Originally published November 10, 2009
Keywords: SEC, mandatory credit ratings disclosure, rating agencies, credit crisis, credit ratings, Rule 436(g), Securities Act, Exchange Act, Investment Company Act
In October 2009, the Securities and Exchange Commission proposed rules requiring disclosure of credit ratings used by registrants in connection with registered offerings of securities. See Release Nos. 33-9070; 34-60797; IC-28942, available at http://www.sec.gov/rules/proposed/2009/33-9070.pdf. The SEC stated 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, investors may not have access to sufficient information about credit ratings." The SEC proposed specific categories of disclosure to address the following concerns:
That investors may have insufficient information to understand the scope or meaning of ratings that are used to market securities; That investors may not have access to information that would enable them to fully understand the potential conflicts of interest faced by credit agencies and the impact of such conflicts on ratings; That registrants, or persons on their behalf, "shop" for ratings by approaching multiple credit rating agencies to obtain the highest credit rating available; and That while ratings are a key part of investment decisions, disclosure is not currently required in prospectuses. In response to its four principal concerns, the SEC proposed mandatory disclosure of information regarding credit ratings used by registrants in securities offerings, including a detailed description of the scope and limitations of the ratings. These amendments would require disclosure about potential conflicts of interest that could affect credit ratings. Under the proposal, registrants, in certain circumstances, would have to disclosure preliminary credit ratings, as well as the final ratings. The amendments would affect registration statements filed under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940, and would require the updating of disclosure in Forms 8-K and 20-F. Comments on the proposing release are due by December 14, 2009.
Proposed Amendments The SEC has proposed a new paragraph (g) to Item 202 of Regulation S-K. Under this new paragraph, much of the specific disclosure currently permitted as voluntary disclosure under Item 10(c) of Regulation S-K, as well as additional categories of information, would be required. Disclosure of the material scope and limitations of the credit rating and any related published designation, including a discussion of non-credit payment risks assigned by the rating organization with respect to the security, also would be required, as would the source of payment for the credit rating. If the credit rating agency has provided additional services to the registrant or its affiliates, disclosure of the services and the fees paid for those services would be required.
Trigger Requirements The proposed credit ratings disclosure would be required if the registrant, any selling...