OTC Quotations in Fixed Income Securities

Regulatory Obligations

SEA Rule 15c2-11 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, set to expire on January 4, 2025. On October 30, 2023, the SEC issued an order providing permanent exemptive relief for fixed income securities sold in compliance with the safe harbor in SEA Rule 144A, and on November 22, 2024, the SEC issued a new no-action letter, without an expiration date, to extend the relief previously provided for other fixed income securities.

FINRA Rule 3110 (Supervision) requires that firms establish and maintain a system to supervise, including written procedures, reasonably designed to achieve compliance with 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 on all quotation mediums the firm uses; and not reviewing the firm’s activity to determine applicability of SEA Rule 15c2-11. 
    • Improperly excluding from the firm’s systems and controls and written procedures publications of “quotations” on “quotation mediums,” including platforms that are not ATSs and other systems that meet SEA Rule 15c2-11’s definition of “quotation medium.”
    • Not including in the firm’s systems and controls and written procedures publications of “quotations” on a “quotation medium” to all counterparties, including both broker-dealer and non-broker-dealer customers.
  • Failing to Test Applicability: Stating that the firm only quotes in exempt securities without conducting an analysis or documenting the basis for such determinations.
  • Failing to Prevent Potential Quotations: Not implementing procedures and controls—including a process for complying with SEA Rule 15c2-11—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

  • Testing Applicability: Periodically reassessing the applicability of SEA Rule 15c2-11 to the firm’s business activities.
  • 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

Previous:
Fixed Income – Fair Pricing
Up:
OTC Quotations in Fixed Income Securities
Next:
Market Access Rule

1 Exchange Act Rule 15c2-11(e)(7) broadly defines “quotation” as “any bid or offer at a specified price with respect to a security, or any indication of interest by a broker or dealer in receiving bids or offers from others for a security, or any indication by a broker or dealer that wishes to advertise its general interest in buying or selling a particular security.” Similarly, Exchange Act Rule 15c2-11(e)(8) broadly defines “quotation medium” to include “any ‘interdealer quotation system’ or any publication or electronic communications network or other device that is used by brokers or dealers to make known to others their interest in transactions in any security, including offers to buy or sell at a stated price or otherwise, or invitations of offers to buy or sell.”