With only a month to spare before new public disclosure rules were to take hold, the Securities and Exchange Commission pushed the effective date for the amended Rule 15c2-11 back two years.
Had the rules gone into effect on its original timetable, it would have required new public disclosures that could reduce the liquidity and inhibit new offerings of asset-based securities, including collateralized loan obligations that are major buyers of banks' leveraged loans.
The SEC clarified in December 2021 that the rule it had amended the year before also applies to fixed-income debt, but it would not enforce it for Rule 144A transactions until the start of 2023, to give the market time to prepare. Had the rule become effective next month and broker-dealers were unable to provide the required disclosures, they would be prohibited from quoting the securities. That would reduce the securities' liquidity, according to the Structured Finance Association, and increase their liquidity premiums and issuers' financing costs.
In turn, that could impact other major financial markets such as bank-originated leveraged loans. CLOs purchase upward of 70% of leveraged loans that they pool as collateral for the ABS they issue.
In a footnote in both no-action letters, the SEC acknowledged industry concerns that the rule's financial disclosure requirements, such as balance sheet and profit and loss information, were inappropriate for securitization trusts pooling numerous financial assets. The regulator clarified that current Rule 144A disclosure requirements would suffice.
But while the recent no-action letter does address some concerns, others have simply been delayed for two years.
"The no-action letter was very welcomed, but we were looking for a more permanent fix," said Kristi Leo, president of the Structured Finance Association.
Rule 144A transactions are privately placed to qualified institutional buyers without registering them with the SEC, as long as issuers provide information requested by the investors. The bulk of securitizations are issued today in the Rule 144A market, but making that information public poses issues that will remain in 2025 unless addressed, according to Kristi.
For one, such information could also be used by competitors and may inhibit some issuers from tapping the Rule 144A market in the future. For example, the sponsor commercial mortgage-backed security for a single asset such as an office building would have to identify individual tenants that competitors could seek to poach. Similarly, competitors may be able triangulate who the borrowers are of other asset loans pooled in a securitization.
The industry has yet to reach a consensus on exactly what information should be made public, said Matthew Armstrong, a global finance partner at Dechert. However, the offering documents and servicing reports typically contain information regarding loan terms and lease terms that could be particularly problematic for single-asset, single-borrower transactions.
"Borrowers generally would not want their competitors to have access to this information and may avoid securitization in the future if the risk of public disclosure of sensitive information is not addressed," he said.
In addition, Kristi said, the SFA's investor constituents have broadly confirmed that the information they need may have been difficult to obtain 10 or 15 years ago but now is available to investors upon request.
Armstrong said ideally the SEC would exempt all Rule 144A fixed-income securities from Rule 15c2-11, since they can only be purchased by qualified institutional buyers anyway. He added that existing and prospective investors also already have access to additional information through an investor website provided by the note administrator, subject to a click-through confidentiality agreement.
"The issuers have gotten a lot better at providing the data," Kristi said. "It would be incrementally better to be able to find it in one place, but at the expense of less liquidity? No."
Another significant concern raised by market participants is that the SEC has extended Rule 15c2-11 to fixed-income via a no-action letter, rather than an official rule change. Elliot Ganz, head of advocacy and co-head of public policy at the Loan Syndication & Trading Association, said his organization's position is similar to that of the Securities Industry and Financial Markets Association.
"The SEC should use this time to engage in rulemaking, including a cost/benefit analysis—rather than merely an interpretive release—to give stakeholders a chance to consider the rule and weigh in with comments," he said.
