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The US Securities and Exchange Commission has given bond brokers a three-month reprieve to get in line with amendments to a 50-year-old rule that are set to come into effect next week, after banks, asset managers and trade lobbies fretted the changes could bring trading in large swaths of the market to a halt.
Bond bankers and trading platforms had been left scrambling in recent weeks to get up to speed with SEC rule 15c2-11, which was first introduced in 1971. The rule was put in place 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 rule never explicitly exempted bond trading, but in practice had never been applied to the fixed-income market. Many traders — and even some SEC commissioners — had believed it solely pertained to the stock market.
Last year the SEC amended the rule to require dealers to ensure the information they were checking was also publicly available to investors.
The change under then SEC chair Jay Clayton prompted queries from lawyers and bank compliance departments over whether the rule did apply to fixed income securities like corporate bonds, given the absence of an explicit exemption for anything but municipal bonds.
Trade associations said that earlier this year the SEC, under the new leadership of Gary Gensler, confirmed the rule would apply to the bond market, setting in motion a mad dash to plead for exemption or, at the very least, more time to comply.
The SEC said late on Friday that it would begin applying the rule to fixed income markets on January 3 rather than September 28 as originally scheduled.
Bond dealers have worried that much of the information that is required to be disclosed by publicly listed companies on the stock market is not available for private companies that only issue bonds.
Fears have swirled in recent weeks that without an exemption or extension, trading in large parts of the bond market — especially bonds of lower-quality, private companies — could be severely curtailed. Some dealers debated whether 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 Peirce, who joined the SEC in 2018 and was involved in passing the amendment, said the deadline extension was “wholly inadequate”, adding that she believed the rule when written only applied to stocks.
“I ought to have solicited comment on the rule’s broader application,” Peirce said in a statement Friday. “However, my failure to do so, the failure of the commission to highlight this issue for active consideration by the public, and the failure of the relevant market participants to identify the issue during the rulemaking process, is not a reason for us now to move forward robotically and apply the rule to fixed income markets without proper deliberation.”