The Securities and Exchange Commission (SEC) has proposed changes that would remove the references to credit rating agencies from existing exceptions provided in Rule 101 and Rule 102 of Regulation M.
These are a set of rules designed to preserve market integrity by prohibiting activities that could artificially influence the market for an offered security.
“In Section 939A of the Dodd-Frank Act of 2010, Congress directed federal agencies, including the SEC, ‘to remove any reference to or requirement of reliance on credit ratings’ from our rules and to substitute an appropriate standard for creditworthiness,” SEC Chair Gary Gensler said. “The SEC has completed much of this work, and the only remaining references to credit ratings are in Rules 101 and 102 of Reg M. Today’s proposal, if adopted, thus would fulfill Congress’s mandate to remove all such references to credit rating agencies from our rules.”
The SEC proposes to replace the credit-rating requirement included in Rule 101’s exception with requirements that the nonconvertible debt securities and nonconvertible preferred securities meet a specified probability of default threshold. Also, it proposes that the asset-backed securities be offered pursuant to an effective shelf registration statement filed on the Commission’s Form SF-3.
In addition, the proposed changes would eliminate Rule 102’s exception for investment-grade nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities.
Further, the commission voted to propose a recordkeeping requirement for broker-dealers who make the probability of default determinations in reliance on Rule 101’s proposed exception for nonconvertible debt securities and nonconvertible preferred securities.
The comment period on the proposed changes will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days after publication in the Federal Register, whichever period is longer.