On February 9, 2011, the SEC unanimously voted to re-propose rule amendments that would eliminate security ratings as a condition for "short form" registration. The amendments are substantially similar to rule changes the SEC proposed in 2008. The SEC noted that it was re-proposing the amendments in light of the Dodd-Frank Act's mandate to "remove references to credit ratings in our regulations."
Among other things, the proposed amendments would remove investmentgrade ratings as an eligibility criterion for registering non-convertible debt securities on Form S-3. Instead, the registrant would be required to have issued over $1 billion of non-convertible securities for cash in registered, primary offerings during the past three years.
MVA and Synthetic Annuity Issuers
The SEC estimated that the proposed amendments would render at least five insurance companies ineligible for continued use of Form S-3 to register offerings of insurance contracts with market value adjustment features and socalled "synthetic" annuities that provide guaranteed living benefits by reference to the value of an investor's mutual funds, brokerage, or investment advisory assets. The SEC sought comment on whether such companies should nevertheless be permitted to use Form S-3 on the basis of other criteria, such as state insurance regulation and supervision, adequacy of capital, the eligibility of the company's parent to register a primary offering on Form S-3 or F-3, a requirement that the securities offered not constitute an equity interest and be subject to state insurance regulation, and a requirement that the value of the securities offered not vary according to the investment experience of a separate account.
At yesterday's open meeting, various Commissioners emphasized the importance of receiving input about companies that could be harmed by the proposed amendments. There seemed to be genuine interest in developing satisfactory alternatives for such companies.
There also was general agreement that the intent of the Dodd-Frank Act was not to narrow the range of companies that could rely on Form S-3.
Commissioner Paredes noted that, in evaluating the impact on companies that would no longer qualify to use Form S-3 under the proposal, it is not sufficient to look only at how many companies have filed Form S-3 within any recent period. One also must consider the loss of eligibility to potentially file on Form S-3.
The SEC's stated rationale for the $1 billion eligibility requirement is that it generally corresponds with a "wide following" of the issuer in the marketplace such that information about the issuer is readily available, thereby making it appropriate for the issuer to use the abbreviated forms' procedure for incorporating by reference subsequently-filed Exchange Act reports. This rationale would appear to have little relationship with the manner in which MVA, synthetic annuities, and other life insurance company products are sold and priced.