SEC Invites Public Input on Cryptocurrency Treatment Under OTC Broker-Dealer Regulation
In a proposed amendment, the SEC plans to limit Rule 15c2-11 exclusively to equity securities, while requesting public feedback on its potential application to specific cryptocurrency assets and other related matters.
The United States Securities and Exchange Commission is working to resolve years of ambiguity surrounding a critical broker-dealer disclosure regulation that has restricted certain assets from being quoted by broker-dealers operating in the over-the-counter (OTC) marketplace.
Originally established in 1971, SEC Rule 15c2-11 was designed to minimize fraudulent activity within the penny stock trading sector. The rule mandates that broker-dealers must have access to current publicly available information regarding an issuer before publishing quotes on over-the-counter markets.
The rule underwent reinterpretation in 2021 to encompass fixed-income securities (including government or corporate bonds), a move that triggered significant opposition from market participants. Additionally, uncertainty has surrounded whether the rule extends to crypto securities.
Through a statement released on Monday, the SEC put forward an amendment to Rule 15c2-11 that would restrict the reporting obligations for over-the-counter broker-dealers exclusively to "equity securities," effectively undoing the 2021 interpretation.
SEC Commissioner Hester Peirce, who heads the agency's crypto task force, expressed support for the proposed changes, noting that the SEC had generated years of confusion through an amendment introduced under prior leadership in 2020, which became effective in 2021.
"According to its language, the text of Rule 15c2-11 has always been applicable to quotations of a 'security.' However, market participants and other observers, including myself, interpreted the rule as applying exclusively to quotations of over-the-counter ('OTC') equity securities," she stated, further noting:
"The Commission should have provided long-term no-action relief while we evaluated whether applying the rule to the fixed income market was suitable and then modified the rule accordingly. Instead, the Commission... issued multiple rounds of temporary relief, at times for periods as brief as three months... creating uncertainty in this market."
SEC to seek comment about application to crypto
According to the SEC's definition, an equity security encompasses any stock, comparable security, or convertible security that signifies an ownership stake in a corporation.
Notwithstanding the SEC's recent proposed changes, no final determination has been reached regarding whether "equity securities" might encompass crypto assets. The SEC has initiated a 60-day window for public commentary.
"I am especially interested in hearing commenters' perspectives on the questions surrounding the definition of 'equity security,' how the rule applies to crypto assets, and what the appropriate next steps should be regarding the establishment of an 'expert market,'" she stated.
Under the present administration, both the SEC and Commodities Futures Trading Commission (CFTC) have been actively working to create regulatory clarity for cryptocurrency in the United States.
In the previous week, the two agencies executed a memorandum committing to coordinate their oversight of financial markets, crypto included. The agencies indicated this would conclude decades of "regulatory turf wars" that have existed between them.