Speech by SEC Staff:
Division Statement before the Commission Open Meeting
Special Counsel, Division of Corporation Finance
U.S. Securities and Exchange Commission
June 25, 2008
Thank you. The Division of Corporation Finance is presenting for your consideration proposed amendments that would replace rule and form requirements under the Securities Act and Exchange Act that use security ratings by nationally recognized statistical rating organizations with alternative requirements. We are recommending that the Commission propose the following amendments:
First, we recommend that the Commission propose to replace the Securities Act Form S-3 eligibility (and shelf registration) criteria for offerings of investment grade asset-backed securities. Instead, an asset-backed offering would be Form S-3 eligible, regardless of the credit rating of the securities, if initial and subsequent sales of the securities are made in denominations of at least $250,000 and initial sales are made only to qualified institutional buyers, as defined in Securities Act Rule 144A. Also, we recommend that the Commission propose to revise the reference in Securities Act Rule 415 to "mortgage related securities" so that delayed offerings of mortgage backed securities would also be permitted in the same way — provided that initial and subsequent sales of the securities are made in denominations of at least $250,000 and initial sales are made only to qualified institutional buyers.
Second, we recommend that the Commission propose to replace the Securities Act Forms S-3 and F-3 eligibility provisions for primary offerings of investment grade non-convertible securities. Instead of an investment grade rating requirement, a primary offering of non-convertible securities would be S-3 or F-3 eligible, regardless of the credit rating, if the issuer has issued for cash, as of a date within 60 days prior to the filing of the registration statement, more than $1 billion in non-convertible securities, other than common equity, through registered primary offerings, within the prior three years. Our recommended proposal here uses the same method and threshold by which a debt issuer that does not meet the requisite public float threshold is defined in the Securities Act rules as a "well-known seasoned issuer."
Several other rule and form requirements that are based on investment grade ratings would also be replaced with the new proposed criteria for Form S-3 and F-3 eligibility. This would include Forms F-9, S-4, and F-4, Schedule 14A, Item 1100 of Regulation AB and Securities Act Rules 138, 139, and 168. We also are recommending that the Commission replace the existing provisions that allow foreign private issuers to comply with the less extensive U.S. GAAP reconciliation requirements under Item 17 of Form 20-F with the proposed criteria for Form S-3 and F-3 eligibility, if the Commission does not adopt the recent proposals to eliminate the option to provide Item 17 financial statements.
In addition, the release does not propose to amend the Commission's policy on security ratings, as it is currently outlined in Item 10(c) of Regulation S-K. Information on ratings is permitted under Item 10(c) and in that item the Commission recommends issuers consider additional disclosure regarding the ratings. The release requests comment as to whether the Commission should instead mandate this disclosure and whether additional information regarding any material limitations or qualifications on the rating and any related designation or other published evaluation of non-credit payment risks assigned by the credit rating agency with respect to the security would be valuable to investors.
We are also recommending other related amendments. We recommend that the Commission propose to revise the reference to a nationally recognized statistical rating organization in Securities Act Rule 134(a)(17) to allow for disclosure of ratings assigned by any credit rating agency, not just an NRSRO, in a communication not deemed to be a prospectus or free writing prospectus. Further, we recommend that the Commission propose to revise Securities Act Rule 436(g) so that a security rating assigned by any credit rating agency, not just an NRSRO, would be excluded from the consent requirement related to a rating used in connection with a registration statement prepared or certified by a person within the meaning of sections 7 and 11 of the Securities Act.
We are happy to answer any questions you may have on these recommendations