In an effort to address concerns regarding the use of credit ratings issued by nationally recognized statistical rating organizations (“NRSROs”), the SEC has proposed to remove all references to NRSRO ratings from the rules under the Investment Company Act and the Investment Advisers Act. The SEC believes that including NRSROs in the rules has effectively placed an “official seal of approval” on the ratings, and that this in turn has caused undue reliance on the ratings resulting in a lack of due diligence and investment analysis by market participants. SEC Division of Investment Management Director “Buddy” Donohue has stated that the SEC hopes that removal of NRSRO ratings will “require a subjective determination of the quality of the instruments at issue” instead of allowing reliance on the NRSRO rating.
Comments from the industry have generally been critical of the proposed changes, especially those to Rule 2a-7. Currently, under Rule 2a-7, money market funds are only allowed to invest in securities that are in one of the two highest short-term rating categories, or comparable unrated securities. Opponents of the changes point out that, by removing references to NRSRO ratings, the SEC will effectively be removing a uniform, objective “floor” and replacing it with a subjective requirement that funds assess the risk of an investment on their own. Commenters, such as the Investment Company Institute, also point out that NRSRO ratings are merely a component of the determination required to be made by money market funds under Rule 2a-7 as to whether a security presents minimal credit risk and that such determinations are not made solely based on the NRSRO ratings.