SIFMA Criticizes Application of Rule on Public Quotations to Private Debt Securities
Commentary by Steven Lofchie
SIFMA raised "serious concerns" that the application of the SEA rule on quotations without specific information ("Rule 15c2-11") to private debt securities would adversely affect the value and liquidity of private resales of securities to institutions ("Rule 144A").
In its letter to SEC Chair Gary Gensler, SIFMA asserted that institutions that currently invest in Rule 144A securities "do not have any issues obtaining access to financial reporting to make informed investment decisions regarding issuers accessing fixed income financing pursuant to Rule 144A, and are unaware of significant examples of investors having been harmed by a lack of information access."
SIFMA claimed that the financial reporting covenants connected to Rule 144A securities are calibrated to the asset class and reflect "what the investor community considers to be important." SIFMA stated that current disclosure provisions require issuers of Rule 144A securities to include (i) similar anti-fraud provisions to those required pursuant to SEA Rule 10b-5, (ii) requirements for the issuer to provide relevant information to investors upon request and (iii) covenants that require ongoing disclosure of information beyond just the initial or resale offering.
SIFMA reiterated that most information that would be required to be made public is already available to investors, typically via a password-protected website. SIFMA added that institutional investors have sufficient information available to them prior to making an investment decision.
Commentary
Rule 15c2-11 had been in place for approximately 50 years and had always been understood only to apply to equity securities. The current SEC "realized" that the rule, read literally, applied to debt securities and determined to apply it to such securities without giving any meaningful consideration to the implications of the expansion of the effects of the rule. Because the rule was not written to apply to debt securities, and certainly not to Rule 144A debt securities, the SEC has postponed the application and, to a limited extent, rewritten the rule.
That is not how the rulemaking process should work. If the SEC believes that Rule 15c2-11 should apply to debt, it ought to do that by considering the costs and benefits of a material expansion of the rule's scope, not by discovering it is possible to reinterpret the rule to apply to wholly new area. That approach to regulation results in real-world problems.
While Rule 15c2-11 by its terms applies to broker-dealers, if the market for debt securities is adversely impacted, the impact will fall on those who issue debt securities and those that hold them. It will also impact consumers, as the debt securities that will be negatively affected include, for example, securitized consumer debt.
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