The SEC has recently proposed two rules under the Dodd-Frank Act on credit ratings. Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires federal agencies to review how existing regulations rely on credit ratings and remove such references from their rules as appropriate.
In one rulemaking, the SEC proposed rule amendments to remove references to credit ratings in certain rules and forms under the Investment Company Act of 1940, including rule 2a-7 governing the operations of money market funds. Under the SEC’s proposal, a rating would no longer be a required element in determining which securities are permissible investments for a money market fund. A security would instead be an eligible investment for a money market fund if the fund’s board or its delegate determines that the security presents minimal credit risks. As under the current rule, funds would have to invest at least 97 percent of their assets in securities that the board has determined are issued by an issuer that has the highest capacity to meet its short-term financial obligations. This latter standard is intended to be consistent with the highest credit rating category. The SEC’s proposed rule amendments also would remove credit ratings in three other areas: repurchase agreements, certain business and industrial development company, or BIDCO, investments, and shareholder reports.
In another rulemaking, the SEC proposed rules that would remove credit ratings as one of the conditions for companies seeking to use short-form registration when registering securities for public sale. The SEC’s proposed rule amendments would remove the NRSRO investment grade ratings condition included in SEC forms S-3 and F-3 for offerings of non-convertible securities, such as debt securities. And, instead of ratings, the new short-form test for shelf-offering eligibility of companies would be tied to the amount of debt and other non-convertible securities they have sold in the past three years. For instance, under the proposed amendments, Form S-3 and Form F-3 would be revised to remove the eligibility standard based on an investment-grade rating by an NRSRO. Instead, the company seeking to qualify for short-form registration, as well as the expedited “shelf” process, to register non-convertible securities would have to have issued over $1 billion of non-convertible securities for cash in registered, primary offerings within the previous three years.
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