HFS Marked-Up Bill Excluding Fixed-Income Securities from SEC Quotation Rules
Commentary by Steven Lofchie
The House Financial Services Committee marked-up a series of bills for final consideration, including the "Protecting Private Job Creators Act" which addresses disclosures in over-the-counter markets and imposes requirements upon broker-dealers who publish quotations in such markets.
The bipartisan bill, introduced by Representatives Troy Downing (R) and Cleo Fields (D), would codify an exemption for fixed-income securities from SEC Rule 15c2-11 ("Initiation or resumption of quotations without specific information").
The Structured Finance Association ("SFA") supported the House Financial Services Committee's inclusion of the bill in its markup package. The SFA asserted that fixed-income securities were designed for "equity markets and never intended to apply to fixed-income products." The SFA claimed the legislation "would preserve market liquidity, protect jobs, and ensure efficient functioning of U.S. capital markets" by codifying longstanding regulatory treatment and existing relief.
In a letter to the Committee, the American Securities Association stated: "There are many reasons for why a business may elect to remain private – the SEC should not force public company disclosure requirements on those businesses that seek to maintain confidentiality over certain information. While the SEC has granted temporary relief from this requirement, Congress should make the exemption permanent."
Commentary
Rule 15c2-11 is intended to prevent broker-dealers from quoting securities without a reasonable basis for the price at which they quote. It had been in existence for 50 years, and had applied only to equity securities. Examining the literal wording of the rule, the prior SEC Chair seized an opportunity to apply it to transactions in debt securities. In a rush to expand the regulation, the SEC did not consider whether there might be very substantial differences between equity markets and debt markets that made it unwise to simply announce that a rule that had long applied to one market should be dumped on to another.
Not surprisingly, a Rule intended for equity markets was not a perfect fit for debt markets. Under industry pressure, the SEC carved out various exclusions from the expanded Rule until what remained was reduced to a material inconvenience as opposed to a major impediment to debt capital markets.
A congressional action to limit the scope of the Rule to its intended purpose would be the correct end to the whole misadventure.