Credit Ratings Disclosure, 53086-53114 [E9-24546]
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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 229, 239, 240, 249 and
274
[Release Nos. 33–9070; 34–60797; IC–
28942; File No. S7–20–09]
RIN 3235–AK41
Credit Ratings Disclosure
AGENCY: Securities and Exchange
Commission.
ACTION: Proposed rule.
SUMMARY: We are proposing
amendments to our rules to require
disclosure of information regarding
credit ratings used by registrants,
including closed-end management
investment companies, in connection
with a registered offering of securities so
that investors will better understand the
credit rating and its limitations. The
amendments we are proposing today
also would require additional disclosure
that would inform investors about
potential conflicts of interest that could
affect the credit rating. In addition, we
are proposing amendments to require
disclosure of preliminary credit ratings
in certain circumstances so that
investors have enhanced information
about the credit ratings process that may
bear on the quality or reliability of the
rating. The proposed amendments
would be applicable to registration
statements filed under the Securities
Act of 1933, the Securities Exchange Act
of 1934 and the Investment Company
Act of 1940, and Forms 8–K and 20–F.
DATES: Comments should be received on
or before December 14, 2009.
ADDRESSES: Comments may be
submitted by any of the following
methods:
Electronic Comments
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• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/proposed.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–20–09 on the subject line;
or
Use the Federal eRulemaking Portal
(https://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to
Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number S7–20–09. This file number
should be included on the subject line
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if e-mail is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s Web site (https://
www.sec.gov/rules/proposed.shtml).
Comments are also available for public
inspection and copying in the
Commission’s Public Reference Room,
100 F Street, NE., Washington, DC
20549, on official business days
between the hours of 10 a.m. and 3 p.m.
All comments received will be posted
without change; we do not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
FOR FURTHER INFORMATION CONTACT:
Blair F. Petrillo, Special Counsel in the
Office of Rulemaking, Division of
Corporation Finance, at (202) 551–3430,
or with respect to questions regarding
investment companies, Devin F.
Sullivan, Staff Attorney in the Office of
Disclosure Regulation, Division of
Investment Management, at (202) 551–
6784, 100 F Street, NE., Washington, DC
20549.
SUPPLEMENTARY INFORMATION: The
Commission is proposing amendments
to Regulation S–K,1 and forms under the
Securities Act of 1933,2 the Securities
Exchange Act of 1934 3 and the
Investment Company Act of 1940.4 In
Regulation S–K, the Commission is
proposing to amend Items 10 5 and 202.6
Under the Securities Act, the
Commission is proposing to amend
Form S–3 7 and Form S–4.8 Under the
Exchange Act, the Commission is
proposing to amend Rule 13a–11 9 and
Rule 15d–11,10 as well as Form 8–K 11
and Form 20–F.12 The Commission is
also proposing amendments to Form
N–2 13 under the Securities Act and the
Investment Company Act.
I. Proposed Amendments
A. Introduction
The disclosure requirements we are
proposing today are intended to
enhance credit rating disclosure so that
investors will better understand credit
ratings and their limitations. These
1 17
CFR 229.10 through 1123.
U.S.C. 77a et seq.
3 15 U.S.C. 78a et seq.
4 15 U.S.C. 80a–1 et seq.
5 17 CFR 229.10.
6 17 CFR 229.202.
7 17 CFR 239.13.
8 17 CFR 239.25.
9 17 CFR 240.13a–11.
10 17 CFR 240.15d–11.
11 17 CFR 249.308.
12 17 CFR 249.220f.
13 17 CFR 239.14; 17 CFR 274.11a–1.
2 15
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proposals reflect our concerns that even
though credit ratings appear to be a
major factor in the investment decision
for investors and play a key role in
marketing and pricing of the
securities,14 investors may not have
access to sufficient information about
credit ratings. We believe our proposed
rules would improve investor protection
by providing information about credit
ratings that will place the credit rating
in an appropriate context.
We have four principal areas of
concern. First, we are concerned that
investors may not be provided with
sufficient information to understand the
scope or meaning of ratings being used
to market various securities.
Historically, credit ratings were
intended to be a measure of the
registrant’s ability to repay its corporate
debt.15 As the types of investment
products expand and become more
complex, however, the returns
(including the prospect of repayment)
on these securities often are dependent
on factors other than the
creditworthiness of the registrant.16 As
a result, the information conveyed by
ratings has become increasingly less
comparable across types of securities.17
Investors, however, may not be aware of
the differences underlying two
14 See Report on the Role and Function of Credit
Rating Agencies in the Operation of the Securities
Markets, January 2003, at https://www.sec.gov/news/
studies/credratingreport0103.pdf (noting that
issuers use credit ratings in part ‘‘to improve the
marketability or pricing of their financial
obligations.’’). See also Bo Becker and Todd
Milbourn, Reputation and Competition: Evidence
from the Credit Rating Industry, Working Paper,
(June 2009) at https://www.hbs.edu/research/pdf/09051.pdf.
15 See Disclosure of Ratings in Registration
Statements, Release No. 33–6336 (Aug. 6, 1981) [46
FR 42024].
16 See Disclosure of Security Ratings, Release No.
33–7086 (Aug. 31, 1994) [59 FR 46304] (‘‘1994
Ratings Release’’) (noting that ‘‘[b]ecause of these
non-credit payment risks, there is substantially
greater uncertainty relating to yield and total return
than for traditional debt obligations of comparable
credit rating’’). See also Joseph Mason and Joshua
Rosner, Where Did the Risk Go? How Misapplied
Bond Ratings Cause Mortgage Backed Securities
and Collateralized Debt Obligation Market
Disruptions, Working Paper, (May 2007), at
https://ssrn.com/abstract=1027475.
17 As we noted in 1994:
Today, a traditional corporate debt instrument
with fixed principal and interest obligations, a
structured note whose principal and interest is tied,
for example, to an index of securities, an ‘‘interestonly’’ strip, a collateralized mortgage obligation
security, a residual interest in a CMO offering, and
a cash flow (or ‘‘kitchen-sink’’) bond all can be
designated ‘‘triple-a,’’ notwithstanding that
investment returns on most of these instruments are
largely dependent on factors in addition to the
issuer’s creditworthiness and that the scope of the
rating differs among the securities.
See 1994 Ratings Release in note 16 above. See
also Alan Blinder, Six Fingers of Blame in the
Mortgage Mess, N.Y. Times, Sept. 30, 2007.
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securities with the same credit rating
even if the securities were issued by the
same registrant. The recent turmoil in
the credit markets has raised serious
concerns that investors may not have
fully understood what credit ratings
mean, or the limits inherent in them.18
Even when securities are highly rated,
investors can suffer significant losses, as
was evident during the recent market
crisis.19 For example, the value of AAArated mortgage-backed securities fell 70
percent from January 2007 to January
2008.20 As a result, we believe that
investors should be provided with
additional disclosure regarding credit
ratings so that investors can choose how
much weight to place on a credit rating
when making an investment decision.
Second, we are concerned that
investors may not have access to
information allowing them to appreciate
fully the potential conflicts of interest
faced by credit rating agencies and how
these conflicts may impact ratings. For
example, most credit rating agencies are
paid by the registrants who receive the
credit ratings.21 This situation creates
the potential for a rating to be inflated
by a credit rating agency as a result of
the credit rating agency’s desire to keep
the registrant’s business for future
ratings.22 Credit rating agencies also
may provide additional services to
registrants, which can be an important
18 See e.g. Recommendations of the Securities
Industry and Financial Markets Association Credit
Rating Agency Task Force (July 2008), at
https://www.sifma.org/capital_markets/docs/SIFMACRA-Recommendations.pdf (recommending that
investor education regarding the nature and
limitations of the credit rating process is necessary
to prevent over-reliance on credit ratings). See also
Report of the Financial Stability Forum on
Enhancing Market and Institutional Resilience
(Apr. 7, 2008), at
https://www.financialstabilityboard.org/
publications/r_0804.pdf.
19 For a more detailed discussion of the role of
nationally recognized statistical rating organizations
(‘‘NRSROs’’) in determining ratings for structured
products, particularly subprime residential
mortgage backed securities and collateralized debt
obligations, in the time period leading up to the
credit crisis, see Proposed Rules for Nationally
Recognized Statistical Rating Organizations,
Release No. 34–57967 (June 16, 2008) [73 FR
36212].
20 See e.g., Marco Pagano and Paolo Volpin,
Credit Ratings Failures: Causes and Policy Options,
Working Paper, (Feb. 9, 2009), at https://
www.italianacademy.columbia.edu/publications/
working_papers/2008_2009/pagano_volpin
_seminar_IA.pdf.
21 See Briefing Paper: Roundtable to Examine
Oversight of Credit Rating Agencies (Apr. 2009), at
https://www.sec.gov/spotlight/cra-oversightroundtable/briefing-paper.htm (noting that seven of
the ten NRSROs registered with the Commission
operate under the issuer-pay model and that the
issuer-pay NRSROs have determined 98% of the
currently outstanding credit ratings issued by
NRSROs).
22 See Pagano and Volpin in note 20 above.
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source of revenue for the credit rating
agency.23
Third, there has been significant
discussion of the possibility that
‘‘ratings shopping’’ may lead to inflated
ratings.24 Ratings shopping occurs when
a registrant, or someone acting on its
behalf, seeks the highest credit rating
available from multiple credit rating
agencies. We are concerned that
investors have not been informed about
this practice, which we believe could
color their assessment of the reliability
of the credit ratings ultimately obtained.
Finally, even though credit ratings
appear to be a key part of investment
decisions and are used to market
securities, disclosure about ratings is
not required in prospectuses currently.
As a result, we are concerned that
investors may not be receiving even
basic information about a potentially
key element of their investment
decisions.
To address these concerns, we are
proposing several enhancements to our
disclosure rules. As a threshold matter,
we are proposing to require disclosure
by registrants regarding credit ratings in
their registration statements under the
Securities Act and the Exchange Act,
and by closed-end management
investment companies (‘‘closed-end
funds’’) in registration statements under
the Securities Act and the Investment
Company Act, if the registrant uses the
rating in connection with a registered
offering. The disclosure requirements
are intended to address the concerns
noted above. To keep investors apprised
of developments relating to credit
ratings for their investments, we are also
proposing amendments to Exchange Act
reports to require registrants to disclose
changes to credit ratings. We are not
proposing to require registrants to
obtain credit ratings; instead, we are
proposing to require disclosure about
credit ratings used by registrants and
other offering participants in connection
with a registered offering in order to
place the credit rating in its proper
context for investors.
23 As discussed below, Exchange Act Section
15E(h) and (i) and Exchange Act Rule 17g–5 [17
CFR 240.17g–5] identify a series of conflicts arising
from the business of determining credit ratings.
Under the rule, some of these conflicts must be
disclosed and managed, while others are prohibited
outright.
24 See e.g. Vasiliki Skreta and Laura Veldkamp,
Ratings Shopping and Asset Complexity: A Theory
of Ratings Inflation, working paper, (Feb. 2009), at
https://pages.stern.nyu.edu/%7Elveldkam/pdfs/
ratings.pdf; Patrick Bolton, Xavier Freixas and Joel
Shapiro, The Credit Ratings Game, Working Paper,
(Feb. 2009), at https://www.nber.org/papers/w14712;
Becker and Milbourn in note 14 above.
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In a companion concept release,25 we
seek comment on whether we should
propose to repeal the exemption for
credit ratings provided by NRSROs from
being considered a part of the
registration statement prepared or
certified by a person within the meaning
of Sections 7 26 and 11 27 of the
Securities Act currently contained in
Rule 436(g) under the Securities Act.28
If Rule 436(g) were eliminated, there
would no longer be a distinction
between NRSROs and credit rating
agencies that are not NRSROs for
purposes of liability under Section 11 of
the Securities Act.
As we noted, we continue to have
concerns about the appropriate use of
credit ratings by investors, but we
recognize the reality that credit ratings
are important to investors. Therefore,
we seek to improve investor protection
through enhanced disclosure about
credit ratings. In addition to proposing
the rule amendments set forth in this
release, the Commission today is also
adopting certain amendments to its
existing rules regulating NRSROs, as
well as proposing additional
amendments and a new rule.29 We
believe that today’s proposals could
help reduce undue reliance on credit
ratings by providing investors with
information about what a credit rating
is, and what it is not, and other
information bearing on the reliability of
ratings to place the credit rating in its
proper context. In light of the
importance of credit ratings to investors
and their use by registrants in marketing
securities, we believe it is appropriate to
require that this information be
included in a registrant’s prospectus so
that all investors receive this
information.
B. Background
In 1981, the Commission issued a
statement of policy regarding its view of
disclosure of credit ratings in
registration statements under the
Securities Act.30 This statement marked
a clear shift from the Commission’s
historic practice of discouraging the
25 See the companion concept release considered
by the Commission on September 17, 2009
regarding Rule 436(g) under the Securities Act.
26 15 U.S.C. 77g.
27 15 U.S.C. 77k.
28 17 CFR 220.436(g).
29 See the releases considered by the Commission
on September 17, 2009 regarding (i) amendments to
Rule 17g–2 under the Exchange Act; (ii)
amendments to Rule 17g–5 under the Exchange Act;
(iii) amendments to Regulation FD; (iv) proposed
amendments to Rule 17g–3 under the Exchange Act;
(v) proposed amendments to the Instructions to
Exhibit 6 of Form NRSRO; and (vi) proposed new
Rule 17g–7 under the Exchange Act.
30 See Disclosure of Ratings in Registration
Statements, in note 15 above.
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disclosure of credit ratings in these
filings and reflected the Commission’s
then-developing acknowledgement of
the growing importance of credit ratings
in the securities markets and in the
regulation of those markets.31 Soon
thereafter, the Commission amended
Regulation S–K to reflect its new policy
of permitting the voluntary disclosure of
credit ratings in registration statements
along with clear disclosure explaining
the rating.32 The Commission also
adopted rules to permit the voluntary
disclosure of credit ratings in tombstone
advertisements,33 and provided that a
credit rating by an NRSRO generally is
not part of a registration statement or
report prepared or certified by a person
within the meaning of Sections 7 and 11
of the Securities Act.34
31 See Release No. 33–6336 in note 15 above. The
Commission announced ‘‘that, contrary to prior
general staff positions on this matter, it will now
permit the disclosure of security ratings assigned by
rating organizations in registration statements.’’ In
support of this shift in policy, the Commission cited
‘‘the general usefulness’’ of credit ratings to
investors and the ‘‘importance that the Commission
and other regulatory entities have attached to the
issuance’’ of a credit rating. Id.
32 See Adoption of Integrated Disclosure System,
Release No. 33–6383 (Mar. 3, 1982) [47 FR 11380]
(‘‘Integrated Disclosure Release’’). See also
Registration Form for Closed-End Management
Investment Companies, Release No. 33–6967
(November 20, 1992) [57 FR 56826] (adopting
amendment to Form N–2 regarding voluntary
disclosure of credit ratings for closed-end funds).
33 See Integrated Disclosure Release in note 32
above (adopting amendments to Rule 134(a) under
the Securities Act to provide that certain
communications containing a security rating or
ratings of a class of debt securities, convertible debt
securities and preferred stock and the name(s) of
the rating organization would not be deemed to be
a prospectus under Section 2(10) of the Securities
Act).
34 Concurrent with the adoption of these rules
and guidance, the Commission adopted Securities
Act Form S–3, the short-form Securities Act
registration statement for eligible domestic issuers
[17 CFR 239.13]. Form S–3 provides that a primary
offering of non-convertible debt securities may be
eligible for registration on the form if rated
investment grade. A non-convertible security is an
‘‘investment grade security’’ for purposes of form
eligibility if at the time of sale, at least one NRSRO
has rated the security in one of its generic rating
categories which signifies investment grade,
typically one of the four highest rating categories.
In adopting this requirement, the Commission
specifically noted that commenters believed that
the component relating to investment grade ratings
was appropriate because non-convertible debt
securities generally are purchased on the basis of
interest rates and credit ratings. See Section III.A.1
of the Integrated Disclosure Release in note 32
above. Later, in 1992, the Commission expanded
the eligibility requirement to delete references to
debt or preferred securities and to provide Form S–
3 eligibility for other investment grade securities
(such as foreign currency or other cash settled
derivative securities). See Simplification of
Registration Procedures for Securities Offerings,
Release No. 33–6964 (Oct. 22, 1992) [57 FR 48970].
Consistent with Form S–3, the Commission adopted
a provision in Form F–3 [17 CFR 239.33] providing
for the eligibility of a primary offering of investment
grade non-convertible debt securities by eligible
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At various times since the policy
statement and the adoption of these
rules and form eligibility requirements,
the Commission has reviewed and
reconsidered its approach to the
disclosure of credit ratings in filings and
the reliance on ratings in the
Commission’s form eligibility
requirements. For example, in 1994, the
Commission published a proposing
release that would have mandated
disclosure in Securities Act
prospectuses of a credit rating given by
an NRSRO whenever a credit rating
with respect to the securities being
offered is ‘‘obtained by or on behalf of
an issuer.’’ 35 The proposals would have
required disclosure of specified
information with respect to credit
ratings, whether or not disclosed
voluntarily or mandated by the thenproposed rules. In addition, the release
sought comment on various areas
relating to the disclosure of credit
ratings. The release also proposed to
require disclosure on a Form 8–K of any
material change in the credit rating
assigned to the registrant’s securities by
an NRSRO.36 The Commission received
wide-ranging comments on those
proposals. Commenters’ views on
whether registrants should be required
to provide disclosure regarding credit
ratings of their securities in a final
prospectus reflected a wide variety of
opinions. Commenters who were against
the mandatory disclosure of credit
ratings argued, among other things, that:
NRSROs have incentives to provide
quality ratings; information about credit
ratings is widely available and
understood; requiring disclosure would
be costly and burdensome; and
requiring disclosure of ratings may
increase investors’ reliance on them.37
Commenters who supported mandatory
disclosure regarding credit ratings
argued, among other things, that: credit
ratings have the potential to confuse and
mislead investors; investors do not
receive sufficient information about the
credit rating; and investors expect to
know the credit rating when buying a
security, so the proposed required
disclosure would comport with investor
expectations.38 The Commission did not
act on the proposals.
foreign private issuers. Shelf registration
requirements for asset-backed securities, originally
adopted in 1992, also depend on a credit ratings
component. See General Instruction I.B.5 of Form
S–3.
35 See the 1994 Ratings Release in note 16 above.
36 See the 1994 Ratings Release in note 16 above.
37 See e.g. letter regarding File No. S7–24–94 of
Moody’s Investor Service, Inc. (Dec. 5, 1994); and
letter regarding File No. S7–24–94 of Fitch Investors
Service Inc. (Dec. 6, 1994).
38 See e.g. letter regarding File No. S7–24–94 of
Savings & Community Bankers of America; and
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In 2002, as part of the broader changes
to the Form 8–K current reporting
requirements, the Commission again
proposed to require a registrant to file a
Form 8–K current report when it
received a notice or other
communication from any rating agency
regarding, for example, a change or
withdrawal of a particular rating.39
Comments were mixed on whether
changes to a credit rating should be
reported on a Form 8–K.40 Commenters
against the requirement generally
believed it was unnecessary because the
information was publicly available.41
Commenters who supported the
requirement generally believed it should
be limited to ratings provided by
NRSROs.42 The new Form 8–K filing
regime adopted in 2004 did not include
this requirement.43 In declining to adopt
a Form 8–K reporting requirement for
credit rating changes, the Commission
noted that it was continuing to consider
the appropriate regulatory approach for
rating agencies.44
In 2003, the Commission issued a
concept release requesting comment on
whether it should cease using the
NRSRO designation and, as an
alternative to the ratings criteria,
provide for Form S–3 eligibility where
investor sophistication or large size
denomination criteria are met.45 In
2008, the Commission proposed
changes to certain of its forms and rules
that would have removed references to
credit ratings and would have amended
Securities Act Rule 436(g), which
exempts NRSROs from liability under
Section 11 of the Securities Act, so that
letter regarding file No. S7–24–94 of A.G. Edwards
& Sons, Inc.
39 See Additional Form 8–K Disclosure
Requirements and Acceleration of Filing Date,
Release No. 33–8106 (June 17, 2002) [67 FR 42914].
40 See also the discussion of Form 8–K in Section
I.D. below.
41 See e.g. letter regarding File No. S7–22–02 of
CIGNA Corporation (Aug. 26, 2002), at https://
www.sec.gov/rules/proposed/s72202.shtml.
42 See e.g. letter regarding File No. S7–22–02 of
Investment Counsel Association of America (Aug.
26, 2002), at https://www.sec.gov/rules/proposed/
s72202.shtml.
43 See Additional Form 8–K Filing Requirements
and Acceleration of Filing Date, Release No. 33–
8400 (Mar. 16, 2004) [69 FR 15594], amended by
Additional Form 8–K Disclosure Requirements and
Acceleration of Filing Dates; Correction, Release No.
33–8400A (Aug. 4, 2004) [69 FR 48370].
44 Id.
45 See Rating Agencies and the Use of Credit
Ratings under the Federal Securities Laws, Release
No. 33–8236 (June 4, 2003) [68 FR 35258] (‘‘2003
Concept Release’’). Most of the commenters that
addressed the issue supported retaining the
requirement to use NRSRO ratings for purposes of
Form S–3 eligibility. Comments on the concept
release are available at https://www.sec.gov/rules/
concept/s71203.shtml. See also the extensive
discussion of market developments in Release No.
34–57967 in note 19.
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the exemption would apply to all credit
rating agencies, including those that are
not NRSROs.46
In April 2009, the Commission held a
roundtable to examine the oversight of
credit rating agencies.47 Topics
addressed by the panels at the
roundtable included current actions
being taken by NRSROs, competition
within the industry and how to improve
oversight of the industry. Participants
and the public were invited to submit
comments regarding the issues
addressed at the roundtable.
Commenters addressed a wide range of
issues.
The Commission’s history in
considering the possibility of mandating
disclosure of credit ratings reflects the
complexity of the issues raised by
investors’ reliance on them. Our rules
under the Securities Act and the
Exchange Act require that investors be
provided material information in order
to evaluate investment opportunities.
We understand that investors will
continue to use credit ratings in making
investment decisions; therefore, we are
proposing disclosure requirements we
believe will provide investors with
additional meaningful information that
they can use to make those decisions.
We acknowledge the risk that requiring
disclosure of credit ratings could
emphasize their significance and draw
attention away from other, more
important information about the
registrant and its securities. However,
we believe the recent market crisis and
questions about the use of credit ratings
suggest that investors may not have
sufficient information to understand
credit ratings fully. In light of the
concerns discussed above, we believe
all investors would benefit from the
proposed revisions to our disclosure
rules to require specific disclosures
about ratings.
C. Mandatory Disclosure of Credit
Ratings
As noted above, the Commission’s
policy on credit ratings currently is set
forth in Item 10(c) of Regulation S–K.
Specifically, the policy permits
registrants to voluntarily disclose
ratings assigned by credit rating
agencies to classes of debt securities,
convertible debt securities and preferred
stock in registration statements and
periodic reports.48 Item 10(c) also
46 See Security Ratings, Release No. 33–8940
(Jul.1, 2008) [73 FR 40106].
47 See generally https://www.sec.gov/spotlight/craoversight-roundtable.htm.
48 We understand that only a small number of
registrants include disclosure regarding credit
ratings in their prospectuses. Generally, if ratings
are disclosed, they are disclosed in free writing
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provides the Commission’s views on
important matters registrants should
consider in disclosing credit ratings in
Securities Act and Exchange Act filings.
So that all investors are provided with
appropriate information about credit
ratings, the amendments we propose
today would mandate much of the
disclosure permitted under Item 10(c)
when a registrant uses a credit rating in
connection with a registered offering
and would remove the policy statement
and recommended disclosure from that
Item.
Specifically, we are proposing a new
paragraph in Item 202 of Regulation S–
K that would require much of the
specific disclosure currently permitted
under Item 10(c).49 As more fully
described below, proposed Item 202(g)
would require disclosure of all material
scope limitations of the credit rating and
any related published designation, such
as non-credit payment risks, assigned by
the rating organization with respect to
the security.50 In addition, in order to
highlight potential conflicts of interest,
the proposed rule would require
disclosure of the source of payment for
the credit rating; and if any additional
non-rating services have been provided
by the credit rating agency or its
affiliates to the registrant or its affiliates
over a specified period of time,
disclosure of the services and the fees
paid for those services would be
required. Disclosure required pursuant
to proposed Item 202(g) of Regulation
S–K would be required in Securities Act
and Exchange Act registration
statements. We are proposing to amend
Item 9 of Form S–3 and Item 4(a)(3) of
Form S–4 so that disclosure regarding
credit ratings is provided in all
registration statements on that form
when the trigger for disclosure is met.
We also are proposing to require, in
certain circumstances, disclosure of
preliminary ratings, as well as final
ratings not used by a registrant, so that
investors will be informed when a
registrant may have engaged in ratings
shopping. Finally, we are proposing to
amend Exchange Act reports to require
reporting of changes in credit ratings in
certain circumstances.
We are proposing to apply similar
mandatory disclosure requirements
regarding credit ratings of senior
securities issued by closed-end funds
registered under the Investment
Company Act. Like other companies,
closed-end funds sometimes issue
prospectuses filed pursuant to Rule 433 [17 CFR
230.433].
49 See proposed new paragraph (g) to Item 202 of
Regulation S–K.
50 See note 67 below.
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senior securities that are rated by one or
more credit rating agency and currently
are permitted to voluntarily disclose
these credit ratings in their registration
statements.51 We are proposing to
amend Form N–2 to require that closedend funds include credit ratings
disclosure in their registration
statements under the Securities Act and
the Investment Company Act. We are
also proposing to amend Exchange Act
Rules 13a-11 and 15d-11 to require
reporting by closed-end funds of
changes in credit ratings in certain
circumstances.
We believe that the proposed
amendments to require disclosure of
certain information regarding credit
ratings, rather than permitting voluntary
disclosure, would provide investors
with the information they need about
credit ratings to put the rating in the
appropriate context. The proposed
amendments also may benefit
companies that in the past may have
hesitated to provide disclosure
voluntarily by leveling the playing field
so that all companies using credit
ratings in connection with a registered
offering of securities would be required
to provide disclosure.
1. Trigger for Required Disclosure
We believe that it is appropriate for
registrants to provide the proposed
disclosure when they use a credit rating
in connection with a registered offering
of their securities. As discussed above,
investors rely on credit ratings in
making investment decisions. We
believe requiring disclosure when a
registrant uses the credit rating to offer
or sell securities would provide
investors with the information they
need about the credit rating to put the
credit rating in its appropriate context.
Specifically, we are proposing to amend
Item 202 of Regulation S–K,52 Item 12
of Form 20–F,53 and Item 10.6 of Form
51 Section 18(f) of the Investment Company Act
[15 U.S.C. 80a-18(f)] generally prohibits a registered
open-end management investment company (i.e.,
mutual fund) from issuing senior securities.
52 See proposed new paragraph (g) to Item 202 of
Regulation S–K.
53 Form 20–F is the combined registration
statement and annual report form for foreign private
issuers under the Exchange Act. It also sets forth
disclosure requirements for registration statements
filed by foreign private issuers under the Securities
Act. ‘‘Foreign private issuer’’ is defined in
Securities Act Rule 405 [17 CFR 230.405] and
Exchange Act Rule 12b-2 [17 CFR 240.12b-2]. We
are proposing to amend Item 12 of Form 20–F,
which pertains to securities other than equity
securities, to elicit the same disclosure that would
be required by proposed Item 202(g) of Regulation
S–K. We also propose to amend Item 10 of Form
20–F to require the same disclosure under proposed
Regulation S–K Item 202(g) for a class of preferred
securities, including non-participatory preferred
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N–2 54 to require registrants to provide
detailed disclosure regarding credit
ratings if the registrant, any selling
security holder, any underwriter, or any
member of a selling group uses a credit
rating 55 from a credit rating agency 56
with respect to the registrant or a class
of securities issued by the registrant, in
connection with a registered offering.
The proposed rule would not require
that registrants obtain a credit rating on
any security; however, if a registrant
uses a credit rating in connection with
a registered offering, then disclosure
would be required.
We have proposed to require
disclosure regarding credit ratings if the
registrant, a selling security holder,
underwriter or any member of a selling
group uses a credit rating in connection
with a registered offering. We included
selling security holders, underwriters
and other members of the selling group
in the proposed trigger for disclosure so
that registrants would not be able to
structure their selling efforts in a
manner that would avoid triggering
disclosure under the proposed rule. In
addition, there are circumstances where
the underwriter obtains the credit rating
on behalf of the registrant, and if the
underwriter uses that rating, we believe
disclosure should be required.
A credit rating may be ‘‘used’’ in a
variety of ways. For example, in
addition to oral and written selling
efforts of the registrant and other
members of the selling group, we would
consider a credit rating to be used in
connection with a registered offering of
securities when it is disclosed in a
prospectus or a term sheet filed
pursuant to Rule 433 or Rule 497 57
under the Securities Act.
Furthermore, as proposed, a credit
rating also would be considered to be
used in connection with a registered
offering of securities if it is used in
connection with a private offering of
stock as that term is used under 17 CFR
230.902(a)(1).
54 Form N–2 is the registration form used by
closed-end funds to register under the Investment
Company Act and to offer their securities under the
Securities Act. We are proposing to amend Item
10.6 of Form N–2 to elicit the same disclosure that
would be required by proposed Item 202(g) of
Regulation S–K.
55 As proposed, a ‘‘credit rating’’ would have the
same meaning as the definition in Section 3(a)(60)
of the Securities Exchange Act [15 U.S.C.
78c(a)(60)].
56 As proposed, a ‘‘credit rating agency’’ would
have the same meaning as the definition in Section
3(a)(61) of the Securities Exchange Act [15 U.S.C.
78c(a)(61)].
57 17 CFR 230.497. This would include closedend fund advertisements that, under Rule 497(i) [17
CFR 230.497(i)], are considered to be filed with the
Commission upon filing with a national securities
association registered under Section 15A of the
Exchange Act [15 U.S.C. 78o].
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securities that is made in reliance on an
exemption from registration under the
Securities Act when the privately
offered securities are exchanged shortly
thereafter for substantially identical
registered securities.58 Disclosure would
be required even if the rating was not
disclosed in the registered exchange
offer.59 As a result, registrants would
not be able to avoid the proposed
disclosure requirements regarding credit
ratings by disclosing a credit rating to
investors in a private offering but not
using it in connection with the
registered exchange offer to those same
investors of substantially identical
securities.
We intend for the proposed rule to
apply to both oral and written selling
efforts. Thus, for example, disclosure
would be required when a credit rating
is disclosed to potential purchasers by
the registrant, any selling security
holder, any underwriter or any member
of a selling group in response to an
inquiry from an investor. A registrant
would not be able to avoid providing
the proposed disclosure by using a
rating only in oral selling efforts and not
including it in written communications
related to an offering, by not
‘‘volunteering’’ the information about
the credit rating except upon request or
by referring an investor to a Web site
that discloses the credit rating. We
believe that if a credit rating is used in
connection with a registered offering,
then investors should have the benefit
of all of the disclosure required by our
proposed amendments.
We have not proposed to require that
a registrant provide disclosure when it
has not sought or otherwise solicited the
58 See
proposed Instruction 3 to Item 202(g).
transactions are sometimes referred to as
Exxon Capital exchange offers based on a series of
no-action letters issued by the staff beginning in
May 1988 that outline the staff’s interpretive
positions regarding such exchange offers. In a
typical Exxon Capital exchange offer, an issuer sells
debt securities to a broker-dealer in reliance on the
exemption in Section 4(2) of the Securities Act [15
U.S.C. 77d(2)]. The broker-dealer then immediately
resells those securities to qualified institutional
buyers in reliance on Rule 144A under the
Securities Act. [17 CFR 230.144A]. The issuer then
files a registration statement on Form S–4 to register
the exchange of the securities for substantially
identical securities. Upon effectiveness of the S–4
registration statement, the qualified institutional
buyers exchange restricted securities for registered
securities, and therefore, may resell the securities
they receive in the exchange offer without further
registration or prospectus delivery. See Exxon
Capital Holdings Corporation, SEC No-Action Letter
(pub. avail. May 13, 1988); Morgan Stanley & Co.,
Inc., SEC No-Action Letter (pub. avail. June 5,
1991); Mary Kay Cosmetics, Inc., SEC No-Action
Letter (pub. avail. June 5, 1991); K–III
Communications Corp., SEC No-Action Letter (pub.
avail. May 14, 1993); Shearman & Sterling, SEC NoAction Letter (pub. avail. July 2, 1993); Brown &
Wood LLP, SEC No-Action Letter (pub. avail.
Feb. 5, 1997).
59 These
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credit rating unless the rating is used in
connection with a registered offering of
its securities, as we believe that such a
requirement may create an undue
burden for registrants to follow and
provide disclosure on all of the ratings
outstanding on their securities. In this
regard, we note that regulatory changes
could increase the number of
unsolicited ratings being provided. 60 If
we were to require disclosure of
unsolicited ratings not used in
connection with a registered offering of
a security, a registrant would have to
monitor all of the credit rating agencies
to determine not only whether a credit
rating had been issued with respect to
a security, but also whether the rating
has been changed or withdrawn.
We are aware that some registrants
discuss their credit rating in other
contexts in their periodic reports or
Securities Act registration statements.
As proposed, the disclosure requirement
regarding credit ratings would not be
triggered if the only disclosure of a
credit rating in a filing with the
Commission is related to changes to a
credit rating, the liquidity of the
registrant, the cost of funds for a
registrant or the terms of agreements
that refer to credit ratings, and the credit
rating is not otherwise used in
connection with a registered offering.
For instance, some registrants note their
ratings in the context of a risk factor
discussion regarding the risk of failure
to maintain a certain rating and the
potential impact a change in credit
rating would have on the registrant. A
registrant also may refer to its rating in
the context of its liquidity discussion in
Management’s Discussion and Analysis
of Financial Condition and Results of
Operations (‘‘MD&A’’). Registrants may
need to discuss ratings when they
describe debt covenants, interest or
dividends that are tied to credit ratings
or potential support to variable interest
entities. We have proposed to exclude
these references to credit ratings from
the trigger that would require additional
disclosure regarding credit ratings
because we believe that the additional
information is not necessary in that
setting. We believe that the material
information to be conveyed in that
setting relates to the fact that a credit
rating has the potential to have a
material impact on the registrant. We
believe additional information about
60 The Commission is adopting today various
changes to Exchange Act Rule 17g–5 [17 CFR
240.17g–5] that would provide the opportunity for
other credit rating agencies to use the information
provided to NRSROs by the registrant to develop
‘‘unsolicited ratings’’ for certain rated asset-backed
securities. See the adopting release considered by
the Commission on September 17, 2009.
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scope limitations, conflicts of interest,
preliminary ratings and other matters
does not appear to be necessary to
understand that disclosure.
We are proposing to amend Item 9 of
Form S–3 and Item 4(a)(3) of Form S–
4 so that disclosure regarding credit
ratings is included in all registration
statements where appropriate.
Currently, Item 9 requires registrants to
include the disclosure required by Item
202 of Regulation S–K in a registration
statement on Form S–3 unless capital
stock is to be registered and securities
of the same class are registered pursuant
to Section 12 of the Exchange Act.61
Item 4(a)(3) of Form S–4 requires
registrants to include the disclosure
required by Item 202 of Regulation
S–K unless the registrant would meet
the requirements for use of Form S–3
and capital stock is to be registered,
securities of the same class are
registered pursuant to Section 12 of the
Exchange Act, and the security is listed
on a national securities exchange. We
are proposing to amend these items so
that the disclosure required by proposed
Item 202(g) of Regulation S–K would be
included in a registration statement on
Form S–3 or Form S–4 even if securities
of the same class are registered under
Section 12 of the Exchange Act so long
as the trigger for disclosure under
proposed Item 202(g) has been met. We
believe these amendments are
appropriate so that investors would
receive information about credit ratings
in circumstances where securities of the
same class have been previously
registered because securities of the same
class that are issued at different times
may have different ratings.
Request for Comments
• As proposed, we would require
disclosure of credit ratings if the
registrant, any selling securityholder,
underwriter or member of a selling
group uses a credit rating in connection
with a registered offering. Are there any
other persons that should be included as
persons who could cause the disclosure
requirement to be triggered? Are there
reasons to exclude any of the persons or
entities currently included in the
proposal?
• Should the proposed rule mandate
disclosure of a credit rating obtained by
a registrant regardless of whether the
rating is used in connection with a
registered offering? For example, should
we require disclosure whenever a
61 15
U.S.C. 78l.
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registrant discloses a rating? Do the
triggers in the requirement encourage
the use and related disclosure of only
favorable ratings? Are there other
circumstances that should trigger the
proposed disclosure?
• Would the rule, as proposed, have
an effect on the frequency with which
registrants seek credit ratings? Why or
why not?
• As proposed, we would consider a
credit rating to be used in connection
with a registered offering of securities if
it is disclosed upon request of an
investor. We believe this approach
should reduce the risk that practices
might develop that would undermine
the purpose of our proposal, such as a
registrant or member of a selling group
not offering the information about a
credit rating unless asked. Is this
approach necessary or appropriate?
Should registrants be excluded from the
proposed requirement to provide
disclosure regarding credit ratings if
they and the offering participants decide
not to use the rating in selling efforts,
but disclose the rating in response to an
investor who specifically asks about the
rating?
• Would registrants and other
members of a selling group be able to
circumvent the rule as proposed? How
would they be able to do that? How
could we modify the rule proposal to
avoid circumvention? Could the
proposed trigger for disclosure lead to
procedural modifications to the practice
of assigning credit ratings so that
registrants could avoid the disclosure
requirement even though the credit
rating is used in connection with a
registered offering? If so, how could we
modify the proposal to avoid such
modifications?
• As proposed, a credit rating would
be considered used for purposes of the
proposed disclosure trigger if it is used
in connection with a private offering
even if not used in a subsequent
registered exchange offering for
substantially identical securities made
to the purchasers in the private
placement. Is this trigger for disclosure
appropriate in light of the unique
structure of these transactions? Should
we expand the instruction to include a
credit rating obtained in connection
with a private offering if those securities
are subsequently registered for resale?
• Is the instruction, as proposed, that
a credit rating would be considered
used if it is used in connection with a
private offering but not used in a
subsequent registered exchange offering
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53091
for substantially identical securities,
appropriate for closed-end funds?
• As proposed, a registrant would not
be required to make disclosure with
regard to solicited or unsolicited ratings
unless the rating is used in connection
with the registered offering of a security.
Is there a difference between solicited
and unsolicited ratings such that they
should be treated differently for
purposes of this proposal? Would
requiring disclosure of all unsolicited
ratings regardless of whether they are
used in connection with a registered
offering be too burdensome for
registrants? Should disclosure be
triggered only if the registrant, or
someone acting on its behalf, obtains the
credit rating (i.e., a solicited rating) and
uses the rating in connection with a
registered offering? If we were to require
disclosure of unsolicited ratings
regardless of whether they are used in
connection with a registered offering of
securities, should we impose limitations
on how many ratings, or which credit
rating agencies’ ratings, should be
required to be disclosed? For example,
should we require disclosure for
unsolicited ratings issued by NRSROs
only? Would such disclosure impose an
undue burden on the registrant?
• Should the proposed mandatory
disclosure of credit ratings apply to
closed-end funds?
• Investment companies, including
both closed-end funds and mutual
funds, sometimes represent that they
invest only in securities that have a
specified credit rating, such as
investment grade, or disclose the
percentage of their portfolios comprised
of securities with specified ratings. As
noted above, investors may not have
access to sufficient information in order
to understand fully what credit ratings
mean, or the limits inherent in them. Do
current investment company disclosure
requirements adequately address the
meaning and limitations of credit
ratings of portfolio securities? If not,
how could investment company
disclosure requirements be changed to
better promote investor understanding
of credit ratings of portfolio securities?
• The proposed amendments apply to
the disclosure of credit ratings. Mutual
funds sometimes obtain other non-credit
ratings and use such ratings in
connection with the offer or sale of their
securities. For example, rating agencies
issue credit quality ratings to fixedincome funds, which examine credit
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risk in the fund’s underlying portfolio.62
Ratings agencies may also issue
volatility ratings, which are designed to
identify the potential volatility of the
market value of a fund’s shares.63 In
addition, at least one rating agency
issues principal stability ratings that are
designed to identify a money market
fund’s capacity to maintain stable
principal or a stable net asset value.64
Should we require the mandatory
disclosure of these additional fund
ratings as part of a fund’s prospectus or
statement of additional information if
the ratings are used in connection with
the offer or sale of an investment
company’s securities? If so, what
disclosures should we require?
• The proposed disclosure item
includes an instruction that provides
that a registrant would not trigger the
disclosure requirement regarding credit
ratings if the credit rating is not
otherwise used in connection with a
registered offering, and the only
disclosure of a credit rating in a filing
with the Commission is related to
changes to a credit rating, the liquidity
of the registrant, the cost of funds for a
registrant or the terms of agreements
that refer to credit ratings. Is this
approach appropriate? Are there other
disclosures about credit ratings of a
similar nature that should be added to
this instruction? Would registrants
avoid such references because of
concerns that it might trigger the
proposed additional disclosure
requirements? Would this instruction be
used to circumvent the disclosure
requirement?
• We are proposing to amend Item 9
of Form S–3 and Item 4(a)(3) of Form
S–4 so that disclosure regarding credit
ratings would be included (if
applicable) in registration statements for
offerings of capital stock even if
securities of the same class have
previously been registered pursuant to
Section 12 of the Exchange Act. Are
there any other circumstances where we
need to amend forms so that
information regarding credit ratings is
62 See, e.g., Fitch’s Fund and Asset Manager
Ratings, at https://www.fitchratings.com/jsp/sector/
Sector.faces?selectedTab=Overview&Ne=
11%2b4293330821 (last visited on Aug. 11, 2009)
(‘‘Fitch’s Fund and Asset Manager Ratings’’);
Moody’s Ratings Definitions, Money Market and
Bond Fund Ratings, at https://v3.moodys.com/
ratings-process/Money-Market-and-Bond-FundRatings/002001018 (last visited Aug. 11, 2009)
(‘‘Moody’s Ratings Definitions’’); Standard & Poor’s
Ratings Definitions, Ratings Direct, (Apr. 30, 2009),
available at https://www2.standardandpoors.com/
spf/pdf/fixedincome/Ratings_Definitions_
Update.pdf (‘‘Standard & Poor’s Ratings
Definitions’’).
63 See, e.g., Fitch’s Fund and Asset Manager
Ratings; Standard & Poor’s Ratings Definitions.
64 See, e.g., Standard & Poor’s Ratings Definitions.
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provided to investors when a credit
rating is used in connection with a
registered offering?
• Schedule B under the Securities Act
provides the disclosure requirements for
foreign governments or political
subdivisions thereof that register their
securities for public offering in the
United States. The disclosure
requirements for those issuers are
located directly in the Securities Act,
and there are no corresponding
disclosure regulations or forms under
Schedule B applicable to foreign
governments 65 or their political
subdivisions.66 However, through
market practice and investor
expectation, registration statements
prepared under Schedule B generally
contain disclosure beyond the
requirements of the statute, and may
include, for example, credit rating
information relating to the sovereign
issuer’s debt. Should we extend the
proposals for the disclosure of credit
ratings to foreign government issuers?
Or should we continue to permit foreign
governments to disclose credit ratings
on a voluntary basis? Should a foreign
government be required to disclose
credit ratings in Schedule B registration
statements under the Securities Act and
in Exchange Act documents, including
the annual report on Form 18–K and the
registration statement on Form 18, if it
uses the credit rating in connection with
a registered offering of its debt
securities? If we extend the credit rating
disclosure requirements to foreign
governments, are there some forms or
documents that in whole or in part
should be exempt from these
requirements? Would disclosure of
credit ratings be appropriate for foreign
government issuers? If so, why? If not,
why should they be exempt? If
mandatory credit ratings disclosure in
filings under the Securities Act or the
Exchange Act is appropriate for foreign
government issuers, should they be
subject to requirements analogous to
those proposed for other issuers or are
there different factors that should be
considered in any amendments that may
65 ‘‘Foreign government’’ refers to any issuer that
is eligible to register securities under Schedule B of
the Securities Act, including political subdivisions
and some quasi-governmental entities.
66 Unlike other issuers, foreign government
issuers that register securities under Schedule B of
the Securities Act are not subject to reporting
obligations under Section 15(d) of the Exchange Act
[15 U.S.C. 78o(d)]. However, foreign government
securities listed on a U.S. exchange must be
registered under Section 12(b) of the Exchange Act
[15 U.S.C. 78l(b)], as is the case with the securities
of other issuers. Foreign governments that have
securities registered under Section 12(b) file annual
reports with the Commission on Form 18.
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be adopted for foreign government
issuers? What are those considerations?
2. Required Disclosure
Under the proposed amendments, a
registrant would be required to disclose
the information for each credit rating
that triggers disclosure. The proposed
disclosure seeks to provide investors
with a specific description of the ratings
and to make clear to investors:
• The elements of the securities that
the credit rating addresses;
• The material limitations or
qualifications on the credit rating; and
• Any related published designation,
such as non-credit payment risks,
assigned by the credit rating agency
with respect to the security.
The disclosure would be required in
registration statements under the
Securities Act and the Exchange Act,
including Form 10 and Form 20–F, and
in registration statements filed by
closed-end funds on Form N–2 under
the Securities Act and the Investment
Company Act.
(a) General Information Including Scope
and Limitations
As proposed, our amendments would
require disclosure of certain general
information regarding credit ratings,
including the scope of the rating and
any limitations on the scope of the
rating. In this regard, our proposed rules
would require:
• The identity of the credit rating
agency assigning the rating and whether
such organization is an NRSRO;
• The credit rating assigned by the
credit rating agency;
• The date the credit rating was
assigned;
• The relative rank of the credit rating
within the credit rating agency’s
classification system;
• A credit rating agency’s definition
or description of the category in which
the credit rating agency rated the class
of securities;
• All material scope limitations of the
credit rating; 67
• How any contingencies related to
the securities are or are not reflected in
the credit rating;
• Any published designation
reflecting the results of any other
evaluation done by the credit rating
agency in connection with the rating,
along with an explanation of the
designation’s meaning and the relative
rank of the designation;
67 A limited scope rating is a rating that assesses
less than the promised or expected return on a
security. We are proposing disclosure of any
material scope limitations in order to mitigate the
potential risk that investors may not understand the
limited scope of the rating. See the 1994 Release in
note 15 above.
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• Any material differences between
the terms of the securities as assumed or
considered by the credit rating agency
in rating the securities and (i) the
minimum obligations of the security as
specified in the governing instruments
of the security; and (ii) the terms of the
securities as used in any marketing or
selling efforts; and
• A statement informing investors
that a credit rating is not a
recommendation to buy, sell, or hold
securities; that it may be subject to
revision or withdrawal at any time by
the assigning credit rating agency; that
each credit rating is applicable only to
the specific class of securities to which
it applies; and that investors should
perform their own evaluation as to
whether an investment in the security is
appropriate.68
A preliminary prospectus would
include information about any credit
rating that is used in connection with a
registered offering of securities. For
example, a registrant would disclose the
initial rating (if any) assigned by the
credit rating agency in the preliminary
prospectus when a final rating is not
assigned until after the effectiveness of
a registration statement. If a disclosed
rating is changed or if a different rating
becomes available before effectiveness,
the registrant would be required to
convey the rating change to the
purchaser. The registrant would be
required to update the final prospectus
to reflect the final rating assigned and
all related disclosure. In connection
with delayed shelf offerings, the final
rating would be disclosed in a
prospectus supplement.69
We are proposing to require
disclosure of the relative rank of the
credit rating within the credit rating
agency’s classification system and the
credit rating agency’s definition or
description of the category in which the
credit rating agency rated the class of
securities. We believe this disclosure
will help put the credit rating in its
appropriate context and provide
investors with important information
about the credit rating agency’s
assessment of the degree of risk
presented by the security.
Under the proposed amendments, a
registrant would be required to disclose
any material limitations on the scope of
68 See proposed amendments to Item 202(g) of
Regulation S–K, Item 12 of Form 20–F, and Item
10.6 of Form N–2.
69 The registrant could also disclose the credit
rating in a free writing prospectus, such as a term
sheet, as long as it was also included in the
registration statement (including through disclosure
in a prospectus supplement that becomes a part of
the registration statement in accordance with Rule
430B).
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the credit rating and how any
contingencies related to the securities
are or are not reflected in the credit
rating. For example, a registrant would
be required to disclose if the credit
rating takes into account less than the
promised return on a security. A
residual security, for example, typically
represents a beneficial interest in
whatever cash flows remain in a pool of
financial assets after obligations to pay
all other outstanding classes have been
satisfied. Sometimes, because of the
highly speculative nature of these cash
flows, a residual security incorporates a
fixed promise to pay a nominal amount
of principal to the residual holder in the
early months of the securities’’
existence. The amount of the nominal
fixed obligation may have no
relationship to the amount paid for the
residual security, nor to the anticipated
residual cash flow. The credit rating for
the residual interest represents only an
evaluation of the likelihood that the
nominal fixed obligation would be paid.
It does not evaluate whether there will
be any residual cash flow. Under the
proposed rule, such a limitation would
be required to be disclosed. We believe
this type of disclosure would help
investors understand what the rating is
intended to cover, and, just as
importantly, the limitations on the
rating issued. In addition, if the security
is subject to contingent payment
obligations, registrants would be
required to disclose how those
contingencies are reflected in the credit
rating. We believe these requirements
will provide investors with better
information so that they can make
important distinctions about the nature
of risks presented by securities with the
same or similar ratings.
If the credit rating includes a related
published designation, such as noncredit payment risk assessments,
volatility assessments or other analyses
performed by the credit rating agency
that do not solely reflect credit risk, the
proposed amendments would require a
description of the additional analysis, so
that investors relying on the designation
are not left unaware of the related
evaluation. For example, the related
evaluations covered by such designation
could include an analysis of
prepayment speeds, effects of interest
rates or other market based factors, or
volatility assessments done in
connection with a credit rating.70 We
70 See
e.g., Moody’s Global Credit Policy, Rating
Methodology, Updated Report on V Scores and
Parameter Sensitivities for Structured Finance
Securities (Dec. 2008), at https://www.moodys.com
indicating that the evaluations are intended to
address the degree of uncertainty underlying the
assumptions made in determining ratings and how
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believe disclosure of these published
designations together with a description
of the analysis would provide
meaningful additional information to
investors regarding the information
taken into consideration by the credit
rating agency. We also believe
disclosure of these related designations
would signal to investors that
significant differences may exist
between a security with a credit rating
that includes a published designation
indicating that an evaluation of
additional risk was done by the credit
rating agency and a security with a
similar credit rating without such a
designation. In addition, we believe
disclosure of published designations
would help investors understand the
limitations on comparing credit ratings
across different types of securities.
Under the proposed amendments,
registrants would be required to disclose
any material differences between the
terms of the security as considered or
assumed by the credit rating agency for
purposes of determining the rating, the
terms in the governing documents of the
securities and the terms of the securities
as marketed to investors. We believe
this disclosure may allow investors to
better evaluate the credit rating and the
security to which it applies because
they would understand if the credit
rating was based on assumptions or
terms different from the information
provided to investors. For example, this
item would require disclosure if the
security was rated using a yield
assumption which differs from the
expected yield being disclosed to
investors.
We have also proposed to require that
registrants include a statement
informing investors that a credit rating
is not a recommendation to buy, sell, or
hold securities; that it may be subject to
revision or withdrawal at any time by
the assigning credit rating agency; that
each credit rating is applicable only to
the specific class of securities to which
it applies; and that investors should
perform their own evaluation as to
whether an investment in the security is
appropriate. We believe this statement
will alert investors to some of the
limitations inherent in a credit rating so
that the credit rating is placed in an
appropriate context.
Under the proposed amendments, a
closed-end fund would be required to
sensitive the ratings are to changes in those
assumptions); Fitch Ratings Structured Finance
Global Criteria Report, Criteria for Structured
Finance Loss Severity Ratings (Feb. 2009), at
https://www.fitchratings.com indicating that a Loss
Severity Rating is intended to indicate the relative
risk that a security will incur a severe loss in the
event of default).
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include the disclosure concerning credit
ratings in its prospectus, unless the
prospectus relates to securities other
than senior securities that have been
rated by a credit rating agency, in which
case such disclosure may be provided in
the statement of additional information
unless the rating criteria will materially
affect the registrant’s investment
policies.71
For closed-end funds, current Item
10.6 of Form N–2 requires that, if a
registrant discloses a rating assigned by
an NRSRO in its prospectus, the
registrant must briefly discuss the
significance of the rating, the basis upon
which ratings are issued, any conditions
or guidelines imposed by the NRSRO for
the registrant to maintain the rating, and
whether or not the registrant intends, or
has any contractual obligation, to
comply with these conditions or
guidelines. Current Item 10.6 also
requires disclosure of the material terms
of any agreement between the registrant
or its affiliates and the NRSRO under
which the NRSRO provides the rating.
The proposed amendments would, if
adopted, replace those requirements
with the same disclosure requirements
contained in proposed Item 202(g) of
Regulation S-K, which, in some cases,
are substantially similar to the current
requirements and, in other cases,
provide information that is intended to
allow investors to more easily put the
credit rating in its appropriate context
than the disclosure requirements of
current Item 10.6 of Form N–2.72 We are
also proposing technical amendments to
remove the current instructions to Item
10.6.73
71 See proposed Instruction 4 to Item 10.6 of Form
N–2. Cf. Item 10.6 of Form N–2 (similar current
provision regarding inclusion of disclosure in
statement of additional information).
72 Proposed Item 10.6 of Form N–2 is
substantially similar to current Item 10.6 in that a
registrant would be required to disclose the relative
rank of the credit rating within the rating agency’s
overall classification system, the rating agency’s
definition or description of the category in which
the rating agency rated the class of securities, all
material scope limitations, how any contingencies
related to the securities are or are not reflected in
the credit rating, and any material differences
between the terms of the securities as assumed or
considered by the rating agency and (i) the
minimum obligations of the security as specified in
its governing instruments and (ii) the terms of the
security as used in any marketing or selling efforts.
Rather than require disclosure of the material terms
of any agreement between the registrant or its
affiliates and the NRSRO under which the NRSRO
provides the rating as set forth in current Item 10.6,
proposed Item 10.6 would require disclosure of the
identity of the person compensating the rating
agency for providing the rating and a description of
any other non-rating services provided by the rating
agency to the registrant or its affiliates and any fees
paid for such non-rating services.
73 The current instructions to Item 10.6 define
NRSRO, cross-reference Rule 436(g)(1) under the
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Request for Comments
• We have proposed to require
disclosure similar to the disclosure
recommended in Item 10(c) of
Regulation S–K. Is there a better model
for providing disclosure about credit
ratings? Should we adopt a general rule
that all material elements of a credit
rating be disclosed and give examples of
the types of information that should be
disclosed? Does our proposed approach
capture the information that investors
would need to make informed
investment decisions?
• Does the proposed disclosure
requirement add too much weight to the
credit rating?
• Non-investment company
registrants would be required to make
the Item 202(g) disclosures in their
Securities Act and Exchange Act
registration statements, and closed-end
funds would be required to make
similar disclosures in their Securities
Act and Investment Company Act
registration statements. Is disclosure
about a registrant’s credit ratings
appropriate disclosure for such filings?
Are there alternative or additional
filings in which the disclosure should
be made? Should we also require that
similar disclosure be provided in any
written selling materials that disclose
the rating? Should this disclosure be
recommended rather than required?
• Is there another means that could be
used to provide investors with this
information, and the information
described below, when a credit rating is
used in connection with a registered
offering?
• Is the proposed disclosure regarding
credit ratings adequate to provide
investors with sufficient information to
be able to understand the ratings
assigned by a credit rating agency and
to understand the limitations associated
with a rating? Is there other information
that would be useful?
• As proposed, Item 202(g) and Item
10.6 of Form N–2 include a list of
specific items that must be disclosed
about the credit rating. Is this approach
appropriate? Should we also include a
‘‘catch-all’’ provision that would require
any other information necessary to
understand the credit rating? Would
including a catch-all help to assure that
our rules will be flexible enough to
elicit material information about credit
ratings, as securities and credit ratings
change in response to innovations and
market developments? Would Rule 408
under the Securities Act be sufficient to
Securities Act, and cross-reference Item 10(c) of
Regulation S–K.
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capture any additional material
information? 74
• Should our proposed disclosure
distinguish between corporate debt and
structured finance products? Is there
different information that would be
relevant for ratings of corporate debt
and structured finance products?
Should we require disclosure of the
differences in risk characteristics
between corporate debt and structured
finance products? Is this information
already available to investors in all
cases?
• Would investors benefit from the
disclosure of the relative rank of the
credit rating within the credit rating
agency’s classification system and the
credit rating agency’s definition or
description of the category in which the
credit rating agency rated the class of
securities? Is there other or additional
information that would assist investors
in placing the credit rating in context?
• In addition to requiring the
disclosure about a credit rating that
currently is recommended in Item 10(c)
of Regulation S–K, proposed Item 202(g)
of Regulation S–K, Item 12 of Form 20–
F and Item 10.6 of Form N–2 would
require disclosure of all material scope
limitations of the rating, how any
contingencies are or are not reflected in
the credit rating and any related
designation (or other published
evaluation) of non-credit payment risks
assigned by the rating agency with
respect to the security. Would this
additional disclosure assist investors in
better understanding the credit rating
and assessing the risks of an investment
in the security? What additional
disclosure would be helpful to investors
in making these assessments?
• As noted above, under proposed
Item 12 to Form 20–F, foreign private
issuers would be required to provide the
same disclosure that would be required
by proposed Item 202(g) of Regulation
S–K for domestic issuers. Is this type of
ratings information disclosed by foreign
private issuers in their home
jurisdictions? Should foreign private
issuers be required to provide this type
of information? Is there a basis on which
to distinguish between foreign private
issuers and other registrants for this
purpose? If so, please explain. Is there
any other type of credit ratings
information that foreign private issuers
should disclose?
74 17 CFR 230.408. Rule 408 provides that, in
addition to the information expressly required to be
included in a registration statement, the registrant
is required to include any additional material
information necessary to make the required
statements, in the light of the circumstances under
which they are made, not misleading.
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• As proposed, a registrant would be
required to disclose additional
information about any published
designation that reflects the results of
any other evaluation done by a credit
rating agency. Should we require
disclosure for any evaluation by a credit
rating agency that is communicated to
the registrant, regardless of whether it is
published? Do credit rating agencies
communicate information of this type to
the registrant? If so, what types of
information would this cover?
• We are proposing to require
registrants to disclose any material
differences between the terms of the
security as assumed or considered by
the credit rating agency in rating the
security and (i) the minimum
obligations of the security as specified
in the governing instruments, and (ii)
the terms of the security as marketed to
investors. Would this disclosure be
helpful to investors in making an
investment decision?
• Does the proposed requirement that
registrants include a statement
informing investors that a credit rating
is not a recommendation to buy, sell, or
hold securities; that it may be subject to
revision or withdrawal at any time by
the assigning credit rating agency; that
each credit rating is applicable only to
the specific class of securities to which
it applies; and that investors should
perform their own evaluation as to
whether an investment in the security is
appropriate provide meaningful
information to investors? Would this
statement help to place the credit rating
in an appropriate context? Why or why
not?
• Are the proposed disclosure
requirements appropriate for closed-end
funds or should they be modified?
Should we instead, or in addition,
require all or any of the disclosures that
are enumerated in current Item 10.6 of
Form N–2? For example, should we
expressly require disclosure of the basis
upon which ratings are issued by the
credit rating agency or disclosure of any
conditions or guidelines imposed by a
credit rating agency for the registrant to
maintain a credit rating? Is it
appropriate, as proposed, to permit
closed-end funds to include the
proposed disclosure in the statement of
additional information, rather than the
prospectus, if the prospectus relates to
securities other than senior securities of
the registrant that have been rated by a
credit rating agency unless the rating
criteria will materially affect the
registrant’s investment policies?
(b) Potential Conflicts of Interest
We also are proposing to require
disclosure regarding credit ratings that
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would address potential conflicts of
interest.75 Specifically, our proposed
rules would require disclosure of the
identity of the party who is
compensating the credit rating agency
for providing the credit rating. In
addition, if during the registrant’s last
completed fiscal year and any
subsequent interim period up to the
date of the filing, the credit rating
agency or its affiliates has provided nonrating services to the registrant or its
affiliates, the proposed rules would
require a description of the other nonrating services and separate disclosure
of the fee paid for the credit rating
required to be disclosed and the
aggregate fees paid for any other nonrating services provided during such
period.
We believe that the proposed
disclosure regarding fees and services
would alert investors to potential
conflicts of interest that may have
influenced the rating decision of the
credit rating agency. We believe
investors should know who paid for the
rating since that may influence their
assessment of the impartiality of the
credit rating agency in assigning the
rating. For example, many of the
NRSROs are paid by the registrants for
whom they are providing the credit
75 There are rules applicable to NRSROs currently
in place that are designed to address certain
conflicts of interest of NRSROs. Pursuant to
Exchange Act Rule 17g–5 [17 CFR 240.17g–5], an
NRSRO must disclose and manage certain conflicts
of interest, while certain other conflicts are
prohibited outright. Paragraph (b) of Rule 17g–5
identifies nine types of conflicts to be disclosed and
managed by an NRSRO, including a new type of
conflict being adopted today by the Commission in
a companion adopting release: issuing or
maintaining a credit rating for a security or money
market instrument issued by an asset pool or as part
of any asset-backed or mortgage-backed securities
transaction that was paid for by the issuer, sponsor,
or underwriter of the security or money market
instrument. Paragraph (c) of Rule 17g–5 identifies
seven conflicts of interest that are prohibited
outright, including three added by the Commission
in February 2009: issuing or maintaining a credit
rating with respect to an obligor or security where
the NRSRO or a person associated with the NRSRO
made recommendations to the obligor or the issuer,
underwriter, or sponsor of the security about the
corporate or legal structure, assets, liabilities, or
activities of the obligor or issuer of the security;
issuing or maintaining a credit rating where the fee
paid for the rating was negotiated, discussed, or
arranged by a person within the NRSRO who has
responsibility for participating in determining or
approving credit ratings or for developing or
approving procedures or methodologies used for
determining credit ratings, including qualitative
and quantitative models; and issuing or maintaining
a credit rating where a credit analyst who
participated in determining or monitoring the credit
rating, or a person responsible for approving the
credit rating received gifts, including entertainment,
from the obligor being rated, or from the issuer,
underwriter, or sponsor of the securities being
rated, other than items provided in the context of
normal business activities such as meetings that
have an aggregate value greater that $25.
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rating. This business model can create a
conflict of interest because the NRSRO
providing the credit rating may be
concerned that if it issues a lower rating
than the registrant expects, the
registrant would no longer seek credit
ratings from that NRSRO. As a result, an
NRSRO that is paid by a registrant may
have an incentive to give a higher credit
rating than it would have if no potential
conflict of interest existed. In addition,
we believe that the disclosure we are
proposing to require regarding nonrating services and related fees paid to
the credit rating agency should help
investors gauge whether the credit
rating agency’s decision may have been
influenced by a desire to gain or retain
other business from the registrant.76
We are not proposing to require
disclosure of the fee paid for the credit
rating unless disclosure of other nonrating services is required as described
above. We preliminarily believe that
when no such other non-rating services
are provided, disclosure of the source of
the payment for the rating as proposed
would sufficiently convey the potential
conflict of interest. We are requesting
comment, however, on whether we
should require the amount of the fee to
be disclosed in all cases.77
Request for Comments
• We have proposed to require
disclosure of information related to the
party paying for the rating, as well as
any additional non-rating services
provided by the credit rating agency or
its affiliates to the registrant or its
affiliates. Would the proposed
disclosure provide helpful information
for investors in order for them to judge
whether potential conflicts of interest
may have impacted the rating? Is the
provision of other services indicative of
76 See
note 21 above.
a companion proposing release, the
Commission is also today proposing a new rule that
would require an NRSRO, on an annual basis, to
make publicly available on its Internet Web site a
consolidated report that shows three items of
information with respect to each person that paid
an NRSRO to issue or maintain a credit rating;
specifically, (1) the percent of the net revenue
attributable to the person that was earned by the
NRSRO for that fiscal for year from providing
services and products other than credit rating
services; (2) the relative standing (top 10%, top
25%, top 50%, bottom 50%, and bottom 25%) of
the person in terms of the person’s contribution to
the total net revenue of the NRSRO for the fiscal
year as compared with other persons who provided
the NRSRO with revenue; and (3) all outstanding
credit ratings paid for by the person. The proposed
rule also would provide that the NRSRO must
include a generic disclosure statement each time
the NRSRO publishes a credit rating or credit
ratings indicating where on its Internet Web site the
consolidated report is located. See the proposing
release considered by the Commission on
September 17, 2009 related to proposed new Rule
17g–7 under the Exchange Act.
77 In
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potential conflicts of interest? Would
requiring disclosure regarding other
services decrease the other services
being provided? Would that have an
effect on the quality of ratings? If so,
how? Is there other disclosure that
would provide additional or better
information regarding potential conflicts
of interest? If so, what information
would provide investors the ability to
assess potential conflicts of interest?
• Is the information that we have
proposed to require meaningful? Should
we require additional context such as
the percentage of revenue that the
NRSRO or other credit rating agency
earns from the registrant so that an
investor would be aware of when a
registrant accounts for a significant
percentage of the NRSRO’s revenue?
Would requiring disclosure only if nonrating services are provided place too
much emphasis on the mix of revenue
that the registrant provides to the credit
rating agency, rather than the total
revenue earned from the registrant? In
proposed Exchange Act Rule 17g–7, the
Commission is proposing to require that
NRSROs publish a report on an annual
basis with respect to each person that
paid an NRSRO to issue or maintain a
rating disclosing (1) the percent of the
net revenue attributable to the person
that was earned by the NRSRO for that
fiscal year from providing services and
products other than credit rating
services; (2) the relative standing (top
10%, top 25%, top 50%, bottom 50%,
and bottom 25%) of the person in terms
of the person’s contribution to the total
net revenue of the NRSRO for the fiscal
year as compared with other persons
who provided the NRSRO with revenue;
and (3) all outstanding credit ratings
paid for by the person. Should
registrants be required to disclose the
aggregate fees paid by the registrant to
the credit rating agency for ratings and
non-rating services, regardless of
whether non-rating services have been
provided, and the relative standing of
the registrant in terms of the registrant’s
contribution to the total net revenue of
the credit rating agency in registration
statements? If we were to require this
disclosure, should it be updated to the
date of the registration statement instead
of being provided as of the end of the
last fiscal year? Would registrants have
access to this information? If not, could
they negotiate with the credit rating
agency so that this information could be
obtained from the credit rating agency,
such as through the contract for
services? What would the costs of
providing such disclosure be? Would
requiring this disclosure affect a
registrant’s ability to obtain a rating or
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to raise capital? Would investors benefit
from having this information in the
registration statement?
• Our proposed disclosure
requirements relate only to fees paid to
the credit rating agency. We are aware
that there are other relationships that
could present potential conflicts of
interest. Item 509 of Regulation S–K 78
currently requires disclosure by a credit
rating agency that is not an NRSRO
when it (i) is paid on a contingent basis,
(ii) has a substantial direct or indirect
interest in the registrant, or (iii) has a
connection to the registrant as a
promoter, underwriter, officer, director
or employee or voting trustee. Is this
disclosure sufficient, or should there be
a more specific disclosure requirement?
For example, Exchange Act Rule 17g–
5(a) and (b) provides that certain
conflicts are permitted if they are
disclosed and managed by the NRSRO.
Such permitted conflicts include:
Conflicts related to being paid by issuers
for rating and non-rating services;
conflicts related to subscription based
services; conflicts related to ownership
interests in entities being rated by the
NRSRO; conflicts related to business
relationships with issuers being rated by
the NRSRO; conflicts related to the
NRSRO having a broker or dealer
associated with it; and any other
conflict that would be material to the
NRSRO. Should registrants be required
to disclose conflicts: Conflicts related to
being paid by a registrant for rating and
non-rating services, regardless of
whether non-rating services are being
provided, paying the credit rating
agency for subscription-based services,
any ownership interest by the credit
rating agency in the registrants or its
affiliates, any business relationships
between the credit rating agency and the
registrant and its affiliates, any interest
the credit rating agency has in a broker
or dealer associated with it and any
other material conflicts? Would all of
the information be relevant to investors?
Would registrants have access to this
information? If not, could they negotiate
with the credit rating agency so that this
information could be obtained from the
credit rating agency, such as through the
contract for services? Rule 17g–5
currently requires annual reporting by
NRSROs of these conflicts. If registrants
were also required to disclose these
types of conflicts, should we require the
disclosure to be updated to the date of
the registration statement? What would
the costs of providing such disclosure
be? Would requiring this disclosure
affect a registrant’s ability to obtain a
rating or to raise capital? Would
78 17
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investors benefit from having this
disclosure in the registration statement?
• Exchange Act Rule 17g–5(c)
provides a category of conflicts that an
NRSRO is prohibited from having with
respect to a credit rating. These
prohibited conflicts include: Providing a
rating to an entity that accounted for
10% or more of the NRSRO’s net
revenue; direct ownership interests by
the NRSRO or an analyst preparing the
rating in the issuer; issuing or
maintaining a rating on a person
associated with the NRSRO; issuing or
maintaining a rating where a person
determining or approving the rating is
an officer or director of the issuer;
issuing or maintaining a rating where
the NRSRO made recommendations
with respect to the structure of the
rating; issuing or maintaining a rating
where the fee for such rating was
discussed or negotiated by a person at
the NRSRO with responsibility for
determining or approving the rating;
and issuing or maintaining a rating
where a person determining or
approving the rating received gifts in
excess of $25. These prohibitions are
only applicable to NRSROs. To the
extent not otherwise required to be
disclosed by Item 509 of Regulation S–
K, should we require disclosure of the
conflicts described above if credit rating
agencies that are not NRSROs provide a
rating to a registrant and if these
conflicts exist or have existed during the
registrant’s previous two fiscal years
through the date of the registration
statement so that investors would be
aware of such conflicts? Would
registrants have this information? If not,
could they negotiate with the credit
rating agency so that this information
could be obtained from the credit rating
agency, such as through the contract for
services? What would the costs of
providing such disclosure be? Would
requiring this disclosure affect a
registrant’s ability to obtain a rating or
to raise capital? Would investors benefit
from having this disclosure in the
registration statement?
• Are there competitive or proprietary
concerns that the proposed disclosed
requirements should account for? If so,
how? For example, will disclosing fees
have any effect on the ability to
negotiate for services?
• If non-rating services have been
provided to the registrant or any of its
affiliates by the credit rating agency or
any of its affiliates, we have proposed to
require a description of the other nonrating services and separate disclosure
of the fee paid for the credit rating and
the aggregate fees paid for any other
non-rating services provided by the
credit rating agency or its affiliates
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during the registrant’s last completed
fiscal year and any subsequent interim
periods up to the filing date. Should we
require disclosure for fees paid over a
longer period such as two or five years?
Should we require disclosure of fees for
non-rating services that have been
contracted and paid for but not yet
delivered? Should we require disclosure
for services that have been proposed or
solicited but not yet finalized?
• Should we require disclosure of
fees paid by the underwriter or its
affiliates to the credit rating agency or
its affiliates for non-rating services if the
underwriter is the party paying for the
rating? Should we require disclosure
about services provided by the credit
rating agency to the underwriter if the
underwriter is paying for the rating?
Should the underwriter be treated as
acting on behalf of the issuer in such
circumstances? Would the registrant be
able to obtain this information? If not,
should we consider initiating
rulemaking to provide that underwriters
shall make this information available to
issuers upon reasonable request? Is
there any additional information
regarding credit rating agency fees that
would be important to investors?
Should we require disclosure of any
current or anticipated arrangements or
agreements regarding future services? If
so, should we require an estimate of the
fees to be paid for such services?
• Under our proposal, disclosure of
fees would not be triggered if the
services in addition to the credit rating
are other credit rating services, such as
fees to rate another security of the
registrant. Is this approach appropriate?
Do fees for other credit rating services
raise conflict of interest issues similar to
fees for non-rating services? Is the
distinction between a credit rating
service and a non-credit rating service
sufficiently clear? Should we provide
further guidance on this point? Should
we reference the categories in Form
NRSRO in this regard?
• Should we require disclosure of the
fee paid for the credit rating regardless
of whether additional services have
been provided? Would this disclosure
provide information that is important in
evaluating potential conflicts of interest
inherent in the issuer-paid ratings
model? Is the information useful
without additional context, such as the
significance of the fee to the credit
rating agency? If context is necessary to
make the disclosure of fees meaningful,
should we require disclosure of the
significance of the fee to the credit
rating agency? For example, should we
require a registrant to disclose the
percentage of revenue derived from the
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fee? 79 Would registrants have access to
this information? Is there other
information that would convey the
significance of the fee to the credit
rating agency? Should we require
registrants to disclose the total amount
of rating-related fees paid to the credit
rating agency during the most recent
fiscal year completed and any interim
periods? During the two most recent
fiscal years (or longer?) completed and
any interim periods?
• Would disclosure of fees paid to
credit rating agencies affect the amount
of fees charged, or otherwise affect the
competitive landscape for credit rating
agencies?
• We note that there may be other
factors that could influence the
independence of the credit rating
agency, such as a reliance on
underwriters that refer business to the
credit rating agency or the general
importance of a particular registrant to
the credit rating agency. Should we
require disclosure of these sorts of
relationships?
(c) Ratings Shopping
Reports that registrants, or persons
acting on behalf of registrants, may
engage in ‘‘ratings shopping’’ raise
serious issues about the integrity of the
credit ratings process.80 We believe
investors should be made aware of
when a registrant (or a person acting on
a registrant’s behalf) may have engaged
in ratings shopping.81 It is our
understanding that ratings shopping
occurs because registrants, among
others, can solicit preliminary credit
ratings from a rating agency. If the
registrant believes the preliminary
rating is too low, the registrant can seek
a different credit rating from another
credit rating agency.82 When a registrant
can choose which ratings to disclose,
including which final ratings to
disclose, we believe the registrant will
most likely choose the most favorable
rating. If less favorable ratings are not
79 See
note 77 above.
note 24 above.
81 In this regard, we note that three of the largest
NRSROs entered into an agreement with the
Attorney General for the State of New York in June
2008 that provides for certain disclosure regarding
preliminary ratings. See Press Release, Office of the
Attorney General, ‘‘Attorney General Cuomo
Announces Landmark Reform Agreements with the
Nation’s Three Principal Credit Rating Agencies,’’
(June 5, 2008), at https://www.oag.state.ny.us/
media_center/2008/jun/june5a_08.html. Our
proposed rule, however, would apply to all credit
rating agencies. In addition, because our proposed
rules apply to registrants, investors would be able
to find disclosure regarding preliminary ratings on
a registrant-by-registrant and offering-by-offering
basis instead of having to search the disclosure of
the NRSROs.
82 See Roger Lowenstein, Triple-A Failure, N.Y.
Times Magazine, April 27, 2008.
80 See
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disclosed, then investors may not have
access to potentially important
information that may suggest that the
credit rating that is disclosed may be
inflated.83 Similarly, when the credit
rating agency knows that the registrant
will likely choose to use the credit
rating agency that provides the most
favorable rating, there may be an
incentive for ratings to be inflated by the
credit rating agency in order to keep the
business of the registrant. Currently, our
rules do not require disclosure of any
credit ratings, whether preliminary or
not. As a result, investors are not aware
of when registrants seek a preliminary
rating or when registrants obtain
additional credit ratings but choose not
to use them, and investors are not aware
of any differences between the
preliminary rating and the final rating.
We are proposing that if a registrant
has obtained a credit rating and is
required to disclose that credit rating,
then all preliminary ratings of the same
class of securities as the final rating that
are obtained from credit rating agencies
other than the credit rating agency
providing the final rating must also be
disclosed. In addition, we are proposing
that if a rating is disclosed pursuant to
the trigger described above, then any
credit rating obtained by the registrant
but not used must also be disclosed. We
believe this disclosure requirement
would provide investors with important
information to assess whether any
ratings shopping may have occurred,
and whether any rating inflation may
have occurred between the preliminary
rating and the final rating obtained by
a registrant as a result of the ratings
shopping, or whether the registrant has
other credit ratings that it has not used
in connection with the offering.
We have not proposed to require
disclosure of preliminary ratings
obtained by a registrant from the credit
rating agency that issues the final rating.
We are concerned that such a disclosure
requirement may impede useful
communications between credit rating
agencies and registrants as the credit
rating agencies determine their initial
ratings and perform continuing work
related to monitoring the rating. In
addition, there are rules applicable to
NRSROs that are intended to prevent
some of the problematic practices in this
area. For example, Rule 17g–5 under the
Exchange Act prohibits an NRSRO from
issuing or maintaining a rating where it
made recommendations with respect to
the structure of the security.
When disclosure of any preliminary
rating or unused final rating is required,
83 See Skreta and Veldkamp and Bolton, Freixas
and Shapiro in note 24 above.
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we are proposing to require similar
disclosure as is proposed to be required
for a final rating. Because preliminary
ratings may vary in their form and level
of detail, it is possible that all of the
information required to be disclosed
about a particular rating would not be
available to the registrant. In preparing
this disclosure, registrants would be
able to rely on Securities Act Rule 409 84
if the information otherwise required to
be disclosed cannot be obtained without
unreasonable effort or expense.
We believe disclosure of preliminary
ratings as described above would
provide important information for
investors about potential ratings
shopping. We believe registrants could
identify any preliminary ratings
required to be disclosed in the
registration statement in a manner that
would avoid confusion for investors.
For example, registrants could disclose
any preliminary ratings under a separate
sub-heading, or the registrant could
include written disclosure as to the
limitations of preliminary ratings.
For purposes of this proposed
disclosure requirement, a credit rating,
including a preliminary credit rating,
generally would be obtained from a
credit rating agency if it is solicited by
or on behalf of a registrant from a credit
rating agency. For these purposes, we
would view an underwriter and others
involved in structuring a deal, such as
a sponsor or depositor, who obtains a
credit rating, including a preliminary
credit rating, for a deal structure to be
acting on behalf of the registrant.
We intend for the phrase ‘‘preliminary
credit rating’’ to be read broadly and to
include any rating that is not published,
any range of ratings, any oral or other
indications of a potential rating or range
of ratings and all other preliminary
indications of a rating. We believe that
a broad reading would better facilitate
the purpose of the proposed disclosure
in order to alert investors if the
registrant has obtained indications of a
rating from one credit rating agency but
chooses to use a credit rating from
another. We are not proposing to limit
the required disclosure of preliminary
ratings to ratings specific to the
registrant. For example, a preliminary
rating would include ratings on a
particular structure of a security even if
not tied to a specific registrant or pool
of assets.85 As proposed, disclosure of a
84 17
CFR 230.409.
instance, an underwriter may approach a
rating agency about a newly developed or refined
structure for an asset-backed offering of a certain
class of assets generally. In some cases, the rating
agency may be asked to provide an indication of a
rating on that structure without knowledge of the
specific pool assets or names of the originators for
85 For
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preliminary rating would be required
even if there have been changes to the
security for which a final rating is
disclosed. We believe this disclosure
would place the information about
ratings in context.
Request for Comments
• Should we require disclosure of
preliminary ratings, as proposed? Is
there any other information regarding
preliminary ratings that should be
required to be disclosed? Would the rule
as proposed capture all potential ratings
shopping practices? As an alternative,
should the rule require disclosure of
contacts between the registrant and the
credit rating agency as a means of
disclosing preliminary ratings and
negotiations between the registrant and
the credit rating agency? 86 Would the
rule reduce the number of preliminary
ratings sought?
• We have expressed our concerns
about ratings shopping by registrants
and the potential for credit rating
agencies to use less conservative rating
methodologies in order to gain or retain
business, presumably lessening the
value of the ratings. As proposed, a
registrant would only be required to
provide disclosure of a preliminary
rating if it is of the same class of
securities as a final rating otherwise
required to be disclosed by the rule and
is received from a credit rating agency
other than the credit rating agency
providing the final rating. Are these
limitations appropriate? Are there
circumstances where disclosure of
preliminary ratings would be important
even if a final rating was never
obtained? Should we require disclosure
of all preliminary ratings obtained by a
registrant, including from the credit
rating agency that issues the final
rating?
• We have proposed to require
disclosure of unused final credit ratings
obtained by a registrant if a credit rating
is otherwise disclosed pursuant to the
proposed rules so that investors would
be aware of any potential ratings
shopping by the registrant in choosing
which credit rating to use. Would this
provide important information for
investors? Do registrants ever obtain
the assets, although certain criteria for the assets
could be outlined. The preliminary rating that is
assigned to the structure would need to be
disclosed under our proposal if a rating is used in
connection with a registered offering of securities
by the underwriter with that structure.
86 For example, in the context of roll-up
transactions, Item 911(a)(5) of Regulation S–K [17
CFR 229.911(a)(5)] requires disclosure of any
contacts between the sponsor or general partner and
a third party providing a report, opinion or
appraisal on the roll-up transaction. See also Item
1005 of Regulation M–A [17 CFR 229.1105].
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final ratings but not use them? Why
might a registrant choose not to use a
credit rating? Would requiring
disclosure of such ratings reveal
potential ratings shopping practices of
registrants? If not, is there other
disclosure that would elicit disclosure
about potential ratings shopping?
• Would requiring the proposed
disclosure for preliminary or unused
final ratings enhance investors’
understanding of, and therefore the
value of, the ratings? Would such
disclosure help to address our concerns
with ratings shopping? If you do not
believe such disclosure would be
helpful, how would you suggest that we
address these concerns? Is disclosure of
an indication from a credit rating agency
of a likely or possible rating
appropriate? What effect would our
proposed rule have on ratings shopping?
Would it encourage or discourage the
practice? Why?
• To the extent that a preliminary
rating that would be required to be
disclosed pursuant to the proposed rule
is not based on final and full
information, to what extent would
disclosure of such preliminary rating
present a risk that investors could form
a mistaken impression about the credit
quality of the security or the registrant’s
ratings shopping?
• How would our proposed rule affect
communications between registrants
and credit rating agencies? Would the
proposed requirement result in fewer
discussions between credit rating
agencies and registrants? Would it affect
the quality of information provided by
registrants to obtain a rating?
• What types of activities might
replace the issuance of preliminary
ratings if the proposed rule is adopted?
To what extent might some alternative
ratings shopping behavior develop?
• Would the proposal have a negative
impact on smaller or newer credit rating
agencies? Would smaller or newer credit
rating agencies have a difficult time
establishing their market position if
registrants no longer seek multiple
preliminary ratings? For example,
would registrants be less likely to
engage in initial conversations with
smaller or newer credit rating agencies
in order to understand their
methodologies and procedures if we
require the disclosure of preliminary
ratings?
• How would changes in the structure
of a security affect disclosure of
preliminary ratings? Would it be
difficult for registrants to track
preliminary ratings?
• As proposed, a credit rating,
including a preliminary credit rating,
would be ‘‘obtained’’ if it is solicited by
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or on behalf of a registrant from a credit
rating agency. Is this sufficient to
capture all of the preliminary ratings
sought from other credit rating agencies?
• Should we include additional
guidance as to what constitutes a
preliminary rating? Would additional
guidance allow registrants and credit
rating agencies to structure their
dealings to avoid disclosure? Are there
less formal preliminary indications
given by credit rating agencies that
should be included in the required
disclosure? Would requiring disclosure
of preliminary ratings interfere with
other types of communications between
registrants and credit rating agencies,
such as discussions related to
surveillance or maintenance ratings that
credit rating agencies may provide on
other classes of securities issued by the
same registrant for which credit ratings
have been provided? If so, how should
we address this concern? Would the
broad view of ‘‘preliminary credit
rating’’ as proposed interfere with any
non-rating services provided to the
registrant? If so, how could we address
this?
• Are there any concerns about the
availability of the information about
preliminary ratings that we are
proposing registrants be required to
disclose? Would credit rating agencies
object to registrant’s disclosure of
preliminary ratings where no
compensation was paid to the credit
rating agency?
• Would disclosure of preliminary
ratings have negative effects for
investors, registrants or credit rating
agencies? For example, would investors
be confused by disclosure of
preliminary ratings? Would disclosure
of preliminary ratings be confusing or
misleading? If so, how could we revise
the proposal to reduce the risk that
investors would be confused or misled?
Would credit rating agencies change
their practices if preliminary ratings are
required to be disclosed? If so, how
might their practices change?
• Should our proposed disclosure
regarding preliminary ratings
distinguish among issuers of corporate
debt, structured finance products and/or
closed-end funds? Do corporate issuers,
issuers of structured finance products
and closed-end funds engage in ratings
shopping equally or in the same
manner? What are the differences? Is
there different information regarding
preliminary ratings that would be
relevant for corporate debt, structured
finance products and closed-end funds?
D. Disclosure in Exchange Act Reports
We are proposing to amend Exchange
Act reports and rules to require a
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registrant to provide investors with
updated disclosure regarding changes to
a previously disclosed credit rating.
If a credit rating that was previously
disclosed under the rules proposed
above has been changed, including
when a rating has been withdrawn or is
no longer being updated, that change
would be required to be disclosed in a
current report on Form 8–K.87 We are
proposing a new item requirement to
Form 8–K, which would require a
registrant (including a closed-end fund)
to file a report within four business days
of receiving a notice or other
communication from any credit rating
agency, that the organization has
decided to change or withdraw a credit
rating assigned to the registrant or any
class of debt or preferred security or
other indebtedness of the registrant
(including securities or obligations as to
which the registrant is a guarantor or
has a contingent financial obligation) or
take any similar action with respect to
a credit rating that was previously
disclosed pursuant to proposed Item
202(g) of Regulation S–K or proposed
Item 10.6 of Form N–2.
As discussed above, we previously
proposed in 2002 to require disclosure
in current reports of changes in credit
ratings when we amended the item
requirements for current reports on
Form 8–K. We did not adopt the
proposal at the time.88
Under the proposed item, the
registrant would have to disclose the
date that the registrant received the
credit rating agency’s notice or
communication, the name of the rating
agency, and the nature of the rating
agency’s decision. We are not proposing
to require the registrant also discuss the
impact of the change or other decision
on the registrant, though it would be
permitted to do so. Rather, consistent
with similar Form 8–K items, we believe
that a discussion of any material impact
of the change in credit rating would be
required to be disclosed in a registrant’s
periodic reports.89 We believe this
87 As discussed in this section, we are proposing
that foreign private issuers be required to provide
disclosure regarding credit rating changes in their
annual reports on Form 20–F. As a result, the
disclosure for foreign private issuers would not be
required to be made within four business days of
the rating change.
88 See note 39 above and the related discussion.
89 When revisions were adopted to the 8–K
reporting requirements in 2004, the Commission
noted that it was not adopting requirements for
certain new items such as Item 2.04—Triggering
Events that Accelerate or Increase a Direct Financial
Obligation or an Obligation under an Off-Balance
Sheet Arrangement that would have required
registrants to provide a management’s analysis of
the change to be included in the Form 8–K. The
Commission noted that the analysis might be
difficult to provide in the time period required for
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53099
would provide the registrant with
additional time to analyze the impact of
the rating change to the registrant
between the filing of a current report
and the filing of its next periodic
reports. We note, though, that a change
in a credit rating may require the
registrant to make related disclosures
under other Form 8–K items, such as
Item 2.04—Triggering Events that
Accelerate or Increase a Direct Financial
Obligation or an Obligation under an
Off-Balance Sheet Arrangement.
Disclosure under this item would not
be required until the rating agency
notifies the registrant that the rating
agency has made a decision to change
the credit rating. If the registrant is still
in negotiations or appealing a
preliminary indication that a credit
rating agency intends an action covered
by the proposed item, no disclosure
would be required. However, once good
faith negotiations and appeals cease,
disclosure would be required.
As noted above, we believe the
application of our current rules would
require a registrant to disclose in its
periodic reports the impact on it, if
material, of any change in a rating that
was previously disclosed under the
rules proposed above.90 For example, if
a credit rating agency withdraws or
stops updating a rating, the registrant
would be required by the proposed
amendment to disclose that fact in a
current report on Form 8–K, and our
current rule requirements would require
the registrant to discuss the impact of
the change on the company, if material,
either in MD&A or in an appropriate
location in its next periodic report.
We have proposed to limit the
disclosure regarding changes to a credit
rating in a current report to credit
ratings that were disclosed previously
pursuant to the rules we propose today.
Thus, a registrant would not be subject
to the new requirement to disclose
changes to credit ratings that were
obtained or used prior to the
effectiveness of any new disclosure
requirements adopted as a result of this
proposal. We believe this distinction
the filing of the 8–K and that the analysis might be
more relevant and complete in the context of
financial statements. The Commission reminded
registrants, however, that any disclosure made in a
report on Form 8–K must include all other material
information, if any, that is necessary to make the
required disclosure, in the light of the
circumstances under which it is made, not
misleading. See Additional Form 8–K Disclosure
Requirements and Acceleration of Filing Date in
note 43 above.
90 As proposed, this new item in Form 8–K would
also be applicable to asset-backed issuers. However,
such issuers are unlikely to have additional
disclosure in their periodic reports because a
change in a rating of an asset-backed issuer’s own
securities typically does not affect that issuer.
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strikes an appropriate balance between
the burden on registrants in preparing
the disclosure and the needs of
investors for information about credit
ratings. Although our new requirements
would not be applicable in that setting,
we note that disclosure of credit ratings
and changes in ratings may be required
in periodic reports under our current
rules as discussed above.91
We are proposing to require closedend funds to make the same disclosures
regarding changes to a credit rating as
other registrants because we believe that
this information is of similar relevance
to investors in closed-end funds and
other registrants. Specifically, we
propose to amend Exchange Act Rules
13a–11(b) 92 and 15d–11(b) 93 to require
a closed-end fund to file a current report
on Form 8–K containing the disclosures
regarding changes to a credit rating
within the period specified in Form 8–
K unless substantially the same
information has been previously
reported by the fund.94
We are proposing to require foreign
private issuers to provide disclosure
regarding changes to a credit rating
annually in their reports on Form 20–F.
While the disclosure would not be
required as frequently or timely as it
would be for domestic issuers, investors
would still have access to the
information in a foreign private issuer’s
annual report.
In proposing these amendments, we
recognize that credit rating changes can
be important information to an investor
in making investment and voting
decisions. Credit rating agencies
typically disclose rating changes
publicly via press release at the same
time or shortly after they notify affected
companies of the changes. Therefore,
investors already can obtain access to
information about rating changes if they
know where to find the press releases
and are willing to routinely monitor
these releases to find information about
91 Disclosure may also be required pursuant to
Exchange Act Rule 12b–20 [17 CFR 240.12b–20],
which requires that in addition to the information
expressly required to be included in a report, the
report is required to include any further material
information necessary to make the required
statements, in the light of the circumstances under
which they are made not misleading.
92 17 CFR 240.13a–11(b).
93 17 CFR 240.15d–11(b).
94 Under Regulation FD [17 CFR 243.100 et seq.],
closed-end funds are currently required to make
public disclosure of certain material information on
Form 8–K unless they disseminate the information
through other methods of disclosure that are
reasonably designed to provide broad, nonexclusionary distribution of the information to the
public. In addition, pursuant to Rule 104 of
Regulation BTR [17 CFR 245.104], closed-end funds
are required to file notice of a blackout period, if
any, on Form 8–K.
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particular companies and securities.
However, we believe some investors
may not routinely monitor all press
releases issued by credit rating agencies
and therefore likely would benefit from
disclosure about ratings changes filed by
companies on Form 8–K.
Once a credit rating agency stops
rating the securities, a registrant would
be required to disclose that information
in a current report, update a prospectus
if necessary, and include any relevant
analysis in its next periodic report but
would then have no further disclosure
obligation related to that rating in
subsequent filings.
Request for Comments
• As proposed, we would require
disclosure about changes to previously
disclosed credit ratings in a registrant’s
Exchange Act reports, including
whether a rating has been withdrawn or
will no longer be updated. Would the
proposed disclosure provide helpful
information for investors? Is there other
information about ratings that would be
more important to investors? For
example, should we include a
requirement that the reason for the
change in rating be disclosed? Would
the disclosure increase reliance on
credit ratings? If so, how?
• We have proposed to limit the
disclosure regarding changes to a rating
to ratings previously disclosed pursuant
to proposed Item 202(g) of Regulation
S–K or proposed Item 10.6 of Form N–
2. As a result, changes to ratings that
were obtained prior to the effectiveness
of the rule, if adopted, will not be
required to be disclosed. Should we
expand the scope of the proposed rule
to require that all changes to ratings be
disclosed regardless of whether they
were disclosed previously? Would this
create a burden on registrants not in the
public interest? Why or why not? How
could this information be disclosed at
the least cost to registrants?
• Is a requirement to file a current
report on Form 8–K necessary in view
of the typical practice by credit rating
agencies to promptly issue press
releases about rating changes under the
subscriber paid model? Is current
disclosure by credit rating agencies
through press releases adequate? Would
investors benefit from having companies
disclose this information in a uniform
place?
• Could registrants provide an
analysis of the credit rating change in a
Form 8–K in the time allowed for filing
a Form 8–K? How does this disclosure
compare to disclosure of other matters
such as the acceleration of a direct or
off-balance sheet obligation where
disclosure of the event is required in a
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Form 8–K, and analysis of the impact is
allowed to be deferred to the next
periodic report?
• We believe our current rules would
require registrants to discuss the
significance of a credit rating change in
its next periodic report if the impact
would be material to the company. Are
there circumstances where a credit
rating change would not trigger
disclosure in the next periodic report?
Should we adopt an explicit
requirement that any credit rating
change disclosed on Form 8–K would be
required to be analyzed and discussed
in the following periodic report?
• We have proposed to require
disclosure when a rating has changed.
Should we also require disclosure of
other ratings actions, such as placing an
issuer on ‘‘credit watch’’ or assigning a
different outlook to the registrant’s
rating? Are these actions viewed as
important by investors? Would
requiring this disclosure create a burden
for registrants not in the public interest?
• The proposed disclosure would
apply only to credit ratings originally
used in connection with registered
offerings. Are there reasons that
disclosure should be limited to
registered offerings? Should we require
disclosure of credit ratings used in
connection with private offerings? Are
there any concerns regarding disclosure
of credit ratings related to private
offerings?
• Is it appropriate to require closedend funds to file reports on Form 8–K
disclosing credit rating changes? Instead
of filing reports on Form 8–K, should
closed-end funds be permitted to
disclose changes to credit ratings
through other methods, such as a
different filing with the Commission or
a notice posted on an internet Web site
and/or issuance of a press release? Is
there empirical or other evidence
demonstrating that one or more of those
other methods would provide better
dissemination of the information with
respect to closed-end funds? What
would be the disadvantages, if any, of
not requiring a filing that would be
available in the Commission’s EDGAR
system?
• Is the content of the proposed
disclosure requirements on Form 8–K
appropriate for closed-end funds or
should it be modified? Are there
additional disclosures regarding
changes to a credit rating that closedend funds should be required to make?
For example, closed-end funds are not
required to include MD&A in their
periodic reports. Should a closed-end
fund be required to disclose in a Form
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8–K or Form N–CSR 95 the impact on it,
if material, of any change in a credit
rating that was previously disclosed
under proposed Item 10.6 of Form N–2?
• Are the proposed amendments for
foreign private issuers appropriate?
Should they be modified? Are there
additional disclosures that foreign
private issuers should make? Is the
information relevant to investors if it is
only required in the next annual report?
II. General Request for Comments
We request and encourage any
interested person to submit comments
regarding:
• The proposed amendments that are
the subject of this release;
• additional or different changes; or
• other matters that may have an
effect on the proposals contained in this
release.
We request comment from the point
of view of companies, investors, and
other market participants, including
NRSROs and other credit rating
agencies. With regard to any comments,
we note that such comments are of great
assistance to our rulemaking initiative if
accompanied by supporting data and
analysis of the issues addressed in those
comments.
In addition, we request comment on
the following:
• Should the Commission include a
phase-in for registrants beyond the
effective date to accommodate pending
offerings? As proposed, compliance
with the new standards would begin on
the effective date of the new rules. Will
a significant number of registrants have
their offerings limited by the proposed
rules? If a phase-in is appropriate,
should it be for a certain period of time
(for example, six months or one year or
longer) or only for the term of a pending
registration statement?
III. Paperwork Reduction Act
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A. Background
Certain provisions of the proposed
rule amendments contain a ‘‘collection
of information’’ within the meaning of
the Paperwork Reduction Act of 1995
(PRA).96 The Commission is submitting
these proposed amendments and
proposed rules to the Office of
Management and Budget (OMB) for
review in accordance with the PRA. An
agency may not conduct or sponsor, and
a person is not required to comply with,
a collection of information unless it
displays a currently valid control
95 17 CFR 249.331; 17 CFR 274.128. Form N–CSR
is the periodic reporting form used by registered
management investment companies.
96 44
U.S.C. 3501 et seq.; 5 CFR 1320.11.
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number. The titles for the collections of
information are: 97
‘‘Regulation S–K’’ (OMB Control No.
3235–0071);
‘‘Form S–1’’ (OMB Control No. 3235–
0065);
‘‘Form S–3’’ (OMB Control No. 3235–
0073);
‘‘Form S–4’’ (OMB Control No. 3235–
0324);
‘‘Form S–8’’ (OMB Control No. 3235–
0066);
‘‘Form S–11’’ (OMB Control No. 3235–
0067);
‘‘Form 10’’ (OMB Control No. 3235–
0064);
‘‘Form 8–A’’ (OMB Control No. 3235–
0056);
‘‘Form 8–K’’ (OMB Control No. 3235–
0060);
‘‘Form F–1’’ (OMB Control No. 3235–
0258);
‘‘Form F–3’’ (OMB Control No. 3235–
0256);
‘‘Form F–4’’ (OMB Control No. 3235–
0325);
‘‘Form 20–F’’ (OMB Control No. 3235–
0288); and
‘‘Form N–2’’ (OMB Control No. 3235–
0026).
We adopted all of the existing
regulations and forms pursuant to the
Securities Act, the Exchange Act or the
Investment Company Act. These
regulations and forms set forth the
disclosure requirements for registration
statements and Exchange Act reports
that are prepared by registrants to
provide investors with information to
make investment decisions in registered
offerings and in secondary market
transactions.
The hours and costs associated with
preparing disclosure, filing forms, and
retaining records constitute reporting
and cost burdens imposed by the
collection of information. There is no
mandatory retention period for the
information disclosed, and the
information disclosed would be made
publicly available on the EDGAR filing
system.
B. Summary of Collection of
Information Requirements
We are proposing to amend Item 202
of Regulation S–K to mandate disclosure
by registrants regarding their credit
ratings in their registration statements
when a credit rating is used in
connection with a registered offering.
97 The paperwork burden from Regulation S–K is
imposed through the forms that are subject to the
requirements in those regulations and is reflected
in the analysis of those forms. To avoid a
Paperwork Reduction Act inventory reflecting
duplicative burdens and for administrative
convenience, we assign a one-hour burden to
Regulation S–K.
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We are proposing parallel amendments
for closed-end funds and foreign private
issuers. We are also proposing to amend
Exchange Act reporting requirements to
require disclosure when there has been
a change to a previously disclosed credit
rating.
If a credit rating is used by the
registrant, a selling securityholder, an
underwriter or a member of a selling
group in connection with a registered
offering, then the registrant would be
required to provide information about
the credit rating in the registration
statement. Such information would
include general information about the
rating, including any scope limitations
on the rating, the identity of the person
paying for the rating, a description of
any non-rating services provided to the
registrant within a specified period of
time, including disclosure of the fees
paid for such non-rating services, and
disclosure of preliminary ratings
obtained from a credit rating agency
other than the credit rating agency
providing the final rating and unused
final ratings. A registrant would also be
required to update the prospectus if a
final rating is changed or is not available
until after the effectiveness of the
registration statement.
We are also proposing amendments to
Form 8–K (for operating companies and
closed-end funds) and to Form 20–F (for
foreign private issuers) to require
disclosure of changes in a credit rating,
including when the rating is no longer
being updated or has been withdrawn.
For operating companies and closed-end
funds, the change in a credit rating
would be required to be reported within
four business days on Form 8–K. For
foreign private issuers, disclosure would
be required annually on Form 20–F.
The proposals would increase existing
disclosure burdens for Exchange Act
reports on Form 8–K and registration
statements by requiring disclosure of
credit ratings, whether or not issued by
an NRSRO, in registrants’’ registration
statements and reports.
C. Paperwork Reduction Act Burden
Estimates
For purposes of the Paperwork
Reduction Act, we estimate that over a
three-year period the average annual
incremental increase in the paperwork
burden for non-investment company
registrants to comply with our proposed
collection of information requirements
to be approximately 2,120 hours of inhouse company personnel time and to
be approximately $816,000 for the
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services of outside professionals.98 For
closed-end funds, we estimate the
annual incremental increase to be
approximately 157 hours of in-house
company personnel time and
approximately $108,400 for the services
of outside professionals. These
estimates include the time and the cost
of preparing and reviewing disclosure
and filing documents. Our
methodologies for deriving the above
estimates are discussed below.99
Our methodologies for deriving the
burden hour and cost estimates
presented below represent the average
burdens for all registrants who are
required to provide the disclosure, both
large and small. For registration
statements, we estimate that 25% of the
burden of preparation is carried by the
company internally and that 75% of the
burden is carried by outside
professionals retained by the registrant
at an average cost of $400 per hour.100
The portion of the burden carried by
outside professionals is reflected as a
cost, while the portion of the burden
carried by the company internally is
reflected in hours.
Our estimates are based on the
assumption that the proposed disclosure
would add disclosure for a subset of
affected registrants (i.e. those issuing
rated securities). We further assume that
the new disclosure requirement would
not affect the number of registrants. For
registration statements, we estimate that
the proposed amendments would
impose an average of a 60 minute
burden of preparation carried by the
company internally and a $1,200 cost
for outside professionals retained by the
registrant reflecting three hours of their
time. This estimate includes the time
necessary to obtain the relevant
information, including certain
information that would likely be
provided by the credit rating agency
98 We calculated an annual average over a threeyear period because OMB approval of Paperwork
Reduction Act submissions covers a three-year
period. For administrative convenience, the
presentation of the totals related to the paperwork
burden hours have been rounded to the nearest
whole number and the cost totals have been
rounded to the nearest thousand.
99 The estimates reflect the burden of collecting
and disclosing information under the PRA. Other
costs associated with the proposed amendments are
discussed in Section IV below.
100 We estimate an hourly rate of $400 as the
average cost of outside professionals that assist
registrants in preparing disclosure and conducting
registered offerings.
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such as the relative rank of the rating in
the credit rating agency’s classification
system. Further, based on statistics
related to the number of registration
statements filed for debt offerings in
fiscal years 2007 and 2008 from our
Office of EDGAR Information and
Analysis, we estimate that 500
registration statements on Forms S–1,
S–3, and S–4 will be affected annually
by the disclosure requirements.101 We
have attempted to be conservative in our
estimates of affected filings. We
recognize that not all debt offerings have
credit ratings associated with them;
however, given the relatively low
number of debt filings over the past two
fiscal years, we have included most of
those filings within our estimate. For
closed-end funds, we also estimate that
approximately 82 registration
statements on Form N–2 102 would be
affected annually by the disclosure
requirements. For purposes of Form 20–
F, there would be an increased burden
in Forms 20–F used as registration
statements and as annual reports. There
were an average of 77 Forms 20–F filed
as registration statements in fiscal years
2007 and 2008. Based on a review of a
101 All of the registration statements would be
required to contain the proposed disclosure if the
proposed trigger for the disclosure has been
satisfied. We have assumed for purposes of this
PRA analysis that the distribution of the estimated
500 filings will be proportional to the number of
Forms S–1, S–3 and S–4 registration statements
filed for debt offerings with approximately 60% of
filings on Form S–3, 20% on Form S–1, and 20%
on Form S–4. We have not included estimates for
Form 10, Form S–8 and Form S–11 as we believe
a negligible number of registrants use those forms
to register debt securities.
102 Based on Commission filings, we estimate that
there are approximately 802 active registered
closed-end funds and approximately 205 annual
responses to Form N–2. According to statistics
maintained by the Investment Company Institute,
approximately 322 of these closed-end funds have
issued senior securities. See Investment Company
Institute, Total Net Assets of Closed-End Funds,
2009: Q1, available at https://www.ici.org/pdf/
cef_ql_09_sup_tables.pdf (last visited on Aug. 17,
2009) (showing data as of Mar. 31, 2009). Based on
the proportion of the number of closed-end funds
that have issued senior securities to the total
number of active registered closed-end funds, we
have assumed, for purposes of the PRA, that
approximately 40% (322 divided by 802) of the
annual Form N–2 responses will involve closed-end
funds that have issued senior securities. We have
further assumed that all closed-end funds issuing
senior securities also will be required to disclose
credit ratings in their registration statements under
the proposed amendments. Therefore, we estimate
that approximately 82 (40% of 205) registration
statements on Form N–2 filed annually would
include disclosure of credit ratings under the
proposed amendments.
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sample of these filings, we estimate that
20 Form 20–F registration statements
would include the required disclosure
and that 20 Form 20–F annual reports
would include disclosure regarding
changes to a credit rating.
For current reports on Form 8–K,
including Forms 8–K filed by closedend funds, we estimate that registrants
spend, on average, five hours
completing the form. We estimate that
75% of that burden is carried by the
company while 25% is carried by
outside counsel at a cost of $400 per
hour. In order to estimate the number of
additional Form 8–Ks that would be
required to be filed pursuant to our
proposed amendments, we have looked
to the number of Forms 8–K filed with
disclosure pursuant to Item 2.04Triggering Events That Accelerate or
Increase a Direct Financial Obligation or
an Obligation under an Off-Balance
Sheet Arrangement. We believe that
many rating changes may also accelerate
financial obligations, so that looking to
Item 2.04 gives some indication of the
number of Forms 8–K that may be filed
even though it does not cover the same
disclosure. For example, we are aware
that Item 2.04 likely would not be
triggered by a credit rating upgrade. We
solicit comment on better ways to
estimate the number of 8–Ks that would
be filed pursuant to our proposed
requirements. In our fiscal year 2007
and 2008, there were an average of 396
Forms 8–K filed pursuant to Item 2.04.
In addition, based on publicly available
information concerning changes in
credit ratings of senior securities issued
by closed-end funds occurring during
calendar years 2007 and 2008,
Commission staff estimates that
approximately 20 additional Forms 8–K
would be filed annually by closed-end
funds pursuant to proposed Item 3.04.
As a result, we estimate that 420
additional Forms 8–K would be filed
pursuant to proposed Item 3.04.
Table 1 below illustrates the
incremental annual compliance burden
in the collection of information in hours
and cost for current reports and
registration statements.103
103 The number of responses for Form N–2
reflected in the table equals the actual number of
forms filed with the Commission during the 2008
fiscal year. This amount is an increase from the
current approved number of annual responses to
Form N–2 of 200.
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D. Solicitation of Comments
We request comments in order to
evaluate: (1) Whether the proposed
collection of information is necessary
for the proper performance of the
functions of the agency, including
whether the information would have
practical utility; (2) the accuracy of our
estimate of the burden of the proposed
collection of information; (3) whether
there are ways to enhance the quality,
utility, and clarity of the information to
be collected; and (4) whether there are
ways to minimize the burden of the
collection of information on those who
are to respond, including through the
use of automated collection techniques
or other forms of information
technology.104
Any member of the public may direct
to us any comments concerning the
accuracy of these burden estimates and
any suggestions for reducing these
burdens. Persons submitting comments
on the collection of information
requirements should direct the
comments to the Office of Management
and Budget, Attention: Desk Officer for
the Securities and Exchange
Commission, Office of Information and
Regulatory Affairs, Washington, DC
20503, and should send a copy to
Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090, with reference to File No.
S7–20–09. Requests for materials
submitted to OMB by the Commission
with regard to these collections of
information should be in writing, refer
to File No. S7–20–09, and be submitted
to the Securities and Exchange
Commission, Records Management,
Office of Filings and Information
Services, 100 F Street, NE., Washington,
DC 20549. OMB is required to make a
decision concerning the collection of
information between 30 and 60 days
104 We request comment pursuant to 44 U.S.C.
3506(c)(2)(B).
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after publication of this release.
Consequently, a comment to OMB is
best assured of having its full effect if
OMB receives it within 30 days of
publication.
IV. Cost-Benefit Analysis
A. Proposed Amendments
The proposed amendments would
require disclosure regarding credit
ratings by registrants in their
registration statements under the
Securities Act, Exchange Act and
Investment Company Act if the
registrant uses the rating in connection
with the offer or sale of securities in a
registered offering. Under proposed new
paragraph (g) to Item 202 of Regulation
S–K, Item 12 of Form 20–F and Item
10.6 of Form N–2, registrants would be
required to disclose much of the specific
disclosure currently permitted under
Item 10(c) of Regulation S–K. The
proposal would require disclosure of all
material scope limitations of the credit
rating and any related published
designation, such as non-credit payment
risks, assigned by the rating agency with
respect to the security. The proposed
changes would also require disclosure
of the source of the payment for the
credit rating. If any non-rating services
have been provided by the credit rating
agency to the registrant, disclosure of
the fees paid for those services also
would be required, so that investors
would be aware of potential conflicts of
interest with respect to the credit rating
used by the registrant. Under the
proposed amendments, if a registrant is
required to disclose a credit rating, then
it would also be required to disclose all
preliminary ratings and unused final
ratings it received from rating agencies
other than the credit rating agency that
provided the final rating. This
disclosure is intended to provide
investors with useful information to
assess whether a registrant may have
engaged in ratings shopping. In
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addition, we are proposing to amend
Exchange Act reports to require
disclosure of a change in previously
disclosed credit rating.
The additional information and
transparency provided by our proposed
amendments are intended to help
provide investors with the information
they need about credit ratings to put the
rating in the appropriate context. The
proposed amendments are aimed at
addressing concerns that investors may
not have sufficient information to
understand the scope or meaning of
ratings being used to market various
securities, that they may not fully
appreciate the potential conflicts of
interest faced by credit rating agencies
and how these conflicts may impact
ratings, that ratings shopping may be
occurring and may be leading to inflated
ratings, and that our current disclosure
rules do not require certain basic
information about a potentially key
element of their investment decision.
The proposed amendments may affect
economic behavior if the amendments
alter (a) the use of ratings by investors,
(b) registrants’ security issuance and
ratings-seeking behavior, and (c) the
credit rating agencies’ behavior when
providing ratings, These effects will
likely vary depending on the asset class
(e.g., corporate issues, structured
finance products), the type of the
registrant (e.g., corporate registrant,
sponsor of the financial product, closedend funds), the type of credit rating
agency (e.g., subscriber-paid rating
agencies, issuer-paid NRSROs,
unregistered credit rating agencies), the
type of investor (e.g., retail investors,
institutional investors), and the ongoing
changes in the regulatory environment.
The economic benefits and costs on
market participants associated with
these economic effects are discussed
below.
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B. Benefits
Benefits to investors resulting from
increased contextual information about
ratings
The proposed amendments would
require disclosure of information related
to the rating used in a registered
offering, such as the relative rank of the
credit rating within the assigning credit
rating agency’s overall classification
system, all material scope limitations of
the rating, and any published
designation that reflects the results of
any other evaluation done by the credit
rating agency in connection with the
credit rating. Some investors may
benefit from an improved understanding
of the meaning and scope of ratings
resulting from these new disclosures.
While much of this information is
publicly available, requiring it to be
presented in the registration statement
may increase the degree to which
investors understand what the rating
means. Additionally, new information,
such as changes in ratings, would be
disclosed in Exchange Act reports.
While ratings are typically public
information, available through news
services or from the credit rating agency,
investors may find it easier to access
ratings in a central repository that is
available over time. Investors should be
better able to put the ratings in context
when ratings and the proposed
disclosure are presented together with
other information in the registration
statement. Less sophisticated investors
may benefit more from these
disclosures, as sophisticated investors
may already have absorbed this
information from other sources.
Disclosure of potential conflicts of
interests faced by credit rating agencies
would provide information to investors
that is not currently available. Potential
conflicts of interest may arise when a
credit rating agency derives significant
revenue from a registrant whose
securities it also rates. Credit rating
agencies, in some cases, offer nonratings services to registrants, such as
consulting services.105 Both
sophisticated and unsophisticated
investors could benefit from
understanding whether the rating was
received in the context of other services;
in particular, they may place less weight
on ratings in which the agency was
substantially compensated for other
services. This additional information
may, in some cases, reduce the
105 See Frank Partnoy, How and Why Credit
Rating Agencies are Not Like Other Gatekeepers,
(2006) at https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=900257 for a discussion of
non-rating services provided by credit rating
agencies.
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possibility of investors placing undue
reliance on ratings. Alternatively,
however, if new disclosures cause
investors to believe that ratings are not
subject to any potential conflict of
interest, the additional disclosures may
increase the degree to which investors
rely on ratings.
The proposed amendments would
enable investors to distinguish between
solicited ratings (which can rely on both
public and non-public information) and
unsolicited ratings (which generally rely
on only public information). Currently,
it is not possible in every case for
investors to make this distinction.
Under the proposed amendments, if
registrants use a rating to sell a security
in a registered offering, it will be
included in the registration statement;
in other cases, it may not be. If a rating
is disclosed in a registration statement,
the registrant would be required to
disclose who paid for the rating.
Benefits to Investors From Increased
Informativeness of Ratings
The proposed amendments may have
the long-term benefit of increasing the
informativeness of credit ratings to
investors, that is, the degree to which
ratings correspond to the credit quality
of the rated security or entity. Investors
benefit from increased informativeness
in several ways. Entities with different
credit quality are exposed to distinct
economic factors, and investors may
take this fact into account when making
investment decisions. Additionally,
investors can use credit ratings in
conducting fundamental analysis of
individual securities. As a result,
investors benefit from credit ratings that
are more informative.
Increased informativeness of ratings
can result from a reduction in ‘‘ratings
shopping.’’ 106 Currently registrants may
solicit more ratings than they intend to
use, choosing from among ratings
providers without making any
disclosure regarding the other solicited
ratings. Criteria for selecting ratings
agencies include the reputation of the
agency and the rating itself.107 There
may be other, non-shopping reasons for
soliciting multiple ratings, such as
obtaining multiple expert views on the
registrant’s financial health. If the
proposed amendments are adopted and
registrants continue to solicit more
106 See Aaron Lucchetti and Serena Ng, How
Rating Firms’ Calls Fueled Subprime Mess, (Aug.
16, 2007), at https://www.realestatejournal.com/
buysell/mortgages/20070816-lucchetti.html. See
also Skreta and Veldkamp, and Bolton, Freixas and
Shapiro in note 24 above.
107 See Dion Bongaerts, Martijn Cremers, and
William N. Goetzmann Multiple Ratings and Credit
Spreads (June 30, 2009), at https://papers.ssrn.com/
sol3/papers.cfm?abstract_id=1307782.
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ratings than they intend to use,
preliminary and unused final ratings
would be made public if the registrant
used a rating in connection with a
registered offering. Credit rating
agencies would know that their ratings
would be disclosed if the registrant uses
a final rating from a different credit
rating agency in connection with a
registered offering. Thus, the market
could assess the relative
informativeness of ratings used to sell
the security and ratings from other
agencies. This ability to compare a
broader group of ratings, including
preliminary ratings, for the same issue
may allow investors to identify agencies
whose ratings they perceive to be less
reliable. This ability may be limited,
however, as direct comparisons between
preliminary ratings and final ratings
may be affected by factors such as
changes in information made available
to the credit rating agency throughout
the ratings process. The proposed
disclosure could cause credit rating
agencies to expend greater effort to
examine the financial health of the
underlying entity. Ultimately, increased
efforts in the ratings process could
improve ratings informativeness.
The proposed amendments may
change the way rating agencies compete.
This may indirectly improve ratings
informativeness. Rating agencies may
compete on the quality of ratings or they
may engage in ratings-based
competition that focuses on producing
high ratings. Any potential reduction in
ratings-based competition may result in
credit rating agencies focusing on
enhancing their reputations for
producing quality ratings and
competing on that basis, rather than
competing to produce high ratings so
that registrants select them. Rating
agencies may have greater incentives to
compete on the basis of the quality of
ratings as they are likely to face reduced
incentives to produce optimistic ratings
in the hopes of being selected, since
registrants’’ incentives to obtain a higher
rating would be reduced. These changes
in registrants’’ incentives and their
consequent effect on credit rating
agencies’’ incentives, however, will be
limited, to the extent that preliminary
ratings are incomplete or based on less
than full and final information, or that
registrants replace the use of
preliminary ratings for ratings shopping
with new alternative mechanisms. Any
potential reduction in the rating-based
competition is likely to result in more
informative ratings.108
108 See
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Benefits to Certain Rating Agencies
From Enhanced Competitive Position
The proposed amendments may
benefit certain rating agencies by
enhancing their competitive position,
relative to others. Enhanced competitive
position may result in these agencies
charging higher fees, rating more
securities, or being more selective in the
securities they rate. These effects result
from two factors. First, smaller agencies
may be asked to provide preliminary
ratings less frequently, and may
therefore see information about fewer
rated securities, thereby limiting their
ability to assess the credit quality of the
issue that they are rating relative to the
rest of the rated issues.109 Second,
registrants may not choose to use ratings
from smaller agencies if the registrants
elect not to seek the smaller agencies’’
preliminary ratings. Competitive
realignment may represent a cost to the
credit rating agencies who are not
market leaders. Competitive effects are
discussed in detail in the Costs section,
below.
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Reductions in Cost of Capital for Some
Registrants
As discussed, the proposed
amendments may increase the
informativeness of ratings. Credit rating
agencies interpret non-public
information to which they have access,
together with public information.110
This practice may reduce the asymmetry
of information between registrants and
investors. Additionally, the mandatory
disclosure of information about credit
ratings used in connection with a
registered offering could level the
playing field for all registrants and
would benefit registrants that in the past
may have hesitated to provide such
disclosure voluntarily. These reductions
in the asymmetry of information
between registrants and investors could
reduce registrants’’ cost of capital as
investors may demand a lower risk
premium when they have access to
more information.111
109 See Jeremy Fons, Rating Competition and
Structured Finance, J. Structured Fin. (Fall 2008),
at https://www.iijournals.com/doi/abs/10.3905/
JSF.2008.14.3.007.
110 In the discussion of their rating
methodologies, Standard and Poor’s and Moody’s
explain how they use confidential non-public
information that registrants provide for the purpose
of assigning ratings. See https://
www2.standardandpoors.com/aboutcreditratings/
RatingsManual_PrintGuide.html for the Standard
and Poor’s rating methodology. See https://
v3.moodys.com/sites/products/
AboutMoodysRatingsAttachments/
2001400000389218.pdf?frameOfRef=corporatefor
Moody’s description of their use of non-public
information.
111 See David Easley and Maureen O’Hara,
Information and the Cost of Capital, J. Fin. (2004)
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If the proposed amendments have the
effect of reducing ratings shopping and
ratings inflation that may result from
such shopping, ratings scales may shift
downward that is, debt issues of the
same credit quality may receive a lower
rating than currently as an indirect
effect of the proposed amendments. In
some cases, because of ratings-based
investment restrictions faced by some
institutional investors, this may result
in changes in the cost of capital for
registrants, including potential increases
and decreases. For example, registrants
of securities that would currently be
given an investment grade rating, but
that would receive a lower rating as an
indirect result of the proposed
amendments, could face a higher cost of
capital. Those registrants whose
securities would be investment grade
under both sets of circumstances may
face a lower cost of capital. Reductions
in cost of capital constitute benefits to
registrants. Additional potential costs
are discussed in more detail in the Costs
section, below.
C. Costs
Costs of New Disclosures
Registrants will face costs associated
with the process of preparing and
reporting the proposed disclosures. For
purposes of the Paperwork Reduction
Act, we estimate that over a three-year
period the average annual incremental
increase in the paperwork burden for
non-investment company registrants to
comply with our proposed collection of
information requirements to be
approximately 2,120 hours of in-house
company personnel time and to be
approximately $816,000 for the services
of outside professionals. For closed-end
funds, we estimate the annual
incremental increase to be
approximately 157 hours of in-house
company personnel time and
approximately $108,400 for the services
of outside professionals. These
estimates include the time and the cost
of preparing and reviewing disclosure
and filing documents. These disclosure
costs may be limited by the fact that
close-end funds that disclose ratings in
their registration statements are already
subject to comparable disclosure
requirements and that some operating
companies may already be providing
this information voluntarily.
(arguing that the information composition between
public and non-public information affects the cost
of capital since investors demand a higher return
from their investments when they face asymmetric
information).
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Temporary Uncertainty Resulting From
Potential Shift in Ratings
As discussed, the proposed
amendments may cause ratings scales to
shift downward; disclosure of
preliminary and unused final ratings in
certain circumstances may reduce
ratings shopping, in turn reducing the
upward bias in ratings resulting from
registrants choosing the highest of
several ratings. The amount of this shift
is uncertain. This uncertainty represents
a potential cost to investors, who may
temporarily have fewer highly rated
investment options. It also represents a
cost to registrants, who may be less sure
of the rating they will receive for
securities.
Costs to Investors Resulting From
Potential Undue Reliance on Ratings
Requiring ratings disclosure may
reinforce the importance of ratings,
possibly causing investors to place
undue reliance on the rating. This effect
may be mitigated by accompanying
contextual disclosures, such as
disclosures on ratings limitations and by
any improvements in the quality of
ratings.
Costs to Registrants Resulting From
Increased Prices of Ratings
Any enhancement of the competitive
position of market leaders that may arise
in the medium- or long-term may result
in higher prices for assigning ratings,
both through a reduction in potential
price competition among existing
agencies and a reduction in the threat of
entry by new agencies. Competitive
effects of the proposed amendments are
discussed below in this section, as well
as in the Competition, Efficiency, and
Capital Formation section.
Increases in Cost of Capital for Some
Registrants Resulting From Potential
Declines in the Level of Ratings
As mentioned in the Benefits section,
in some cases, the proposed
amendments may alter issuance
behavior by affecting investor demand
for securities with specific ratings. Some
investors are limited, either by
regulation or custom, to investing only
in the highest rated securities, while
others are limited to investing in
‘‘investment grade’’ securities. If ratings
shift downward as a result of the
proposed amendments, there may be
fewer securities available meeting these
investment criteria, potentially resulting
in a larger price premium for top-rated
securities and for investment-grade
securities. These price premia may
affect issuance behavior. For example,
registrants of securities that would
currently be given an investment grade
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rating, but that would receive a lower
rating as an indirect result of the
proposed amendments, would
potentially face a higher cost of capital,
while those registrants whose securities
would be investment grade under both
sets of circumstances may face a lower
cost of capital. These changes in cost of
capital may, in turn, affect issuance
decisions. In particular, registrants
whose securities would no longer be
considered investment grade may face
greater difficulty in raising capital.
These differences in the cost of capital
across new classes of ‘‘investmentgrade’’ and ‘‘non-investment grade’’
securities may diminish in the longterm. In the short-term, however, the
differential in the cost of capital across
these two classes of securities are likely
to remain due to the limited access to
‘‘non-investment grade’’ securities by
certain investors. Similar considerations
apply to the ratings at the top of the
scale. Some registrants may be
effectively shut out from the commercial
paper market, for example, if they can
no longer obtain top ratings.
These effects depend on the rigidity of
institutional ratings-based constraints. If
ratings scale downward, these
constraints may adapt. For example, a
wider range of ratings may be
considered investment grade, and the
commercial paper market may become
viable for lower rated registrants. Any
such adaptation is more likely to occur
in the long term, however, as ratingsbased investment restrictions are costly
to modify.
srobinson on DSKHWCL6B1PROD with PROPOSALS2
Costs to Certain Rating Agencies
Resulting From Potential Changes in
Competitive Environment
Although NRSROs and other credit
rating agencies are not subject to the
proposed amendments, some of these
rating agencies may incur costs. As
mentioned in the benefits section,
established market leaders in ratings
may indirectly benefit from the
proposed amendments, at the expense
of smaller, less established credit rating
agencies. Currently, the credit ratings
industry is highly concentrated. For
‘‘corporate issuers’’ in 2007, for
example, Standard and Poor’s, Moody’s,
and Fitch issued 39%, 33%, and 21% of
outstanding credit ratings, respectively,
for a total of 93% of outstanding credit
ratings.112 This concentration could
increase in several ways as described
below, such as an increase in market
share of certain ratings agencies among
112 See Annual Report on Nationally Recognized
Statistical Rating Organizations (2008) at https://
www.sec.gov/divisions/marketreg/ratingagency/
nrsroannrep0608.pdf.
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the dominant agencies or a reduction in
market share of the remaining agencies.
The proposed disclosure requirements
for preliminary and unused final ratings
may lead registrants to solicit fewer
ratings, potentially only as many as they
intend to ultimately use. In structured
financial products, for example, the
market may customarily require
registrants to obtain two ratings, but
registrants can solicit preliminary
ratings from more than two agencies. If
the registrant knows that preliminary
ratings must be disclosed in certain
circumstances, including the most
optimistic ratings, then its incentive to
shop for ratings may be reduced,
because such a practice would become
apparent to the market, and its selection
of the higher rating may be discounted.
Registrants may instead choose to
initially solicit ratings only from
agencies who are market leaders in the
type of product they are issuing.
Specifically, they may gravitate toward
agencies that have established
reputations for high quality ratings and
agencies that, for other reasons, such as
branding or market share, are best
known to investors. They may choose to
involve other credit rating agencies only
if they do not meet specific ratings
hurdles, such as the top rating category,
or investment grade. Agencies who are
not market leaders may, as a result,
receive information about fewer issues,
potentially affecting the perceived
quality of their ratings. This may cause
registrants to purchase fewer ratings
from such agencies. Ultimately, this
could strengthen the relative position of
market leaders and potentially harm the
competitive position of other rating
agencies. Relatedly, registrants’
conversations with smaller, lessestablished NRSROs and other credit
rating agencies may help them to
understand the agencies’ methodologies
and procedures; these conversations
may help smaller NRSROs introduce
themselves to registrants. To the extent
that registrants contact only established
NRSROs, they may not develop this
understanding of other agencies’
methodologies.
The effect on market leaders’
competitive position could be mitigated
by an additional factor. A decrease in
ratings shopping depends in part on the
ability of investors to easily compare
final and preliminary ratings. However,
investors may feel that they cannot
easily compare these ratings. When
rating agencies make preliminary
ratings, they do so with a more limited
set of information. As the ratings
process proceeds to a final rating, more
information can become available. For
example, as time passes, material
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information about the industry or
registrant from public sources may
become available. Additionally, the
registrant (or those acting on its behalf)
may continue to share information with
rating agencies. Consequently, investors
may consider preliminary ratings to be
informative only in a limited sense, and
registrants may not experience a
significant penalty for using a final
rating that is substantially different than
preliminary ratings.113 Thus, to some
degree, registrants may still shop for
ratings, and agencies may continue to
compete based on the level of ratings.
The changes in the competitive
position of rating agencies discussed
above may not occur for structured
finance products because of the
amendments to Rule 17g–5 being
adopted today, since all NRSRO’s would
be entitled to receive information about
all such issues.114 This would depend,
however, on whether credit rating
agencies choose to access this
information. Access comes with certain
obligations, including the obligation to
rate 10% of the securities for which
information is received.
Another factor that could potentially
impact the competitive forces among the
credit rating agencies is the mandatory
disclosure that a fee was paid for the
credit rating and the aggregate fees paid
for any other non-rating services
provided during such period. This
disclosure may present some costs to
the extent that it reveals competitive or
proprietary information about the
business model of the credit rating
agency proving the credit rating. To the
extent that there are negative
competitive effects, some rating
agencies may stop providing some of
these non-rating services which could
result in declines in their revenues.
V. Consideration of Burden on
Competition and Promotion of
Efficiency, Competition, and Capital
Formation
Section 23(a) of the Exchange Act 115
requires the Commission, when making
rules and regulations under the
Exchange Act, to consider the impact a
new rule would have on competition.
Section 23(a)(2) prohibits the
Commission from adopting any rule
which would impose a burden on
competition not necessary or
appropriate in furtherance of the
113 These factors would also reduce the efficacy
of ratings shopping, however, since registrants
would also face some uncertainty about what the
final rating would be.
114 See the proposing release related to Rule 17g–
5 under the Exchange Act considered by the
Commission on September 17, 2009.
115 15 U.S.C. 78w(a).
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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules
purposes of the Exchange Act. Section
2(b) of the Securities Act,116 Section 3(f)
of the Exchange Act,117 and Section 2(c)
of the Investment Company Act 118
require the Commission, when engaging
in rulemaking that requires it to
consider or determine whether an action
is necessary or appropriate in the public
interest, to consider, in addition to the
protection of investors, whether the
action would promote efficiency,
competition, and capital formation.
The proposed amendments would
require registrants to make specified
disclosure to investors regarding credit
ratings if credit ratings are used in
connection with a registered offering.
We believe these disclosures would
help investors understand the limits and
purposes of credit ratings as well as
potential conflicts of interest or ratings
shopping practices that could affect the
quality of the credit rating. Therefore, if
adopted, the Commission believes that
the disclosure required by these
amendments would promote investor
protection. We believe that if investors
have more information regarding credit
ratings, including the scope of the
rating, they will be better able to place
the rating in its proper context. The
Commission anticipates that these
proposed amendments could improve
investors’ ability to make informed
investment decisions, which will,
therefore, lead to potential increased
efficiency and competitiveness of the
U.S. capital markets. The Commission
expects that this increased market
efficiency and investor confidence also
may encourage more efficient capital
formation for the reasons discussed
below and in Section IV above.
Specifically, the proposed amendments
would enhance the availability of
information to investors and the markets
with regard to credit ratings so that
investors will more clearly understand
the terms of the credit rating and its
limitations.
As discussed in more detail in Section
IV, the proposed amendments may
reduce the level of ratings-based
competition among credit rating
agencies. This may indirectly improve
ratings informativeness. Any potential
reduction in ratings-based competition
may result in credit rating agencies
increasingly focusing on enhancing
their reputations for producing quality
ratings and competing on that basis,
rather than competing to produce high
ratings so that registrants select them.
These changes in registrants’ incentives
and their consequent effect on credit
116 15
U.S.C. 77b(b).
U.S.C. 78c(f).
118 15 U.S.C. 8a–2(c).
117 15
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rating agencies’ incentives, however,
will be limited, to the extent that
preliminary ratings are incomplete or
based on less than full and final
information, or that registrants replace
the use of preliminary ratings for ratings
shopping with new alternative
mechanisms.
Furthermore, the proposed
amendments may also increase the
informativeness of ratings by reducing
the asymmetry of information between
registrants and investors. The
mandatory disclosure of credit ratings in
registration documents would level the
playing field for all companies and
would benefit companies that in the
past may have hesitated to provide such
disclosure voluntarily, thereby
promoting competition. Furthermore,
these reductions in the asymmetry of
information between registrants and
investors could reduce registrants’ cost
of capital as investors may demand a
lower risk premium when they have
access to more information.
Market efficiency and capital
formation may be enhanced by more
informative ratings because investors
would have access to better information
and could act on that information
accordingly.
The Commission recognizes that
requiring disclosure of preliminary
ratings and unused final ratings could
have an effect on competition among the
credit rating agencies. To the extent that
the proposed disclosure reduces ratings
shopping, then competition among
credit rating agencies may be reduced as
registrants seek only ratings they intend
to use and do not shop around among
many agencies. The proposed
amendments may benefit the
competitive position of certain rating
agencies if, for example, registrants seek
fewer credit ratings. Enhanced
competitive position would enable these
agencies to charge higher fees, to rate
more securities, or to be more selective
in the securities they rate. Competitive
realignment may represent a cost to the
credit rating agencies who are not
market leaders. This may increase the
cost of capital for issuers who use
smaller credit rating agencies if they are
unable to pay the increased fees of the
larger credit rating agencies or if the
larger credit rating agencies elect not to
rate them.
If the proposed amendments have the
effect of reducing ratings shopping and
ratings inflation resulting from such
shopping, rating scales may shift
downward—that is, debt issues may
receive a lower rating than currently as
an indirect effect of the proposed
amendments. In some cases, because of
ratings-based investment restrictions
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faced by some institutional investors,
this may result in changes in the cost of
capital for registrants, including
potential increases and decreases. For
example, registrants of securities that
would currently be given an investment
grade rating, but that would receive a
lower rating as an indirect result of the
proposed amendments, would
potentially face a higher cost of capital,
while those registrants whose securities
would be investment grade under both
sets of circumstances may face a lower
cost of capital.
The Commission solicits comment on
the effects of the proposed amendments
on efficiency, competition, and capital
formation. The Commission requests
comment on whether the required
disclosure of ratings in registration
statements, especially ratings that a
registrant would otherwise choose not
to disclose, may affect positively or
negatively registrants’ ability to raise
capital. The Commission requests
comment on the anticipated effect of the
new disclosure requirements on
competition in the market for credit
rating agencies. The Commission
requests commenters to provide
empirical data and other factual support
for their views, if possible.
VI. Initial Regulatory Flexibility Act
Analysis
This Initial Regulatory Flexibility
Analysis (IRFA) has been prepared in
accordance with the Regulatory
Flexibility Act.119 It relates to proposed
revisions to Regulation S–K, rules under
the Securities Act, and forms under the
Exchange Act, the Securities Act, and
the Investment Company Act regarding
disclosure regarding credit ratings.
A. Reasons for, and Objectives of, the
Proposed Action
As discussed throughout the release,
we are proposing amendments to our
rules to require disclosure of
information regarding credit ratings
used by registrants in connection with
a registered offering of securities so that
investors will better understand the
credit rating and its limitations. The
amendments we are proposing today
also would require additional disclosure
that would inform investors about
potential conflicts of interest that could
affect the credit rating. In addition, we
are proposing amendments to require
disclosure of preliminary credit ratings
and unused final ratings in certain
circumstances so that investors have
enhanced information about the credit
ratings process that may bear on the
quality or reliability of the rating. The
119 5
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proposed amendments would be
applicable to registration statements
filed under the Securities Act, the
Securities Exchange Act and the
Investment Company Act, and Forms 8–
K and 20–F.
srobinson on DSKHWCL6B1PROD with PROPOSALS2
B. Legal Basis
We are proposing the amendments
contained in this document under the
authority set forth in Sections 6, 7, 10,
and 19(a) of the Securities Act, Sections
12, 13, 15(d) and 23(a) of the Exchange
Act, and Sections 8, 24(a), 30, and 38 of
the Investment Company Act.
C. Small Entities Subject to the
Proposed Action
The proposed amendments could
affect some companies that are small
entities. The disclosure requirements as
proposed would apply to any registrant
that uses a credit rating in connection
with a registered offering, though based
on the staff’s observations of market
practice, we believe it is unlikely that a
small entity would use a credit rating in
connection with a registered offering.
The Regulatory Flexibility Act defines
‘‘small entity’’ to mean ‘‘small
business,’’ ‘‘small organization,’’ or
‘‘small governmental jurisdiction.’’ 120
The Commission’s rules define ‘‘small
business’’ and ‘‘small organization’’ for
purposes of the Regulatory Flexibility
Act for each of the types of entities
regulated by the Commission. Securities
Act Rule 157 121 and Exchange Act Rule
0–10(a) 122 defines a company, other
than an investment company, to be a
‘‘small business’’ or ‘‘small
organization’’ if it had total assets of $5
million or less on the last day of its most
recent fiscal year. We estimate that there
are approximately 1,229 companies,
other than registered investment
companies, that may be considered
small entities. Investment Company Act
Rule 0–10(a) 123 defines a ‘‘small
business’’ or ‘‘small organization’’ for
purposes of the Investment Company
Act as an investment company that,
together with other investment
companies in the same group of related
investment companies, has net assets of
$50 million or less as of the end of its
most recent fiscal year. We estimate that
there are approximately 30 registered
closed-end funds that may be
considered small entities. The proposed
amendments could affect small entities
that have a class of securities that are
registered under Section 12 of the
Exchange Act or that are required to file
120 5
U.S.C. 601(6).
CFR 230.157.
122 17 CFR 240.0–10(a).
123 15 U.S.C. 270.0–10(a)
121 17
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reports under Section 15(d) of the
Exchange Act or Section 30 of the
Investment Company Act. In addition,
the proposals also could affect small
entities that file, or have filed, a
registration statement that has not yet
become effective under the Securities
Act or the Investment Company Act and
that has not been withdrawn.
D. Reporting, Recordkeeping, and Other
Compliance Requirements
The disclosure requirements we are
proposing today are intended to
enhance credit rating disclosure so that
investors will better understand credit
ratings and their limitations. These
amendments would require small
entities that are operating companies or
closed-end funds to provide the same
disclosure as larger entities if they use
a credit rating in connection with a
registered offering. The disclosure
required would include general
information about the credit rating,
including all material scope limitations
of the credit rating and any related
published designation, such as noncredit payment risks, assigned by the
rating organization with respect to the
security. In addition, the proposed
amendments would require disclosure
of additional non-rating services
provided by the credit rating agency and
its affiliates to the registrant and its
affiliates, including disclosure of the
fees paid for those services, so that
investors will be aware of potential
conflicts of interest with respect to the
credit rating obtained by the registrant.
Small entities would be required to
include the disclosure in their
Securities Act, Exchange Act, and
Investment Company Act registration
statements. In addition, small entities
would be required to provide updating
of the rating disclosure. In certain
circumstances, small entities would be
required to provide disclosure of
preliminary ratings or unused final
ratings so that investors will be
informed of when a registrant may have
engaged in ratings shopping.
E. Duplicative, Overlapping, or
Conflicting Federal Rules
We believe the proposed amendments
would not duplicate, overlap, or conflict
with other federal rules.
F. Significant Alternatives
The Regulatory Flexibility Act directs
us to consider alternatives that would
accomplish our stated objectives, while
minimizing any significant adverse
impact on small entities subject to the
rules. In connection with the proposed
disclosure amendments, we considered
the following alternatives:
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• Establishing different compliance or
reporting requirements or timetables
that take into account the resources
available to small entities;
• Clarifying, consolidating or
simplifying compliance and reporting
requirements under the rules for small
entities;
• Use of performance rather than
design standards; and
• Exempting small entities from all or
part of the requirements.
The proposed amendments would
provide investors with more
information regarding credit ratings and
their limitations so that investors will be
able to place the credit rating in its
appropriate context. We do not believe
these disclosures will create a
significant new burden on smaller
entities subject to the proposed
amendments. To the extent that a small
entity must comply with the proposed
amendments, we believe uniform,
comparable disclosures across all
companies will help investors and the
markets. Therefore, we are not
proposing special requirements,
standards or exemptions for small
entities. However, because small entities
rarely receive credit ratings from credit
rating agencies in connection with their
offerings, it is unlikely that the
proposed amendments would have a
significant impact on a substantial
number of small entities.
G. Solicitation of Comments
We encourage the submission of
comments with respect to any aspect of
this Initial Regulatory Flexibility
Analysis. In particular, we request
comments regarding:
• How the proposed amendments can
achieve their objective while lowering
the burden on smaller entities subject to
the rules;
• The number of small entity
companies that may be affected by the
proposed amendments;
• The existence or nature of the
potential impact of the proposed
amendments on small entity companies
discussed in the analysis; and
• How to quantify the impact of the
proposed amendments.
Respondents are asked to describe the
nature of any impact and provide
empirical data supporting the extent of
the impact. Such comments will be
considered in the preparation of the
Final Regulatory Flexibility Analysis, if
the proposed rule amendments are
adopted, and will be placed in the same
public file as comments on the proposed
amendments themselves.
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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules
§ 229.10
VII. Small Business Regulatory
Enforcement Fairness Act
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996,124 a rule is ‘‘major’’ if it has
resulted, or is likely to result in:
• An annual effect on the U.S.
economy of $100 million or more;
• A major increase in costs or prices
for consumers or individual industries;
or
• Significant adverse effects on
competition, investment, or innovation.
We request comment on whether our
proposal would be a ‘‘major rule’’ for
purposes of the Small Business
Regulatory Enforcement Fairness Act.
We solicit comment and empirical data
on:
• The potential effect on the U.S.
economy on an annual basis;
• Any potential increase in costs or
prices for consumers or individual
industries; and
• Any potential effect on competition,
investment, or innovation.
VIII. Statutory Authority and Text of
Rule and Form Amendments
We are proposing the amendments
contained in this document under the
authority set forth in Sections 6, 7, 10,
and 19(a) of the Securities Act; Sections
12, 13, 15(d) and 23(a) of the Exchange
Act; and Sections 8, 24(a), 30, and 38 of
the Investment Company Act.
List of Subjects
17 CFR Parts 229, 239, 240, 249 and 274
Reporting and recordkeeping
requirements, Securities.
For the reasons set out in the
preamble, Title 17, Chapter II of the
Code of Federal Regulations is proposed
to be amended as follows:
PART 229—STANDARD
INSTRUCTIONS FOR FILING FORMS
UNDER SECURITIES ACT OF 1933,
SECURITIES EXCHANGE ACT OF 1934
AND ENERGY POLICY AND
CONSERVATION ACT OF 1975—
REGULATION S–K
srobinson on DSKHWCL6B1PROD with PROPOSALS2
1. The authority citation for part 229
continues to read in part as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j,
77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26),
77ddd, 77eee, 77ggg, 77hhh, 777iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n,
78o, 78u–5, 78w, 78ll, 78mm, 80a–8, 80a–9,
80a–20, 80a–29, 80a–30, 80a–31(c), 80a–37,
80a–38(a), 80a–39, 80b–11, and 7201 et seq.;
18 U.S.C. 1350, unless otherwise noted.
*
*
*
*
*
124 Pub. L. No. 104–121, Title II, 110 Stat. 857
(1996).
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[Amended]
2. Amend § 229.10 by removing and
reserving paragraph (c).
3. Amend § 229.202 by:
a. Adding paragraph (g); and
b. Adding Instructions 1 through 5 to
Item 202(g).
The additions read as follows:
§ 229.202 (Item 202) Description of
registrant’s securities.
*
*
*
*
*
(g) Credit ratings. If a registrant, any
selling security holder, any underwriter,
or any member of a selling group in a
registered offering uses a credit rating,
as that term is defined in 15 U.S.C.
78c(a)(60), from a credit rating agency,
as that term is defined in 15 U.S.C.
78c(a)(61), with respect to the registrant
or a class of securities issued by the
registrant, in connection with a
registered offering, the registrant shall
disclose the following information for
each rating used:
(1) The identity of the credit rating
agency assigning the credit rating and
whether such organization is a
nationally recognized statistical rating
organization as that term is defined in
15 U.S.C. 78c(a)(62);
(2) The credit rating assigned;
(3) The relative rank of the credit
rating within the assigning credit rating
agency’s overall classification system;
(4) The date the credit rating was
assigned;
(5) The credit rating agency’s
definition or description of the category
in which the credit rating agency rated
the class of securities;
(6) The identity of the party who is
compensating the credit rating agency
for providing the credit rating;
(7) A description of any other nonrating services provided by the credit
rating agency or its affiliates to the
registrant or its affiliates, and if such
other services have been provided,
separate disclosure of the fee paid for
the credit rating required to be disclosed
and the aggregate fees paid for any other
non-rating services provided during the
registrant’s last completed fiscal year
and any subsequent interim period up
to the date of the filing;
(8) All material scope limitations of
the credit rating;
(9) How any contingencies related to
the securities are or are not reflected in
the credit rating;
(10) Any published designation
reflecting the results of any other
evaluation done by the credit rating
agency in connection with the credit
rating, along with an explanation of the
designation’s meaning and the relative
rank of the designation;
(11) Any material differences between
the terms of the securities as assumed or
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considered by the credit rating agency
in rating the securities and:
(i) The minimum obligations of the
security as specified in the governing
instruments of the security; and
(ii) The terms of the securities as used
in any marketing or selling efforts;
(12) A statement informing investors
that a credit rating is not a
recommendation to buy, sell, or hold
securities; that it may be subject to
revision or withdrawal at any time by
the assigning credit rating agency; that
each credit rating is applicable only to
the specific security to which it applies;
and that investors should make their
own evaluation as to whether an
investment in the security is
appropriate;
(13) A description of a final rating
obtained by the registrant but not used
in connection with the offering,
including the information set forth in
paragraphs (g)(1) through (12) of this
section; and
(14) A description of any preliminary
rating of the class of securities that
received the rating being disclosed
pursuant to this Item 202(g) of this part
if such preliminary rating was obtained
by or on behalf of the registrant and
received from a credit rating agency
other than the credit rating agency that
provided the credit rating disclosed
pursuant to this Item 202(g) of this part.
Such description shall include:
(i) The identity of the credit rating
agency that determined or indicated the
rating and an indication of whether
such organization is a nationally
recognized statistical rating organization
as that term is defined in 15 U.S.C.
78c(a)(62);
(ii) The preliminary rating determined
or indicated or a description of the
category or range of categories in which
the preliminary credit rating agency
placed the class of securities;
(iii) The date the preliminary rating
was conveyed to the registrant, any
party acting on the registrant’s behalf or
the underwriters;
(iv) The relative rank of the
preliminary rating within the
preliminary credit rating agency’s
overall classification system;
(v) Any material scope limitations of
the preliminary rating; and
(vi) Any material differences between
the terms of the securities on which the
preliminary rating was determined and
the terms of the securities on which the
final rating was determined.
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Instructions to Item 202(g):
1. Disclosure is not required by this
Item 202(g) if the only disclosure of a
credit rating in a filing with the
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Commission relates to changes to a
credit rating, liquidity of the registrant,
the cost of funds of a registrant or the
terms of agreements that refer to credit
ratings, and the credit rating is not
otherwise used in connection with a
registered offering.
2. If a registrant includes information
about credit ratings in a prospectus
pursuant to this Item 202(g) and the
rating has not yet been issued in final
form, the registrant shall update the
description of each rating as set forth
below:
A. If a change in a rating, including
the assignment of a final rating, already
included in the prospectus is available
subsequent to the filing of the
registration statement, but prior to its
effectiveness, the registrant shall convey
to the purchaser the rating change.
B. If an additional rating, including a
final rating, that the registrant is
required to disclose, or if a material
change in a rating already included,
becomes available during any period in
which offers or sales are being made, the
registrant shall disclose such additional
rating or rating change by means of a
post-effective amendment, or
supplement to the prospectus pursuant
to § 230.424(b) of this chapter, unless, in
the case of a registration statement on
Form S–3 (§ 239.13 of this chapter), it
has been disclosed in a document
incorporated by reference into the
registration statement subsequent to its
effectiveness and prior to the
termination of the offering or
completion of sales.
3. For purposes of this Item 202(g), a
credit rating is ‘‘used in connection with
a registered offering of securities’’ in
circumstances, including but limited to,
when such rating is used in connection
with an unregistered offering of
securities, and the securities offered
privately are subsequently exchanged
for substantially similar registered
securities even if the credit rating was
not used in connection with the
registered exchange offering.
4. A preliminary rating includes any
rating that is not published, any range
of ratings, any oral or other indications
of a potential rating or range of ratings
and all other preliminary indications of
a rating. A preliminary rating includes
ratings on a particular structure of a
security even if not tied to a specific
registrant or group of assets. Disclosure
of a preliminary rating is required even
if there have been changes to the
security for which a final rating is
disclosed pursuant to this Item 202(g).
5. For purposes of determining
whether disclosure of any preliminary
rating or unused final rating is required,
a credit rating is obtained from a credit
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rating agency if it is solicited by or on
behalf of a registrant from a credit rating
agency.
*
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PART 239—FORMS PRESCRIBED
UNDER THE SECURITIES ACT OF 1933
4. The authority citation for part 239
continues to read in part as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s,
77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n,
78o(d), 78u–5, 78w(a), 78ll, 78mm, 80a–2(a),
80a–3, 80a–8, 80a–9, 80a–10, 80a–13, 80a–
24, 80a–26, 80a–29, 80a–30, and 80a–37,
unless otherwise noted.
trading or admitted to unlisted trading
privileges on a national securities
exchange; or (ii) are securities for which
bid and offer quotations are reported in
an automated quotations system
operated by a national securities
association. Notwithstanding the
foregoing, furnish the information
required by Item 202(g) of Regulation
S–K.
*
*
*
*
*
PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
*
7. The authority citation for part 240
continues to read, in part, as follows:
Note The text of Form S–3 does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j,
78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a–
20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4,
80b–11, and 7201, et seq.; and 18 U.S.C.
1350, unless otherwise noted.
*
*
*
*
5. Amend Form S–3 (referenced in
§ 239.13) by revising Part I, Item 9 to
read as follows:
FORM S–3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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*
8. Amend § 240.13a–11 by revising
paragraph (b) to read as follows:
Item 9. Description of Securities To Be
Registered
§ 240.13a–11 Current reports on Form 8–K
(§ 249.308 of this chapter).
Furnish the information required by
Item 202 of Regulation S–K (§ 229.202 of
this chapter), unless capital stock is to
be registered and securities of the same
class are registered pursuant to Section
12 of the Exchange Act, in which case
furnish only the information required by
Item 202(g) of Regulation S–K.
*
*
*
*
*
6. Amend Form S–4 (referenced in
§ 239.25) by revising Part I, Item 4(a)(3)
to read as follows:
*
Note The text of Form S–4 does not, and
this amendment will not, appear in the Code
of Federal Regulations.
FORM S–4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
*
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*
*
Item 4. Terms of the Transaction
(a) Furnish a summary of the material
features of the proposed transaction.
The summary should include, where
applicable:
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*
(3) The information required by Item
202 of Regulation S–K (§ 229.202 of this
chapter), description of registrant’s
securities, unless: (i) The registrant
would meet the requirements for use of
Form S–3, (ii) capital stock is to be
registered and (iii) securities of the same
class are registered pursuant to Section
12 of the Exchange Act and (i) listed for
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(b) This section shall not apply to
foreign governments, foreign private
issuers required to make reports on
Form 6–K (17 CFR 249.306) pursuant to
§ 240.13a–16, issuers of American
Depositary Receipts for securities of any
foreign issuer, or investment companies
required to file reports pursuant to
§ 270.30b1–1 of this chapter under the
Investment Company Act of 1940,
except:
(1) Where such investment companies
are required to file notice of a blackout
period pursuant to § 245.104 of this
chapter; and
(2) A closed-end company (as defined
in 15 U.S.C. 80a–5(a)(2)) is required to
file a current report on Form 8–K
containing the information required by
Item 3.04 of Form 8–K within the period
specified in that form unless
substantially the same information as
required by that item has been
previously reported by the registrant.
*
*
*
*
*
9. Amend § 240.15d–11 by revising
paragraph (b) to read as follows:
§ 240.15d–11 Current reports on Form 8–K
(§ 249.308 of this chapter).
*
*
*
*
*
(b) This section shall not apply to
foreign governments, foreign private
issuers required to make reports on
Form 6–K (17 CFR 249.306) pursuant to
§ 240.15d–16, issuers of American
Depositary Receipts for securities of any
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foreign issuer, or investment companies
required to file reports pursuant to
§ 270.30b1–1 of this chapter under the
Investment Company Act of 1940,
except:
(1) Where such investment companies
are required to file notice of a blackout
period pursuant to § 245.104 of this
chapter; and
(2) A closed-end company (as defined
in 15 U.S.C. 80a–5(a)(2)) is required to
file a current report on Form 8–K
containing the information required by
Item 3.04 of Form 8–K within the period
specified in that form unless
substantially the same information as
required by that item has been
previously reported by the registrant.
*
*
*
*
*
PART 249—FORMS, SECURITIES
EXCHANGE ACT OF 1934
10. The authority citation for part 249
continues to read in part as follows:
Authority: 15 U.S.C. 78a et seq., 7201 et
seq., and 18 U.S.C. 1350, unless otherwise
noted.
*
*
*
*
*
11. Amend Form 20–F (referenced in
§ 249.220f) by redesignating Instruction
3 to Item 10 as Instruction 4, adding
new Instruction 3 to Item 10,
redesignating Items 12.C. and 12.D. as
Items 12.D. and 12.E., adding new Item
12.C. and the Instructions to Item 12.C.,
and revising Instruction 1 to Item 12. to
read as follows:
Note: The text of Form 20–F does not, and
this amendment will not, appear in the Code
of Federal Regulations.
FORM 20–F
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*
Item 10. Additional Information
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*
*
Instructions to Item 10
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3. In registration statements filed
under the Securities Act or Exchange
Act that relate to a class of preferred
securities for which a credit rating, as
that term is defined in 15 U.S.C.
78c(a)(60), from a credit rating agency,
as that term is defined in 15 U.S.C.
78c(a)(61), is being used in connection
with the registered offering, disclose the
information required under Item 12.C.1
of Form 20–F. If filing Form 20–F as an
annual report, furnish the information
required by Item 12.C.2 of Form 20–F if
there have been any changes to a rating
required to be disclosed by Item 12.C.1
of Form 20–F.
*
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*
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Item 12. Description of Securities Other
than Equity Securities
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C. Credit ratings.
1. If a company, any selling security
holder, any underwriter, or any member
of a selling group in a registered offering
uses use a credit rating, as that term is
defined in 15 U.S.C. 78c(a)(60), from a
credit rating agency, as that term is
defined in 15 U.S.C. 78c(a)(61), with
respect to the company or a class of
securities issued by the company, in
connection with a registered offering,
the company shall disclose the
following information for each rating
used:
(a) The identity of the credit rating
agency assigning the credit rating and
whether such organization is a
nationally recognized statistical rating
organization as that term is defined in
15 U.S.C. 78c(a)(62);
(b) The credit rating assigned;
(c) The relative rank of the credit
rating within the assigning credit rating
agency’s overall classification system;
(d) The date the credit rating was
assigned;
(e) The credit rating agency’s
definition or description of the category
in which the credit rating agency rated
the class of securities;
(f) The identity of the party who is
compensating the credit rating agency
for providing the rating;
(g) A description of any other nonrating services provided by the credit
rating agency or its affiliates to the
company or its affiliates, and if such
other services have been provided,
separate disclosure of the fee paid for
the credit rating required to be disclosed
and the aggregate fees paid for any other
non-rating services provided during the
company’s last completed fiscal year
and any subsequent interim period up
to the date of the filing;
(h) All material scope limitations of
the credit rating;
(i) How any contingencies related to
the securities are or are not reflected in
the credit rating;
(j) Any published designation
reflecting the results of any other
evaluation done by the credit rating
agency in connection with the credit
rating, along with an explanation of the
designation’s meaning and the relative
rank of the designation;
(k) Any material differences between
the terms of the securities as assumed or
considered by the credit rating agency
in rating the securities and:
(i) The minimum obligations of the
security as specified in the governing
instruments of the security; and
(ii) The terms of the securities as used
in any marketing or selling efforts;
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53111
(l) A statement informing investors
that a credit rating is not a
recommendation to buy, sell, or hold
securities; that it may be subject to
revision or withdrawal at any time by
the assigning credit rating agency; that
each credit rating is applicable only to
the specific security to which it applies;
and that investors should make their
own evaluation as to whether an
investment in the security is
appropriate;
(m) A description of a final rating
obtained by the company but not used
in connection with the offering,
including the information set forth in
paragraphs (a)–(l) of this item; and
(n) A description of any preliminary
rating of the class of securities that
received the rating being disclosed
pursuant to this Item 12 if such
preliminary rating was obtained by or
on behalf of the company and received
from a credit rating agency other than
the credit rating agency that provided
the credit rating disclosed pursuant to
this Item 12. Such description shall
include:
(i) The identity of the credit rating
agency that determined or indicated the
rating and whether such organization is
a nationally recognized statistical rating
organization as that term is defined in
15 U.S.C. 78c(a)(62);
(ii) The preliminary rating determined
or indicated or a description of the
category or range of categories in which
the preliminary credit rating agency
placed the class of securities;
(iii) The date the preliminary rating
was conveyed to the company, any
party acting on the company’s behalf or
the underwriters;
(iv) The relative rank of the
preliminary rating within the
preliminary credit rating agency’s
overall classification system;
(v) Any material scope limitations of
the preliminary rating; and
(vi) Any material differences between
the terms of the securities on which the
preliminary rating was determined and
the terms of the securities on which the
final rating was determined.
2. Credit rating agency decisions.
(a) Disclose the information required
by paragraph (b) of this Item 12.C.2. if
the company is notified by, or receives
any communication from, any credit
rating agency to the effect that the
organization has decided to change or
withdraw the credit rating assigned to
the company or any class of debt or
preferred security or other indebtedness
of the company (including securities or
obligations as to which the company is
a guarantor, or may become directly or
contingently liable for arising out of an
off-balance sheet arrangement) that was
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previously required to be disclosed
pursuant to Item 12.C.1 of this Form.
(b) If the registrant has received any
notification or other communication as
described in paragraph (a) of this Item
12.C.2., file the notice as an exhibit to
the annual report on Form 20–F and
disclose the following information:
(i) The date the company received the
notification or communication;
(ii) The name of the credit rating
agency and whether such organization
is a nationally recognized statistical
rating organization as that term is
defined in 15 U.S.C. 78c(a)(62); and
(iii) The nature of the rating agency’s
decision.
*
*
*
*
*
Instructions to Item 12
1. You do not need to provide the
information called for by this Item 12 if
you are using the form as an annual
report for your fiscal years ending before
December 15, 2009. For your fiscal years
ending on or after December 15, 2009,
except for Item 12.C.2, Item 12.E.3. and
Item 12.E.4 of this Form, you do not
need to provide the information called
for by this Item 12 if you are using this
form as an annual report. You do not
need to provide the information
required by Item 12.C.2. of this Form if
you are using the form as a registration
statement.
*
*
*
*
*
srobinson on DSKHWCL6B1PROD with PROPOSALS2
Instructions to Item 12.C.1.
1. Disclosure is not required by this
Item 12.C.1. of this Form if the only
disclosure of a credit rating in a filing
with the Commission relates to changes
to a credit rating, liquidity of the
company, the cost of funds of a
company or terms of agreements that
refer to credit ratings, and the credit
rating is not otherwise used in
connection with a registered offering.
2. If a company includes information
about credit ratings in a prospectus
pursuant to Item 12.C.1. of this Form
and the rating has not yet been issued
in final form, the company shall update
the description of each rating as set
forth below:
A. If a change in a rating, including
the assignment of a final rating, already
included in the prospectus is available
subsequent to the filing of the
registration statement, but prior to its
effectiveness, the company shall convey
to the purchaser the rating change.
B. If an additional rating, including a
final rating, that the company is
required to disclose, or if a material
change in a rating already included,
becomes available during any period in
which offers or sales are being made, the
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company shall disclose such additional
rating or rating change by means of a
post-effective amendment, or
supplement to the prospectus pursuant
to Rule 424(b) under the Securities Act
(§ 230.424(b) of this chapter), unless, in
the case of a registration statement on
Form F–3 under the Securities Act
(referenced in § 239.33 of this chapter),
it has been disclosed in a document
incorporated by reference into the
registration statement subsequent to its
effectiveness and prior to the
termination of the offering or
completion of sales.
3. For purposes of this Item 12, a
credit rating is ‘‘used in connection with
a registered offering’’ in circumstances,
including but limited to, when such
rating is used in connection with an
unregistered offering of securities, and
the securities offered privately are
subsequently exchanged for
substantially similar registered
securities even if the credit rating was
not used in connection with the
registered exchange offering.
4. A preliminary rating includes any
rating that is not published, any range
of ratings, any oral or other indications
of a potential rating or range of ratings
and all other preliminary indications of
a rating. A preliminary rating includes
ratings on a particular structure of a
security even if not tied to a specific
company or group of assets. Disclosure
of a preliminary rating is required even
if there have been changes to the
security for which a final rating is
disclosed pursuant to this Item 12.
5. For purposes of determining
whether disclosure of any preliminary
rating or unused final rating is required,
a credit rating is obtained from a credit
rating agency if it is solicited by or on
behalf of a company from a credit rating
agency.
Instructions to Item 12.C.2.
1. No disclosure need be made under
Item 12.C.2. of this Form during any
discussions between the company and
any credit rating agency regarding any
decision required to be disclosed unless
and until the credit rating agency
notifies the company that the credit
rating agency has made a final decision
to take such action.
2. For purposes of Item 12.C.2. of this
Form, the term ‘‘credit rating agency’’
has the meaning set forth in Section
3(a)(60) of the Exchange Act [15 U.S.C.
78c(a)(60].
3. For purposes of Item 12.C.2. of this
Form, off-balance sheet arrangement has
the meaning set forth in Item 5.E.2. of
this Form.
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12. Amend Form 8–K (referenced in
§ 249.308) by revising Section 3—
Securities and Trading Markets to add
Item 3.04 to read as follows:
Note: The text of Form 8–K does not, and
this amendment will not, appear in the Code
of Federal Regulations.
Form 8–K
*
*
*
*
*
Item 3.04. Credit Rating Agency
Decisions
(a) Furnish the information required
by paragraph (b) of this Item 3.04 if the
registrant is notified by, or receives any
communication from, any credit rating
agency to the effect that the organization
has decided to change or withdraw the
credit rating assigned to the registrant or
any class of debt or preferred security or
other indebtedness of the registrant
(including securities or obligations as to
which the registrant is a guarantor or
may become directly or contingently
liable for arising out of an off-balance
sheet arrangement) that was previously
required to be disclosed pursuant to
Item 202(g) of Regulation S–K or Item
10.6 of Form N–2.
(b) If the registrant has received any
notification or other communication as
described in paragraph (a) of this Item
3.04, file the notice as an exhibit to the
report on Form 8–K and furnish the
following information:
(1) The date the registrant received
the notification or communication;
(2) The name of the credit rating
agency and whether such organization
is a nationally recognized statistical
rating organization as that term is
defined in 15 U.S.C. 78c(a)(62); and
(3) The nature of the rating agency’s
decision.
Instructions to Item 3.04
1. No disclosure need be made under
this Item 3.04 during any discussions
between the registrant and any credit
rating agency regarding any decision
required to be disclosed unless and
until the credit rating agency notifies
the registrant that the credit rating
agency has made a final decision to take
such action.
2. For purposes of this Item 3.04, the
term ‘‘credit rating agency’’ has the
meaning set forth in Section 3(a)(60) of
the Exchange Act [15 U.S.C. 78c(a)(60].
3. For purposes of this Item 3.04, offbalance sheet arrangement has the
meaning set forth in Item 303(a)(4)(ii) of
Regulation S–K [17 CFR
229.303(a)(4)(ii)].
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PART 239—FORMS PRESCRIBED
UNDER THE SECURITIES ACT OF 1933
PART 274—FORMS PRESCRIBED
UNDER THE INVESTMENT COMPANY
ACT OF 1940
13. The authority citation for part 274
continues to read in part as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s,
78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 80a–24,
80a–26, and 80a–29, unless otherwise noted.
*
*
*
*
*
14. Amend Form N–2 (referenced in
§§ 239.14 and 274.11a–1), Item 10 by
revising paragraph 6 and Instructions to
read as follows:
Note: The text of Form N–2 does not, and
these amendments will not, appear in the
Code of Federal Regulations.
FORM N–2
*
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*
*
Item 10. Capital Stock, Long-Term Debt,
and Other Securities
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6. Credit ratings: If the Registrant, any
selling security holder, any underwriter,
or any member of a selling group in a
registered offering uses a credit rating,
as that term is defined in section
3(a)(60) of the Exchange Act [15 U.S.C.
78c(a)(60)], from a credit rating agency,
as that term is defined in section
3(a)(61) of the Exchange Act [15 U.S.C.
78c(a)(61)], with respect to the registrant
or a class of securities issued by the
Registrant, in connection with a
registered offering, the Registrant shall
disclose the following information for
each rating used:
a. The identity of the credit rating
agency assigning the credit rating and
whether such organization is a
nationally recognized statistical rating
organization as that term is defined in
section 3(a)(62) of the Exchange Act [15
U.S.C. 78c(a)(62)];
b. The credit rating assigned;
c. The relative rank of the credit rating
within the assigning credit rating
agency’s overall classification system;
d. The date the credit rating was
assigned;
e. The credit rating agency’s
definition or description of the category
in which the credit rating agency rated
the class of securities;
f. The identity of the party who is
compensating the credit rating agency
for providing the credit rating;
g. A description of any other nonrating services provided by the credit
rating agency or its affiliates to the
Registrant or its affiliates, and if such
other services have been provided,
separate disclosure of the fee paid for
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the credit rating required to be disclosed
and the aggregate fees paid for any other
non-rating services provided during the
Registrant’s last completed fiscal year
and any subsequent interim period up
to the date of the filing;
h. All material scope limitations of
the credit rating;
i. How any contingencies related to
the securities are or are not reflected in
the credit rating;
j. Any published designation
reflecting the results of any other
evaluation done by the credit rating
agency in connection with the credit
rating, along with an explanation of the
designation’s meaning and the relative
rank of the designation;
k. Any material differences between
the terms of the securities as assumed or
considered by the credit rating agency
in rating the securities and (1) the
minimum obligations of the security as
specified in the governing instruments
of the security; and (2) the terms of the
securities as used in any marketing or
selling efforts;
l. A statement informing investors
that a credit rating is not a
recommendation to buy, sell, or hold
securities; that it may be subject to
revision or withdrawal at any time by
the assigning credit rating agency; that
each credit rating is applicable only to
the specific security to which it applies;
and that investors should make their
own evaluation as to whether an
investment in the security is
appropriate;
m. A description of a final rating
obtained by the registrant but not used
in connection with the offering,
including the information set forth in
paragraphs (a)–(l) of this item; and
n. A description of any preliminary
rating of the class of securities that
received the rating being disclosed
pursuant to this paragraph 6 if such
preliminary rating was obtained by or
on behalf of the Registrant and received
from a credit rating agency other than
the credit rating agency that provided
the credit rating disclosed pursuant to
this paragraph 6. Such description shall
include:
(1) The identity of the credit rating
agency that determined or indicated the
rating and an indication of whether
such organization is a nationally
recognized statistical rating organization
as that term is defined in section
3(a)(62) of the Exchange Act [15 U.S.C.
78c(a)(62)];
(2) The preliminary rating determined
or indicated or a description of the
category or range of categories in which
the preliminary credit rating agency
placed the class of securities;
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Fmt 4701
Sfmt 4702
53113
(3) The date the preliminary rating
was conveyed to the Registrant, any
party acting on the Registrant’s behalf,
or the underwriters;
(4) The relative rank of the
preliminary rating within the
preliminary credit rating agency’s
overall classification system;
(5) Any material scope limitations of
the preliminary rating; and
(6) Any material differences between
the terms of the securities on which the
preliminary rating was determined and
the terms of the securities on which the
final rating was determined.
Instructions:
1. Disclosure is not required by
paragraph 6 of this item if the only
disclosure of a credit rating in a filing
with the Commission relates to changes
to a credit rating, liquidity of the
Registrant, the cost of funds of a
Registrant or the terms of agreements
that refer to credit ratings, and the credit
rating is not otherwise used in
connection with a registered offering.
2. If a Registrant includes information
about credit ratings in a prospectus
pursuant to paragraph 6 of this item and
the rating has not yet been issued in
final form, the Registrant shall update
the description of each rating as set
forth below:
a. If a change in a rating, including the
assignment of a final rating, already
included in the prospectus is available
subsequent to the filing of the
registration statement, but prior to its
effectiveness, the Registrant shall
convey to the purchaser the rating
change.
b. If an additional rating, including a
final rating, that the Registrant is
required to disclose, or if a material
change in a rating already included,
becomes available during any period in
which offers or sales are being made, the
Registrant shall disclose such additional
rating or rating change by means of a
post-effective amendment, or
supplement to the prospectus pursuant
to Rule 497 under the 1933 Act [17 CFR
230.497].
3. For purposes of paragraph 6 of this
item, a credit rating is ‘‘used in
connection with a registered offering of
securities’’ in circumstances, including
but limited to, when such rating is used
in connection with an unregistered
offering of securities, and the securities
offered privately are subsequently
exchanged for substantially similar
registered securities even if the credit
rating was not used in connection with
the registered exchange offering.
4. A preliminary rating includes any
rating that is not published, any range
of ratings, any oral or other indications
of a potential rating or range of ratings
E:\FR\FM\15OCP2.SGM
15OCP2
53114
Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules
and all other preliminary indications of
a rating. A preliminary rating includes
ratings on a particular structure of a
security even if not tied to a specific
registrant or group of assets. Disclosure
of a preliminary rating is required even
if there have been changes to the
security for which a final rating is
disclosed pursuant to this paragraph 6.
5. For purposes of determining
whether disclosure of any preliminary
rating or unused final rating is required,
a credit rating is obtained from a credit
rating agency if it is solicited by or on
behalf of a Registrant from a credit
rating agency.
6. If the prospectus relates to
securities other than senior securities of
the Registrant that have been assigned a
credit rating by a credit rating agency,
the information required by this
paragraph may be provided in the
Statement of Additional Information
unless the rating criteria will materially
affect the investment policies of the
Registrant (e.g., if the rating agency
establishes criteria for selection of the
Registrant’s portfolio securities with
which the Registrant intends to
comply), in which case it should be
included in the prospectus.
*
*
*
*
*
By the Commission.
Dated: October 7, 2009.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–24546 Filed 10–14–09; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 220
[Release Nos. 33–9071; 34–60798; IC–
28943; File No. S7–21–09]
RIN 3235–AK45
Concept Release on Possible
Rescission of Rule 436(g) Under The
Securities Act of 1933
srobinson on DSKHWCL6B1PROD with PROPOSALS2
AGENCY: Securities and Exchange
Commission.
ACTION: Concept release; request for
comments.
SUMMARY: As part of the Commission’s
review of the role of credit rating
agencies in the operation of the
securities markets, and in light of
disclosure regarding credit ratings that
is being proposed in a companion
release, the Commission is seeking
comment on whether Rule 436(g) under
the Securities Act of 1933 should be
rescinded. In particular, we would like
to understand whether there continues
VerDate Nov<24>2008
16:49 Oct 14, 2009
Jkt 220001
to be a sufficient basis to exempt
nationally recognized statistical rating
organizations from Section 7 and 11 of
the Securities Act.
DATES: Comments should be received on
or before December 14, 2009.
ADDRESSES: Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/concept.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–21–09 on the subject line;
or
• Use the Federal eRulemaking Portal
(https://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number S7–21–09. This file number
should be included on the subject line
if e-mail is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s Web site (https://
www.sec.gov/rules/concept.shtml).
Comments are also available for public
inspection and copying in the
Commission’s Public Reference Room,
100 F Street, NE., Washington, DC
20549, on official business days
between the hours of 10 a.m. and 3 p.m..
All comments received will be posted
without change; we do not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
FOR FURTHER INFORMATION CONTACT:
Blair F. Petrillo, Special Counsel in the
Office of Rulemaking, Division of
Corporation Finance, at (202) 551–3430,
100 F Street, NE., Washington, DC
20549.
SUPPLEMENTARY INFORMATION: In a
companion release,1 the Commission is
proposing amendments to rules under
the Securities Exchange Act of 1934 2
and Regulation S–K,3 and forms under
the Securities Act of 1933,4 the
1 See the proposing release considered by the
Commission on September 17, 2009 regarding
proposed disclosure regarding credit ratings in
registration statements.
2 15 U.S.C. 78a et seq.
3 17 CFR 229.10 through 1123.
4 15 U.S.C. 77a et seq.
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Fmt 4701
Sfmt 4702
Exchange Act and the Investment
Company Act of 1940 5 to require
disclosure by registrants regarding
credit ratings in their registration
statements under the Securities Act and
the Exchange Act, and by closed-end
management investment companies in
registration statements under the
Securities Act and the Investment
Company Act, if the registrant uses the
rating in connection with a registered
offering. In connection with the
proposed amendments, we are soliciting
comment on whether the Commission
should rescind Rule 436(g) under the
Securities Act.6
I. Introduction
We are considering whether we
should propose rescinding Rule 436(g)
under the Securities Act. Rule 436(g)
provides an exemption for credit ratings
provided by nationally recognized
statistical rating organizations
(‘‘NRSROs’’) from being considered a
part of the registration statement
prepared or certified by a person within
the meaning of Sections 7 7 and 11 8 of
the Securities Act. The exemption
currently does not apply to credit rating
agencies that are not NRSROs. We are
concerned that there is no longer a
sufficient basis to exempt NRSROs and
to distinguish between NRSROs and
credit rating agencies that are not
NRSROs for purposes of liability under
Section 11 of the Securities Act.
Rescinding the exemption would cause
NRSROs to be included in the liability
scheme for experts set forth in Section
11, as is currently the case for credit
rating agencies that are not NRSROs.
We solicit comment on what impact
removing the rule would have on
markets and their participants. Scrutiny
of credit ratings and the process of
obtaining a credit rating appears to have
increased as a result of the turmoil in
the credit markets over the past few
years. As discussed below and in the
companion release proposing to require
disclosure regarding credit ratings, as
credit ratings have become more
significant, we have sought to protect
investors while recognizing the role
credit ratings play in the offer and sale
of securities. In that regard, we are now
exploring whether Rule 436(g) is still
appropriate in light of the growth and
development of the credit rating
industry and investors’ use of credit
ratings. We are mindful of the potential
significant impact that rescinding Rule
436(g) could have on registrants,
5 15
U.S.C. 80a–1 et seq.
CFR 220.436(g).
7 15 U.S.C. 77g.
8 15 U.S.C. 77k.
6 17
E:\FR\FM\15OCP2.SGM
15OCP2
]]>Agencies
[Federal Register Volume 74, Number 198 (Thursday, October 15, 2009)]
[Proposed Rules]
[Pages 53086-53114]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-24546]
[[Page 53085]]
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Part III
Securities and Exchange Commission
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17 CFR Parts 220, 229, 239, et al.
Credit Ratings Disclosure and Concept Release on Possible Rescission of
Rule 436(g) Under the Securities Act of 1933; Proposed Rules
Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 /
Proposed Rules
[[Page 53086]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229, 239, 240, 249 and 274
[Release Nos. 33-9070; 34-60797; IC-28942; File No. S7-20-09]
RIN 3235-AK41
Credit Ratings Disclosure
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: We are proposing amendments to our rules to require disclosure
of information regarding credit ratings used by registrants, including
closed-end management investment companies, in connection with a
registered offering of securities so that investors will better
understand the credit rating and its limitations. The amendments we are
proposing today also would require additional disclosure that would
inform investors about potential conflicts of interest that could
affect the credit rating. In addition, we are proposing amendments to
require disclosure of preliminary credit ratings in certain
circumstances so that investors have enhanced information about the
credit ratings process that may bear on the quality or reliability of
the rating. The proposed amendments would be applicable to registration
statements filed under the Securities Act of 1933, the Securities
Exchange Act of 1934 and the Investment Company Act of 1940, and Forms
8-K and 20-F.
DATES: Comments should be received on or before December 14, 2009.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-20-09 on the subject line; or
Use the Federal eRulemaking Portal (https://www.regulations.gov).
Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-20-09. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's Web
site (https://www.sec.gov/rules/proposed.shtml). Comments are also
available for public inspection and copying in the Commission's Public
Reference Room, 100 F Street, NE., Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. All comments
received will be posted without change; we do not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Blair F. Petrillo, Special Counsel in
the Office of Rulemaking, Division of Corporation Finance, at (202)
551-3430, or with respect to questions regarding investment companies,
Devin F. Sullivan, Staff Attorney in the Office of Disclosure
Regulation, Division of Investment Management, at (202) 551-6784, 100 F
Street, NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to
Regulation S-K,\1\ and forms under the Securities Act of 1933,\2\ the
Securities Exchange Act of 1934 \3\ and the Investment Company Act of
1940.\4\ In Regulation S-K, the Commission is proposing to amend Items
10 \5\ and 202.\6\ Under the Securities Act, the Commission is
proposing to amend Form S-3 \7\ and Form S-4.\8\ Under the Exchange
Act, the Commission is proposing to amend Rule 13a-11 \9\ and Rule 15d-
11,\10\ as well as Form 8-K \11\ and Form 20-F.\12\ The Commission is
also proposing amendments to Form N-2 \13\ under the Securities Act and
the Investment Company Act.
---------------------------------------------------------------------------
\1\ 17 CFR 229.10 through 1123.
\2\ 15 U.S.C. 77a et seq.
\3\ 15 U.S.C. 78a et seq.
\4\ 15 U.S.C. 80a-1 et seq.
\5\ 17 CFR 229.10.
\6\ 17 CFR 229.202.
\7\ 17 CFR 239.13.
\8\ 17 CFR 239.25.
\9\ 17 CFR 240.13a-11.
\10\ 17 CFR 240.15d-11.
\11\ 17 CFR 249.308.
\12\ 17 CFR 249.220f.
\13\ 17 CFR 239.14; 17 CFR 274.11a-1.
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I. Proposed Amendments
A. Introduction
The disclosure requirements we are proposing today are intended to
enhance credit rating disclosure so that investors will better
understand credit ratings and their limitations. These proposals
reflect our concerns that even though credit ratings appear to be a
major factor in the investment decision for investors and play a key
role in marketing and pricing of the securities,\14\ investors may not
have access to sufficient information about credit ratings. We believe
our proposed rules would improve investor protection by providing
information about credit ratings that will place the credit rating in
an appropriate context.
---------------------------------------------------------------------------
\14\ See Report on the Role and Function of Credit Rating
Agencies in the Operation of the Securities Markets, January 2003,
at https://www.sec.gov/news/studies/credratingreport0103.pdf (noting
that issuers use credit ratings in part ``to improve the
marketability or pricing of their financial obligations.''). See
also Bo Becker and Todd Milbourn, Reputation and Competition:
Evidence from the Credit Rating Industry, Working Paper, (June 2009)
at https://www.hbs.edu/research/pdf/09-051.pdf.
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We have four principal areas of concern. First, we are concerned
that investors may not be provided with sufficient information to
understand the scope or meaning of ratings being used to market various
securities. Historically, credit ratings were intended to be a measure
of the registrant's ability to repay its corporate debt.\15\ As the
types of investment products expand and become more complex, however,
the returns (including the prospect of repayment) on these securities
often are dependent on factors other than the creditworthiness of the
registrant.\16\ As a result, the information conveyed by ratings has
become increasingly less comparable across types of securities.\17\
Investors, however, may not be aware of the differences underlying two
[[Page 53087]]
securities with the same credit rating even if the securities were
issued by the same registrant. The recent turmoil in the credit markets
has raised serious concerns that investors may not have fully
understood what credit ratings mean, or the limits inherent in
them.\18\ Even when securities are highly rated, investors can suffer
significant losses, as was evident during the recent market crisis.\19\
For example, the value of AAA-rated mortgage-backed securities fell 70
percent from January 2007 to January 2008.\20\ As a result, we believe
that investors should be provided with additional disclosure regarding
credit ratings so that investors can choose how much weight to place on
a credit rating when making an investment decision.
---------------------------------------------------------------------------
\15\ See Disclosure of Ratings in Registration Statements,
Release No. 33-6336 (Aug. 6, 1981) [46 FR 42024].
\16\ See Disclosure of Security Ratings, Release No. 33-7086
(Aug. 31, 1994) [59 FR 46304] (``1994 Ratings Release'') (noting
that ``[b]ecause of these non-credit payment risks, there is
substantially greater uncertainty relating to yield and total return
than for traditional debt obligations of comparable credit
rating''). See also Joseph Mason and Joshua Rosner, Where Did the
Risk Go? How Misapplied Bond Ratings Cause Mortgage Backed
Securities and Collateralized Debt Obligation Market Disruptions,
Working Paper, (May 2007), at https://ssrn.com/abstract=1027475.
\17\ As we noted in 1994:
Today, a traditional corporate debt instrument with fixed
principal and interest obligations, a structured note whose
principal and interest is tied, for example, to an index of
securities, an ``interest-only'' strip, a collateralized mortgage
obligation security, a residual interest in a CMO offering, and a
cash flow (or ``kitchen-sink'') bond all can be designated ``triple-
a,'' notwithstanding that investment returns on most of these
instruments are largely dependent on factors in addition to the
issuer's creditworthiness and that the scope of the rating differs
among the securities.
See 1994 Ratings Release in note 16 above. See also Alan
Blinder, Six Fingers of Blame in the Mortgage Mess, N.Y. Times,
Sept. 30, 2007.
\18\ See e.g. Recommendations of the Securities Industry and
Financial Markets Association Credit Rating Agency Task Force (July
2008), at https://www.sifma.org/capital_markets/docs/SIFMA-CRA-Recommendations.pdf (recommending that investor education regarding
the nature and limitations of the credit rating process is necessary
to prevent over-reliance on credit ratings). See also Report of the
Financial Stability Forum on Enhancing Market and Institutional
Resilience (Apr. 7, 2008), at https://www.financialstabilityboard.org/publications/r_0804.pdf.
\19\ For a more detailed discussion of the role of nationally
recognized statistical rating organizations (``NRSROs'') in
determining ratings for structured products, particularly subprime
residential mortgage backed securities and collateralized debt
obligations, in the time period leading up to the credit crisis, see
Proposed Rules for Nationally Recognized Statistical Rating
Organizations, Release No. 34-57967 (June 16, 2008) [73 FR 36212].
\20\ See e.g., Marco Pagano and Paolo Volpin, Credit Ratings
Failures: Causes and Policy Options, Working Paper, (Feb. 9, 2009),
at https://www.italianacademy.columbia.edu/publications/working_papers/2008_2009/pagano_volpin_seminar_IA.pdf.
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Second, we are concerned that investors may not have access to
information allowing them to appreciate fully the potential conflicts
of interest faced by credit rating agencies and how these conflicts may
impact ratings. For example, most credit rating agencies are paid by
the registrants who receive the credit ratings.\21\ This situation
creates the potential for a rating to be inflated by a credit rating
agency as a result of the credit rating agency's desire to keep the
registrant's business for future ratings.\22\ Credit rating agencies
also may provide additional services to registrants, which can be an
important source of revenue for the credit rating agency.\23\
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\21\ See Briefing Paper: Roundtable to Examine Oversight of
Credit Rating Agencies (Apr. 2009), at https://www.sec.gov/spotlight/cra-oversight-roundtable/briefing-paper.htm (noting that seven of
the ten NRSROs registered with the Commission operate under the
issuer-pay model and that the issuer-pay NRSROs have determined 98%
of the currently outstanding credit ratings issued by NRSROs).
\22\ See Pagano and Volpin in note 20 above.
\23\ As discussed below, Exchange Act Section 15E(h) and (i) and
Exchange Act Rule 17g-5 [17 CFR 240.17g-5] identify a series of
conflicts arising from the business of determining credit ratings.
Under the rule, some of these conflicts must be disclosed and
managed, while others are prohibited outright.
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Third, there has been significant discussion of the possibility
that ``ratings shopping'' may lead to inflated ratings.\24\ Ratings
shopping occurs when a registrant, or someone acting on its behalf,
seeks the highest credit rating available from multiple credit rating
agencies. We are concerned that investors have not been informed about
this practice, which we believe could color their assessment of the
reliability of the credit ratings ultimately obtained.
---------------------------------------------------------------------------
\24\ See e.g. Vasiliki Skreta and Laura Veldkamp, Ratings
Shopping and Asset Complexity: A Theory of Ratings Inflation,
working paper, (Feb. 2009), at https://pages.stern.nyu.edu/%7Elveldkam/pdfs/ratings.pdf; Patrick Bolton, Xavier Freixas and
Joel Shapiro, The Credit Ratings Game, Working Paper, (Feb. 2009),
at https://www.nber.org/papers/w14712; Becker and Milbourn in note 14
above.
---------------------------------------------------------------------------
Finally, even though credit ratings appear to be a key part of
investment decisions and are used to market securities, disclosure
about ratings is not required in prospectuses currently. As a result,
we are concerned that investors may not be receiving even basic
information about a potentially key element of their investment
decisions.
To address these concerns, we are proposing several enhancements to
our disclosure rules. As a threshold matter, we are proposing to
require disclosure by registrants regarding credit ratings in their
registration statements under the Securities Act and the Exchange Act,
and by closed-end management investment companies (``closed-end
funds'') in registration statements under the Securities Act and the
Investment Company Act, if the registrant uses the rating in connection
with a registered offering. The disclosure requirements are intended to
address the concerns noted above. To keep investors apprised of
developments relating to credit ratings for their investments, we are
also proposing amendments to Exchange Act reports to require
registrants to disclose changes to credit ratings. We are not proposing
to require registrants to obtain credit ratings; instead, we are
proposing to require disclosure about credit ratings used by
registrants and other offering participants in connection with a
registered offering in order to place the credit rating in its proper
context for investors.
In a companion concept release,\25\ we seek comment on whether we
should propose to repeal the exemption for credit ratings provided by
NRSROs from being considered a part of the registration statement
prepared or certified by a person within the meaning of Sections 7 \26\
and 11 \27\ of the Securities Act currently contained in Rule 436(g)
under the Securities Act.\28\ If Rule 436(g) were eliminated, there
would no longer be a distinction between NRSROs and credit rating
agencies that are not NRSROs for purposes of liability under Section 11
of the Securities Act.
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\25\ See the companion concept release considered by the
Commission on September 17, 2009 regarding Rule 436(g) under the
Securities Act.
\26\ 15 U.S.C. 77g.
\27\ 15 U.S.C. 77k.
\28\ 17 CFR 220.436(g).
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As we noted, we continue to have concerns about the appropriate use
of credit ratings by investors, but we recognize the reality that
credit ratings are important to investors. Therefore, we seek to
improve investor protection through enhanced disclosure about credit
ratings. In addition to proposing the rule amendments set forth in this
release, the Commission today is also adopting certain amendments to
its existing rules regulating NRSROs, as well as proposing additional
amendments and a new rule.\29\ We believe that today's proposals could
help reduce undue reliance on credit ratings by providing investors
with information about what a credit rating is, and what it is not, and
other information bearing on the reliability of ratings to place the
credit rating in its proper context. In light of the importance of
credit ratings to investors and their use by registrants in marketing
securities, we believe it is appropriate to require that this
information be included in a registrant's prospectus so that all
investors receive this information.
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\29\ See the releases considered by the Commission on September
17, 2009 regarding (i) amendments to Rule 17g-2 under the Exchange
Act; (ii) amendments to Rule 17g-5 under the Exchange Act; (iii)
amendments to Regulation FD; (iv) proposed amendments to Rule 17g-3
under the Exchange Act; (v) proposed amendments to the Instructions
to Exhibit 6 of Form NRSRO; and (vi) proposed new Rule 17g-7 under
the Exchange Act.
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B. Background
In 1981, the Commission issued a statement of policy regarding its
view of disclosure of credit ratings in registration statements under
the Securities Act.\30\ This statement marked a clear shift from the
Commission's historic practice of discouraging the
[[Page 53088]]
disclosure of credit ratings in these filings and reflected the
Commission's then-developing acknowledgement of the growing importance
of credit ratings in the securities markets and in the regulation of
those markets.\31\ Soon thereafter, the Commission amended Regulation
S-K to reflect its new policy of permitting the voluntary disclosure of
credit ratings in registration statements along with clear disclosure
explaining the rating.\32\ The Commission also adopted rules to permit
the voluntary disclosure of credit ratings in tombstone
advertisements,\33\ and provided that a credit rating by an NRSRO
generally is not part of a registration statement or report prepared or
certified by a person within the meaning of Sections 7 and 11 of the
Securities Act.\34\
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\30\ See Disclosure of Ratings in Registration Statements, in
note 15 above.
\31\ See Release No. 33-6336 in note 15 above. The Commission
announced ``that, contrary to prior general staff positions on this
matter, it will now permit the disclosure of security ratings
assigned by rating organizations in registration statements.'' In
support of this shift in policy, the Commission cited ``the general
usefulness'' of credit ratings to investors and the ``importance
that the Commission and other regulatory entities have attached to
the issuance'' of a credit rating. Id.
\32\ See Adoption of Integrated Disclosure System, Release No.
33-6383 (Mar. 3, 1982) [47 FR 11380] (``Integrated Disclosure
Release''). See also Registration Form for Closed-End Management
Investment Companies, Release No. 33-6967 (November 20, 1992) [57 FR
56826] (adopting amendment to Form N-2 regarding voluntary
disclosure of credit ratings for closed-end funds).
\33\ See Integrated Disclosure Release in note 32 above
(adopting amendments to Rule 134(a) under the Securities Act to
provide that certain communications containing a security rating or
ratings of a class of debt securities, convertible debt securities
and preferred stock and the name(s) of the rating organization would
not be deemed to be a prospectus under Section 2(10) of the
Securities Act).
\34\ Concurrent with the adoption of these rules and guidance,
the Commission adopted Securities Act Form S-3, the short-form
Securities Act registration statement for eligible domestic issuers
[17 CFR 239.13]. Form S-3 provides that a primary offering of non-
convertible debt securities may be eligible for registration on the
form if rated investment grade. A non-convertible security is an
``investment grade security'' for purposes of form eligibility if at
the time of sale, at least one NRSRO has rated the security in one
of its generic rating categories which signifies investment grade,
typically one of the four highest rating categories. In adopting
this requirement, the Commission specifically noted that commenters
believed that the component relating to investment grade ratings was
appropriate because non-convertible debt securities generally are
purchased on the basis of interest rates and credit ratings. See
Section III.A.1 of the Integrated Disclosure Release in note 32
above. Later, in 1992, the Commission expanded the eligibility
requirement to delete references to debt or preferred securities and
to provide Form S-3 eligibility for other investment grade
securities (such as foreign currency or other cash settled
derivative securities). See Simplification of Registration
Procedures for Securities Offerings, Release No. 33-6964 (Oct. 22,
1992) [57 FR 48970]. Consistent with Form S-3, the Commission
adopted a provision in Form F-3 [17 CFR 239.33] providing for the
eligibility of a primary offering of investment grade non-
convertible debt securities by eligible foreign private issuers.
Shelf registration requirements for asset-backed securities,
originally adopted in 1992, also depend on a credit ratings
component. See General Instruction I.B.5 of Form S-3.
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At various times since the policy statement and the adoption of
these rules and form eligibility requirements, the Commission has
reviewed and reconsidered its approach to the disclosure of credit
ratings in filings and the reliance on ratings in the Commission's form
eligibility requirements. For example, in 1994, the Commission
published a proposing release that would have mandated disclosure in
Securities Act prospectuses of a credit rating given by an NRSRO
whenever a credit rating with respect to the securities being offered
is ``obtained by or on behalf of an issuer.'' \35\ The proposals would
have required disclosure of specified information with respect to
credit ratings, whether or not disclosed voluntarily or mandated by the
then-proposed rules. In addition, the release sought comment on various
areas relating to the disclosure of credit ratings. The release also
proposed to require disclosure on a Form 8-K of any material change in
the credit rating assigned to the registrant's securities by an
NRSRO.\36\ The Commission received wide-ranging comments on those
proposals. Commenters' views on whether registrants should be required
to provide disclosure regarding credit ratings of their securities in a
final prospectus reflected a wide variety of opinions. Commenters who
were against the mandatory disclosure of credit ratings argued, among
other things, that: NRSROs have incentives to provide quality ratings;
information about credit ratings is widely available and understood;
requiring disclosure would be costly and burdensome; and requiring
disclosure of ratings may increase investors' reliance on them.\37\
Commenters who supported mandatory disclosure regarding credit ratings
argued, among other things, that: credit ratings have the potential to
confuse and mislead investors; investors do not receive sufficient
information about the credit rating; and investors expect to know the
credit rating when buying a security, so the proposed required
disclosure would comport with investor expectations.\38\ The Commission
did not act on the proposals.
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\35\ See the 1994 Ratings Release in note 16 above.
\36\ See the 1994 Ratings Release in note 16 above.
\37\ See e.g. letter regarding File No. S7-24-94 of Moody's
Investor Service, Inc. (Dec. 5, 1994); and letter regarding File No.
S7-24-94 of Fitch Investors Service Inc. (Dec. 6, 1994).
\38\ See e.g. letter regarding File No. S7-24-94 of Savings &
Community Bankers of America; and letter regarding file No. S7-24-94
of A.G. Edwards & Sons, Inc.
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In 2002, as part of the broader changes to the Form 8-K current
reporting requirements, the Commission again proposed to require a
registrant to file a Form 8-K current report when it received a notice
or other communication from any rating agency regarding, for example, a
change or withdrawal of a particular rating.\39\ Comments were mixed on
whether changes to a credit rating should be reported on a Form 8-
K.\40\ Commenters against the requirement generally believed it was
unnecessary because the information was publicly available.\41\
Commenters who supported the requirement generally believed it should
be limited to ratings provided by NRSROs.\42\ The new Form 8-K filing
regime adopted in 2004 did not include this requirement.\43\ In
declining to adopt a Form 8-K reporting requirement for credit rating
changes, the Commission noted that it was continuing to consider the
appropriate regulatory approach for rating agencies.\44\
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\39\ See Additional Form 8-K Disclosure Requirements and
Acceleration of Filing Date, Release No. 33-8106 (June 17, 2002) [67
FR 42914].
\40\ See also the discussion of Form 8-K in Section I.D. below.
\41\ See e.g. letter regarding File No. S7-22-02 of CIGNA
Corporation (Aug. 26, 2002), at https://www.sec.gov/rules/proposed/s72202.shtml.
\42\ See e.g. letter regarding File No. S7-22-02 of Investment
Counsel Association of America (Aug. 26, 2002), at https://www.sec.gov/rules/proposed/s72202.shtml.
\43\ See Additional Form 8-K Filing Requirements and
Acceleration of Filing Date, Release No. 33-8400 (Mar. 16, 2004) [69
FR 15594], amended by Additional Form 8-K Disclosure Requirements
and Acceleration of Filing Dates; Correction, Release No. 33-8400A
(Aug. 4, 2004) [69 FR 48370].
\44\ Id.
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In 2003, the Commission issued a concept release requesting comment
on whether it should cease using the NRSRO designation and, as an
alternative to the ratings criteria, provide for Form S-3 eligibility
where investor sophistication or large size denomination criteria are
met.\45\ In 2008, the Commission proposed changes to certain of its
forms and rules that would have removed references to credit ratings
and would have amended Securities Act Rule 436(g), which exempts NRSROs
from liability under Section 11 of the Securities Act, so that
[[Page 53089]]
the exemption would apply to all credit rating agencies, including
those that are not NRSROs.\46\
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\45\ See Rating Agencies and the Use of Credit Ratings under the
Federal Securities Laws, Release No. 33-8236 (June 4, 2003) [68 FR
35258] (``2003 Concept Release''). Most of the commenters that
addressed the issue supported retaining the requirement to use NRSRO
ratings for purposes of Form S-3 eligibility. Comments on the
concept release are available at https://www.sec.gov/rules/concept/s71203.shtml. See also the extensive discussion of market
developments in Release No. 34-57967 in note 19.
\46\ See Security Ratings, Release No. 33-8940 (Jul.1, 2008) [73
FR 40106].
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In April 2009, the Commission held a roundtable to examine the
oversight of credit rating agencies.\47\ Topics addressed by the panels
at the roundtable included current actions being taken by NRSROs,
competition within the industry and how to improve oversight of the
industry. Participants and the public were invited to submit comments
regarding the issues addressed at the roundtable. Commenters addressed
a wide range of issues.
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\47\ See generally https://www.sec.gov/spotlight/cra-oversight-roundtable.htm.
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The Commission's history in considering the possibility of
mandating disclosure of credit ratings reflects the complexity of the
issues raised by investors' reliance on them. Our rules under the
Securities Act and the Exchange Act require that investors be provided
material information in order to evaluate investment opportunities. We
understand that investors will continue to use credit ratings in making
investment decisions; therefore, we are proposing disclosure
requirements we believe will provide investors with additional
meaningful information that they can use to make those decisions. We
acknowledge the risk that requiring disclosure of credit ratings could
emphasize their significance and draw attention away from other, more
important information about the registrant and its securities. However,
we believe the recent market crisis and questions about the use of
credit ratings suggest that investors may not have sufficient
information to understand credit ratings fully. In light of the
concerns discussed above, we believe all investors would benefit from
the proposed revisions to our disclosure rules to require specific
disclosures about ratings.
C. Mandatory Disclosure of Credit Ratings
As noted above, the Commission's policy on credit ratings currently
is set forth in Item 10(c) of Regulation S-K. Specifically, the policy
permits registrants to voluntarily disclose ratings assigned by credit
rating agencies to classes of debt securities, convertible debt
securities and preferred stock in registration statements and periodic
reports.\48\ Item 10(c) also provides the Commission's views on
important matters registrants should consider in disclosing credit
ratings in Securities Act and Exchange Act filings. So that all
investors are provided with appropriate information about credit
ratings, the amendments we propose today would mandate much of the
disclosure permitted under Item 10(c) when a registrant uses a credit
rating in connection with a registered offering and would remove the
policy statement and recommended disclosure from that Item.
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\48\ We understand that only a small number of registrants
include disclosure regarding credit ratings in their prospectuses.
Generally, if ratings are disclosed, they are disclosed in free
writing prospectuses filed pursuant to Rule 433 [17 CFR 230.433].
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Specifically, we are proposing a new paragraph in Item 202 of
Regulation S-K that would require much of the specific disclosure
currently permitted under Item 10(c).\49\ As more fully described
below, proposed Item 202(g) would require disclosure of all material
scope limitations of the credit rating and any related published
designation, such as non-credit payment risks, assigned by the rating
organization with respect to the security.\50\ In addition, in order to
highlight potential conflicts of interest, the proposed rule would
require disclosure of the source of payment for the credit rating; and
if any additional non-rating services have been provided by the credit
rating agency or its affiliates to the registrant or its affiliates
over a specified period of time, disclosure of the services and the
fees paid for those services would be required. Disclosure required
pursuant to proposed Item 202(g) of Regulation S-K would be required in
Securities Act and Exchange Act registration statements. We are
proposing to amend Item 9 of Form S-3 and Item 4(a)(3) of Form S-4 so
that disclosure regarding credit ratings is provided in all
registration statements on that form when the trigger for disclosure is
met. We also are proposing to require, in certain circumstances,
disclosure of preliminary ratings, as well as final ratings not used by
a registrant, so that investors will be informed when a registrant may
have engaged in ratings shopping. Finally, we are proposing to amend
Exchange Act reports to require reporting of changes in credit ratings
in certain circumstances.
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\49\ See proposed new paragraph (g) to Item 202 of Regulation S-
K.
\50\ See note 67 below.
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We are proposing to apply similar mandatory disclosure requirements
regarding credit ratings of senior securities issued by closed-end
funds registered under the Investment Company Act. Like other
companies, closed-end funds sometimes issue senior securities that are
rated by one or more credit rating agency and currently are permitted
to voluntarily disclose these credit ratings in their registration
statements.\51\ We are proposing to amend Form N-2 to require that
closed-end funds include credit ratings disclosure in their
registration statements under the Securities Act and the Investment
Company Act. We are also proposing to amend Exchange Act Rules 13a-11
and 15d-11 to require reporting by closed-end funds of changes in
credit ratings in certain circumstances.
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\51\ Section 18(f) of the Investment Company Act [15 U.S.C. 80a-
18(f)] generally prohibits a registered open-end management
investment company (i.e., mutual fund) from issuing senior
securities.
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We believe that the proposed amendments to require disclosure of
certain information regarding credit ratings, rather than permitting
voluntary disclosure, would provide investors with the information they
need about credit ratings to put the rating in the appropriate context.
The proposed amendments also may benefit companies that in the past may
have hesitated to provide disclosure voluntarily by leveling the
playing field so that all companies using credit ratings in connection
with a registered offering of securities would be required to provide
disclosure.
1. Trigger for Required Disclosure
We believe that it is appropriate for registrants to provide the
proposed disclosure when they use a credit rating in connection with a
registered offering of their securities. As discussed above, investors
rely on credit ratings in making investment decisions. We believe
requiring disclosure when a registrant uses the credit rating to offer
or sell securities would provide investors with the information they
need about the credit rating to put the credit rating in its
appropriate context. Specifically, we are proposing to amend Item 202
of Regulation S-K,\52\ Item 12 of Form 20-F,\53\ and Item 10.6 of Form
[[Page 53090]]
N-2 \54\ to require registrants to provide detailed disclosure
regarding credit ratings if the registrant, any selling security
holder, any underwriter, or any member of a selling group uses a credit
rating \55\ from a credit rating agency \56\ with respect to the
registrant or a class of securities issued by the registrant, in
connection with a registered offering. The proposed rule would not
require that registrants obtain a credit rating on any security;
however, if a registrant uses a credit rating in connection with a
registered offering, then disclosure would be required.
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\52\ See proposed new paragraph (g) to Item 202 of Regulation S-
K.
\53\ Form 20-F is the combined registration statement and annual
report form for foreign private issuers under the Exchange Act. It
also sets forth disclosure requirements for registration statements
filed by foreign private issuers under the Securities Act. ``Foreign
private issuer'' is defined in Securities Act Rule 405 [17 CFR
230.405] and Exchange Act Rule 12b-2 [17 CFR 240.12b-2]. We are
proposing to amend Item 12 of Form 20-F, which pertains to
securities other than equity securities, to elicit the same
disclosure that would be required by proposed Item 202(g) of
Regulation S-K. We also propose to amend Item 10 of Form 20-F to
require the same disclosure under proposed Regulation S-K Item
202(g) for a class of preferred securities, including non-
participatory preferred stock as that term is used under 17 CFR
230.902(a)(1).
\54\ Form N-2 is the registration form used by closed-end funds
to register under the Investment Company Act and to offer their
securities under the Securities Act. We are proposing to amend Item
10.6 of Form N-2 to elicit the same disclosure that would be
required by proposed Item 202(g) of Regulation S-K.
\55\ As proposed, a ``credit rating'' would have the same
meaning as the definition in Section 3(a)(60) of the Securities
Exchange Act [15 U.S.C. 78c(a)(60)].
\56\ As proposed, a ``credit rating agency'' would have the same
meaning as the definition in Section 3(a)(61) of the Securities
Exchange Act [15 U.S.C. 78c(a)(61)].
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We have proposed to require disclosure regarding credit ratings if
the registrant, a selling security holder, underwriter or any member of
a selling group uses a credit rating in connection with a registered
offering. We included selling security holders, underwriters and other
members of the selling group in the proposed trigger for disclosure so
that registrants would not be able to structure their selling efforts
in a manner that would avoid triggering disclosure under the proposed
rule. In addition, there are circumstances where the underwriter
obtains the credit rating on behalf of the registrant, and if the
underwriter uses that rating, we believe disclosure should be required.
A credit rating may be ``used'' in a variety of ways. For example,
in addition to oral and written selling efforts of the registrant and
other members of the selling group, we would consider a credit rating
to be used in connection with a registered offering of securities when
it is disclosed in a prospectus or a term sheet filed pursuant to Rule
433 or Rule 497 \57\ under the Securities Act.
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\57\ 17 CFR 230.497. This would include closed-end fund
advertisements that, under Rule 497(i) [17 CFR 230.497(i)], are
considered to be filed with the Commission upon filing with a
national securities association registered under Section 15A of the
Exchange Act [15 U.S.C. 78o].
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Furthermore, as proposed, a credit rating also would be considered
to be used in connection with a registered offering of securities if it
is used in connection with a private offering of securities that is
made in reliance on an exemption from registration under the Securities
Act when the privately offered securities are exchanged shortly
thereafter for substantially identical registered securities.\58\
Disclosure would be required even if the rating was not disclosed in
the registered exchange offer.\59\ As a result, registrants would not
be able to avoid the proposed disclosure requirements regarding credit
ratings by disclosing a credit rating to investors in a private
offering but not using it in connection with the registered exchange
offer to those same investors of substantially identical securities.
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\58\ See proposed Instruction 3 to Item 202(g).
\59\ These transactions are sometimes referred to as Exxon
Capital exchange offers based on a series of no-action letters
issued by the staff beginning in May 1988 that outline the staff's
interpretive positions regarding such exchange offers. In a typical
Exxon Capital exchange offer, an issuer sells debt securities to a
broker-dealer in reliance on the exemption in Section 4(2) of the
Securities Act [15 U.S.C. 77d(2)]. The broker-dealer then
immediately resells those securities to qualified institutional
buyers in reliance on Rule 144A under the Securities Act. [17 CFR
230.144A]. The issuer then files a registration statement on Form S-
4 to register the exchange of the securities for substantially
identical securities. Upon effectiveness of the S-4 registration
statement, the qualified institutional buyers exchange restricted
securities for registered securities, and therefore, may resell the
securities they receive in the exchange offer without further
registration or prospectus delivery. See Exxon Capital Holdings
Corporation, SEC No-Action Letter (pub. avail. May 13, 1988); Morgan
Stanley & Co., Inc., SEC No-Action Letter (pub. avail. June 5,
1991); Mary Kay Cosmetics, Inc., SEC No-Action Letter (pub. avail.
June 5, 1991); K-III Communications Corp., SEC No-Action Letter
(pub. avail. May 14, 1993); Shearman & Sterling, SEC No-Action
Letter (pub. avail. July 2, 1993); Brown & Wood LLP, SEC No-Action
Letter (pub. avail. Feb. 5, 1997).
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We intend for the proposed rule to apply to both oral and written
selling efforts. Thus, for example, disclosure would be required when a
credit rating is disclosed to potential purchasers by the registrant,
any selling security holder, any underwriter or any member of a selling
group in response to an inquiry from an investor. A registrant would
not be able to avoid providing the proposed disclosure by using a
rating only in oral selling efforts and not including it in written
communications related to an offering, by not ``volunteering'' the
information about the credit rating except upon request or by referring
an investor to a Web site that discloses the credit rating. We believe
that if a credit rating is used in connection with a registered
offering, then investors should have the benefit of all of the
disclosure required by our proposed amendments.
We have not proposed to require that a registrant provide
disclosure when it has not sought or otherwise solicited the credit
rating unless the rating is used in connection with a registered
offering of its securities, as we believe that such a requirement may
create an undue burden for registrants to follow and provide disclosure
on all of the ratings outstanding on their securities. In this regard,
we note that regulatory changes could increase the number of
unsolicited ratings being provided. \60\ If we were to require
disclosure of unsolicited ratings not used in connection with a
registered offering of a security, a registrant would have to monitor
all of the credit rating agencies to determine not only whether a
credit rating had been issued with respect to a security, but also
whether the rating has been changed or withdrawn.
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\60\ The Commission is adopting today various changes to
Exchange Act Rule 17g-5 [17 CFR 240.17g-5] that would provide the
opportunity for other credit rating agencies to use the information
provided to NRSROs by the registrant to develop ``unsolicited
ratings'' for certain rated asset-backed securities. See the
adopting release considered by the Commission on September 17, 2009.
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We are aware that some registrants discuss their credit rating in
other contexts in their periodic reports or Securities Act registration
statements. As proposed, the disclosure requirement regarding credit
ratings would not be triggered if the only disclosure of a credit
rating in a filing with the Commission is related to changes to a
credit rating, the liquidity of the registrant, the cost of funds for a
registrant or the terms of agreements that refer to credit ratings, and
the credit rating is not otherwise used in connection with a registered
offering. For instance, some registrants note their ratings in the
context of a risk factor discussion regarding the risk of failure to
maintain a certain rating and the potential impact a change in credit
rating would have on the registrant. A registrant also may refer to its
rating in the context of its liquidity discussion in Management's
Discussion and Analysis of Financial Condition and Results of
Operations (``MD&A''). Registrants may need to discuss ratings when
they describe debt covenants, interest or dividends that are tied to
credit ratings or potential support to variable interest entities. We
have proposed to exclude these references to credit ratings from the
trigger that would require additional disclosure regarding credit
ratings because we believe that the additional information is not
necessary in that setting. We believe that the material information to
be conveyed in that setting relates to the fact that a credit rating
has the potential to have a material impact on the registrant. We
believe additional information about
[[Page 53091]]
scope limitations, conflicts of interest, preliminary ratings and other
matters does not appear to be necessary to understand that disclosure.
We are proposing to amend Item 9 of Form S-3 and Item 4(a)(3) of
Form S-4 so that disclosure regarding credit ratings is included in all
registration statements where appropriate. Currently, Item 9 requires
registrants to include the disclosure required by Item 202 of
Regulation S-K in a registration statement on Form S-3 unless capital
stock is to be registered and securities of the same class are
registered pursuant to Section 12 of the Exchange Act.\61\ Item 4(a)(3)
of Form S-4 requires registrants to include the disclosure required by
Item 202 of Regulation S-K unless the registrant would meet the
requirements for use of Form S-3 and capital stock is to be registered,
securities of the same class are registered pursuant to Section 12 of
the Exchange Act, and the security is listed on a national securities
exchange. We are proposing to amend these items so that the disclosure
required by proposed Item 202(g) of Regulation S-K would be included in
a registration statement on Form S-3 or Form S-4 even if securities of
the same class are registered under Section 12 of the Exchange Act so
long as the trigger for disclosure under proposed Item 202(g) has been
met. We believe these amendments are appropriate so that investors
would receive information about credit ratings in circumstances where
securities of the same class have been previously registered because
securities of the same class that are issued at different times may
have different ratings.
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\61\ 15 U.S.C. 78l.
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Request for Comments
As proposed, we would require disclosure of credit ratings
if the registrant, any selling securityholder, underwriter or member of
a selling group uses a credit rating in connection with a registered
offering. Are there any other persons that should be included as
persons who could cause the disclosure requirement to be triggered? Are
there reasons to exclude any of the persons or entities currently
included in the proposal?
Should the proposed rule mandate disclosure of a credit
rating obtained by a registrant regardless of whether the rating is
used in connection with a registered offering? For example, should we
require disclosure whenever a registrant discloses a rating? Do the
triggers in the requirement encourage the use and related disclosure of
only favorable ratings? Are there other circumstances that should
trigger the proposed disclosure?
Would the rule, as proposed, have an effect on the
frequency with which registrants seek credit ratings? Why or why not?
As proposed, we would consider a credit rating to be used
in connection with a registered offering of securities if it is
disclosed upon request of an investor. We believe this approach should
reduce the risk that practices might develop that would undermine the
purpose of our proposal, such as a registrant or member of a selling
group not offering the information about a credit rating unless asked.
Is this approach necessary or appropriate? Should registrants be
excluded from the proposed requirement to provide disclosure regarding
credit ratings if they and the offering participants decide not to use
the rating in selling efforts, but disclose the rating in response to
an investor who specifically asks about the rating?
Would registrants and other members of a selling group be
able to circumvent the rule as proposed? How would they be able to do
that? How could we modify the rule proposal to avoid circumvention?
Could the proposed trigger for disclosure lead to procedural
modifications to the practice of assigning credit ratings so that
registrants could avoid the disclosure requirement even though the
credit rating is used in connection with a registered offering? If so,
how could we modify the proposal to avoid such modifications?
As proposed, a credit rating would be considered used for
purposes of the proposed disclosure trigger if it is used in connection
with a private offering even if not used in a subsequent registered
exchange offering for substantially identical securities made to the
purchasers in the private placement. Is this trigger for disclosure
appropriate in light of the unique structure of these transactions?
Should we expand the instruction to include a credit rating obtained in
connection with a private offering if those securities are subsequently
registered for resale?
Is the instruction, as proposed, that a credit rating
would be considered used if it is used in connection with a private
offering but not used in a subsequent registered exchange offering for
substantially identical securities, appropriate for closed-end funds?
As proposed, a registrant would not be required to make
disclosure with regard to solicited or unsolicited ratings unless the
rating is used in connection with the registered offering of a
security. Is there a difference between solicited and unsolicited
ratings such that they should be treated differently for purposes of
this proposal? Would requiring disclosure of all unsolicited ratings
regardless of whether they are used in connection with a registered
offering be too burdensome for registrants? Should disclosure be
triggered only if the registrant, or someone acting on its behalf,
obtains the credit rating (i.e., a solicited rating) and uses the
rating in connection with a registered offering? If we were to require
disclosure of unsolicited ratings regardless of whether they are used
in connection with a registered offering of securities, should we
impose limitations on how many ratings, or which credit rating
agencies' ratings, should be required to be disclosed? For example,
should we require disclosure for unsolicited ratings issued by NRSROs
only? Would such disclosure impose an undue burden on the registrant?
Should the proposed mandatory disclosure of credit ratings
apply to closed-end funds?
Investment companies, including both closed-end funds and
mutual funds, sometimes represent that they invest only in securities
that have a specified credit rating, such as investment grade, or
disclose the percentage of their portfolios comprised of securities
with specified ratings. As noted above, investors may not have access
to sufficient information in order to understand fully what credit
ratings mean, or the limits inherent in them. Do current investment
company disclosure requirements adequately address the meaning and
limitations of credit ratings of portfolio securities? If not, how
could investment company disclosure requirements be changed to better
promote investor understanding of credit ratings of portfolio
securities?
The proposed amendments apply to the disclosure of credit
ratings. Mutual funds sometimes obtain other non-credit ratings and use
such ratings in connection with the offer or sale of their securities.
For example, rating agencies issue credit quality ratings to fixed-
income funds, which examine credit
[[Page 53092]]
risk in the fund's underlying portfolio.\62\ Ratings agencies may also
issue volatility ratings, which are designed to identify the potential
volatility of the market value of a fund's shares.\63\ In addition, at
least one rating agency issues principal stability ratings that are
designed to identify a money market fund's capacity to maintain stable
principal or a stable net asset value.\64\ Should we require the
mandatory disclosure of these additional fund ratings as part of a
fund's prospectus or statement of additional information if the ratings
are used in connection with the offer or sale of an investment
company's securities? If so, what disclosures should we require?
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\62\ See, e.g., Fitch's Fund and Asset Manager Ratings, at
https://www.fitchratings.com/jsp/sector/Sector.faces?selectedTab=Overview&Ne=11%2b4293330821 (last visited
on Aug. 11, 2009) (``Fitch's Fund and Asset Manager Ratings'');
Moody's Ratings Definitions, Money Market and Bond Fund Ratings, at
https://v3.moodys.com/ratings-process/Money-Market-and-Bond-Fund-Ratings/002001018 (last visited Aug. 11, 2009) (``Moody's Ratings
Definitions''); Standard & Poor's Ratings Definitions, Ratings
Direct, (Apr. 30, 2009), available at https://www2.standardandpoors.com/spf/pdf/fixedincome/Ratings_Definitions_Update.pdf (``Standard & Poor's Ratings Definitions'').
\63\ See, e.g., Fitch's Fund and Asset Manager Ratings; Standard
& Poor's Ratings Definitions.
\64\ See, e.g., Standard & Poor's Ratings Definitions.
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The proposed disclosure item includes an instruction that
provides that a registrant would not trigger the disclosure requirement
regarding credit ratings if the credit rating is not otherwise used in
connection with a registered offering, and the only disclosure of a
credit rating in a filing with the Commission is related to changes to
a credit rating, the liquidity of the registrant, the cost of funds for
a registrant or the terms of agreements that refer to credit ratings.
Is this approach appropriate? Are there other disclosures about credit
ratings of a similar nature that should be added to this instruction?
Would registrants avoid such references because of concerns that it
might trigger the proposed additional disclosure requirements? Would
this instruction be used to circumvent the disclosure requirement?
We are proposing to amend Item 9 of Form S-3 and Item
4(a)(3) of Form S-4 so that disclosure regarding credit ratings would
be included (if applicable) in registration statements for offerings of
capital stock even if securities of the same class have previously been
registered pursuant to Section 12 of the Exchange Act. Are there any
other circumstances where we need to amend forms so that information
regarding credit ratings is provided to investors when a credit rating
is used in connection with a registered offering?
Schedule B under the Securities Act provides the
disclosure requirements for foreign governments or political
subdivisions thereof that register their securities for public offering
in the United States. The disclosure requirements for those issuers are
located directly in the Securities Act, and there are no corresponding
disclosure regulations or forms under Schedule B applicable to foreign
governments \65\ or their political subdivisions.\66\ However, through
market practice and investor expectation, registration statements
prepared under Schedule B generally contain disclosure beyond the
requirements of the statute, and may include, for example, credit
rating information relating to the sovereign issuer's debt. Should we
extend the proposals for the disclosure of credit ratings to foreign
government issuers? Or should we continue to permit foreign governments
to disclose credit ratings on a voluntary basis? Should a foreign
government be required to disclose credit ratings in Schedule B
registration statements under the Securities Act and in Exchange Act
documents, including the annual report on Form 18-K and the
registration statement on Form 18, if it uses the credit rating in
connection with a registered offering of its debt securities? If we
extend the credit rating disclosure requirements to foreign
governments, are there some forms or documents that in whole or in part
should be exempt from these requirements? Would disclosure of credit
ratings be appropriate for foreign government issuers? If so, why? If
not, why should they be exempt? If mandatory credit ratings disclosure
in filings under the Securities Act or the Exchange Act is appropriate
for foreign government issuers, should they be subject to requirements
analogous to those proposed for other issuers or are there different
factors that should be considered in any amendments that may be adopted
for foreign government issuers? What are those considerations?
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\65\ ``Foreign government'' refers to any issuer that is
eligible to register securities under Schedule B of the Securities
Act, including political subdivisions and some quasi-governmental
entities.
\66\ Unlike other issuers, foreign government issuers that
register securities under Schedule B of the Securities Act are not
subject to reporting obligations under Section 15(d) of the Exchange
Act [15 U.S.C. 78o(d)]. However, foreign government securities
listed on a U.S. exchange must be registered under Section 12(b) of
the Exchange Act [15 U.S.C. 78l(b)], as is the case with the
securities of other issuers. Foreign governments that have
securities registered under Section 12(b) file annual reports with
the Commission on Form 18.
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2. Required Disclosure
Under the proposed amendments, a registrant would be required to
disclose the information for each credit rating that triggers
disclosure. The proposed disclosure seeks to provide investors with a
specific description of the ratings and to make clear to investors:
The elements of the securities that the credit rating
addresses;
The material limitations or qualifications on the credit
rating; and
Any related published designation, such as non-credit
payment risks, assigned by the credit rating agency with respect to the
security.
The disclosure would be required in registration statements under
the Securities Act and the Exchange Act, including Form 10 and Form 20-
F, and in registration statements filed by closed-end funds on Form N-2
under the Securities Act and the Investment Company Act.
(a) General Information Including Scope and Limitations
As proposed, our amendments would require disclosure of certain
general information regarding credit ratings, including the scope of
the rating and any limitations on the scope of the rating. In this
regard, our proposed rules would require:
The identity of the credit rating agency assigning the
rating and whether such organization is an NRSRO;
The credit rating assigned by the credit rating agency;
The date the credit rating was assigned;
The relative rank of the credit rating within the credit
rating agency's classification system;
A credit rating agency's definition or description of the
category in which the credit rating agency rated the class of
securities;
All material scope limitations of the credit rating; \67\
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\67\ A limited scope rating is a rating that assesses less than
the promised or expected return on a security. We are proposing
disclosure of any material scope limitations in order to mitigate
the potential risk that investors may not understand the limited
scope of the rating. See the 1994 Release in note 15 above.
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How any contingencies related to the securities are or are
not reflected in the credit rating;
Any published designation reflecting the results of any
other evaluation done by the credit rating agency in connection with
the rating, along with an explanation of the designation's meaning and
the relative rank of the designation;
[[Page 53093]]
Any material differences between the terms of the
securities as assumed or considered by the credit rating agency in
rating the securities and (i) the minimum obligations of the security
as specified in the governing instruments of the security; and (ii) the
terms of the securities as used in any marketing or selling efforts;
and
A statement informing investors that a credit rating is
not a recommendation to buy, sell, or hold securities; that it may be
subject to revision or withdrawal at any time by the assigning credit
rating agency; that each credit rating is applicable only to the
specific class of securities to which it applies; and that investors
should perform their own evaluation as to whether an investment in the
security is appropriate.\68\
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\68\ See proposed amendments to Item 202(g) of Regulation S-K,
Item 12 of Form 20-F, and Item 10.6 of Form N-2.
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A preliminary prospectus would include information about any credit
rating that is used in connection with a registered offering of
securities. For example, a registrant would disclose the initial rating
(if any) assigned by the credit rating agency in the preliminary
prospectus when a final rating is not assigned until after the
effectiveness of a registration statement. If a disclosed rating is
changed or if a different rating becomes available before
effectiveness, the registrant would be required to convey the rating
change to the purchaser. The registrant would be required to update the
final prospectus to reflect the final rating assigned and all related
disclosure. In connection with delayed shelf offerings, the final
rating would be disclosed in a prospectus supplement.\69\
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\69\ The registrant
