Rule 144A Fixed Income Securities Won’t Become Subject to Public Information Requirement under Rule 15c2-11
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On October 30, 2023, the US Securities Exchange Commission (the "SEC") issued an order (the "Order")1 granting broker-dealers exemptive relief from Rule 15c2-11 ("Rule 15c2-11") under the US Securities Exchange Act of 1934 (the "Exchange Act") for fixed-income securities sold in compliance with Rule 144A under the US Securities Act of 1933 (“Rule 144A”). Accordingly, the requirement to make certain information set forth in Rule 15c2-11 with respect to Rule 144A fixed-income securities offerings publicly available no longer applies.
Rule 15c2-11 governs the publication of quotations for securities in a quotation medium other than a national securities exchange (i.e., over the counter ("OTC") securities) and is designed to prevent broker-dealers from publishing or submitting quotations for OTC securities that may facilitate a fraudulent or manipulative scheme. Subject to certain exceptions, Rule 15c2-11 prohibits broker-dealers from publishing any quotation for a security or, directly or indirectly, submitting any quotation for publication, in a quotation medium unless they have reviewed specified information concerning the issuer. After several extensions, Rule 15c2-11 was expected to start being enforced for fixed income securities starting January 4, 2025.
Since its inception in 1971, Rule 15c2-11 has targeted fraud in the OTC equity markets, where the primary securities owners are retail investors. In 2020, amendments were made to modernize Rule 15c2-11 and account for advances in communications technologies. Among other things, the amendments added public availability requirements for issuer information. As demonstrated by the SEC's own statements and discussion in the proposed and final 2020 amendments to Rule 15c2-11, the SEC viewed it as applicable to OTC equity markets.2 The amendments relied solely on OTC equity markets data sources and did not include analysis of fixed income markets.
Accordingly, it came as a surprise to the broker-dealer and investment communities as well as some SEC Commissioners when SEC staff in September 2021 stated that Rule 15c2-11 does apply and has always applied to fixed income markets (i.e., the 144A debt market), representing an unexpected reversal of 50 years of regulatory policy.3
SEC Commissioner Hester Peirce summarized this unusual situation when she noted the following in a September 2021 statement concerning the SEC staff's actions: "The equity-focused nature of the discussion during the rulemaking process and the limited application of the pre-amendment rule in the fixed-income context meant little attention was focused on the possible broad application of the amended rule to fixed-income securities. Consequently, nobody seems to have contemplated that this rule would affect the fixed-income markets in a way different from the pre-amendment version of the rule, much less that its requirements potentially would render unviable certain recent technological innovations in trading—innovations that have benefited investors and improved market quality. In other words, we are now grappling for the first time with whether the application of the amended rule to fixed-income securities could undermine transparency, rather than enhance it as it is expected to do for equities."4
Certain market participants commented that Rule 15c2-11's information review and recordkeeping requirements should not apply to quotations for fixed-income securities that are sold in compliance with the safe harbor in Rule 144A.5 This is because, in a Rule 144A offering, securities may only be sold to "qualified institutional buyers" ("QIBs," or purchasers that the seller or a person acting on its behalf reasonably believes are qualified institutional investors), which must, in the aggregate own and invest on a discretionary basis at least $100 million in securities. Accordingly, these QIBs are typically provided with an offering memorandum that is subject to the antifraud provisions of the federal securities laws that contains the same general type of information contemplated by Rule 15c2-11 (“Rule 144A information”), including a detailed description of the issuer, its financial statements, and the securities offered. For issuers that do not file periodic reports under the Exchange Act or furnish home country information to the SEC under Rule 12g3-2(b) of the Exchange Act, Rule 144A requires that any prospective purchaser of Rule 144A fixed income securities has the right to obtain from the issuer reasonably current Rule 144A information.
The availability of the Rule 144A information can be used by prospective QIB investors to make better informed investment decisions and assess potential risks in investing in the security. While the Rule 144A information that is required to be provided to QIBs upon request is not the current publicly available information defined in paragraph (b) of Rule 15c2-11, the Rule 144A information serves the same purpose of investor protection, and therefore the exemptive relief makes clear that such information does not need to be made publicly available.
The Order's exemptive relief is limited to Rule 144A fixed-income securities.
1 Order Granting Broker-Dealers Exemptive Relief, Pursuant to Section 36(a) and Rule 15c2-11(g) under the Securities Exchange Act of 1934, from Rule 15c2-11 for Fixed-Income Securities Sold in Compliance with the Safe Harbor of Rule 144A under the Securities Act of 1933.
2 SEC Adopts Amendments to Enhance Retail Investor Protections and Modernize the Rule Governing Quotations for Over-the-Counter Securities.
3 No action letter re Amended Rule 15c2-11 in relation to Fixed Income Securities (September 24, 2021).
4 Statement on Staff No-Action Letter Regarding Amended Rule 15c2-11 in Relation to Fixed Income Securities.
5 See, e.g., Letter from Andrew Pincus to Vanessa Countryman, Petition for Rulemaking and Application for Exemption from Rule 15c2-11 (Nov. 22, 2022).
Karin Braverman (White & Case, Professional Support Lawyer, New York) co-authored this publication.
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