s requirements, the
Rule does not duplicate these SRO rule requirements because the Rule contains an
enhanced suitability determination and allows for direct Commission enforcement actions
in cases of non-compliance. In addition, the Rule does not duplicate any of the
requirements of other rules adopted pursuant to Section 15(g) of the Exchange Act. The
other rules adopted pursuant to Section 15(g) mandate that broker-dealers disclose certain

information to customer about the penny stock market in general and about the particular
penny stock transaction to customers with whom they do business. In contrast, the Rule
requires that broker-dealers who engaged in penny stock transactions with customers to
obtain certain information from customers and to make a suitability determination on the
basis thereof.
5.

Effects on Small Entities

The statements requested are not extensive, and therefore the collection of
information is not unduly burdensome for small entities.
6.

Consequences of Not Conducting Collection

These statements are required only upon the occurrence of a single event.
Therefore, collection could be no less frequent.
7.

Inconsistencies with Guidelines in 5 CFR 1320.8(d)

There are no special circumstances. The collection is consistent with the
guidelines in 5 CFR 1320.8(d).
8.

Consultations with Outside Agencies

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

Not applicable.
11.

Sensitive Questions

There are no questions of a sensitive nature asked.
12.

Burden of Information Collection

The burden of the collection of information varies widely depending on the
activity and size of the broker-dealer. In this regard, the burden is the greatest on those
broker-dealers whose questionable sales practice activities correspond directly to the sale
of penny stocks (i.e. boiler-room broker-dealers), the primary type of security that the
Rule addresses. The Rule is intended to reign in questionable penny stock sales practices

by establishing procedures that broker-dealers follow before recommending penny stocks
to unsophisticated customers. The burden of the Rule’s information requirements
therefore is triggered by the solicitation of new customers, and the greatest burden is
imposed on broker-dealers who are constantly soliciting new customers for penny stock
purchases.
The burden on the other broker-dealers, however, is much lower. These brokerdealers tend to concentrate on servicing existing customers. Consequently, the additional
information burden for these broker-dealers is not nearly as great as for boiler-room
broker-dealers, and the Rule imposes the greatest burden on those broker-dealers who
employ sales practices that are the direct target of the prophylactic requirements of the
Rule.
The Commission staff estimates that approximately five percent of registered
broker-dealers, or 253 broker-dealers, are subject to the Rule (5% x approximately 5,063
registered broker-dealers = 253 broker-dealers). As indicated above, the burden of the
Rule on a respondent varies widely depending on the frequency with which new
customers are solicited. On the average for all respondents, the staff has estimated that
respondents process three new customers per week, or approximately 156 new customer
suitability determinations per year. We also estimate that a broker-dealer would expend
approximately one-half hour per new customer in obtaining, reviewing, and processing
(including transmitting to the customer) the information required by Rule 15g-9, and each
respondent would consequently spend 78 hours annually (156 customers x .5 hours)
obtaining the information required in the rule. We determined, based on the estimate of
253 broker-dealer respondents, that the current annual burden of Rule 15g-9 is 19,734
hours (253 respondents x 78 hours).
In addition, we estimate that if tangible communications alone are used to
transmit the documents required by Rule 15g-9, each customer should take: (1) no more
than eight minutes to review, sign and return the suitability determination document; and
(2) no more than two minutes to either read and return or produce the customer
agreement for a particular recommended transaction in penny stocks, listing the issuer
and number of shares of the particular penny stock to be purchased, and send it to the
broker-dealer. Thus, the total current customer respondent burden is approximately 10
minutes per response, for an aggregate total of 1,560 minutes for each broker-dealer
respondent. Since there are approximately 253 respondents, the annual burden for
customer responses is 394,680 minutes (1,560 customer minutes per each of the 253
respondents) or 6,578 hours.
In addition, we estimate that, if tangible means of communications alone are used,
broker-dealers could incur a burden under Rule 15g-9 of approximately two minutes per
response. Since there are approximately 253 broker-dealer respondents and each
respondent would have approximately 156 responses annually, respondents would incur
an aggregate burden of 78,936 minutes (253 respondents x 156 responses x 2 minutes per
response), or 1,315 hours. Accordingly, the aggregate annual hour burden associated with

Rule 15g-9 is 27,627 hours (19,734 hours to prepare the suitability statement and
agreement + 6,578 hours for customer review + 1,315 hours for processing).
We recognize that the Rule’s burden hours may be slightly reduced if the
transaction agreement required under the Rule is provided through electronic means, such
as e-mail, from the customer to the broker-dealer (e.g., the customer may take only one
minute, instead of the two minutes estimated above, to provide the transaction agreement
by e-mail rather than regular mail). If each of the customer respondents estimated above
communicates with his or her broker-dealer electronically, the total burden hours on the
customers would be reduced from 10 minutes to 9 minutes per response, or an aggregate
total of 1,404 minutes per respondent (156 customers x 9 minutes for each customer).
Because there are approximately 253 respondents, the annual customer respondent
burden, if electronic communications were used by all customers, would be
approximately 355,9212 minutes (253 respondents x 1,404 minutes per each respondent),
or 5,920 hours. We do not believe the hour burden on broker-dealers in obtaining,
reviewing, and processing the suitability determination would change through use of
electronic communications. In addition, we do not believe that, based on
information currently available to us, the burdens under Rule 15g-9 would change where
the required documents were sent or received through means of electronic
communication. Thus, if all broker-dealer respondents obtain and send the documents
required under the rule electronically, the aggregate annual hour burden associated with
Rule 15g-9 would be 26,969 hours (19,734 hours to prepare the suitability statement and
agreement + 5,920 hours for customer review + 1,315 hours for processing).
We cannot estimate how many broker-dealers and customers will choose to
communicate electronically. If we assume that 50 percent of respondents would continue
to provide documents and obtain signatures in tangible form, and 50 percent would
choose to communicate electronically, the total aggregate hour burden would be 27,297
burden hours ((27,627 aggregate burden hours for documents and signatures in tangible
form x 0.50 of the respondents = 13,813 hours) + (26,969 aggregate burden hours for
electronically signed and transmitted documents x 0.50 of the respondents = 13,484
hours). We estimate that 50% of the burden associated with Rule 15g-9 is a
recordkeeping type of burden, and the remaining 50% of the burden is a third party
disclosure type of burden.
13.

Cost to Respondents

There is no cost to respondents other than the internal cost of the hours per
respondent per year obtaining the information required by the rule.
14.

Costs to Federal Government

There are no costs to the Federal Government apart from internal labor costs.
Commission staff estimates that approximately 50 hours of staff time per year are
devoted to analysis of the data at a cost of $2500 per year.

15.

Changes in Burden

There was a slight increase in the number of respondents affected by the rule,
which impacted agency estimates. This increase was caused by in an increase in the
number of registered broker-dealers.
16.

Information Collection Planned for Statistical Purposes

This collection does not involve statistical methods.
17.

Exceptions to Certification for Paperwork Reduction Act Submissions

The Commission is not seeking approval to not display the expiration date for
OMB approval.
B.

Collection of Information Employing Statistical Methods.
Rule 15g-9 does not employ statistical methods.