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Re: Securities and Exchange Commission ( SEC) Rule 15c2-11
Chapman, Spira & Carson - Disscusion

From: The Bond Market Association
Date: 4/11/99
Time: 10:56:42 AM
Remote User:


The Bond Market Association Urges SEC to Exclude High-Yield and MBS/ABS Debt from Proposed Amendment Aimed at Microcap Fraud New York, NY - Pointing out that the fixed income markets are dominated by institutional investors, The Bond Market Association is urging the Securities and Exchange Commission (SEC) to exclude all mortgage- and asset-backed securities and corporate bonds, regardless of their ratings, from proposed regulations aimed at stemming fraud in microcap equity securities.

The comment letter, filed late Wednesday, noted that the SEC has already agreed to exclude non-convertible debt securities, non-participatory preferred stock and investment grade asset-backed securities from the amended regulations, as recommended by the Association last year in responding to the SEC's initial proposal.

The Association explains that the changes are justified because the fixed income markets are not subject to the same kind of fraud and manipulation that the Commission has seen in the microcap equities market and which was documented when the SEC issued its release initially proposing the amendments to Rule 15c2-11 in 1998.

That rule prohibits dealers from publishing quotations for securities on certain "quotation media" unless they have received information required by the rule from the dealer. The proposed change to the rule raises the dealer's responsibility by requiring them to review the information provided prior to publishing quotations and to deliver it to anyone who requests it. It would also require dealers to suspend publication of quotations under certain circumstances.

"The predominantly institutional nature of investors in the debt market contrasts sharply with the mostly retail nature of investors in the microcap equity markets," the Association's letter says. "Institutional investors have a degree of access to issuers and information about those issuers that is on par with, if not higher than, that of dealers."

For that reason, they do not require the same level of protection that would be warranted in regulations aimed at protecting retail investors in the penny stock and microcap equity markets.

Increased transparency and surveillance in the pricing of high-yield debt and the enhanced level of credit analysis should provide further comfort to justify exempting these securities from Rule 15c2-11, the Association says.

Turning to the MBS and ABS market, the Association suggests the rule is not relevant to structured issues since their performance is unrelated to the financial characteristics of a particular issuer and contends that they should not be subject to the proposed amendments in the rule, regardless of their rating.

"Issuers of MBS/ABS are not operating companies," the Association notes, "but rather special purpose entities specifically established for the sole purpose of holding assets that support payments on related MBS/ABS."

These securities are priced and evaluated based on the structure of the transaction and the nature of the underlying collateral, the collection and distribution of cash flows from the assets underlying the securities. That information is generally provided on an ongoing basis to the market throughout the life of the transaction.

As with nonconvertible corporate debt, it would be very difficult, if not impossible, to manipulate MBS/ABS prices because they are based on spreads to U.S. Treasury securities of comparable maturities, rather than on credit quality and business prospects of an issuer operating an ongoing business.

As with other debt securities, the market for MBS/ABS is largely institutional, justifying removing them from falling under the jurisdiction of Rule 15c2-11, the Association said.

The Bond Market Association represents the securities firms and banks that underwrite, trade and sell debt securities, both domestically and internationally.

Last changed: March 17, 2000