The Securities and Exchange Commission published the text of proposed and final rules to enhance disclosures regarding the quality of credit ratings, remove references to credit ratings in certain SEC regulations, rules and forms and broaden liability for “experts” under Section 11 of the Securities Act to include Nationally Recognized Statistical Rating Organizations (NRSROs). The proposed and final rules are aimed at reducing market participants’ undue reliance on credit ratings and increasing NRSROs’ accountability for their ratings. The SEC’s vote on these proposed and final rule changes was previously reported in the September 25 edition of Corporate and Financial Weekly Digest.
The SEC’s proposal includes adding a new Item 202(g) to Regulation S-K that requires issuers electing to obtain and use a credit rating in connection with a registered offering to disclose in the prospectus, among other items, all material scope limitations of the credit rating, any related published designation (such as non-credit payment risks) assigned by the credit rating agency, the source of payment for such credit rating and whether the credit rating agency provides any other services for the issuer. Registration statements would be required to include a statement that credit ratings are not recommendations to buy, sell or hold securities, that the rating is subject to revision or withdrawal, and that investors should perform their own evaluations of the security. These disclosures would be applicable to private offerings in which the privately offered securities are exchanged shortly thereafter for registered securities, and would likewise apply to issuer’s oral and written selling efforts with respect to such securities.
The SEC’s release further proposes that if an issuer is required to disclose a credit rating, then the issuer must disclose all preliminary ratings obtained from other credit rating agencies. The purpose of this proposal is to disclose and curb instances of “ratings shopping.” Additionally, Form 8-K would be revised to provide that if an issuer has previously disclosed its rating, and the rating changes or is withdrawn, then the issuer must file a current report on Form 8-K disclosing such change or withdrawal.
Click here to view the SEC’s release regarding the foregoing proposed rules.
The SEC also published final and proposed rules removing references to credit ratings from certain rules, regulations and forms. Adopted rule changes include removing the distinction between “investment grade” and “non-investment grade” corporate securities for purposes of Rule 3a1-1 under the Exchange Act, Regulation ATS, Form ATS-R and Form PILOT, each of which relates to the regulation of exchanges and alternative trading systems. Click here to view the SEC’s release regarding these final rules.
The SEC is seeking additional comments on its proposed deletions of other references to credit ratings, including replacing certain references to “investment grade” securities in Regulation M with references to non-convertible securities issued by “well-known seasoned issuers,” as defined in Rule 405 under the Securities Act, as well as other alternatives. Click here to view the SEC’s release regarding these proposals.
The SEC is also seeking public comment on a proposed amendment to subject NRSROs to liability under Section 11 of the Securities Act when a rating is used in a registered offering by eliminating the current protection of NRSROs in such situations. Currently, Rule 436(g) under the Securities Act exempts the 10 credit rating agencies presently registered as NRSROs from Section 11 liability, while other credit rating agencies remain subject to Section 11. The SEC proposal would rescind Rule 436(g). Public comments on the proposed rule amendments must be received by the SEC within 60 days after their publication in the Federal Register. Click here to view the SEC’s concept release regarding this proposal.