Risk & Compliance

SEC Gives Bond Dealers 3-Month Reprieve

The commission has delayed enforcement of amendments to a disclosure rule amid concerns over its potential impact on the bond markets.
Matthew HellerSeptember 27, 2021

The U.S. Securities and Exchange Commission has delayed implementation of a rule revision intended to protect investors from “pump and dump” schemes amid concerns over its potential impact on the bond markets.

The amendments to Exchange Act Rule 15c2-11, which the SEC adopted a year ago, were due to go into effect on Tuesday. The revised rule enhances disclosure by generally prohibiting broker-dealers from publishing quotations for an issuer’s security when issuer information is not current and publicly available, subject to certain exceptions.

But in a “no-action” letter, Josephine Tao, assistant director of the SEC’s Division of Trading and Markets, said the rule would not be enforced until Jan. 3, 2022 in response to indications from industry representatives that they would not be ready to comply by the original deadline.

Rule 15c2-11 was first introduced in 1971 to protect retail investors from predatory schemes in penny stocks by requiring dealers to check that an array of financial information was up to date on each company for which they quoted stock prices.

The 2020 amendments closed loopholes that allowed broker-dealers to maintain a quoted market for an issuer’s security in perpetuity, in the absence of current and publicly available information about the issuer, and even when the issuer no longer exists.

The 1971 rule was not applied to fixed-income securities but the SEC didn’t exempt them from the amendments, fueling consternation among bond dealers who, according to the Financial Times, feared “they would need to stop publishing quotes broadly on securities trading platforms and instead revert to methods such as phone broking to avoid running afoul of the rule.”

Commissioner Hester Pierce said the three-month delay in enforcement was “wholly inadequate” to forestall “the potentially significant negative effects of these amendments on trading in the fixed-income market.”

“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,” she said in a statement.