SEC negates credit ratings from short-form registration
The Securities and Exchange Commission voted unanimously to adopt new rules that will limit the use of credit ratings when issuers attempt to sell debt securities off-the-shelf or on an expedited basis. The SEC vote is in line with regulatory goals outlined in the Dodd-Frank Wall Street Reform Act, which evolved from the 2008 mortgage market meltdown. Tuesday's vote relates specifically to two securities forms used when issuers file short-term registration: the S-3 and F-3 form. Issuers file these two forms when registering securities for a public offering, so they can sell the debt off-the-shelf or in an expedited fashion, the SEC said. Since the financial crisis, at least one Senate report placed part of the blame for the crisis on the ratings ascribed to mortgage securities by the nation's top ratings agencies. Under current guidelines, companies can use the forms to speed up the debt offering if they obtain an investment-grade rating from at least one of the recognized credit rating agencies. Due to the changes adopted by the SEC Tuesday, the presence of a quality rating will no longer qualify the securities for an expedited sale. Instead, the issuer of the securities will have to pass one of four new tests to use the S-3 and F-3 offering forms. "This action is part of our effort to reduce reliance on credit ratings, as the Dodd-Frank Act requires all financial regulators to do," SEC Chairman Mary Schapiro said. "The new rules provide an appropriate and workable alternative to credit ratings for determining whether an issuer should be able to use short-form registration and have access to the shelf offering process." One of the four tests is whether the issuer has sold at least $1 billion in non-convertible securities other than common equity in primary offerings for cash over the prior three years. The second test is whether the issuer has at least $750 million of non-convertible securities other than common equity outstanding issued in primary offerings for cash, not exchange, registered under the Securities Act. The third test is whether the issuer is a unit of a well-known seasonal issuer or a majority-owned operating partnership of a real estate investment trust that qualifies as a well-known seasoned issuer, the SEC said. The final rule will include a temporary grandfather provision to give issuers wiggle room for about three years after the amendments take effect. Write to Kerri Panchuk.