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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
“The Search For an Appropriate Substitute To Credit Ratings”


Commissioner Luis A. Aguilar

SEC Open Meeting
Washington, D.C.
February 9, 2011

Today we are proposing rules to respond to the Dodd-Frank Act provision that directs the Commission to review any regulation that requires the use of a credit rating and to replace those references with an appropriate substitute.1 The key analysis here is what constitutes an appropriate substitute for a credit rating and does one exist in this context?

Based on the review of the references to credit ratings in Form S-3 and other related forms and rules, today’s proposal would replace the investment grade eligibility condition2 with criteria based on the dollar volume of recent issuances of non-convertible securities.3 The proposed minimum threshold of at least $1 billion of registered debt is designed to provide eligibility to those issuers that are widely followed in the market.4 As a result, this appears to be an appropriate substitute, because it would replace one proxy of wide market following, an investment grade rating, with another, a significant amount of already outstanding debt.

Form S-3 was developed in order to provide flexibility to widely-followed issuers in accessing the public markets.5 Because Form S-3 expedites an issuer’s ability to access the market,6 it also constricts the time that investors and others involved in the offering process, including underwriters and SEC staff, have to review the offering. In addition, the information provided in connection with offerings in Form S-3 is fragmented with some of the information provided in the initial shelf registration statement, some incorporated by reference, and some provided at the takedown. For this reason, the disclosure of accurate and adequate information, and the likelihood that the market has integrated the available information, are key factors for Form S-3 eligibility.

I will be interested in hearing from commenters as to whether the minimum threshold of $1 billion is an appropriate substitute. In particular, I welcome receiving empirical data as to whether issuers who meet the proposed $1 billion debt threshold are, in fact, widely followed, and whether short form eligibility for such issuers would be consistent with investor protection and informed decision making.

The release also requests comment on various other potential substitutes for the investment grade criteria. In addressing these alternatives, I encourage commenters to explain how any replacement would ensure the risks with short-form registration are appropriately addressed. As the Commission has previously observed, shelf registration “may limit Commission and underwriter involvement in the registration process.”7 These limitations should lead the Commission to proceed with caution in adopting any substitute criteria that could expand its use to issuers who may not have a wide market following, or where investors otherwise would benefit from SEC involvement, including staff review. Any substitute eligibility conditions must be consistent with investor protection and promote informed decision making. Therefore, I look forward to comments explaining whether and how alternatives could accomplish these goals.

I support the proposal, and I thank the staff for their work.

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1 Dodd-Frank Wall Street Reform and Consumer Protection Act, 939A, “Review of Reliance On Ratings.

(a) Agency Review.—Not later than 1 year after the date of the enactment of this subtitle, each Federal agency shall, to the extent applicable, review—

    (1) any regulation issued by such agency that requires the use of an assessment of the credit-worthiness of a security or money market instrument; and

    (2) any references to or requirements in such regulations regarding credit ratings.

(b) Modifications Required.—Each such agency shall modify any such regulations identified by the review conducted under subsection (a) to remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of credit-worthiness as each respective agency shall determine as appropriate for such regulations. In making such determination, such agencies shall seek to establish, to the extent feasible, uniform standards of credit-worthiness for use by each such agency, taking into account the entities regulated by each such agency and the purposes for which such entities would rely on such standards of credit-worthiness.

(c) Report.—Upon conclusion of the review required under subsection (a), each Federal agency shall transmit a report to Congress containing a description of any modification of any regulation such agency made pursuant to subsection (b).”

2 To be eligible to use Forms S-3 and F-3, an issuer must meet the eligibility requirements of the form. See General Instruction I.A. & I.B. to Forms S-3 and F-3. One of those requirements permits issuers to register offerings of investment grade securities if the securities are rated investment grade by an NRSRO. Id. at I.B.2.

3 See Proposed General Instruction I.B.2. “Primary Offerings of Non-convertible Securities. Non-convertible securities to be offered for cash by or on behalf of a registrant, provided the registrant, as of a date within 60 days prior to the filing of the registration statement on this Form, has issued in the last three years at least $1 billion aggregate principal amount of non-convertible securities, other than common equity, in primary offerings for cash, not exchange, registered under the Act.”

4 This threshold is similar to the Commission’s definition of a “well-known seasoned issuer.” See 17 CFR 230.405.

5 See Securities Act Rel. No. 33-6499 (Nov. 17, 1983).

I also note that while the Commission engaged in a limited expansion of Form S-3 eligibility for smaller public companies, it did so only by placing other conditions designed to, among other things, ensure that these issuers were subject to sufficient depth and liquidity in the markets to justify use of Form S-3. See Securities Act Rel. No. 33-8878 (Dec. 19, 2007). Among the conditions added was a cap on the amount of securities that the issuer could sell and also a requirement that the registrant have a class of common equity listed and registered on a national securities exchange. These protections were designed to help assure that issuers have a “sufficient public float, investor base, and trading interest to assure that the market for the issuer’s security has the depth and liquidity necessary to maintain fair and orderly markets.” Id. at 21. In addition, the exchange-listing requirement provided that the issuers would be “subject to real-time reporting of quotation and transaction information, which benefits investors by apprising them of current market information about the security.” Id. at 21-22.

6 See 17 CFR 230.415. Among other things, the short form allows eligible issuers to rely on their periodic reports under the Securities Exchange Act to satisfy their disclosure obligations to investors under the Securities Act, and also enables form eligible issuers to conduct primary offerings “off the shelf.”

7 Securities Act Rel. No. 33-8878 (Dec. 19, 2007) (“Extending the benefits of shelf registration to an expanded group of transactions will limit the staff’s direct prior involvement in takedowns of securities off the shelf. Although the Commission’s staff may review registration statements before they are declared effective, individual takedowns are not conditioned on further Commission action or subject to prior selective staff review. In addition, the short time horizon of shelf offerings may also reduce the time that participating underwriters have to apply their independent scrutiny and judgment to an issuer’s prospectus disclosure”).



Modified: 02/09/2011