SEC Extends Time-Limited Relief on the Application of "Quotation Rule" to Debt Securities
Commentary by Steven Lofchie
The SEC extended no-action relief for FINRA members that do not comply with Exchange Act Rule 15c2-11 ("Initiation or resumption of quotations without specific information") on fixed income securities.
The SEC provided a no-action letter that effectively extended the no-action letter issued as of December 16, 2021 (and Appendix A, thereof) that it had previously provided broker-dealers out of compliance with the rule. The December 2021 letter was withdrawn and replaced by this letter. The new letter also provided for an exemption from Rule 15c2-11 for fixed income securities that are foreign sovereign debt or guaranteed by a foreign government.
The new letter is available to corporate fixed income securities or asset-backed securities offered pursuant to Securities Act Rule 144A ("Private resales of securities to institutions"). There are a number of other debt securities within the scope of the letter, including those of an issuer listed on a national securities exchange and debt securities of certain banking entities.
Commentary
The purported reason for the no-action letter was that the SEC wanted to allow time for an "orderly and good faith transition into compliance." The fact that the relief granted was for two years, rather than six months or even a year, could be read to suggest that the SEC may be backing away from the concept of applying Rule 15c2-11 to fixed income securities. Notably, the no-action letter extends past the next presidential election.
This is a no-action letter that should not have been issued, or rather should not have been needed. Rule 15c2-11 has been in effect for 50 years and was always applied only to equity securities. If the SEC thought it should be applied to fixed income securities, it should have issued a rule proposal and received public comment. Instead, it issued an "interpretation" that read the rule's words literally, but devoid of 50 years of context, and without regard to the SEC's duty to consider what the impact would be on fixed income markets, which are quite different from equity markets. In short, while we have more or less come to the right place - largely the place we would have been had the SEC not issued its novel interpretation of Rule 15c2-11 - that journey to right-back-where-we-started-from has come at the cost of money, time and, for the SEC, some credibility.
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