SEC No-Action Letter Regarding Amended Rule 15c2-11

Publish Date

Type

Compliance Alert

Topics

  • Compliance

The Securities and Exchange Commission (“SEC”) amended Rule 15c2-11 under the Securities Exchange Act of 1934 (“Exchange Act)” in 2020 with an effective date of September 26, 2021. Rule 15c2-11 applies primarily to broker-dealers that provide quotations for securities traded on the over-the-counter (“OTC”) market. The rule addresses broker-dealers’ obligation to have a reasonable basis for believing that issuers of securities being quoted in the OTC market have kept financial and other information current and made it publicly available. The amendment included the documents and types of information that must be reviewed prior to providing quotes for a security and stipulated that the information must be publicly available.

Following the rule’s amendment, some industry representatives that trade fixed income securities contacted the SEC to request an extension to complete the operation and systems changes necessary to comply with the rule amendments. On September 24, 2021, the Staff of the Division of Trading and Markets issued a no-action letter stating that it would not recommend enforcement action under the Rule 15c2-11 amendments until January 3, 2022. This would apply to fixed income securities quotations published by broker-dealers in quotation mediums.1 The SEC staff issued the extension to allow for an orderly transition into compliance with the amended rule.

In a no-action letter dated December 16, 2021, the SEC staff provided additional time to the industry to comply. Specifically, the SEC staff will not recommend enforcement action under the amended Rule 15c2-11 if the broker-dealer has determined the following:

  • Phase 1 – the fixed income security, or its issuer, meets one of the criteria in Appendix A of the no-action letter, or there is current and publicly available financial information (consistent with Rule 15c2-11(b)) about the issuer. Phase 1 will reportedly run from January 3, 2022, until January 3, 2023.
  • Phase 2 – as in Phase 1, the fixed income security, or its issuer, meets one of the criteria in Appendix B of the no-action letter, or there is current and publicly available financial information (consistent with Rule 15c2-11(b)) about the issuer. Fixed income securities sold pursuant to Rule 144A that do not otherwise meet the criteria in Appendix B would not qualify for Phase 2 unless the broker-dealer determines that current and publicly available information (consistent with Rule 15c2-11(b)) about the issuer exists. Phase 2 will reportedly run from January 4, 2023, through January 4, 2024.
  • Phase 3 – the fixed income security qualifies for Phase 2 and (1) is foreign sovereign debt or a debt security guaranteed by a foreign government; or (2) there is a direct website link on the quotation medium where the security is being quoted to the current and publicly available information about the issuer (consistent with Rule 15c2-11(b)). However, the broker-dealer must determine at least on an annual basis that the website link is active and its linked information is current. Phase 3 will reportedly commence at the expiration of Phase 2, that is, on or after January 5, 2024.

The phase-in approach permits brokers-dealers that publish or submit quotations for fixed income securities in a quotation medium to meet the requirements of Rule 15c2-11.

ACA notes that many broker-dealers continue to evaluate how they will implement processes to apply the rule to fixed income securities.

How we help

ACA has a number of solutions to help broker-dealers build effective compliance programs to comply with regulations set by the SEC and FINRA.

Please reach out to your ACA consultant or contact us if you have any questions about this alert or to find out how ACA can help you comply with Rule 15c2-11.

1 “Quotation medium” is defined in Rule 15c2-11(e)(8) as “any device that is used by brokers or dealers to make known to others their interest in any security.” Brokers or dealers that publish or submit quotations in a quotation medium that is an “interdealer quotation system” (“IDQS”), defined as a system of general circulation that regularly disseminates quotations of “identified brokers or dealers,” may become eligible for the piggybacking exception of Rule 15c2-11(f)(3) (see subparagraphs (e)(3) and (e)(8)).