December 1, 2022 - The SEC’s Trading and Markets Division this week issued a No-Action Letter in relation to its novel and controversial application of Rule 15c2-11 to 144A securities (including CLO securities), pushing off its enforcement of the rule for two more years. The SEC specifically noted that this move was in response “to indications from industry representatives that they need additional time to complete the operational and systems changes necessary to comply with the Amended Rule for fixed income securities.”
What happened? As we explained in an article we published in May, Rule 15c2-11, a rule that has been on the books for 50 years and was originally designed to address penny-stock fraud, requires a broker-dealer that wishes to publish an over the counter quotation for an issuer’s securities, to first ensure that certain information about the issuer is current and publicly available. As noted by Politico, “the SEC is requiring broker-dealers to obtain and review public and current information about issuers before initiating and maintaining a market in their fixed-income securities.” Debevoise points out that the SEC in December, 2021, “published a no-action letter introducing the phased compliance regime for fixed-income securities. Under Phase 1, which was to initially expire on January 3, 2023, regular practices required for securities to trade among qualified institutional buyers under Rule 144A…, were also deemed to satisfy Rule 15c2-11 (i.e., it was sufficient for an issuer of Rule 144A securities to undertake to make certain financial information about the issuer available to current and prospective investors on request).”
Why is this important? CLO liabilities can only be purchased by sophisticated investors, and managers currently make extensive information available to those investors on a monthly and quarterly basis and to prospective investors on an “as requested” basis. No purpose is served by requiring such information to be publicly published and made available to retail investors who are not even eligible to purchase CLO securities. Moreover, requiring dealers to validate that information before quoting the CLO securities could prevent dealers from publishing quotes on many CLO securities on any “quotation medium”. This likely would reduce liquidity for existing holders of CLO securities and could also negatively impact the ability of managers to efficiently issue CLO notes in the future.
Our view. The SEC’s extension of the no-action period is a very welcome result. We urge the Commission to use this time to engage in a proper rulemaking process, including the development of a thorough cost-benefit analysis, which will give stakeholders the opportunity to careful consideration it and submit comments.