On March 23, the SEC announced that it is proposing amendments to remove references to credit rating agencies from current exceptions included in Regulation M. The rules that comprise Regulation M are intended to maintain the pricing integrity of the securities trading markets by prohibiting issuers, distribution participants, selling security holders, and any of their affiliated purchasers from taking part in activities that could inorganically influence the market for an offered security. The proposed changes would also implement new standards to replace the current standard gauges for credit-worthiness and add new record-keeping requirements in certain cases.
Under Section 939A of the Dodd-Frank Act of 2010, the SEC is required to:
review its rules that use credit ratings as a determinant of credit-worthiness of nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities
remove those references from its regulations
replace them with other appropriate standards
Rule 101 concerns distribution participants and their affiliated purchasers, while Rule 102 is related to issuers, selling security holders, and their affiliated purchasers. Rule 101(c)(2) and Rule 102(d)(2) currently make exception concerning the following securities that are rated “investment grade” by at least one nationally recognized statistical rating organization:
nonconvertible debt securities and nonconvertible preferred securities of issuers having a probability of default of less than 0.055% as measured over certain period of time and as determined and documented using a “structural credit risk model” (defined in the rule)
asset-backed securities that are offered pursuant to an effective shelf registration statement filed on the SEC’s Form SF-3. The SEC proposed to eliminate from Rule 102 the existing exception for investment grade nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities
The SEC examines and oversees broker-dealers who are distribution participants or affiliated purchasers who rely on the proposed exception in Rule 101 for certain nonconvertible debt securities and nonconvertible preferred securities. The addition of paragraph (b)(17) of Rule 17a-4 would facilitate the SEC’s oversight by requiring those broker-dealers to preserve the written probability of default determination supporting their reliance on the exception. Under Rule 17a4(b)(17), broker-dealers relying on Rule 101’s exception for certain nonconvertible debt securities and nonconvertible preferred securities would be required to maintain the written probability of default determination for a minimum of three years, the first two of which preserved in an easily accessible place.
The SEC previously proposed amendments in 2008 and in 2011 concerning removing credit rating references from these exceptions for certain investment-grade securities. However, the SEC did not approve any amendments based on those proposals.
The public comment period will remain open for 30 days following publication of the proposing release in the Federal Register or 60 days after publication of the proposing release on the SEC’s website, whichever period is longer.