Definition of Equity Security

Summary

SIFMA and SIFMA AMG provided comments to the U.S. Securities and Exchange Commission (SEC) addressing its proposed use of Rule 3a11-1’s definition of an equity security. Importantly, this definition would scope in certain types of securities which have not been traditionally within the scope of this rule, such as convertible debt and hybrids.  We suggest some tailoring of the definition, for example, that all TRACE-eligible securities be deemed not in scope. They also discuss other aspects of the proposal related to securities issued in a bankruptcy proceeding, express support for the SEC restarting consideration of creating an expert market for OTC equities, and cover other topics.

Excerpt

As we explained in our May 15th comment letter regarding fixed-income securities, ¹ the Proposal is a constructive correction because it would revise Rule 15c2-11 to refer only to “equity securities,” as defined in Exchange Act Rule 3a11-1, without otherwise changing the rule’s substantive information-gathering and review requirements. This letter addresses additional recommendations regarding the proposed use of Rule 3a11-1, including: (i) instruments that should be excluded or clarified, (ii) registered securities pending listing (iii) tokenization, (iv) securitiesissued in bankruptcy, (v) the potential development of an expert market, and (vi) the proposed simultaneous effective and compliance dates.

I. Executive Summary

SIFMA generally supports the Commission’s use of Rule 3a11-1 as a familiar and established starting point for identifying equity securities under Rule 15c2-11. At the same time, this rulemaking is necessary only because market participants faced years of uncertainty and disruption following the Commission’s unexpected position that Rule 15c2-11 applied to fixed-income securities—an application that had not previously been understood by market participants to fall within the rule. That history counsels particular care here: in narrowing Rule 15c2-11 to equity securities, the Commission should ensure that it does not inadvertently expand the rule again to capture instruments that historically have not been treated as within its scope and that do not implicate its core OTC equity-market concerns. Rule 3a11-1 was not designed specifically for Rule 15c2-11, and importing it wholesale would sweep in instruments that do not present the policy concerns that Rule 15c2-11 was designed to address, or present those concerns only marginally.