SEC Seeks Public Comment on Crypto in OTC Rule Shift

TLDR

• The SEC proposed amending Rule 15c2-11 to limit its scope to equity securities in OTC markets.
• The proposal would reverse the 2021 interpretation that extended the rule to fixed-income securities.
• The SEC opened a 60-day public comment period to gather feedback on the amendment.
• Commissioner Hester Peirce said prior short-term relief measures created uncertainty in the market.
• The agency requested public input on whether crypto assets fall under the definition of equity securities.

The US Securities and Exchange Commission (SEC) has moved to revise a long-debated broker-dealer reporting rule. The agency proposed limiting Rule 15c2-11 to equity securities and requested public input on crypto assets. The proposal aims to resolve confusion that followed a 2021 interpretation covering fixed-income markets.

SEC Proposes Amendment to Rule 15c2-11

The SEC issued a proposal to amend Rule 15c2-11 and narrow its scope to equity securities. The agency said the change would reverse its 2021 interpretation that included fixed-income securities.

The rule, adopted in 1971, requires broker-dealers to keep current public information before quoting OTC securities. Regulators designed the rule to reduce fraud in penny stock markets and protect market integrity.

In 2021, the SEC interpreted the rule to apply to fixed-income securities, including government and corporate bonds. Market participants raised concerns and said the interpretation disrupted parts of the bond market.

Now, the SEC seeks to clarify that the rule applies only to equity securities. The agency defined equity securities as stocks or instruments representing ownership interests in companies.

The SEC opened a 60-day public comment period following the proposal. Officials said they want views on how the rule should address crypto assets and related instruments.

Crypto Definition and Interagency Coordination

Hester Peirce, SEC commissioner and head of the crypto task force, welcomed the proposal. She said the agency created years of uncertainty through a 2020 amendment implemented in 2021.

“By its terms, the text of Rule 15c2-11 always has applied to quotations of a ‘security,’” Peirce said. She added that many observers understood the rule to apply only to OTC equity securities.

Peirce said the Commission should have granted long-term no-action relief while reviewing the fixed-income application. Instead, she said the agency issued short-term relief, sometimes lasting three months, which fostered uncertainty.

She also requested a comment on whether equity securities could include certain crypto assets. “I am particularly interested in commenters’ views as to the questions about the definition of ‘equity security,’” she said.

The SEC has not decided whether crypto securities fall within the equity security definition. Therefore, the agency invited feedback on next steps and the potential formation of an expert market.

Meanwhile, the SEC and the Commodity Futures Trading Commission signed a memorandum to coordinate oversight of financial markets, including crypto. The agencies said the agreement would end decades of regulatory turf disputes.

Both agencies continue to pursue regulatory clarity for crypto markets under the current administration. The SEC will collect public comments for 60 days before taking further action.

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