2017 15g-2 Support Statement

SUPPORTING STATEMENT
for the Paperwork Reduction Act
Information Collection Submission for
Rule 15g-2
A.

Justification
1.

Necessity of Information Collection

Section 15(c)(2) of the Securities Exchange Act of 1934 (“Exchange Act”) authorizes the
Commission to promulgate rules that prescribe means reasonably designed to prevent fraudulent,
deceptive, or manipulative acts or practices in connection with over-the-counter securities
(“OTC”) transactions. Pursuant to this authority, on July 7, 2005, the Commission amended
Exchange Act Rule 15g-2 (the “Rule”) to provide an explicit “cooling-off period” to replace the
implicit period that customers traditionally have had when the disclosure documents required by
the penny stock rules are provided by postal mail rather than electronically.
Rule 15g-2(a) prohibits a broker-dealer from effecting a transaction in a penny stock with
or for the account of a customer unless the broker-dealer distributes to the customer, prior to
effecting a transaction in a penny stock, a disclosure document, as set forth in Schedule 15G, and
receives a signed and dated acknowledgement of receipt of that document from the customer in
tangible form. The document (“penny stock disclosure document”), which must contain the
information set forth in Schedule 15G, gives several important warnings to investors concerning
the penny stock market, and cautions investors against making a hurried investment decision.
Rule 15g-2 requires broker-dealers to provide their customers with a penny stock disclosure
document, as set forth in Schedule 15G under the Exchange Act, prior to each customer's first
non-exempt transaction in a penny stock.
The 2005 amendments to Rule 15g-2(b) impose a uniform waiting period of two business
days that can be satisfied by waiting two days after sending the penny stock disclosure document
required by the rule electronically or by mail or some other paper-based means. As amended, the
rule prohibits a broker-dealer from effecting a transaction in a penny stock for or with the
account of a customer unless, prior to effecting the transaction, the broker-dealer distributes to
the customer a penny stock disclosure document, and has obtained from the customer a signed
and dated acknowledgement of receipt of that document. The amendments to Rule 15g-2 were
designed to preserve parity between electronic and paper communications in the context of the
disclosure requirements of the penny stock rules.
Rule 15g-2(c) requires broker-dealers to maintain a copy of the customer’s written
acknowledgement for at least three years following the date on which the risk disclosure
document was provided to the customer, the first two years in an accessible place. Lastly, Rule
15g-2(d) requires a broker-dealer, upon request of a customer, to furnish the customer with a
copy of certain information set forth on the Commission’s website.
2.

Purpose and Use of the Information Collection

In adopting Rule 15g-2, the Commission sought to combat the unscrupulous, highpressure 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 lowpriced 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 disciplines this process by establishing
account opening procedures that must be followed before penny stocks are recommended to
unsophisticated new customers. The penny stock disclosure document gives several important
warnings to investors concerning the penny stock market, and cautions investors against making
a hurried investment decision. Among other things, the penny stock disclosure document points
out that salespersons are not impartial advisors, that investors should compare information from
the salesperson with other information on the penny stock, and that investors in penny stocks
should be prepared for the possibility of losing their whole investment. As a result of these
procedures, 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 brokerdealers 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 broker-dealers that fail to comply.
3.

Consideration Given to Information Technology

No specific consideration was given to using information technology to reduce this
burden. However, a majority of broker-dealers do use technology to comply with the rule.
4.

Duplication

Broker-dealers are not otherwise required to obtain the written agreement to purchases
required by the Rule. The penny stock rules mandate that broker-dealers disclose certain
information about the market for penny stocks and the particular penny stock transaction to
customers with whom they do business in penny stocks, while the Rule requires broker-dealers
who do such business to obtain certain information from customers acknowledging receipt of the
penny stock disclosure documents.
5.

Effect on Small Entities

The Commission believes that the changes incorporated in the Rule, in particular its 2005
amendments, substantially reduce the Rule’s effect on legitimate broker-dealers and issuers. The

Commission also believes that the significant potential for sales practice abuse and manipulation
in connection with the transactions covered by the Rule justifies the Rule.
6.

Consequences of Not Conducting Collection

As stated in Section 2 above, the Rule disciplines the “boiler room” process by
establishing account opening procedures that must be followed before penny stocks are
recommended to unsophisticated new customers. The penny stock disclosure document gives
several important warnings to investors concerning the penny stock market, and cautions
investors against making a hurried investment decision. As a result of these procedures, 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 requiring such disclosure less frequently would be a substantial
weakening of the Rule's effectiveness because each new customer would not receive the required
warning. Furthermore, any less frequent recordkeeping would jeopardize the ability of the
Commission and the SROs to monitor compliance with the requirements of 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

The information is not confidential. In fact, this information is subject to inspection by
the Commission and the various SROs.
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

There are approximately 198 broker-dealers that could potentially be subject to current
Rule 15g-2. The Commission estimates that approximately 5% of registered broker-dealers are
engaged in penny stock transactions, and thereby subject to the Rule (5% x approximately 3,969
registered broker-dealers = 198 broker-dealers). The Commission estimates that each one of
these firms processes an average of three new customers for penny stocks per week. Thus, each
respondent processes approximately 156 penny stock disclosure documents per year. If
communications in tangible form alone are used to satisfy the requirements of Rule 15g-2, then
the copying and mailing of the penny stock disclosure document takes no more than two
minutes. Thus, the total associated burden is approximately 2 minutes per response, or an
aggregate total of 312 minutes per respondent. Since there are 198 respondents, the current
annual burden is 61,776 minutes (312 minutes per each of the 198 respondents) or 1,030 hours
for this third party disclosure burden. In addition, broker-dealers incur a recordkeeping burden of
approximately two minutes per response when filing the completed penny stock disclosure
documents as required pursuant to the Rule 15(g)(2)(c), which requires a broker-dealer to
preserve a copy of the written acknowledgement pursuant to Rule 17a-4(b) of the Exchange Act.
Since there are approximately 156 responses for each respondent, the respondents incur an
aggregate recordkeeping burden of 61,776 minutes (198 respondents x 156 responses for each x
2 minutes per response) or 1,030 hours, under Rule 15g-2. Accordingly, the current aggregate
annual hour burden associated with Rule 15g-2 (assuming that all respondents provide tangible
copies of the required documents) is approximately 2,060 hours (1,030 third party disclosure
hours + 1,030 recordkeeping hours).
The burden hours associated with Rule 15g-2 may be slightly reduced when the penny
stock disclosure document required under the rule is provided through electronic means such as
e-mail from the broker-dealer (e.g., the broker-dealer respondent may take only one minute,
instead of the two minutes estimated above, to provide the penny stock disclosure document by
e-mail to its customer). In this regard, if each of the customer respondents estimated above
communicates with his or her broker-dealer electronically, the total ongoing respondent burden
is approximately 1 minute per response, or an aggregate total of 156 minutes (156 customers x 1
minutes per respondent). Assuming 198 respondents, the annual third party disclosure burden, if
electronic communications were used by all customers, is 30,888 minutes (156 minutes per each
of the 198 respondents) or 515 hours. If all respondents were to use electronic means, the
recordkeeping burden would be 61,776 minutes or 1,030 hours (the same as above). Thus, if all
broker-dealer respondents obtain and send the documents required under the rules electronically,
the aggregate annual hour burden associated with Rule 15g-2 is 1,545 (515 hours + 1,030 hours).
In addition, if the penny stock customer requests a paper copy of the information on the
Commission’s website regarding microcap securities, including penny stocks, from his or her
broker-dealer, the printing and mailing of the document containing this information takes no
more than two minutes per customer. Because many investors have access to the Commission’s
website via computers located in their homes, or in easily accessible public places such as
libraries, then, at most, a quarter of customers who are required to receive the Rule 15g-2
disclosure document request that their broker-dealer provide them with the additional microcap
and penny stock information posted on the Commission’s website. Thus, each broker-dealer
respondent processes approximately 39 requests for paper copies of this information per year or
an aggregate total of 78 minutes per respondent (2 minutes per customer x 39 requests per

respondent). Since there are 198 respondents, the estimated annual burden is 15,444 minutes (78
minutes per each of the 198 respondents) or 257 hours. This is a third party disclosure type of
burden.
We have no way of knowing how many broker-dealers and customers will choose to
communicate electronically. Assuming that 50 percent of respondents continue to provide
documents and obtain signatures in tangible form and 50 percent choose to communicate
electronically to satisfy the requirements of Rule 15g-2, the total aggregate burden hours is 2,060
((aggregate burden hours for sending disclosure documents and obtaining signed customer
acknowledgments in tangible form x 0.50 of the respondents = 1,030 hours) + (aggregate burden
hours for electronically signed and transmitted documents x 0.50 of the respondents = 773 hours)
+ (257 burden hours for those customers making requests for a copy of the information on the
Commission's website)).
13.

Costs to Respondents

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

Costs to the Federal Government

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

Changes in Burden

There was an overall decrease in the total burden hours because the number of registered
broker-dealers has decreased.
16.

Information Collection Planned For Statistical Purposes

Not applicable. The information collection is not 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 involve statistical methods.