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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Credit Ratings Disclosure
Opening Remarks at the SEC Open Meeting


Blair Petrillo

Special Counsel, Office of Rulemaking, Division of Corporation Finance
U.S. Securities and Exchange Commission

Washington, D.C.
September 17, 2009

Thank you, Dan, Chairman Schapiro, Commissioners. The staff recommends that you publish for public comment proposed amendments that would require disclosure of information regarding credit ratings used by registrants, including closed-end funds, in connection with a registered offering of securities so that investors will better understand the credit rating and its limitations. In addition, we recommend that the Commission issue a concept release seeking comment on whether the Commission should propose to rescind Rule 436(g) under the Securities Act. Our recommendations are as follows.

First, we recommend that you propose amendments to Item 202 of Regulation S-K, Item 12 of Form 20-F and Item 10.6 of Form N-2 to require that if a registrant, selling securityholder, underwriter or other member of a selling group uses a credit rating in connection with a registered offering, certain detailed disclosures regarding the credit rating must be made. Currently, disclosure regarding credit ratings in registration statements is permitted but not required by Item 10(c) of Regulation S-K. The proposed disclosure would build on the disclosure currently permitted under Item 10(c). The proposed disclosure would require disclosure of general information about the credit rating, including all material scope limitations of the credit rating and any related published designation, such as non-credit payment risks, assigned by the rating organization with respect to the security. In addition, in order to highlight potential conflicts of interest, the proposed rule would require disclosure identifying the party who is paying for the credit rating; and if any additional non-rating services have been provided by the credit rating agency to the registrant over a specified period of time, disclosure of the services and the aggregate fees paid for those services would be required. We also are proposing to require disclosure of preliminary ratings, as well as final ratings not used by a registrant, so that investors will be informed when a registrant may have engaged in ratings shopping. We have proposed to require disclosure of preliminary ratings when the final rating is provided by a different credit rating agency than the one providing the preliminary rating because we do not want to limit the conversations that occur between registrants and credit rating agencies with respect to maintenance or surveillance ratings. The proposed disclosure would be required in Securities Act and Exchange Act registration statements.

Second, we recommend that you propose amendments to forms under the Securities Exchange Act of 1934 to provide investors with updated information regarding credit ratings by requiring disclosure of changes in previously disclosed credit ratings. Under the proposed amendments, a change to a credit rating, including when a rating has been withdrawn or is no longer being updated, would be required to be disclosed within four business days pursuant to a new item in Form 8-K. The proposed amendments would require closed-end funds to report changes in a credit rating on Form 8-K and would require foreign private issuers to report changes on Form 20-F.

Finally, we recommend that you issue a concept release seeking comment on whether the Commission should propose to rescind Rule 436(g) under the Securities Act. Rule 436(g) provides an exemption for credit ratings provided by NRSROs from being considered a part of the registration statement prepared or certified by a person within the meaning of Sections 7 and 11 of the Securities Act. The exemption currently does not apply to credit rating agencies that are not NRSROs. We believe that the original reasons supporting adoption of Rule 436(g) may no longer provide a sufficient basis to continue to provide the exemption to NRSROs. Rescinding the exemption would cause NRSROs to be included in the liability scheme for experts set forth in Section 11, as is currently the case for credit rating agencies that are not NRSROs.

As credit ratings have become more significant, the Commission has sought to protect investors while recognizing the role credit ratings play in the offer and sale of securities. In that regard, we recommend that the Commission issue a concept release to explore whether Rule 436(g) is still appropriate in light of the growth and development of the credit rating industry and investors' use of credit ratings, and in light of the disclosure regarding credit ratings that we are recommending the Commission propose. We are mindful of the potential far-reaching impact that rescinding Rule 436(g) could have on registrants, NRSROs and other credit rating agencies, investors and the financial markets in general, and we believe the Commission should seek comment on the possible elimination of Rule 436(g) from all market participants. Thank you.


Modified: 09/28/2009