The Commission’s amendments to Exchange Act Rule 15c2-11 that were finalized last fall will take effect next week.  In recent months, market participants have raised concerns about the potentially significant negative effects of these amendments on trading in the fixed-income markets.  I agree with the staff of the Division of Trading and Markets that relief is necessary to forestall these effects.  However, the time-limited relief—three months—being granted in the no-action letter released today is wholly inadequate to that need.  Instead, we should issue longer Commission-level no-action relief and reopen the rulemaking as part of a broader fixed-income modernization initiative.

Rule 15c2-11 is designed to address fraudulent behavior that is generally associated with trading in stocks in the over-the-counter (OTC) market.  The combination of high retail investor participation and sparse information about certain issuers is fertile ground for fraud in this market.  The Commission’s 2020 amendments were intended to enhance Rule 15c2-11’s ability to combat fraud by ensuring that issuers of securities being quoted in the OTC market make current financial information publicly available.[1] 

Although the text of the rule always has encompassed more than just equity securities, there appears to have been limited, if any, application of the rule to fixed income markets prior to the Commission’s 2020 adopting release.  Nothing in the adopting release suggests that the Commission considered the application of these rules to the fixed-income markets.  The policy analysis focuses entirely on the need for additional disclosure in the OTC equity markets to deter fraud in those markets, and the justification rests on the need to protect retail shareholders.  The economic analysis focuses on the effects and incentives the rule creates in the OTC equity markets.  A question in the proposing release about whether non-equity securities should be excepted from Rule 15c2-11, buried among more than a hundred other questions, failed to elicit any responses.[2]  The equity-focused nature of the discussion during the rulemaking process and the limited application of the pre-amendment rule in the fixed-income context meant little attention was focused on the possible broad application of the amended rule to fixed-income securities.  Consequently, nobody seems to have contemplated that this rule would affect the fixed-income markets in a way different from the pre-amendment version of the rule, much less that its requirements potentially would render unviable certain recent technological innovations in trading—innovations that have benefited investors and improved market quality.  In other words, we are now grappling for the first time with whether the application of the amended rule to fixed-income securities could undermine transparency, rather than enhance it as it is expected to do for equities. 

I acknowledge that I thought of the rule’s application only in the OTC equity context.  I ought to have solicited comment on the rule’s broader application.  However, my failure to do so, the failure of the Commission to highlight this issue for active consideration by the public, and the failure of the relevant market participants to identify the issue during the rulemaking process, is not a reason for us now to move forward robotically and apply the rule to fixed income markets without proper deliberation.  If we were willing to analyze the need for and consequences of the rule in the fixed-income markets, three months—during which Commission attention will be focused on a host of other rulemakings—would not suffice to undertake such an analysis.

The fixed-income markets have changed dramatically over the past several decades.  Many of these changes have been good for investors.  Additional steps to modernize these markets could benefit investors further.  The Commission should devote more resources to identifying areas where that market structure can be improved and regulatory changes can foster greater transparency, electronification, liquidity, and investor protection.  A task of this importance, however, deserves careful consideration and engagement with investors, issuers, broker-dealers, and trading platforms, and the general public, through notice-and-comment rulemaking, not rushed implementation of an ill-tailored rule under the threat of a fast-approaching regulatory deadline.