2020 15g-9 supporting statement

SUPPORTING STATEMENT
for the Paperwork Reduction Act New Information Collection Submission for
Rule 15g-9
OMB Control #: 3235-0385
A.

Justification
1.

Information Collection Necessity

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.

Information Collection Purpose and Use

The Commission recognizes that only comprehensive action will successfully
reduce fraud in the sale of 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 reins 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 a 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. However, responsible broker-dealers 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 noncompliance. 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
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customers 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
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.

Effect 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 1320.5(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

Not applicable.
11.

Sensitive Questions

Broker Dealers are required produce a written suitability determination and obtain
a written customer agreement pursuant to Rule 15g-9; however, no information in
identifiable form is directly collected by, or submitted, to the SEC and therefore this
Information Collection does not constitute a Privacy Act system of records, and no PIA
or SORN are required.
12.

Information Collection Burden

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
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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 rein 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 182 broker-dealers, are subject to the Rule (5% x approximately 3,648
registered broker-dealers = 182 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. This would result in 28,392 annual
responses per year (182 respondents x 156 new determinations per year). We
determined, based on the estimate of 182 broker-dealer respondents, that the
current annual burden of Rule 15g-9 is 14,196 hours (182 respondents x 78 hours).
Burden type

Communication
type

Third party
disclosure
Total burden

Mail

13.

Number
of
brokerdealers
182

Annual
number of
responses

Hours per
response

Total burden per
communication
type

156

1/2

14,196
14,196

Costs 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.

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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 $2,500 per year.
15.

Changes in Burden

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

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