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SEC Proposes First in Series of Rule Amendments to Remove References to Credit Ratings


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Washington, D.C., Feb. 9, 2011 — The Securities and Exchange Commission today voted unanimously to propose amendments to its rules that would remove credit ratings as one of the conditions for companies seeking to use short-form registration when registering securities for public sale.

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Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires federal agencies to review how existing regulations rely on credit ratings and remove such references from their rules as appropriate.

This marks the first in a series of upcoming SEC proposals in accordance with Dodd-Frank to remove references to credit ratings contained within existing Commission rules and replace them with alternative criteria.

“Over-reliance on credit ratings has been one of the factors cited as contributing to the financial crisis,” said SEC Chairman Mary L. Schapiro. “I look forward to hearing from companies that are currently eligible for short-form registration as to whether there are alternative criteria that would preserve their eligibility.”

The SEC’s proposal focuses on the use of credit ratings as a condition of so-called “short-form” eligibility. Companies that are “short-form eligible” also are allowed to register securities “on the shelf.” Shelf registration provides companies considerable flexibility in deciding when to access the public securities markets.

The SEC’s proposed rule amendments would remove the NRSRO investment grade ratings condition included in SEC forms S-3 and F-3 for offerings of non-convertible securities, such as debt securities. And instead of ratings, the new short-form test for shelf-offering eligibility of companies would be tied to the amount of debt and other non-convertible securities they have sold in the past three years

Public comments on the SEC’s proposal should be submitted by March 28, 2011.

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Removing Security Ratings As Condition For Short-Form Registration


Short-Form Eligibility

Under the federal securities laws, a company offering securities must register the sale of those securities with the SEC unless the sale is otherwise exempt.

The SEC’s rules generally allow a company to use short-form registration if that company meets two categories of criteria.

The first category of issuer requirements, among other things, requires that the company has been subject to the SEC’s reporting provisions and that the company has been filing its periodic reports in a timely manner, both for at least one year. An issuer is required to meet all of the criteria in the first category.

The second category contains a list of transaction requirements and issuers need to only satisfy one of the criteria. One of the options in this category involves a company having at least $75 million in common equity held by unaffiliated shareholders.

Another provision in the second category — that would allow an issuer to use short-form registration for an offering of non-convertible securities, such as debt securities — provides that the securities be rated investment grade by at least one credit rating agency that is a nationally recognized statistical rating organization (NRSRO).

If a company qualifies for short-form registration, it is allowed to rely on its quarterly, annual and other reports filed with the SEC to provide historical and future information about itself, rather than repeating the information in the prospectus or amending the prospectus as future reports are filed. The prospectus disclosure in these offerings describes the particular securities being offered and focuses on other offering-specific information. The ability to “incorporate by reference” historic and future SEC reports for the company information can provide significant cost and time savings for companies. The short-form registration forms include Form S-3 for domestic companies and Form F-3 for foreign private issuers.


Companies that are “short-form eligible” also are allowed to register securities “on the shelf.” This means that the companies can file registrations for future offerings and can do one or multiple offerings from the single registration in the future without needing any new SEC staff clearance.

This shelf registration provides companies with flexibility to issue the securities when they choose. Often times, companies use this process when they are planning to offer securities on multiple occasions. Companies that are not short-form and shelf eligible are required to file a new registration for each public securities offering and receive a new staff clearance before completing the offering.

Dodd-Frank Requirements

In an effort to reduce reliance on credit rating agencies, the Dodd-Frank Wall Street Reform and Consumer Protection Act included a provision (Section 939A) that 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.

In the coming months, the Commission will consider additional rules to remove reliance on ratings from other rules and forms currently used by the SEC.

Requirements of the Proposed Rules

In a first step, the Commission has proposed rules that would remove the NRSRO investment grade ratings condition included in current short forms Form S-3 and Form F-3 for offerings of non-convertible securities, such as debt securities. This amendment would also affect the shelf-offering eligibility of companies that rely on this short-form eligibility test.

Instead of ratings, the new test would be tied to the amount of debt and other non-convertible securities the particular company has sold in the past three years.

Form S-3 and Form F-3

Under the proposed amendments, Form S-3 and Form F-3 would be revised to remove the eligibility standard based on an investment-grade rating by an NRSRO. Instead, the company seeking to qualify for short-form registration, as well as the expedited “shelf” process, to register non-convertible securities would have to have issued over $1 billion of non-convertible securities for cash in registered, primary offerings within the previous three years.

The proposed standard is modeled on the standard used to determine whether an issuer is a well-known seasoned issuer.

  • The three-year period would be measured as of a date within 60 days of the filing of the registration statement.
  • Calculating the amount of non-convertible securities issued would be done in a manner consistent with the calculation for determining whether an issuer is a well-known seasoned issuer.

Other Rules and Forms

Under the proposed amendments, other forms that use the same investment grade standard as Form S-3 and Form F-3 would be amended to either use the same $1 billion threshold or to refer to the relevant instruction in Form S-3 or Form F-3. This would affect Form S-4, Form F-4, Rules 138, 139 and 169 and Schedule 14A under the Exchange Act.

Form F-9

The proposed rules also would rescind Form F-9, which is the form certain Canadian registrants use to register non-convertible investment grade debt.

  • The primary advantage to Form F-9 over the only other available form (Form F-10) is that it does not require a reconciliation to U.S. generally accepted accounting principles.
  • Changes to Canadian regulations to require Canadian issuers to use International Financial Reporting Standards will mean that reconciliation will also not be required on Form F-10. As a result, F-9 and F-10 will have the same requirements, so we are proposing to eliminate Form F-9.

Rule 134 — Safe Harbor for Offering Announcements

Under the securities laws, certain communications by an entity are deemed to be a “prospectus” and must, therefore, be filed with the SEC and be subject to various restrictions. However, Rule 134 under the Securities Act provides a safe harbor exclusion from the definition of prospectus for a communication that includes certain categories of information.

Communications that can be made in reliance on the Rule 134 safe harbor generally include “tombstone” ads or press releases announcing offerings. Rule 134 lists 17 items that can be included in a communication that qualifies for safe harbor treatment, including the name of the issuer, a brief description of its business, the title and amount of securities being offered, the planned use of proceeds of the offering, and the names of the underwriters. In addition, the list currently includes a rating provided by an NRSRO.

Under this proposal, the list would be amended to delete references to ratings from the items that are permitted to be included in a communication that qualifies for the safe harbor. This will not mean that a communication that includes a rating will automatically be considered a prospectus. Instead, if the safe harbor is not available, the parties will need to consider whether the communication is a prospectus under a facts and circumstances analysis.

What’s Next?

The Commission is seeking public comments on the proposed rules that should be received by March 28, 2011. The Commission will review the comments it receives and consider those comments in determining whether to adopt the proposed rules.



Modified: 02/09/2011