SEC seeks comment on crypto handling in OTC broker-dealer rule

The U.S. Securities and Exchange Commission (SEC) has proposed an amendment to its 1971 Rule 15c2-11, aiming to clarify reporting requirements for broker-dealers in the over-the-counter (OTC) market. The proposed change seeks to limit the rule's scope to equity securities, reversing a 2021 interpretation that extended its application to fixed-income securities and raised questions about its relevance to crypto securities.

Background of Rule 15c2-11

Originally adopted to combat fraud in the penny stock market, Rule 15c2-11 mandates that broker-dealers maintain updated public information about an issuer before publishing OTC quotes. However, a 2021 reinterpretation broadened its application, leading to market backlash and uncertainty, particularly regarding its impact on bonds and digital assets.

SEC Commissioner's Stance

SEC Commissioner Hester Peirce, who leads the agency's crypto task force, welcomed the proposal. She highlighted that the SEC had created years of uncertainty through an amendment that took effect in 2021. Peirce noted that while the rule's text historically applied to "securities," the market understood it to cover only OTC equity securities. She criticized the SEC's approach of granting limited, short-term relief instead of providing long-term relief or amending the rule sooner.

“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... granted several rounds of limited relief, sometimes for as short a period as three months... fostering uncertainty in this market.”

Application to Crypto Assets and Public Comment

The SEC defines an equity security as representing an ownership interest in a company, such as stock or convertible securities. The proposed amendment specifically targets equity securities, but a decision on whether this definition includes crypto assets has not yet been made. The SEC has initiated a 60-day public comment period to gather feedback on the rule's application to crypto assets and the potential formation of an "expert market."

Broader Regulatory Clarity Efforts

This initiative is part of a larger effort by both the SEC and the Commodity Futures Trading Commission (CFTC) to establish regulatory clarity for the cryptocurrency sector in the U.S. Last week, the two agencies signed a memorandum of understanding to coordinate oversight of financial markets, including crypto, aiming to resolve long-standing jurisdictional disputes.