SEC Rule 15c2-11: New relief for 144A participants

The November 2022 NAL supersedes the Staff’s no-action letter dated December 16, 2021 (the December 2021 NAL), which had granted relief for Rule 144A debt securities through January 3, 2023. We describe the November 2022 NAL and relevant background information below.

Rule background and impact on 144A market

The SEC adopted the Rule in 1971 to require that broker-dealers obtain certain information before initiating or resuming security quotations in over-the-counter (OTC) markets. The SEC initially designed the rule to limit fraud in the trading of equity securities for smaller companies (e.g. pink sheets). The SEC updated the Rule several times, and the 2020 amendments to the Rule (the 2020 Amendments) require broker-dealers to make "current" issuer information "publicly available" in connection with the publication of quotations for securities in the OTC market. The information requirements are specified in Rule 15c2-11(b) and include annual reports and records of submission for quotation.

Importantly, the 2020 Amendments apply the Rule to fixed income securities (including debt issued pursuant to Rule 144A) for the first time. Rule 144A exempts resales of eligible securities to qualified institutional buyers (QIBs), which generally include institutional investors that own and invest at least USD100 million in securities. Given the sophistication of QIBs and the relatively narrow distribution of Rule 144A securities, Rule 144A itself does not require that any financial or other information about an issuer be publicly available. As a result, the Rule would require broker-dealers to adopt new policies, procedures and technology systems that would take time to design and implement before they can continue quoting for Rule 144A debt securities. The Rule may also reduce liquidity in the Rule 144A market and widen spreads for Rule 144A securities.

While the Rule applies directly to broker-dealers, it also indirectly impacts issuers, who would be expected by initial purchasers and investors to make the information required by the Rule available in the manner the Rule prescribes. This may discourage issuers who do not wish to disclose such information from accessing the Rule 144A market. Making such information available may present particular practical difficulty for issuers of asset-backed securities. In particular, periodic remittance or trustee reports relating to a securitization which may satisfy the information requirements of Rule 144A are typically available to investors only behind a password-protected website or otherwise pursuant to the terms of the transaction documents, with any supplemental information provided on request pursuant to Rule 144A(d)(4).

The December 2021 NAL

Following feedback from market participants, the Staff issued the December 2021 NAL, which addressed concerns from industry participants by providing that, for the purposes of the Rule, information made available directly to noteholders or prospective purchasers in accordance with the information requirements of Rule 144A would be deemed to satisfy the Rule’s information requirements. However, the December 2021 NAL indicated that the SEC staff would still require that (i) after January 4, 2023, such information be current and publicly available; and (ii) after January 4, 2024, the broker-dealer provide a website link to such information on the quotation medium and verify on an annual basis that the website link and such information are current.

The November 2022 NAL

In the November 2022 NAL, the Staff states that they will not recommend Rule 15c2-11 enforcement in relation to corporate fixed income securities and asset-backed securities offered pursuant to Rule 144A until January 4, 2025. This effectively means that, until that date, broker-dealers and Rule 144A issuers may continue to rely on the more limited requirements found in Rule 144A(d)(4) as described above.

The NAL relief is temporary and therefore broker-dealers should continue to prepare to implement the 2020 Amendments. For the moment, market participants should continue to assess and digest the Rule and its impact on documentation for new Rule 144A debt transactions. We expect initial purchasers in Rule 144A deals to request Rule 15c2-11 undertakings in many issue indentures to avoid any complications following the January 2025 relief sunset.

The Rule may present particular challenges for the asset-backed securities market in light of the volume of information customarily made available to purchasers of Rule 144A asset-backed securities. From January 4, 2025, securitization issuers and sponsors will likely need to change their current disclosure practices and make publicly available periodic remittance or trustee reports (and other information satisfying the information requirements under Rule 144A). Failure to do so may have an adverse impact on the ability of broker-dealers to publish quotes on, and adversely impact liquidity in, the related asset-backed security.

Please reach out to the A&O team if you have any questions or would like to discuss further.