Originally published on 15th February 2011

Keywords: SEC, references, credit ratings, NRSROs, rules and forms, Exchange Act

On February 9, 2011, the United States Securities and Exchange Commission (SEC), in Release No. 33-9186; 34-63874, proposed removing references to credit ratings from nationally recognized statistical rating agencies (NRSROs) in certain of its rules and forms under the Securities Act of 1933, as amended (the Securities Act), and the Securities Exchange Act of 1034, as amended (the Exchange Act). The SEC proposed the revisions pursuant to Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and this proposal is the first of several intended rules to implement these requirements.1

The proposed revisions would (i) replace the current eligibility requirement for investment-grade ratings for the use by certain issuers of Forms S-3, F-3 and F-4 under the Securities Act with a new requirement that the issuer have issued for cash at least $1 billion in non-convertible securities in offerings registered under the Securities Act over the prior three years, (ii) amend Rules 134, 138, 139 and 168 under the Securities Act and Schedule 14A under the Exchange Act, and (iii) rescind Form F-9 (and eliminate references to that Form in other Rules) under the Securities Act and require applicable Canadian issuers to use Form F-10 or, if not eligible to use that Form, to use Form F-1 or F-3.

In the proposing release, the SEC notes that substantially similar proposals to replace the investment-grade rating eligibility requirement for Form S-3 and related forms and rules were made previously in 2008. Numerous comments were received by the SEC in connection with these earlier proposals, including commenters on behalf of real estate investment trusts (REITs)2, insurance companies3 and utilities4, as well as others, most of whom objected to the proposals and cautioned the SEC that adoption of the proposals would make capital formation more difficult without attendant benefit and potentially drive affected securities issuance overseas or to private, unregistered offerings.

The proposing release, in footnote 58, discusses the SEC's conclusion that only 45 issuers would have been unable to use Form S-3 if the proposed rules had been adopted for the reviewed period (January 1, 2006 through August 15, 2008). The SEC also concluded that eight issuers that would have been ineligible under existing rules would become eligible for Form S-3 under the proposal.
The SEC states that it expects different comments for this proposal than it received in connection with the 2008 proposal and specifically seeks alternatives to that proposed. However, certain issuers, such as utility companies, REITs and issuers of insurance contracts, could be significantly impacted by the proposal and the SEC has asked for specific comment as to the effects of the proposal on issuers in those industries.

Comments on the proposal are due on or before March 28, 2011.

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1 For a general review of proposed post-crisis reforms affecting credit rating agencies in Europe and the US, see our recent International Financial Law Review article.
2 See letter of the National Association of Real Estate Investment Trusts.
3 See, e.g., letter from Manulife.
4 See, e.g., letters for American Electric Power, Southern Company, Pinnacle West, and the Edison Electric Institute.

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