SEC Exempts Broker-Dealers from Quotation Reporting Requirements on Certain Fixed-Income Securities
Commentary by Steven Lofchie
The SEC granted exemptive relief to broker-dealers from requirements on the publication of quotations for fixed-income securities under Exchange Act Rule 15c2-11 ("Initiation or resumption of quotations without specific information") sold in compliance with Securities Act Rule 144A ("Private resales of securities to institutions").
Under Rule 15c2-11, a broker-dealer is required to review and maintain in its records key information about a security and its issuer before the broker-dealer can begin quoting that security in the OTC market. The SEC made clear that the exemption applies only to fixed-income securities issued in accordance with Rule 144A and sold to purchasers that the broker-dealer reasonably believes are qualified institutional buyers.
Commentary
For 50 years, Exchange Act Rule 15c2-11 (the "Rule") was understood to apply only to equity securities. The SEC then issued a surprising and seemingly impractical (albeit literal) interpretation of the Rule saying that it now also considered it applicable to fixed-income securities. Having caused a good deal of consternation in the market, from all parties – sell side, buy side, issuers and investors – the SEC then issued a delaying order, and a further delaying order, and now the SEC issues a partial retreat from its interpretation.
That is progress, even if of a limited sort.
If the SEC believes that the Rule (or some version thereof) should apply to fixed-income securities (which were outside the scope of the Rule when it was adopted and have always been regarded as outside the scope of the Rule), the SEC should issue a rule proposal and obtain public comment. Issuing a major reinterpretation of a 50 year-old rule is not an effective manner of regulation, even if the SEC undoes some, but not all, of the damage (not all debt securities are subject to Rule 144A and the SEC has given no consideration to whether the market is well served by applying Rule 15c2-11 to these non-Rule 144A debt securities).