By: Cooper D’Anton
In a discrete no-action letter last fall, the Securities and Exchange Commission (“SEC”) staff applied the disclosure Rule 15c2-11 (“15c2-11” or “Rule”) to fixed income securities – including those in the $5 trillion Rule 144A (“144A”) private placement market – for the first time in the Rule’s 50-year history. Staff intends to enforce the Rule in fixed income markets starting in January 2023. This significant change in securities regulatory policy and enforcement would have a substantial effect on the 144A debt market, harming issuers, broker-dealers, and investors by disincentivizing the use of private placements and reducing the value of 144A debt holdings.
Implemented in 1971 and amended in 1975, 1991, and 2020, Rule 15c2-11 prohibits broker-dealers from publishing quotations for, what have traditionally been, equity securities unless the issuer’s financial information is public. 144A provides a safe harbor from SEC registration for the resale of restricted securities – usually by broker-dealers – to qualified institutional buyers (“QIB”), provided that QIB purchasers, not the public, have access to the issuers’ private financial information in order to make informed investment decisions. Retail investors are not allowed to buy 144A securities, so they have no reason to access private issuers’ financial information. The SEC staff’s enforcement terms would require private issuers—who engage in the private market to keep their financial information private for competitiveness reasons—to publicly disclose their financial information so broker-dealers can freely quote their securities. This defeats one of the main purposes for which issuers sought capital through the private market to begin with. If brokers can no longer freely quote private issuers’ securities without the issuers publicly disclosing their financial information, issuers may either choose not to sell in the private market or pay higher interest rates, stifling access to a $5 trillion capital market for American businesses. Issuers choosing not to publicly disclose their financials will suffer from reduced liquidity in the market for their existing and future 144A securities. These privately-held issuing companies include household-name job creators like Staples, PetSmart, and Mars. QIB investors eligible to purchase these securities include large pension funds that secure retirement income for state government employees, public school teachers, firefighters, and other working class Americans.
This new 15c2-11 application to fixed income markets is outside the scope of the SEC’s original 15c2-11 rulemaking and subsequent amendments, but the SEC insists the Rule has always applied to fixed income securities and that stakeholders had ample opportunity to weigh in on this exact issue in prior 15c2-11 rulemakings. On the contrary, in the Rule’s 50-year history, the SEC has never enforced 15c2-11 in fixed income markets, and the staff no-action letter was the first instance the SEC ever discussed the Rule’s application to fixed income. Prior rulemakings and amendments to 15c2-11 never contained an economic analysis of the Rule’s impact on fixed income, only equities, which demonstrates the SEC’s lack of intent to apply the Rule to fixed income. The Commission’s application of the Rule outside of its intended scope is “arbitrary” and “capricious” on the merits and, therefore, unlawful.
The SEC is not asserting a strong legal or public policy argument. Retail investors cannot participate in the 144A market and thus would not benefit from access to issuers’ publicly disclosed financial information. If the SEC thought 15c2-11 applied to fixed income all along and that its application to 144A served a valuable public policy interest, one might think they would have established a history at any point over the last 50 years under both Democratic and Republican Commission Chairs of enforcing the Rule against the 144A market to achieve that public interest. At the very least, they would have analyzed the Rule’s impact on fixed income during the Rule’s implementation or subsequent amendments. But they did not.
Instead of implementing this change through a no-action letter, the Commission should engage in an Administrative Procedure Act (“APA”)-compliant rulemaking process, including a sufficient comment period, economic analysis of the Rule’s impact on fixed income securities, and consideration for the proposal’s interconnectivity with other SEC rulemakings. The SEC ought to give stakeholders an opportunity to weigh in on the potential impact of the Rule’s application to 144A securities and allow itself the opportunity to receive the feedback necessary to arrive at the best outcome possible.
 Letter from Josephine Tao, Assistant Dir., Div. of Trading and Mkts. to Raquel Russell, Fin. Indus. Regul. Auth. 1 n.2 (Sept. 24, 2021) (“Since its original adoption in 1971, the Rule has applied to all securities including fixed income . . .”) https://www.sec.gov/files/rule-15c2-11-fixed-income-securities-092421.pdf; 17 CFR § 240.15c2-11 (2020); 17 CFR § 230.144A (2020); Letter from Ken Bentsen, CEO, Sec. Indus. and Fin. Mkts. Assoc. to Gary Gensler, Chair, SEC 1–2 (June 10, 2022) (“The value of outstanding Rule 144A debt securities exceeds $5 trillion”) https://www.sifma.org/wp-content/uploads/2022/06/SIFMA-provided-comments-to-the-SEC-regarding-application-of-Rule-15c2-11.pdf; see infra p. 5 and note 14 (demonstrating that the SEC never intended to apply the Rule to fixed income securities at any time before issuing its no-action letter, hence its lack of enforcement over the past 50 years).
 Letter from Josephine Tao, Assistant Dir., Div. of Trading and Mkts. to Raquel Russell, Fin. Indus. Regul. Auth. 2 (Dec. 16, 2021) (establishing January 2023 as the beginning of the 3-year staged timeline for applying provisions of the letter to 144A markets) https://www.sec.gov/files/fixed-income-rule-15c2-11-nal-finra-121621.pdf.
 See Letter from Ken Bentsen to Gary Gensler, supra note 2, at 1–2; see AF Bureau, Real-World Private Placement Examples and Their Impact on the Businesses, ALCOR Fund (Nov. 2, 2020) (“These include large banks, mutual funds, insurance companies, and pension funds.”) https://alcorfund.com/insight/real-world-private-placement-examples-and-their-impact-on-the-businesses/; see generally Scott Bauguess et al., Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009‐2017 26, SEC, Div. of Econ. And Risk Analysis (2018) (providing a graph listing industries that participate in private placement offerings) https://www.sec.gov/files/DERA%20white%20paper_Regulation%20D_082018.pdf; see generally 17 CFR § 230.144A(a)(1) (2020) (providing a definition for QIB).
 Letter from Josephine Tao to Raquel Russell, supra note 1, at 1 n. 2; 17 CFR § 240.15c2-11(a)(1)(i)(B) (Dec. 28, 2020); see Exchange Act Rel. No. 34-12468 (June 7, 1976); see Exchange Act Rel. No. 34-29094 (Apr. 17, 1991); see Exchange Act Rel. No. 33-10842 (Sept. 16, 2020).
 SEC, Restricted Securities, Investor.gov https://www.investor.gov/introduction-investing/investing-basics/glossary/restricted-securities (“Restricted securities are securities acquired in an unregistered, private sale from the issuing company or from an affiliate of the issuer.”); 17 CFR § 230.144A (2020); see Steven Dresner & E. Kurt Kim, PIPEs: A Guide to Private Investments in Public Equity 87 (Bloomberg Press, Revised and Updated ed. 2003); see Joe Corcoran and Chris Killian, The Collision of Rule 15c2-11 and Rule 144A, Sec. Indus. and Fin. Mkts. Assoc. Blog Series (Sept. 19, 2022, 1:23 PM), https://www.sifma.org/resources/news/the-collision-of-rule-15c2-11-and-rule-144a/ (“[A]n issuer . . . first sells restricted securities directly to a broker-dealer through a private placement that is exempt from registration. The broker-dealer then uses the Rule 144A exemption to offer and resell those securities to QIBs . . .”).
 Letter from Josephine Tao to Raquel Russell, supra note 2.
 11 Reasons To Issue A Private Placement, Prudential Priv. Cap., https://prudentialprivatecapital.webflow.io/posts/11-reasons-to-issue-a-private-placement (last visited Sept. 29, 2022).
 Letter from Ken Bentsen to Gary Gensler, supra note 2, at 2 (“[D]iminished secondary market liquidity in Rule 144A bonds will cause issuers issuing in the 144A market to pay higher interest rates for new issuances and could devalue their existing debt. Investors will demand higher yield from issuers due to the uncertainty of secondary market liquidity. This could increase capital costs at American businesses at a time when they and their customers are facing economic headwinds.”).
 See Letter from Ken Bentsen to Gary Gensler, supra note 2, at 2; see Corcoran, supra note 16 (explaining why the Rule’s application to 144A would “reduce investors’ ability to exit [144A] investments at the best possible price.”) https://www.sifma.org/resources/news/the-collision-of-rule-15c2-11-and-rule-144a/.
 Wilmer Hale LLP, 2002 Public Offerings 2 (2003) https://www.wilmerhale.com/en/insights/publications/selected-2002-public-offerings-january-2003; Jakema Lewis, PetSmart completes 2-part, $2.35B bond deal for refinancing; terms, S&P Global Market Intelligence (Jan. 29, 2021), https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/petsmart-completes-2-part-2-35b-bond-deal-for-refinancing-terms-62391223; Press Release, Mars, Mars, Incorporated Announces Offering of Senior Notes (July 13, 2020) https://www.mars.com/news-and-stories/press-releases-statements/mars-incorporated-announces-offering-of-senior-notes.
 17 CFR § 230.144A(a)(1)(i)(E) (Dec. 8, 2020) (“Any employee benefit plan within the meaning of title I of the Employee Retirement Income Security Act of 1974.”).
 See Letter from Josephine Tao to Raquel Russell, supra note 2, at 2–3 (saying the rule has applied to any “security,” a term including fixed income securities).
 Corcoran, supra note 16 (“To our knowledge, in the 50 years of the rule’s existence, the SEC has never enforced compliance with the rule for fixed income or questioned firms’ fixed income activities under the rule.”); see Hester Pierce, Commissioner, SEC, Public Statement (Sept. 24, 2021) (“[T]here appears to have been limited, if any, application of the rule to fixed income markets prior to the Commission’s 2020 adopting release. Nothing in the adopting release suggests that the Commission considered the application of these rules to the fixed-income markets.”) https://www.sec.gov/news/public-statement/peirce-nal-rule-15c2-11-2021-09-24.
 See Letter from Ken Bentsen to Gary Gensler, supra note 2, at 3 n.3 (showing how the calculations in the Commission’s economic analysis did not include fixed income); Pierce, supra note 13 (“Nothing in the adopting release suggests that the Commission considered the application of these rules to the fixed-income markets.”).
 Administrative Procedure Act §10(e), 5 U.S.C. §§ 551 (2011); Business Roundtable v. SEC, 647 F.3d 1144, 1148 (D.C. Cir. 2011) (“[T]he Commission acted arbitrarily and capriciously for having failed once again—as it did most recently in [two other federal circuit cases]—adequately to assess the economic effects of a new rule.”).
 17 CFR § 230.144A (2020) (stipulating that only QIBs can purchase 144A securities).
 Administrative Procedure Act, 5 U.S.C. §§ 551 (2011); see Letter from Ken Bentsen to Gary Gensler, supra note 2, at 1–2; see Letter from Twenty Members of the House of Representatives to the SEC (July 2022) (on file with the authors); Cf. Letter from Alt. Credit Council et. al. to Gary Gensler, Chair, SEC (Apr. 5, 2022) (noting the SEC Chair’s use of 30-day comment periods); Cf. Patrick Conroy & Jordan Milev, Risk of Economic Impacts from the Cumulative Effects of Proposed and Pending SEC Rules, NERA Economic Consulting (2022) https://www.sifma.org/wp-content/uploads/2022/09/2022.09.12-NERA-Slides-Market-Impact-Diagram.pdf.
 See Oversight of the U.S. Securities and Exchange Commission: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 117th Cong. (2022) (statement of Gary Gensler) (stating, “the public comment process is about” addressing the concerns of potentially impacted stakeholders, like farmers in the case of the SEC’s climate risk disclosure proposal, before finalizing a rule) https://www.bgov.com/next/news/RI9URZ073NCW.