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House Hearing with SEC Includes 15c2-11 

October 1, 2024

Last week, the House Financial Services Committee held a hearing with commissioners from the Securities and Exchange Commission (SEC). The Senate Banking Committee’s counterpart to the SEC hearing was abruptly canceled for unclear reasons.

Why it matters: Such hearings often serve as a venue for messaging from lawmakers and offer a chance for regulators to defend or advance their own priorities.

The full committee hearing featured all five of the SEC commissioners and covered a wide variety of topics, including digital assets, capital formation, equity market structure reforms, proxy advisor firms, AI, incentive-based compensation rulemaking, and climate disclosures.

For CREFC members there were a few moments of note:

• Congressman Andrew Garbarino (R-NY) questioned SEC Chair Gary Gensler on whether the SEC would conduct a rulemaking on applying broker-dealer rule 15c2-11 to fixed-income products. Gensler declined to comment on a rulemaking. More detail on that below.
• GOP members teed up questions on the SEC’s authority to issue climate and ESG focused rules.

15c2-11 Discussion: For CREFC members, Rep. Garbarino’s exchange with Chairman Gensler highlights the upcoming 2025 compliance deadline for public fixed-income securities.

• Background: The 15c2-11 rule requires broker-dealers to verify that certain issuer information is publicly available prior to quoting a price on over-the-counter (OTC) securities. The rule always has been interpreted to apply to equities until a 2021 staff “no action” letter clarified that the rule includes fixed-income, including CMBS.
• 144A Exempted: The SEC staff had previously tried to apply 15c2-11 to 144A bonds, which do not have public reporting requirements. The SEC issued an exemptive order in November 2023 that clarified broker-dealers did not have to verify public information for 144A bonds.
• January Deadline: But the exemptive order purposefully did not include public fixed-income bonds, and the 2022 no action letter expires on January 4, 2025. This means broker-dealers will have to verify certain public issuer information in order to quote bonds next year.
• Industry groups have been seeking relief on the 15c2-11 requirements for fixed-income, as the SEC has never addressed how key components of the rule apply to fixed-income.

Rep. Garbarino highlighted potential consequences of SEC inaction:

“Letting no action relief expire could significantly disrupt those markets which are critical to funding businesses across the country, funding consumer lending like auto and home loans and supporting everyone's 401k pension or other retirement savings plans. To avoid this unnecessary harm to investors in our financial markets, can you commit to a permanent extension of this no action letter, or at least an extension until the SEC can propose a rule that is tailored to how fixed-income markets work?” - Rep. Andrew Garbarino

What they're saying: Gensler referenced the 144A exemption, but declined to commit to any rulemaking during the hearing.

Materiality, Climate Disclosures, and ESG

• Rep. Bill Huizenga (R-MI) touched on the topic of materiality, asking Commissioner Hester Peirce why the SEC has diverged from the materiality standard toward “decision-useful language.”
• Commissioner Peirce contended that the shift opens the dialogue to a “wide range of stakeholders who have any list of non-essential, non-economic interests in the company.”
• Rep. Andy Barr (R-KY) focused on the SEC’s climate rule, asking if the SEC has the authority to issue regulations that “compel companies to disclose general and immaterial information about environmental or social issues.” Peirce expressed her concerns about going beyond materiality, emphasizing that materiality serves as the foundational principle for her agency.
• In response to Rep. Barr’s comments, Rep. Sean Casten (D-IL) argued that there are inconsistencies in rating methodologies and weighting systems, emphasizing that there should be a regulatory regime for ESG ratings providers. “We have clear accounting rules for other issues,” he argued. “We should have clear accounting rules there as well.”

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