The CSA is currently considering comments received on its proposal to amend provisions of National Instrument 25-101 Designated Rating Organizations (“NI 25-101”) and related instruments. The proposal put forward is in response in part to an application by Kroll Bond Rating Agency (“Kroll”) to be recognized as a DRO for certain purposes. The regulators can make a designation for the purposes of allowing a credit rating organization to satisfy either (i) a requirement in securities law that a credit rating be given by a DRO, or (ii) a condition for an exemption under securities law that a credit rating be given by a DRO. Currently, these credit rating provisions refer to the required credit rating of the four existing DROs, namely, S&P, Moody’s, Fitch and DBRS. The CSA is now proposing to recognize the credit ratings of Kroll, but only for the limited purpose of meeting certain eligibility requirements to file a short form or shelf prospectus for issuers of asset-backed securities.
A number of investment policy statements and restrictions require holding securities of a certain rating. If Kroll is recognized as a DRO, among other things, asset-backed securities rated by Kroll may become a permissible investment under such policies, and additional competition among DROs may result. In addition to the proposed changes relating to Kroll’s application, other proposed amendments to NI 25- 101 would deal with new requirements in the European Union for credit rating organizations. The changes are required for the EU to recognize the Canadian DRO regime as an “equivalent” regime and thus for the credit ratings of a Canadian office of a DRO to be used for regulatory purposes in the EU. Other changes being proposed reflect amendments to the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies. Some proposed amendments include adding policies to mitigate conflicts and to ensure independence of credit ratings.
In the notice accompanying the proposed changes, the CSA notes that investors could benefit from additional safeguards in NI 25-101, including changes to increase protection of the integrity of the rating process.