The SEC issued a no-action letter to FINRA stating that it will not take enforcement action against member firms that do not comply with SEA Rule 15c2-11 ("Initiation or resumption of quotations without specific information") (the "Rule") on fixed income securities until January 3, 2022.
The Rule provides that a broker-dealer may not submit quotations for a security in a "quotation medium" other than a national securities exchange unless the broker-dealer is able to satisfy specified information requirements as the security and its issuer. The Rule, which has been effect since 1971, has by its terms always applied to fixed income securities. The Rule has never been applied to debt securities. The SEC has made clear that it intends to interpret the Amended Rule as applying to debt securities. The Amended Rule compliance date is September 28, 2021. Market participants are trying to figure out how they can comply and whether it is possible to make a market for fixed income securities in light of the obligations imposed by the Amended Rule. While the SEC granted a three month delay in enforcement as to fixed income securities, the SEC's letter did not address whether the Commission might reconsider its decision to apply Rule 15c2-11 as to fixed income securities, whether in whole or in part.
SEC Commissioner Hester M. Peirce issued a statement describing the time-limited relief as "inadequate" and urging the Commission to "reopen the rulemaking" with regard to the application of Rule 15c2-11 as "part of a broader fixed-income modernization initiative."
As Rule 15c2-11 was written for the equities market, its application to trading in fixed income securities - which trade in a very different manner from equities - has the potential to create meaningful market stresses. In particular, it could make it impractical for broker-dealers to provide quotes for many fixed income securities.
It is likely that there are a substantial number of fixed income securities for which it is essentially impossible to comply with the Rule. For example, broker-dealers may simply not be able to satisfy the information requirements with respect to privately issued asset-backed securities. The inability for broker-dealers to provide such quotes, and thus facilitate liquidity, could also have a negative impact on related credit markets (such as commercial loans and mortgages) whose products are indirectly distributed as asset-backed securities.
As the SEC no-action letter notes, Rule 15c2-11 has by its terms always applied to debt securities, or at least it has not expressly carved them out from its application. This raises the interesting question of why no one had noticed this when the Rule was adopted, back in 1971(36 FR 18641 (Sept. 18, 1971). A possible reason is that the rule applies to quotes on a "quotation medium," which was defined as a "communications network . . . used by brokers or dealers to make known their interests in transactions in any security . . . ." In 1971, equity securities were quotes on such "quotation media," such as the pink sheets, but it is likely that fixed income securities were not quoted in this way. In fact, the widespread quoting of fixed income securities on electronic media is a much more recent development than the trading of equity securities in this manner. If that hypothesis is correct, it means that the Rule as adopted did not, as a practical matter, apply to fixed income securities and that no one gave any thought as to how it might apply to such securities, as there was no reason to do so.
Further, if the above hypothesis is correct, then it seems incumbent upon the SEC to provide a general exemption from Rule 15c2-11 for fixed income securities while the SEC considers whether the Rule should apply to such securities at all, and if so, how the Rule should apply.
In addition, the application of the Rule to fixed income securities raises questions under the Administrative Procedures Act. Is it appropriate for the SEC to declare the Rule applicable to fixed income when there was no intent at time of adoption to apply the Rule to those securities? Is it appropriate when the Rule might have been applied to such securities for at least the last 20 years (where quotation media have been used for trading fixed income securities), but the SEC has not done so?
- SEC No-Action Letter: Amended Rule 15c2-11 in Relation to Fixed Income Securities
- SEC Statement, Hester M. Peirce: Statement on Staff No-Action Letter Regarding Amended Rule 15c2-11 in Relation to Fixed Income Securities
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