On October 30, 2023, the Securities and Exchange Commission (the “Commission") issued an Order exempting brokers and dealers from the requirements of Rule 15c2-11(g) (the “Rule") under the Securities Exchange Act of 1934, as amended, with respect to fixed-income securities that are sold in compliance with the safe harbor in Rule 144A (the “Rule 144A") under the Securities Act of 1933, as amended, for resales to Qualified Institutional Buyers (“QIBs"). As a result, issuers of Rule 144A fixed-income securities will not have to publish public information in order for brokers to quote their securities and facilitate trading.
As discussed in more detail in our prior Client Alert from November 21, 2022, the Rule, first adopted in 1971, while not directly applicable to issuers, requires US broker-dealers to collect and review certain issuer information before publishing quotes on the issuer's securities in the Over the Counter market. The Rule was never applied to fixed-income securities, and industry practice was to comply with the Rule only with respect to equity securities.
In September 2020, the Commission announced the adoption of amendments to the Rule, requiring that specified issuer information be current and publicly available in order for US broker-dealers to publish quotes on that issuer's securities. In September 2021, the Division of Trading and Markets surprised all Rule 144A market participants when it issued a no-action letter stating that the amended Rule applies to all securities, including fixed income securities, but providing additional time to comply to allow for an orderly and good faith transition. The Division subsequently issued two additional no-action letters to ultimately delay the effect of the amended Rule until January 4, 2025, as discussed in further detail in our prior Client Alert from December 1, 2022.
Under the interpretation underlying those no-action letters, issuers of fixed-income securities would be required to publicly disclose specified current financial and other information in order to allow U.S. broker-dealers to publish quotations on their Rule 144A fixed-income securities. This would undercut one of the primary reasons why private companies use Rule 144A to issue securities – it allows them to raise capital without publicly disclosing competitively sensitive financial information.
A strong adverse reaction from Rule 144A market participants ensued. On November 22, 2022, a petition was submitted to the Commission to amend the Rule pursuant to the Commission's rulemaking power, to expressly exempt fixed income securities issued under Rule 144A therefrom.
Instead of amending the Rule, the Commission exercised its exemptive authority under the Exchange Act to issue the Order. The Order exempts Rule 144A fixed-income securities from Rule 15c2-11, thus effectively granting the relief sought in the petition (the “Relief").
Paragraph (g) of the Rule provides that the Commission may exempt any person, security, or transaction from any provisions of the Rule to the extent such exemption is necessary or appropriate in the public interest, and it is consistent with the protection of investors.
In granting the Relief, the Commission noted that (i) the Relief would be limited to resales of securities to an investor base that “can be conclusively assumed to be sophisticated" since QIBs are required to own and invest at least $100 million in securities, and (ii) Rule 144A requires that any prospective purchaser of Rule 144A fixed-income securities has the right to obtain from the issuer reasonably current financial information (the “Rule 144A information"). The Commission concluded that both of these conditions advanced the investor protection goal that was sought under the amended Rule.
The Order specified that the Relief is limited to Rule 144A fixed-income securities, and expressly excluded equity securities sold in compliance with the safe harbor in Rule 144A, noting that the amended Rule has applied to Rule 144A equity securities since the compliance date of those amendments in September 2021.
With the exemption provided by the Order, the information environment for Rule 144A fixed-income issuers will remain the status quo for the foreseeable future. Issuers that are not public companies or otherwise required to publicly provide current financial and other information will welcome this reversal by the Commission. They are no longer subject to the requirement to publicly provide enhanced disclosure pursuant to the Rule, and will have the benefit of broker-dealers publishing or submitting quotations for their fixed-income securities.
We would like to thank Marie Kwon and Rodrigo Surcan from our New York office for their work on this post.