On December 27, the SEC adopted amendments to eliminate references in certain of its rules and forms to credit ratings. The changes were mandated by Dodd-Frank. Rating references were removed from the following rules and forms:
On June 13, the OCC published final rules, which will be effective on January 1, 2013, removing references to credit ratings from its regulations pertaining to investment securities, securities offerings, and foreign bank capital equivalency deposits. The OCC also revised regulations, which are effective immediately upon publication, regarding financial subsidiaries of national banks to better reflect the language of the underlying statute, as amended by Section 939(d) of the Dodd-Frank Act. In addition, the OCC published guidance to assist national banks and federal savings associations in their exercise of due diligence to determine whether securities are “investment grade” when assessing credit risk for portfolio investments. Release. Final Rules. Final Guidance.
On March 30, 2012, Judge Laura Taylor Swain of the U.S. District Court for the Southern District of New York dismissed claims based on credit ratings brought by several retirement and pension funds against Bear Stearns & Co., Inc. and related affiliates in connection with the sale of RMBS pass-through certificates. Plaintiff brought claims under Section 11, 12(a)(2) and 15 of the Securities Act of 1933. The court found that plaintiffs failed to plead that the rating agencies disbelieved their ratings, but granted plaintiffs leave to amend to allege Bear Stearns was aware of the inaccuracy of the credit ratings. The court, however, declined to dismiss claims that Bear Stearns made misrepresentations concerning the quality of the underlying loans in its offering documents. It also rejected Bear Stearns’ argument that plaintiffs lacked standing to sue on tranches they did not purchase. Decision.
On November 29, pursuant to Section 939A of the Dodd-Frank Act, the OCC proposed a rule to remove references to credit ratings from various regulations and related guidance. In addition, the OCC issued proposed guidance on the procedures banks should follow in order to demonstrate that their investments satisfy the new credit quality standards created by the proposed rule. Comments must be submitted by December 29. OCC Release. OCC Proposed Rule. OCC Proposed Guidance.
On July 25, pursuant to Section 939A of the Dodd-Frank Act, the Fed published a report identifying instances in which Fed regulations reference or have requirements regarding credit ratings. The report finds that most references to credit ratings occur in the Fed’s capital requirements for state member banks and bank holding companies, and anticipates the removal of these references upon the implementation of recent Basel III international agreements on regulatory capital. Fed Report.
On July 26, the SEC adopted rules to remove credit ratings as eligibility criteria for companies to use short form registration to register securities for public sale. Instead, one of four tests must be satisfied for an issuer to qualify for short form registration: (i) the issuer has issued (as of a date within 60 days prior to filing of the registration statement) at least $1 billion in non-convertible securities other than common equity, issued in primary offerings for cash, registered under the Securities Act; (ii) the issuer has outstanding (as of a date within 60 days prior to filing of the registration statement) at least $750 billion of such securities; (iii) the issuer is a wholly-owned subsidiary of a well-known seasoned issuer; or (iv) the issuer is a majority-owned operating partnership of a real estate investment trust that qualifies as a well-known seasoned issuer. The rules will be effective 30 days after publication in the Federal Register. SEC Release.
On May 18, pursuant to Section 932 of the Dodd-Frank Act, the SEC proposed rules for credit ratings, NRSROs, and third-party due diligence providers for ABS. NRSROs would be required to: (i) report on internal controls; (ii) protect against conflicts of interest; (iii) establish professional standards for credit analysts; (iv) publicly provide disclosure concerning specific credit ratings and the methodology used; and (v) enhance public disclosure on the performance of credit ratings. The proposed rules would also require a third-party due diligence provider to provide a public written certification to any NRSRO that rates the ABS. Comments must be submitted within 60 days after publication in the Federal Register. SEC Release. SEC Proposed Rule.
On March 3, the SEC proposed rule amendments to remove references to credit ratings in certain rules and forms under the Investment Company Act of 1940, in accordance with the Dodd-Frank Act. The proposed amendments would revise the permissible investment standards for money market funds. A security would no longer need to receive a certain credit rating, but would qualify for investment if the fund’s board or its delegate determines that the security presents minimal credit risks. The SEC’s proposed rule amendments also would remove credit ratings in three other areas: repurchase agreements, certain business and industrial development company (BIDCO) investments, and shareholder reports. Comments on the proposed rule amendments must be submitted by April 25. SEC Release. SEC Proposed Rules.
On October 27, the Financial Stability Board (FSB) issued principles to reduce reliance on credit ratings in laws and regulations, including removing references to ratings “wherever possible” and replacing them with alternative standards of creditworthiness. FSB Release.
On August 10, the Fed, the FDIC, the OCC and the OTS issued an advance notice of proposed rulemaking regarding alternatives to the use of credit ratings in their risk-based capital rules for banking organizations. The ANPR is being issued in response to Section 939A of the Dodd-Frank Act, which requires the agencies to remove references to credit ratings and adopt alternative standards of credit-worthiness. The ANPR solicits comment on a range of potential alternative standards, a set of criteria the banking agencies believe are important in evaluating these standards, and the feasibility and burden associated with these alternative measures. Comments must be received within 60 days of publication of the ANPR in the Federal Register. Release. Advance Notice of Proposed Rulemaking.
