Public Disclosure of Information for Private Issuers of Rule 144A Debt Securities is Deferred to January 4, 2025
On November 30, 2022, the SEC issued a no-action letter to FINRA providing relief for brokers and dealers until January 4, 2025 from the application of Rule 15c2-11 under the Securities Exchange Act of 1934 to fixed income securities, including those issued in Rule 144A transactions. The no-action letter was issued in response to requests from industry participants and related organizations for relief from the SEC's position, and it extends the currently applicable Rule 15c2‑11 relief for Rule 144A debt securities that was due to expire on January 3, 2023.
In a September 2021 no-action letter to FINRA, the SEC upended Rule 144A private-for-life debt markets by affirming its view that Rule 15c2-11 applies to fixed income securities, including Rule 144A debt securities. Rule 15c2-11 requires broker-dealers to perform due diligence before issuing public quotations for over-the-counter securities and, under 2021 amendments, requires certain information about the issuers reviewed by the broker-dealer to be current and publicly available. Prior to the September 2021 no-action letter, practitioners believed Rule 15c2‑11 was only applicable to equity securities, which are primarily held by retail investors whom the SEC considers to be most in need of the disclosure and anti-fraud protections of the securities laws.
While the November 2022 no-action letter extends the currently applicable relief to January 4, 2025, the SEC reiterated its position that Rule 15c2-11 applies to fixed income securities. As discussed below, the SEC's position could have ramifications for non-reporting issuers whose debt securities are generally held by institutions and will also impose additional duties on registered broker-dealers that provide quotations of Rule 144A debt securities issued by non-reporting companies.
Rule 144A securities are generally eligible for resale without registration if they are initially offered in compliance with specified requirements, including that (1) they are offered and sold only to persons reasonably believed to be Qualified Institutional Buyers (as defined under Rule 144A), and (2) certain basic business and financial information1 about the issuer is “available upon request” for prospective buyers. Issuers of Rule 144A debt securities that are not otherwise SEC reporting companies typically exceed the Rule 144A information requirements in the initial securities offering by providing investors with a comprehensive offering document. Following issuance of the debt securities, these non-reporting issuers typically satisfy the “available upon request” requirement of Rule 144A through a password-protected website containing the information required by their bond indenture reporting covenant. Issuers that do not want to make the information, principally the financial statements, publicly available will need to consider the impact of broker-dealers not being able to publish quotations on their debt securities on the liquidity of those debt securities, and investor interest in and cost of accessing the Rule 144A debt market for future debt offerings.
The application of Rule 15c2-11 to Rule 144A debt securities does not impact SEC reporting issuers, foreign private issuers exempt from Exchange Act registration under Rule 12g3-2(b), or insurance companies reporting under Section 12(g)(2)(G) of the Exchange Act, which are deemed to have sufficient publicly available information.
In response to industry requests for more time to implement operational and system changes to comply with Rule 15c2-11 for fixed income securities, in December 2021, the SEC issued a no-action letter to FINRA providing a phase-in schedule for application of Rule 15c2-11 to fixed income securities. For non-reporting issuers, under the SEC's phase-in schedule, corporate fixed income securities or asset-backed securities issued pursuant to Rule 144A would be exempt from the Rule 15c2-11 current and publicly available information requirement until January 3, 2023. From January 4, 2023 until January 4, 2024, Rule 15c2-11 would apply to fixed income securities issued pursuant to Rule 144A (other than certain specified issuers or securities, such as those issued or guaranteed by a foreign government or issued by a bank, bank holding company or credit union, or if there is current or publicly available information about the issuer). After January 4, 2024, the exceptions would be further narrowed to fixed income securities issued or guaranteed by a foreign government or if there is a website link, on the quotation medium on which the fixed income security is quoted, directly to the current and publicly available information about the issuer.
The November 2022 no-action letter rescinds the December 2021 phase-in schedule in favor of extending the currently applicable exemptions under the first phase of the December 2021 phase-in plan (including for Rule 144A debt securities) until January 4, 2025 and eliminating the second and third phase-in stages. The permanent exemption for fixed income securities issued or guaranteed by a foreign government was retained.
While several industry participants, such as SIFMA and other industry organizations representing issuers, broker-dealers, and investors, have been lobbying for further relief from the requirements of Rule 15c2-11 for Rule 144A debt securities, including suggestions that Rule 144A debt securities be permanently exempt from Rule 15c2-11, the SEC's statements in its most recent no-action letter on the subject do not provide any indication that it would consider such an exemption or that it is likely to change its position before the January 4, 2025 deadline for compliance.
The deferral of the deadline at least provides industry participants, including broker-dealers, issuers, and investors, with more time to prepare. We expect that, in preparation for compliance with Rule 15c2-11 by the January 2025 deadline, broker-dealers and investors will start pushing for information covenants that require Rule 144A debt issuers to make public the information required by Rule 15c2-11, which would enable broker-dealers to provide quotations for those Rule 144A debt securities. Non-reporting issuers will have more time to consider whether they are willing to make public the required Rule 15c2-11 information or will opt to pursue financing alternatives to the Rule 144A debt capital markets, which may be at a higher cost.
Footnote
1 Rule 144A(d)(4) only requires “a very brief statement of the nature of the business of the issuer and the products and services it offers; and the issuer's most recent balance sheet and profit and loss and retained earnings statements, and similar financial statements for such part of the two preceding fiscal years as the issuer has been in operation (the financial statements should be audited to the extent reasonably available).”
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