Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: File No. S7-3-98
Dear Mr. Katz:
On behalf of Cantor Fitzgerald, L.P. and its group of companies ("Cantor Fitzgerald"), we are pleased to submit this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on Release No. 34-39670 (the "Proposing Release") regarding certain proposed amendments to Rule 15c2-11 (the "Rule") under the Securities Exchange Act of 1934 (the "Exchange Act"). The Commissions request for comments on the proposed amendments presents a welcome opportunity to clarify the applicability of the Rule to debt securities as well as to quotation media that have developed over recent years.
Cantor Fitzgerald provides a broad spectrum of institutional brokerage and execution services to global financial markets. It operates the worlds largest interdealer electronic marketplace for debt securities and is also one of the largest "third market" equity operations in the United States stock market. Headquartered in New York City, Cantor Fitzgerald currently employs more than 2,300 people in offices throughout the United States, Canada, Europe and Asia, serving the worlds largest banks and security houses.
Cantor Fitzgerald operates screen-based broker systems for United States government securities, municipal securities, collateralized mortgage obligations, Canadian sovereign debt, mortgage backed and synthetic strip securities, emerging markets securities and foreign sovereign and multinational corporate debt. The screen brokerage systems display anonymous offers to buy or sell securities that are placed by participants using the telephone. 1
As more fully discussed below, although we do not believe that sponsors of and participants in screen brokerage systems like those operated by Cantor Fitzgerald through which quotations for debt securities are published are subject to the Rule, 2 we believe it would be appropriate for the Commission to amend the Rule to exempt debt securities from the Rules purview because the nature of the market and its participants are significantly different from the equity markets.
As the Commission indicated in the Proposing Release, the Rule was originally adopted in response to fraudulent and manipulative trading schemes in connection with unregistered equity securities issued by shell companies. 3 In response to a need to lessen opportunities for such fraudulent activities, the Commission adopted Rule 15c2-11 in 1971 after determining that there would be a greater likelihood of bona fide quotations if broker-dealers were required to obtain sufficient information about an issuer to justify their activity in the security. The Rule was amended in 1991 in light of fraudulent practices involving "penny stocks," 4 and today the proposed amendments are in response to the increased incidence of fraud and manipulation involving "microcap" equity securities that trade in the over-the-counter market. 5
As the Commission states in the Proposing Release, broker-dealers have not focused on the Rule in connection with publishing quotations for debt securities. It is Cantor Fitzgeralds belief that the differences in the market for debt securities are of the type that make application of the Rule inappropriate. In contrast to the circumstances that resulted in abuses with respect to equity securities, debt issuances are usually large in size relative to the dollar value of capital raised in equity offerings, particularly of microcap issuers, representing the securities of significantly more substantial issuers. For example, the size of issuances of dollar-denominated Eurobonds, including foreign sovereign debt, of the type for which bids and offers are displayed on screen brokerage systems operated by Cantor Fitzgerald usually range from $50 million to $4 billion. In addition, participants in the debt market in general tend to be dealers, banks and other sophisticated institutional investors. Because of the ease of manipulating securities issued by smaller capitalized companies and purchased by unsophisticated and even individual investors, the trading abuses that the Rule is intended to address historically have involved issuers of and market makers in microcap securities or penny stocks, not fixed income securities. With respect to certain types of fixed income securities that would be subject to the Rule as currently in effect and as proposed, including emerging markets Eurobonds as well as collateralized mortgage obligations and debt sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, there has been no demonstration of the types of activities that the Commission found to be widespread in the microcap equity market. Requiring broker-dealers to obtain all the requisite information regarding issuers of emerging markets debt securities, including foreign sovereign debt, would not only impose a huge burden and cost but may in some instances require the impossible.
In the last few years, new quotation media have developed that are significantly different from the Pink Sheets, published by the National Quotation Bureau, or the OTC Bulletin Board, operated by the National Association of Securities Dealers, Inc., both of which are the type of media that the Commission is seeking to further regulate in the proposed amendments. The Pink Sheets and the OTC Bulletin Board are almost exclusively used by broker-dealers that wish to make markets in securities and that are willing to both buy and sell a security at a published bid and offer price. In connection with discussions about the applicability and importance of the Rule, the Commission describes the publication of quotations by broker-dealers in quotation media as a market making activity in various Exchange Act releases 6 as well as in the Proposing Release. The language of the Rule also contemplates that broker-dealers publishing quotations of issuers subject to the Rule are engaged in market making activity. The Rule requires a broker-dealer to obtain and review issuer information upon the initiation and resumption of quotations in a quotation medium, implying that such broker-dealer would be acting as a market maker, as defined in Section 3(a)(38) of the Exchange Act, presenting itself as willing to buy and sell the security for its own account on a regular or continuous basis.
Cantor Fitzgerald operates quotation display screens through which participants from time to time publish bid or offer quotations for various debt securities. Instead of using the telephone to communicate such price information, the bids or offers (almost always one-sided quotations) of unidentified participants are disseminated on screens provided to the other participants. Anonymous (unidentified) dealers publishing one-sided quotations on quotation display screens such as those operated by Cantor Fitzgerald are not making markets in the subject securities. If the Rule were to apply to broker-dealers that from time to time communicate an offer or a bid on such quotation media, the obligation to gather, review and update issuer information may be imposed every time a bid or offer is submitted rather than upon initiation and resumption of quotations as the Rule intends. In addition, the "sponsor" 7 of the screen brokerage system is merely an intermediary that passes on the price information submitted by its participants and therefore should not be subject to the Rule, even if it acts in a riskless principal capacity. The sponsor does not have foreknowledge regarding which securities its participants will be interested in trading. When approved participants contact the sponsor with a bid or offer for a security, there may or may not be a current quotation for such security on the screen or the security may appear on the screen for the first time. If the sponsor were required to obtain, review and evaluate issuer information prior to displaying quotations in securities that participants from time to time indicate an interest in buying or selling, the sponsors operations would be burdened and liquidity of such debt securities would potentially decrease. Cantor Fitzgerald requests that the Commission clarify that Rule 15c2-11 applies only to market making activity by broker-dealers and not to the sponsor of screen brokerage systems.
Cantor Fitzgerald urges the Commission to exempt all debt securities from the provisions of the Rule and to limit the applicability of the Rule to market making activity. Debt securities have not been subject to the same fraudulent trading practices as microcap securities and the investors in most such securities are generally sophisticated institutions. If the Commission remains concerned that the trading of unlisted debt securities may be subject to fraudulent and manipulative practices, the Commission may wish to consider adopting a rule that qualifies the customer in a manner similar to the penny stock rules. 8 Compliance with the Rule with respect to issuers of certain debt securities, such as emerging markets sovereign debt, would be burdensome, if even possible, and expensive. Compliance with the Rule with respect to screen brokerage systems such as those described herein would impose unrealistic impediments on the participants, would have an adverse impact on liquidity, and would inhibit technological innovation in the development of new trading systems.
Cantor Fitzgerald appreciates the opportunity to comment on the Commissions proposals and hopes that the Commission finds these comments helpful. Please feel free to contact the undersigned at (212) 938-4858 to discuss further any aspect of these comments.
Very truly yours,
Arlene E. Fried
Vice President and
Assistant General Counsel
-- See Exchange Act Release No. 34-39884 at n.27 (describing the debt markets as "not centrally organized by a single entity, but . . . nonetheless informally organized around interdealer brokers").
-- Cantor Fitzgerald interprets the Rule as currently in effect to be inapplicable to its screen brokerage systems because (1) the definition of "inter-dealer quotation system" is limited to a system that disseminates quotations of identified brokers or dealers and (2) the definition of "quotation medium" in the Rule includes any other publication or device used by brokers or dealers to make known to others their interest in transactions in a security. It is our understanding that anonymous bids or offers are not subject to the provisions of the current Rule.
-- Exchange Act Release Nos. 34-8909 (June 24, 1970) (proposing the adoption of Rule 15c2-11) and 34-9310 (September 13, 1971) (adopting Rule 15c2-11).
-- Exchange Act Release Nos. 34-27247 (September 14, 1989) (proposing amendments to Rule 15c2-11) and 34-29094 (adopting amendments to Rule 15c2-11).
-- See Testimony of Arthur Levitt, Chairman, U.S. Securities and Exchange Commission, "Concerning Fraud in the ‘Micro Cap’ Market Before the Permanent Subcommittee on Investigations, Committee on Governmental Affairs, United States Senate" (October 27, 1997), available at www.gsionline.com/speech/tsty1497.txt.
-- Exchange Act Release Nos. 34-19673 (April 14, 1983), 34-21470 (November 8, 1984), 34-21914 (April 1, 1985), 34-29094 (April 17, 1991) and 34-29095 (April 17, 1991).
-- "Sponsor" as used herein has the meaning given such term in Exchange Act Rule 17a-23.
-- Exchange Act Rule 15g-9.