MFA Backs SEC Push to Refocus OTC Quotation Rule; Seeks Broader Exemptions

The Managed Funds Association ("MFA") supported SEC proposed amendments to refocus the over-the-counter ("OTC") Quotation Rule on the equity markets, but recommended carve outs for convertible securities, options, and bilaterally negotiated derivatives.  

The SEC proposed amendments to SEA Rule 15c2-11 ("Initiation or Resumption of Quotations Without Specific Information") would limit the rule’s information-gathering and review requirements to broker-dealers publishing or submitting quotations for "equity securities" in OTC markets. (See prior coverage.) 

In a comment letter, the MFA said the amendment was designed to address fraud in retail-oriented over-the-counter equity markets, particularly microcap securities, and that its core premise does not translate to fixed income markets. Applying the rule to fixed income, the MFA said, would force dealers to withdraw indicative quotations rather than perform issuer-level current-information reviews on each instrument, fragmenting liquidity and impairing price discovery.

The MFA recommended that the SEC not simply substitute the definition of "equity security" as defined in SEA Rule 3a11-1 ("Definition of the term 'equity security.') for "security" in Rule 15c2-11 without modification. Rule 3a11-1 defines "equity security" broadly to include stock and similar instruments, security futures, convertible securities, warrants, options, and other rights, which the MFA said derive value primarily from an underlying equity price, contractual features, and market dynamics rather than issuer disclosure. The MFA asked the SEC to add carve-outs for convertible securities, options, and bilaterally negotiated derivatives, and said other instruments - including covered hybrid securities, registered securities pending listing, and securities recently emerged from bankruptcy whose secondary-market trades are reported to FINRA's Trade Reporting and Compliance Engine ("TRACE") - should also be excluded.