On October 30, the U.S. Securities and Exchange Commission (SEC) issued an order (the Order) granting exemptive relief from Rule 15c2-11 under the Securities Exchange Act of 1934 to issuers of fixed-income securities sold in compliance with the safe harbor provided by Rule 144A (Rule 144A Fixed-Income Securities). As a result, the Order has removed a cloud of legal uncertainty that had been previously hanging over private issuers of debt securities regarding whether the SEC's attempt to modernize Rule 15c2-11 would also require such issuers to publish financial statements outside of password-protected datarooms, contrary to decades of market practice.
In October 2020, the SEC issued a final rule amending Rule 15c2-11 (the Final
Rule), governing the publication of quotations for over-the-counter
(OTC) securities.1 Among other things, the Final Rule
required that certain documents and information, including
financial statements, be made publicly available. In a December 2021 No-Action Letter, the SEC
confirmed that it had interpreted Rule 15c2-11 to apply to
fixed-income securities, which include notes, bonds, debentures,
certificates of deposit for a security, certificates of deposit,
and asset-backed securities. The ramifications from such an
interpretation included, among other things, private issuers of
debt securities having to provide the disclosures and documentation
required for issuers under Rule 15c2-11, including the potential
public disclosure of financial statements.
The Order exempts Rule 144A Fixed-Income Securities due to such
sales being limited to resales of securities to investors that can
be conclusively assumed to be sophisticated, are able to obtain
certain basic financial information concerning the issuers'
business, and have extensive experience in the private resale
market for restricted securities. In addition, with respect to
issuers that do not file periodic reports under the Exchange Act
(or furnish home country information to the SEC), Rule 144A
requires that any prospective purchaser of Rule 144A Fixed-Income
Securities has the right to obtain reasonably current financial
information from the issuer. As such, the Order reasoned that such
information available under Rule 144A serves the same purpose of
investor protection as intended in the Final Rule.
The Order provides sought-after legal clarity to private debt
issuers, the disclosure and documentation requirements for whom
appeared to be substantially expanded as a result of the Final Rule
issued three years ago. Because of the Order, issuers of Rule 144A
Fixed-Income Securities need not publicly disclose additional
information and documentation to comply with Rule 15c2-11 (or
initiate public disclosure of such information).
Foonote
1. The SEC intended for the amendments to modernize Rule 15c2-11, promote investor protection, and curb incidents of fraud and manipulation by, among other things, requiring information about issuers to be current and publicly available for broker-dealers to quote their securities in the OTC market. The Final Rule continued to require broker-dealers to obtain and review basic information about an issuer of an OTC security before initiating or resuming a quoted market in the issuer's security and to have a reasonable basis for believing that the information about the issuer is accurate and from a reliable source.
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