The SEC has released its 168-page proposed rule regarding nationally recognized statistical rating organizations (NRSROs). Recently, major rating agencies—Standard & Poor, Moody’s Investors and Fitch Ratings—have come under scrutiny for failing to identify risks in subprime mortgage investments that touched off the credit-market crisis. Seeking to avoid this problem in the future, the proposed rule amendments impose additional requirements on NRSROs, like Fitch Ratings and Standard & Poor, concerning the integrity of their credit rating procedures and methodologies.
The proposed rule amendments strengthen existing conflict of interest provisions concerning NRSROs by requiring disclosure of certain information. For both public and private transactions, information regarding the characteristics of the asset pool and the legal documentation would be required to be made public, as would reports describing how the asset pool is performing on an on-going basis. Specifically, the proposed rule requires disclosure of (1) all information provided to the NRSRO by the issuer or underwriter used in determining the initial credit rating for the security or money market instrument and (2) all information provided to the NRSRO used in undertaking credit rating surveillance. The timing and scope of these required disclosures will vary depending on whether the transaction is public, private, or offshore.
However, only information relevant to generating the credit rating or performing surveillance will be considered “used by the NRSRO.” Certain types of information are excluded from disclosure such as (1) preliminary information about a collateral pool if it differs from the final pool on which the rating is based or (2) communications between the NRSRO and the issuer that do not contain information necessary for the determination of credit ratings or performing surveillance.
In addition to requiring disclosure of potential conflicts, the proposed rule amendments also include the SEC’s proposal related to structured finance products rating symbology. This proposal would require credit rating agencies to differentiate the rating they issue on structured products from those they issue on other bonds, either through use of different symbols or by issuing a report disclosing the differences between ratings of structured products and other securities.
Finally, required disclosures must comply with relevant provisions of the Securities Act of 1933. Under the Securities Act, issuers and other parties are restricted in the types of offering communications and methods they may use during a registered public offering and private offering. However, the proposed rules do not contain transition rules, so it is not clear how the SEC will apply the new rules to transactions rated before the implementation of the rules, including currently outstanding private transactions.
Both issuers and credit rating agencies can expect a major impact from these proposed rules in the future. Issuers will face substantial changes when it comes to their disclosure practices for offerings, and credit rating agencies will be more restricted in their communications and interactions with issuers. The SEC is soliciting public comments regarding these proposed rules for 30 days.