SEC may remove rating agency reference from some filings
The Securities and Exchange Commission unanimously voted Wednesday to rethink the way it approaches credit rating agency activity in its documents. Currently, if a deal is rated, the SEC makes a reference to it. In some case, that may no longer be necessary, the thinking goes. The SEC is reviewing short-form securities registration as well as "on the shelf" registration. The SEC said qualification would be based on an issuance of more than $1 billion of non-convertible securities for cash in a previous offering. In such a case, the SEC is questioning if a ratings reference is necessary. "Congress has mandated that this area be re-examined, and the global community has continued to express concern with credit rating reliance being embedded into regulatory frameworks," said Mary Schapiro, chairman of the SEC. "For these reasons, I support re-issuing this proposal so that commentators can provide us with their current views, informed by more recent events." Under federal securities law, a company offering securities must register the sale with the SEC. Short-form registration is completed for every individual sale, unless the company wants to host multiple offerings. Then it can register securities as "on the shelf," meaning the company can file registrations without needing any new SEC clearance. Under the current criteria, a securities issuer must provide documentation that the securities up for sale are rated investment grade by at least one nationally recognized statistical rating organization (i.e. Moody's Corp., Standard & Poor's, Fitch Ratings) Under the Dodd-Frank Act, every federal agency was required to review its policies that rely on credit rating agencies. The conclusion at Wednesday's SEC meeting was a proposal to strip securities registration forms S-3 and F-3 of the option to qualify company securities by CRA guidelines. The SEC contemplated removing this rule once before in 2008. Instead, a company would qualify if it issued more than $1 billion in non-convertible securities for cash in a previous offering that occurred within the three years prior to the current registration, the SEC said. The decision appears to be a change of heart, as just four months ago the SEC validated the role of CRAs in the securitization process with an extension to its no-action policy against the credit rating agencies. CRAs were heavily criticized as the cause to the financial crisis because they rated junk securities as top-notch. In November, the SEC defended its position to extend no-action policy because "without an extension of our no-action position, offerings of asset-backed securities would not be able to be conducted on a registered basis." Schapiro said the "investment grade" standard was only in place "to ensure that those who use the registration 'short-form' are widely followed in the market by analysts and others." But that's not cutting it anymore. "I believe this proposal is a good starting point," she said. The SEC is open to public comment about the proposal until March 28. Write to Christine Ricciardi. Follow her on Twitter @HWnewbieCR.