OTC Quotations in Fixed Income Securities

NEW FOR 2024

Regulatory Obligations and Related Considerations

Regulatory Obligations

Exchange Act Rule 15c2-11 (the “Rule”) governs the publication or submission of quotations by broker-dealers in a quotation medium other than a national securities exchange (i.e., the OTC market).¹ The Rule generally prohibits a broker-dealer from publishing a quotation for any security in a quotation medium unless the broker-dealer has reviewed current and publicly available information about the issuer whose security is the subject of the quotation, and the broker-dealer believes this information is accurate and obtained from a reliable source. Municipal securities and other “exempt securities” (e.g., government securities, Treasury securities) are not subject to the Rule.

In September 2020, the SEC adopted amendments to the Rule and issued a series of no-action letters providing relief for fixed income securities with defined criteria. The most recent of these no-action letters, issued on November 30, 2022, continues to provide relief for fixed income securities with defined criteria until January 4, 2025.

FINRA Rule 3110 (Supervision) requires that members establish and maintain a system to supervise, including written procedures, reasonably designed to achieve compliance with the requirements of the Rule.

Related Considerations

• Does your firm publish or submit for publication “quotations” in fixed income securities in a “quotation medium” as these terms are defined in the Rule?
• Do your firm’s systems and controls, and written procedures, reasonably address quoting in fixed income securities and the requirements of the Rule?
• Does your firm use a third-party vendor for data or supervisory tools to comply with the Rule? How is your firm supervising this arrangement to ensure compliance with the Rule?
• Does your firm sufficiently evidence its review of current and publicly available information concerning issuers of fixed income securities (i.e., FINRA would be able to test your review for compliance with the Rule)?
• Does your firm conduct training on the requirements of the Rule?

Findings and Effective Practices

Findings

• Inadequate Supervisory Controls and Procedures: Not maintaining controls and procedures reasonably designed to monitor quoting activity in fixed income securities; and not reviewing the firm’s activity to determine applicability of the Rule.
• Failing to Test Applicability: Stating that the firm only quotes in exempt securities without conducting an analysis.
• Failing to Prevent Potential Quotations: Not implementing procedures and controls—including a process for complying with the Rule—to ensure that the firm does not quote a covered security prior to confirming the availability of public financial information (unless an exception under the Rule is available).

Effective Practices

• Supervisory Controls and Procedures: Maintaining reasonable controls and procedures designed to fit the firm’s specific business, including training firm personnel who are impacted.
• Front-End Surveillance: Identifying non-exempt securities and quotation mediums; blocking non-exempt securities from quotation on specific trading platforms determined to be quotation mediums; and warning users when accessing non-exempt securities.
• Self-Assessment: Conducting an analysis of the firm’s business and systems in quoting fixed income securities.
• Third-Party Vendors: Contracting with third-party vendors to help:
  • confirm the availability of current information regarding the issuer of the fixed income security—or the availability of an exemption—prior to quoting; and
  • identify and prevent quoting in non-exempt securities where such information (or exemption) is not available.

Additional Resources

• FINRA
  • Regulatory Notice 21-29 (Vendor Management and Outsourcing)
• SEC
  • No-Action Letter to FINRA re: Amended Rule 15c2-11 in Relation to Fixed Income Securities (November 30, 2022)