November 1, 2023 - In an act of great importance to the CLO market, the SEC this week, in response to a request for exemptive relief (and a lawsuit) by the National Association of Manufacturers, issued exemptive relief with respect to the application of Rule 15c2-11 (the “Rule”) to 144A securities, including, most relevantly, CLO securities. As we noted last year, the LSTA pressed for this result in partnership with SIFMA. While the SEC in December 2022 deferred the application of the Rule to fixed-income securities for two years, the exemptive relief puts the issue to bed, likely for good.

As we previously explained, for 70 years the Rule had only been applied to equities but in 2021 the SEC proposed to extend the Rule to fixed income securities, including CLOs. Under the Rule, broker-dealers would have had to obtain and review public and current information about issuers, such as their earnings statements, before they could begin or maintain a secondary market in fixed-income securities. 

In the case of asset-backed securities like CLOs, not only was application of the Rule unnecessary, but also it was not entirely clear what information would have had to be provided. Since CLO liabilities can only be purchased by sophisticated investors, and managers already make extensive information available to investors on a monthly and quarterly basis and to prospective investors on an “as requested” basis, requiring dealers to validate that information before quoting the CLO securities could have prevented dealers from publishing quotes on many CLO securities on any “quotation medium.” This likely would have reduced liquidity for existing holders of CLO securities and could also have negatively impacted the ability of managers to efficiently issue CLO notes in the future. And, since CLOs purchase at least 65% of broadly syndicated loans, the Rule could have had serious negative ramifications for the underlying loan markets.

The exemptive order preserves the ability of CLO issuers to access the 144A market without needless burdens and expenses and relieves broker-dealers from additional compliance burdens and costs. A great result, indeed.

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