SEC issues fixed income relief for Rule 15c2-11

The Securities and Exchange Commission has issued exemptive relief for 144A eligible fixed income participants under its Rule 15c2-11, which may impact the edges of the municipal market.

Municipal securities are generally exempt from Rule 15c2-11 but the exemption will still have an effect on those “municipal adjacent” securities with corporate CUSIPs that sometimes trade on municipal desks.

“Certain university and hospital systems are the best examples,” said Michael Decker, senior vice president of federal policy and research at the Bond Dealers of America. “I think 144A issuance within this segment is rare, but I wouldn’t want to say it’s never happened.”

“With respect to the corporate and asset-backed markets, on the other hand, this is great news. It is inappropriate in general for the SEC to have applied Rule 15c2-11 to the bond markets in the way they did,” Decker added.

Rule 15c2-11 governs the publication of quotations for securities and sets forth certain review information and recordkeeping requirements for broker-dealers active in the over-the-counter or off exchange market and the exemption is limited to fixed income securities issued in accordance with Rule 144A, which allows private placement purchasers to resell their securities under certain conditions.

Momentum for the exemptive relief has been building since September 2020 when the Commission adopted amendments to Rule 15c2-11 to require broker dealers to have specified information about the issuer and its security that is current and publicly available before a broker-dealer can begin quoting the security.

Many organizations at the time pointed out that 15c2-11’s information review and recordkeeping requirements should not apply to quotations for fixed income securities due to Rule 144A’s safe harbor provision.

The move is being celebrated by many who represent broker-dealers across markets.

“We thank the SEC for listening to reason and realizing that applying this rule to fixed -income securities was misguided from the start,” said American Securities Association president and chief executive officer Chris Iacovella. “Simply asking a question in a rule proposal does not mean the public had adequate notice to understand what the agency was thinking. This overdue exemption is a ‘logical outgrowth’ of the agency’s own error.”

“We believe the exemptive order issued today by the SEC is the right outcome on Rule 15c2-11, and we applaud the Commission for taking this action,” said Securities Industry and Financial Markets Association President and Chief Executive
officer Kenneth Bentsen. “SIFMA and others warned of the potential harm that applying the public disclosure requirements of the Rule to the 144A market would have caused to U.S. companies and investors. The 144A market is currently relief upon by thousands of corporate and asset-backed securities issuers to raise capital and fund consumer lending, and the exemptive order preserves the ability of issuers to access this important market.”