Copyright

SEC Regulations Related to Customer Quotations

Instructor: Yusuf Abdullah

Yusuf has taught Science and Mathematics at school level and Finance and Economics at University level. He has recently earned his Ph.D in Financial Econometrics.

This lesson discusses SEC Rules and regulations related to quotations. Learn about SEC Rules that relate to the identification of quotations, initiation or resumption of quotations, and penny stock disclosures. Updated: 04/24/2020

Quotations

Barry and Rose are talking about quotations for securities such as shares, bonds, and other financial securities. Rose defines quotations as buying and selling prices that are disseminated publicly. The quotations for security include the dealer or the broker's buying and selling price. It also includes the quantity available at the given quotes. Barry remarks that quotations are provided by the dealers who promise to buy and sell securities at the price listed by them. Naturally, market forces would drive these quotations.

Rose tells Barry that she often confuses the quotes provided. She tries to buy at the bid or buy price but was turned down by the dealer. Barry informs her that the bid price or the buy price is the price at which the dealer will buy the securities. Similarly, ask price is the price at which the dealer will sell the securities. Rose states that there should be rules on how dealers can transmit the prices. Barry remarks that there are several rules that the SEC has made to remove any confusion.

SEC Rule 15c2-7 (Identification of Quotations)

Barry informs Rose that SEC Rule 15c2-7 prohibits any quote which is fictitious. This means that if a quote is disseminated, then the securities should be bought and sold at that quote. This is important because fictitious quotes can drive the markets and increase volatility. This would benefit large investors and dealers at the expense of small investors.

In order to prevent fictitious quotations, each broker or dealer is identified by a numeric code. The quotation disseminated is followed by this code to identify the broker or dealer. This prevents them from backtracking on their commitments. In addition to this, any correspondence or contract between the brokers or dealers should be announced to other brokers and dealers.

SEC Rule 15c2-11 (Initiation or Resumption of Quotations Without Specified Information)

Rose remarks that this rule would include pertinent information relating to the security which would help investors asses the worth of these securities and invest in them likewise. Barry agrees and informs her that SEC Rule 15c2-11 requires that the quotations should be accompanied by the information related to securities to the investors. This information would usually include:

  • A copy of both the prospectus and offering circular which were filed when registering for the security as per the Securities Act of 1933.
  • Copies of reports, including quarterly reports and an up to date annual report.
  • Reports for foreign securities and American depository receipts to be gathered electronically.
  • Other information related to a security such as par value, issuer name, address, the title of the security, etc.

SEC Rule 15g-3 (Disclosures Related To Penny Stocks)

Barry asks Rose if she knows what a penny stock is. She replies that penny stocks are small company stocks that trade at less than $5. Only a few penny stocks may trade on NYSE and other major stock exchanges while others are traded over the counter. Barry states that SEC Rule 15g-3 says that a broker or a dealer should not carry out a transaction in a penny stock unless:

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