The history of how Rule 15c2-11 became applied to fixed income securities has many twists and turns. Rule 15c2-11 is a fifty-four-year-old rule that was broadly understood to pertain only to Over the Counter (OTC) equities – to combat penny stock fraud. Rule 15c2-11 was adopted in 1971 and neither the adopting release nor the amendments in 1975, 1991 and 2020 indicated that the Commission intended for the rule to pertain to fixed income. Quite unexpectedly in 2021, SEC staff informally indicated that they believed that the rule also applied to fixed income securities. In September 2021, the staff formally informed the industry of their plans, publishing an initial no-action letter. Market participants were given only three-months, until January 2022, to comply. Following several engagements with the industry, the staff, in December 2021, provided additional guidance and extended the compliance date to January 3, 2024. Following a lawsuit by the National Association of Manufacturers and the Kentucky Association of Manufacturers, in September 2023, challenging that the application of Rule 15c2-11 to fixed income Rule 144A securities would force private companies to publicly disclose confidential financial information, contradicting a protection embedded in Rule 144A, the Commissioners, in October 2023, exempted Rule 144A securities. With the January 2024 expiration rapidly approaching, in November 2023, the staff published another no-action letter providing more implementation guidance. That no-action letter was set to expire on January 4, 2025. Because Rule 15c2-11 did not contain any of the guidance in the no-action letter, the expiration of the no-action letter would have been especially problematic, preventing broker-dealers from providing their customers with quotes in most non-rule144A securities.
While the most recent staff no-action solidified initial compliance guidance in perpetuity, compliance standards and best practices will most likely continue to evolve as SEC and FINRA examiners evaluate compliance programs.
Continuation and some additional clarity
The no-action guidance enables a broker-dealer to quote a security if the issuer maintains a class of securities that is listed on a US national securities exchange. From a practical perspective, the removal of this point would not have been highly impactful, as one requirement is the continuous publication of all SEC required documentation. However, the persistent reliance on the presence of a listing alone provides an easier path to compliance for many of the larger and better-known issuers. Bloomberg’s approach to this condition also goes one step further to ensure that issuers relying on this exemption are not in breach of any of the exchange’s listing requirements.
Additionally, the sunset of the exemption for fixed income instruments issued by bank holding companies and credit unions loomed as a potential challenge. There was sufficient ambiguity around whether reports filed with the National Credit Union Association (NCUA) or the Federal Financial Institutions Examination Council (FFIEC) met the muster of financial reporting. The extension of this clause removed this question and clearly allowed for the continued quotation of thousands of bonds issued by these types of issuers.
Finally, tucked at the end of the list of criteria was an addition that traders in the Asset-Backed Securities (ABS) market welcomed. There had been continued ambiguity around what constituted current financial data from issuers of Special Purpose Vehicles (SPVs), as they do not have conventional financial reports akin to companies. Prior to this, the only explicit exemptions available in the ABS market applied to those securities that were agency-backed, as well as those that were issued in reliance on SEC Rule 144A.
The new letter contains a reference to a prior no-action position issued in 2011 which refers to previously defined reporting requirements pertaining to ABS issuers. Recent ABS issuers are obligated to publish a monthly 10-D report with the SEC, detailing the state of the bonds and underlying collateral. By tracking and validating that an ABS issuer has an up-to-date collateral report that has been publicly filed with the SEC, one can reasonably determine that this condition is met and quote publicly-listed ABS positions. Bloomberg’s ability to test this on an ongoing basis will help provide automation and transparency to quotation of the ABS market.
While the no-action letter is open-ended, and there is still more to be written regarding this rule, Bloomberg’s deep and interconnected data store is well positioned to assist the market by automatically testing the relevant conditions and continuing to evolve as regulations and guidance changes.
How can we help?
The Bloomberg SEC Fixed Income Quotation solution provides firms with automated test results that communicate relevant characteristics regarding bond quotation. It includes (but not limited to) data fields such as:
Indicator for Quotation of Securities, flagging whether an attribute has been identified that may be relevant to the analysis of whether a security may be quoted under the Securities and Exchange Commission (SEC) Rule 15c2-11
Date on which the issuer’s latest financial reports were audited
Indicator whether the issuer of the security has registered at the time of issuance with the Securities and Exchange Commission (SEC)
Indicator whether the issuer of the security is an agency issuer, selling credit risk off its books through the transaction.
To learn more about Bloomberg’s SEC Fixed Income Quotation Solution click here.
