Credit Ratings Regulation

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Dodd-Frank Timeline, Removal of Credit Ratings References Under Securities Exchange Act of 1934, SEC
Proposal Date Comment Deadline Final Rule Issue
May 6, 2011 July 5, 2011 December 27, 2013
Timeline, References to Credit Ratings in Money Market Fund Rules, SEC
Proposal Date Re-proposed Rule Comment Deadline
March 9, 2011 July 24, 2014 60 Days After Federal Register
Dodd-Frank Timeline, Removal of Certain References to Credit Ratings Under the Securities Exchange Act
Comment Deadline Final Rule Issue Effective Date
March 28, 2011 August 3, 2011 September 2, 2011
Dodd-Frank Timeline, NRSROs, SEC
Proposal Date Final Rule Issue Effective Date
June 8, 2011 September 15, 2014 November 14, 2014
Dodd-Frank Timeline-Removing References to Credit from Commission Regulations
Proposal Date Final Rule Issue Effective/Compliance Date
November 2, 2010 July 25, 2011 September 23, 2011

Subsequent to the financial crisis of 2008, credit ratings agencies such as Standard & Poor's, Moody's and Fitch came under fire for having assigned top ratings to securities backed by subprime debt obligations. The debate centered on the ratings agencies' compensation models as creating an inherent conflict of interest.[1]

Among the mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act is the removal of references to or reliance upon credit ratings in U.S. regulations. The Commodity Futures Trading Commission (CFTC), Securities and Exchange Commission (SEC) and other prudential regulators have proposed and finalized various rulemakings pertaining to credit ratings.

The rules are designed to remove the nationally recognized statistical rating organization (NRSRO) condition for investment grade securities, and create new tests for offerings of non-convertible securities, such as debt securities. The various rulemakings are designed to set credit standards that rely on criteria other than ratings issued by NRSROs.

To date, the SEC has finalized one Dodd-Frank related rulemaking regarding credit ratings - the replacement of using NRSRO ratings on securities with four short-form eligibility tests. Two rulemakings have been proposed but not finalized. One proposed rulemaking covers changes in the wording of connission regulations and acts to delete references to credit ratings. The other rulemaking would require changes within NRSROs to promote transparency and mitigate conflicts of interest.

CFTC Final Rule

At its July 19, 2011 open meeting, the CFTC approved its final rules regarding the removal of any reference to or reliance on credit ratings in Commission regulations. The two rules are:

  • Final Rule 1.49, General Regulations Under the Commodity Exchange Act – Denomination of Customer Funds and Location of Depositories, Qualifications for Depositories, and
  • Final Rule 4.24, Commodity Pool Operators and Commodity Trading Advisors – General Disclosures Required; Investment Program and Use of Proceeds
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SEC Final Rule

Security Ratings
On July 26, 2011, the Securities and Exchange Commission (SEC) finalized rules regarding the removal of references to credit ratings from the Securities Exchange Act of 1933. According to the rule, credit ratings criteria will be replaced by four short-form eligibility tests. The SEC also passed a three-year grandfather provision to assist companies with this transition.[2]

Summary points:

  • "The new rules remove the condition for an NRSRO investment grade rating that is included in current short forms, Form S-3 and Form F-3, which are used by eligible issuers to register offerings of non-convertible securities under the Securities Act."
  • Companies can be tested for issuer eligibility through four new short-form tests.
  • "The final rules also rescind Form F-9, which is the form certain Canadian registrants use to register non-convertible investment grade debt."
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Background: On February 9, 2011, the Securities and Exchange Commission introduced its first proposed rulemaking concerning the removal of credit ratings as an eligibility standard for companies using short-form registration when registering securities for public sale.[3] The final rule mirrors the proposal.

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SEC Proposed Rules

Nationally Recognized Statistical Ratings Organizations (NRSROs)
On May 18, 2011, the SEC introduced a proposal to increase transparency with regard to the credit ratings system and edit existing rules governing Nationally Recognized Statistical Rating Organizations (NRSROs).[4]

The Commission's proposed that an NRSRO must:

  • "report on internal controls;
  • protect against conflicts of interest;
  • establish professional standards for credit analysts;
  • publicly provide – along with the publication of the credit rating – disclosure about the credit rating and the methodology used to determine it; and
  • enhance their public disclosures about the performance of their credit ratings."
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Removal of Certain References to Credit Ratings Under the Securities Exchange Act of 1934 Regulation Z; Truth in Lending; Proposed Rule
On April 27, 2011, the Securities and Exchange Commission introduced another proposal in a series of proposals to remove references to credit ratings from certain Exchange Act rules.[5]

Under the proposed rules, references to credit ratings would be deleted and replaced by standards of creditworthiness. Proprietary positions held within broker-dealers would be subject to haircuts. Alternate computations shall be conducted to determine net capital reserve requirements. A link to a copy of the proposed rule and detailed summary can be found below.

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References to Credit Ratings in Certain Investment Company Act Rules and Forms
On March 2, 2011, the Securities and Exchange Commission proposed rule amendments to remove references to credit ratings from certain Investment Company Act rules and forms.[6]

The current rule sets out a two-tier rating system to determine a security's eligibility to be included in a money market fund, depending on the credit quality of the securities in a money market fund. A copy of the rule and detailed summary, including the definitions of the two security tiers, can be found by clicking the link below.

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Prudential Regulators Proposed Rules

Risk-Based Capital Guidelines: Market Risk; Alternatives to Credit Ratings for Debt and Securitization Positions
On December 21, 2011, the Office of the Comptroller of the Currency (OCC), Department of the Treasury; Board of Governors of the Federal Reserve System ("Fed"); and Federal Deposit Insurance Corporation (FDIC) jointly issued a proposed rule incorporate into the proposed market risk capital rules certain alternative methodologies for calculating specific risk capital requirements for debt and securitization positions that do not rely on credit ratings. This is an amended proposal to a proposal issued in January 2011. The amended proposal includes "alternative standards of creditworthiness to be used in place of credit ratings to determine the capital requirements for certain debt and securitization positions covered by the market risk capital rules."[7]

The proposed standards for creditworthiness are based partially on risk classifications published by the Organization for Economic Cooperation and Development (OECD) and the Basel Committee on Banking Supervision. The regulators believe the implementation of these standards will be consistent with those of the Basel Committee.

Public comments will be accepted until February 3, 2012. Comments may be submitted HERE.

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  1. Credit rating execs to face congressional heat. Reuters. Retrieved on November 22, 2011.
  2. SEC Adopts New Short Form Criteria to Replace Credit Ratings. SEC. Retrieved on July 26, 2011.
  3. SEC Proposes First in Series of Rule Amendments to Remove References to Credit Ratings. SEC. Retrieved on February 9, 2011.
  4. SEC Proposes Rules to Increase Transparency and Improve Integrity of Credit Ratings. SEC. Retrieved on May 18, 2011.
  5. SEC Proposes Rule Amendments to Remove Credit Rating References in Exchange Act Rules. SEC. Retrieved on April 27, 2011.
  6. SEC Proposes Rule Amendments to Remove Credit Rating References in Investment Company Act Rules and Forms. SEC. Retrieved on March 2, 2011.
  7. Agencies Seek Comment on Additional Revisions to the Market Risk Capital Rules. Board of Governors of the Federal Reserve System. Retrieved on December 22, 2011.

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