The FDIC and the Federal Reserve have issued guidance letters to remind depository institutions that, effective January 1, 2013, they may no longer rely solely on credit ratings issued by nationally recognized statistical rating organizations to determine whether a particular security is permissible for investment. The letters, Federal Reserve Supervision and Regulation Letter No. SR 12-15 (November 15, 2012) and FDIC Financial Institution Letter No. FIL-48-2012 (November 16, 2012), provide guidance on due diligence requirements that apply to a determination that a security is an eligible investment under recent OCC amendments to its investment securities regulation. The OCC issued a final rule and related guidance on June 4 that removes references to credit ratings in OCC regulations for national banks pertaining to investment securities, as required by Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”). The OCC investment securities regulation also applies to federal and state savings associations and state banks. State banks are subject to the same limitations and conditions with respect to the purchasing, selling, underwriting, and holding of investment securities as national banks under part 362 of the FDIC’s regulations for insured state banks, and under the Federal Reserve’s Regulation H for state member banks. Investments in corporate debt securities by federal and state savings associations are subject to the requirements of a final rule adopted by the FDIC on July 18, which is largely consistent with the OCC final rule and related guidance regarding due diligence considerations and creditworthiness standards for investment securities.
Nutter Notes: Section 939A of the Dodd-Frank Act requires each federal banking agency to remove references to, and requirements of reliance on, external credit ratings in any regulation issued by the agency that requires the assessment of the creditworthiness of a security or money market instrument. The OCC revised its rule governing securities eligible for investment by removing references to external credit ratings and generally requiring national banks to make assessments of a security’s creditworthiness to determine whether it is “investment grade.” Under the revised OCC rule, a security meets the investment grade test only if the issuer has an adequate capacity to meet its financial commitments under the security for the projected life of the asset or exposure. The OCC rule provides that the issuer has an adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full and timely repayment of principal and interest is expected. The OCC said that it expects national banks to consider a number of factors in making the determination that a security is investment grade under the new standard. While a national bank may continue to take into account external credit ratings and assessments as a valuable source of information, the bank is expected to supplement these ratings with due diligence processes and additional analyses appropriate for the bank’s risk profile and for the size and complexity of the instrument. Investments in securities by federal and state savings associations and state banks are required to comply with the revised OCC rule and should also meet the supervisory expectations set forth in the OCC investment guidance, according to the FDIC and the Federal Reserve.