The SEC has announced that it is adopting rule amendments pursuant to Regulation M, under which the SEC is required to replace references to credit ratings with alternative standards of creditworthiness. Regulation M of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) is a set of rules designed to protect the pricing integrity of the securities trading markets by prohibiting issuers, distribution participants, selling security holders, and any of their affiliated purchasers from engaging in activities that could artificially influence the market for an offered security.
New Rule Amendments to Regulation M
The changes to Regulation M will:
remove existing rule exceptions that reference credit ratings for nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities included in Rule 101 and Rule 102 of Regulation M
replace existing rule exceptions with new standards that are based on alternative standards of creditworthiness
except nonconvertible debt securities and nonconvertible preferred securities of issuers with a probability of default of 0.055 percent or less (as estimated as of the sixth business day immediately preceding the determination of the offering price) over 12 full calendar months from such day, as determined and documented in writing by the distribution participant acting as the lead manager, using a structural credit risk model, newly defined in Rule 100 of Regulation M
except asset-backed securities that are offered pursuant to an effective shelf registration statement filed on the SEC’s Form SF-3
To facilitate the SEC’s review of broker-dealers that rely on the new exception in Rule 101 or Rule 102 for certain nonconvertible debt securities and nonconvertible preferred securities, new paragraph (b)(17) of Rule 17a-4 requires those broker-dealers to maintain written records of the probability of default determination supporting their reliance on the exception. Rule 17a-4(b)(17) requires broker-dealers relying on Rule 101’s or Rule 102’s exception for certain nonconvertible debt securities and nonconvertible preferred securities to preserve the written probability of default determination for a period of at least three years, the first two years of which in an easily accessible place.
For more information on the final rule, visit the SEC’s website.
The final rule will go into effect 60 days following its publication in the Federal Register.