In a surprising reinterpretation of a 50-year old rule designed to protect retail investors from fraud in OTC equity markets, in 2021 the U.S. Securities and Exchange Commission decided it would begin to enforce Rule 15c2-11 in the fixed income markets. This rule was implemented in 1971 and amended in 1975, 1991, and 2020. Until the SEC’s decision in 2021, it had never been enforced in fixed income markets.

Evolving Rulemaking by Letter

In December 2021, the SEC staff published a no-action letter that affirmed its new interpretation and established a new and complex regulatory regime for the application of Rule 15c2-11 to fixed income securities. This was effectively an informal rulemaking by unilateral staff pronouncement, rather than through the typical agency processes for developing new regulations through public and deliberative proceedings via Commission (not staff) action.

This 2021 no-action letter was amended and simplified in 2022 when the SEC issued another no-action letter that replaced the 2021 letter. However, this 2022 no-action letter expired by its own terms on January 5, 2025.

Importantly, the new interpretation of Rule 15c2-11 reflected in the 2021 and 2022 no-action letters was in direct tension with SEC Rule 144A. This is because the SEC’s action would have required Rule 144A issuers to publish their financials for dealers to be able to quote their securities, without regard for the fact that Rule 144A already provides for this disclosure, in a non-public manner, to all investors eligible to invest in their securities. The Rule 144A market has grown into a trillion-dollar market that is critical for the capital-raising plans of many issuers. The new interpretation of 15c2-11 would upend the SEC-designed framework of Rule 144A, causing some issuers to exit the market entirely, and generally hinder liquidity for existing issuances. Issuers and investors active in this market brought these significant concerns to the SEC; the National Association of Manufacturers sued the SEC. On October 30, 2023, the SEC issued an exemptive order that exempted quotations of Rule 144A fixed income securities from the scope of the Rule. This relief is permanent and was welcomed by the market.

As time passed, market participants remained concerned about the impending expiration of the 2022 no-action letter. Recognizing this concern and the impossibility of compliance with the existing equity market-focused rule, on November 22, 2024 the SEC issued a further revised no-action letter that essentially continued the 2022 no-action letter framework with some modifications. Importantly, the 2024 no-action letter doesn’t expire.

The Bottom Line

SIFMA members, including our investor members whom the Rule is nominally purported to protect, strongly believe the equity-focused Rule is not appropriate for fixed income markets. If the SEC desires to apply this Rule to the fixed-income markets, they must provide the opportunity for the public to provide comments on the proposed application in a traditional notice-and-comment rulemaking process. This will allow the Commission to design a rule that both protects investors and promotes, rather than impairs, the ability of fixed income markets to fund the consumer, business, and other credit creation that fuels our economy. Application of the existing rule without taking these steps would threaten the continued expansion of liquidity and transparency in fixed-income markets and would increase transaction costs, harming issuers, investors, and the broader economy that is served by fixed income markets.

In the interim, we are pleased that the SEC has revised its no-action relief to permit the continued smooth function of our important fixed-income markets.