With the January 3, 2023, deadline fast approaching for compliance with Exchange Act Rule 15c2-11, as amended and reinterpreted by the staff of the US Securities and Exchange Commission ("SEC") to apply to fixed income securities (the "Rule"), the SEC staff granted some temporary relief in a new no-action letter on November 30 (the "November 2022 Letter"). The November 2022 Letter grants temporary relief to certain issuers of fixed income securities and the broker-dealers, which provide quotations on these securities, by extending the timeline for compliance. Participants in the Rule 144A fixed-income security market, who have been grappling with how to ensure compliance with the Rule, now have an additional two years to consider the issue.

Extension to Compliance Timeline for 144A Securities

Pursuant to the November 2022 Letter, the SEC staff will not recommend enforcement against brokers or dealers under the Rule if the applicable broker-dealer has determined that the issuer or the subject securities meet certain criteria. Securities offered pursuant to Rule 144A and which the applicable broker-dealer reasonably believes satisfy the information requirements of Rule 144A(d)(4) are exempt from compliance with the Rule until January 4, 2025.

The November 2022 Letter also replaces the previous no-action letter issued by the SEC in connection with the Rule on December 16, 2021 (the "December 2021 Letter"). The December 2021 Letter provided for a phased implementation of the information requirements of the Rule, with the first major compliance deadline set for January 3, 2023. By that date, broker-dealers would have been required to determine that certain issuer information was current and publicly available prior to publishing a quotation on a subject security. The December 2021 Letter, and the related timelines contained in it, has been withdrawn in its entirety.

Reiteration of Application to Fixed Income Securities

While the extended compliance timeline will be appreciated by many in the fixed income market, the relief from enforcement is temporary, and the SEC staff reiterated its position in the November 2022 Letter that Rule 15c2-11 has always applied to both equities and fixed income securities. Rule 15c2-11 was originally introduced in 1971 to protect retail investors from fraud in the over-the-counter ("OTC") equity market, such as "pump and dump" schemes, by requiring that broker-dealers review certain information about OTC issuers prior to submitting quotations for the issuer's securities. Due to these origins, the Rule has commonly been referred to as the SEC's "penny stock quote rule."

Notwithstanding the SEC staff's statement in the November 2022 Letter, the Rule has historically only been applied to sales of equity securities. Following an amendment to the Rule in October 2020, the SEC staff indicated that it intended the Rule to cover both equity and fixed-income securities going forward. Many industry participants were surprised by the SEC's decision to apply the Rule to fixed income securities and fear that it will negatively impact the market.

Petition Submitted to the SEC

Certain participants have submitted a petition to the SEC requesting that the SEC amend the Rule (or otherwise provide exemptive relief) to expressly exclude Rule 144A securities. The petition argues in part that the reinterpretation by SEC staff applying the Rule to fixed income securities did not follow the requisite "notice-and-comment" process required under the Administrative Procedures Act for a change of this nature. The petition also quotes research from Ernst & Young noting the potential for significant negative impacts on capital raising and job creation as a result of the implementation of the Rule.

Conclusion

While dialogue is ongoing, absent further amendments or clarifications to the Rule, issuers and broker-dealers active in the fixed income market will need to have a compliance plan in place by January 4, 2025, in order to continuing providing quotes in the secondary market for these securities.

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