Speech by SEC Chairman:
Opening Statement — SEC Open Meeting
Chairman Mary L. Schapiro
February 9, 2011
Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on February 9, 2011.
Today, the Commission will consider the first of what will be a series of proposals to remove references to credit ratings that are contained within our existing rules, and replace them with alternative criteria.
In particular, Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires each federal agency to review how their existing regulations rely on credit ratings as an assessment of credit-worthiness. At the conclusion of this review, each agency is required to remove these references and replace them with alternative standards that the agency determines are appropriate.
This effort is part of a larger movement across the world to generally reduce reliance on credit ratings. Over-reliance on credit ratings has been one of the factors cited as contributing to the financial crisis of 2008.
Last October, the Financial Stability Board — a body formed by the G20 countries to coordinate efforts to strengthen global financial stability — joined the call for removal of links between regulatory requirements and credit ratings. In its report, the FSB concluded that, “[r]educing reliance in this way will reduce the financial stability-threatening herding and cliff effects that currently arise from [credit rating agency] rating thresholds being hard-wired into laws, regulations and market practices.”
Currently, the Commission’s rules refer to credit ratings in a number of different contexts — from those restricting the types of investments that Money Market Funds can make to those linking credit ratings with minimum net capital rules. Today, our focus is on the use of credit ratings as a condition of so-called “short-form” eligibility.
Forms S-3 and F-3 are “short forms” used by eligible companies to register securities offerings under the Securities Act. These forms allow eligible issuers to rely on reports they have filed under the Exchange Act to satisfy many of the disclosure requirements under the Securities Act. Form S-3 and Form F-3 eligibility also enables companies to conduct primary offerings “off the shelf” — or in an expedited manner. Shelf registration provides a company considerable flexibility in deciding when to access the public securities markets.
To be eligible to use Form S-3 (or, in the case of foreign companies, Form F-3) a company must meet two different types of eligibility requirements.
The first type of eligibility relates generally to the company’s reporting history under the Exchange Act. For example, the company must have been a reporting company for at least 12 months, must have filed its reports timely during that 12-month period, and must not have defaulted on any debt or failed to pay a dividend with respect to preferred stock since the end of the last fiscal year.
The second type of eligibility relates to the type of transaction that is being registered. One of these transaction requirements permits an otherwise eligible company to register primary offerings of non-convertible securities if they are rated “investment grade” by at least one Nationally Recognized Statistical Rating Organization (or NRSRO).
This is not the first time we have we considered replacing this reference to an “investment grade” rating. In 2008, the Commission proposed replacing this criterion with the requirement that the company must have issued more than $1 billion of non-convertible debt securities in transactions registered under the Securities Act, for cash during the prior three years.
We chose that alternative criterion because we believed that the goal of the original “investment grade” requirement was to ensure that those who use the registration “short-form” are widely followed in the market by analysts and others. Because of this wide following, we believed that that there would be ample public information available to investors about the company.
Similar to our approach when defining “well-known seasoned issuers” (WKSIs), we believe that having issued $1 billion of registered non-convertible securities over the prior three years would generally correspond with a wide following in the marketplace.
In 2009, we sought additional comment on this same proposal.
Even though commenters generally opposed the 2008 proposal, most opposed replacing the “investment grade” criterion with any alternative standard.
Since then, Congress has mandated that this area be re-examined, and the global community has continued to express concern with credit rating reliance being imbedded into regulatory frameworks. For these reasons, I support re-issuing this proposal so that commenters can provide us with their current views, informed by more recent events.
While I believe this proposal is a good starting point, I also believe we will benefit from public input about whether other alternative criteria would retain short-form eligibility for companies that are eligible under the current rules, but might not be under our proposal.
It is very important to consider the impact of this change on these companies; if there are good alternatives, I very much want to consider them before we adopt final rules and hope we can leave open the door for current users to continue to use S-3.
Before hearing more details from the staff about this proposal, I would like to thank those who worked hard to put this proposal together. From the Division of Corporation Finance, thank you to Meredith Cross, Paula Dubberly, Felicia Kung, Blair Petrillo, Kathy Hsu, Rolaine Bancroft, Paul Dudek, Elliot Staffin, and Elizabeth Kim. Thank you also to our colleagues in the Division of Investment Management, specifically Susan Nash, Bill Kotapish, Keith Carpenter, and Michael Kosoff. In the Office of General Counsel, thanks to Meridith Mitchell, David Fredrickson, Rich Levine, and Bryant Morris. Thank you to our colleagues in the Division of Risk, Strategy and Financial Innovation, specifically Jennifer Marietta-Westberg, Stas Nikolova and Craig Lewis.
I also want to thank my colleagues on the Commission and our counsels for their contributions.
Now I’ll turn to the staff to hear more about their recommendation.