The U.S. Securities and Exchange Commission is giving bond markets at least three more months to prepare for a rule revision that industry insiders say would upend trading for some debt securities.
The amendment to SEC Rule 15c2-1, set to go into effect on Tuesday, is intended to protect investors in over-the-counter trading markets from pump-and-dump schemes often seen with penny stocks. The change mandates that “broker-dealers, in their role as professional gatekeepers to this market, do not publish quotations for an issuer’s security when current issuer information is not publicly available.”
Previously, the rule hadn’t been applied to the trading of fixed-income securities, but the SEC didn’t exempt debt from the new regulation. After a small uproar from bond dealer industry groups, the SEC announced Friday that the rule change won’t be enforced for fixed-income securities until Jan. 3.
Broker dealers weren’t prepared to comply with the rule beginning next week anyway, and hadn’t received guidance on how to do so, according to Michael Decker, senior vice president of federal policy and research at the Bond Dealers of America, an industry group. The BDA called it “unreasonable” for the SEC to expect compliance by next week in a statement.
“We certainly welcome the three-month extension. Without it, you simply would have had a rule with no compliance,” Decker said in an interview. “Trying to squeeze fixed-income into the rule as it exists now would create a lot of problems.”
In a letter announcing the three-month non-enforcement period, SEC Commissioner Hester Peirce said that the rule revision wasn’t intended to go after bonds.
“I acknowledge that I thought of the rule’s application only in the OTC equity context,” Hester wrote in the letter dated Friday. “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.”