Traveling Back From the Road Wrongly Taken: Statement on the Proposed Amendments to Exchange Act Rule 15c2-11

Today, the Commission proposed amendments to revise Rule 15c2-11 to refer only to equity securities. While I am pleased to support these amendments, I regret the protracted and unnecessarily burdensome process that led us here.

By its terms, the text of Rule 15c2-11 always has applied to quotations of a "security." Market participants and other observers including me, however, understood the rule to apply only to quotations of over-the-counter ("OTC") equity securities.[1] This tension between the rule's text and its application came to a head after the Commission amended Rule 15c2-11 in 2020. As the compliance date of those amendments approached, the Commission began signaling that the rule encompassed fixed-income securities and surprised market participants sought clarity from the Commission.[2] They pointed out that many of the rule's requirements and exemptions were clearly written with equity markets in mind. They highlighted that the 2020 rule amendments relied entirely on OTC equity data and did not even mention the term "fixed income" once. They noted that they were unaware of Rule 15c2-11 ever being applied to fixed income securities. And they warned that the application of the rule would gravely harm the fixed income market and investors, with no discernable reduction in fraud.

At that point, the Commission should have granted long-term no-action relief while we assessed whether the application of the rule to the fixed income market was appropriate and then amended the rule as necessary. Instead, the Commission, mostly through a series of staff no-action letters, granted several rounds of limited relief, sometimes for as short a period as three months, that were claimed to provide the fixed income industry with sufficient time to come into compliance with the rule. Eventually, the Commission issued permanent exemptive relief from Rule 15c2-11 for some fixed income securities[3] and the staff issued permanent no-action relief for another subset of fixed income securities. But by then, we had fostered uncertainty in this market and wasted the resources of the industry, and our staff, for multiple years and for no good reason.

Staff, who were following the bizarre directive of the Commission to start reading the rule with a breadth at odds with historical understanding and market reality, are not at fault. I continue to blame myself for failing to ensure that we made the scope of the rule's application crystal clear during the adoption of amendments to Rule 15c2-11.[4] The staff have been constructive throughout, and I thank the Division of Trading and Markets, the Division of Economic and Risk Analysis, and the Office of General Counsel for their diligent work on this corrective proposing release. I encourage commenters to write in and convey their views as to whether this proposal, if adopted, would resolve the tension between the rule text and the appropriate application of this rule to certain markets. I am particularly interested in commenters' views as to the questions about the definition of "equity security," the rule's application to crypto assets, and the appropriate next steps with respect to the formation of an "expert market."