Speech by SEC Commissioner:
Statement at Open Meeting to Propose Rules Regarding Security Ratings
Commissioner Troy A. Paredes
U.S. Securities & Exchange Commission
February 9, 2011
Thank you, Chairman Schapiro.
Section 939A of the Dodd-Frank Act contemplates the removal of references to credit ratings in rules and forms under the Securities Act and the Exchange Act. The recommendation before us goes toward giving effect to Dodd-Frank.
The most notable aspect of the Commission’s proposal is its potential impact on an issuer’s ability to use Form S-3. Form S-3 is a streamlined “short form” for registering a public offering of securities, and Form S-3 eligible issuers can conduct primary offerings “off the shelf.”
Currently, an issuer of non-convertible debt securities with a certain reporting history can use Form S-3 if an NRSRO has rated the issuance investment grade. Today’s proposal would change this, replacing the ratings requirement with a new requirement that depends on the extent to which an issuer has recently issued non-convertible debt securities. Under the proposed amendment, to use Form S-3 when issuing non-convertible securities, an issuer that is not otherwise eligible to use Form S-3 must have issued for cash at least $1 billion in non-convertible securities, other than common equity, in registered primary offerings over the prior three years.
The proposed rule change is substantially similar to an amendment the Commission proposed in 2008. The 2008 proposal also would have replaced the Form S-3 ratings reference with a $1 billion registered debt offering test for Form S-3 eligibility. Many commenters objected to the 2008 proposal. Will commenters view the 2011 version of the proposal differently?
Unlike the 2008 proposal, the 2011 proposal is being forwarded against the backdrop of Section 939A of Dodd-Frank. Even though Dodd-Frank may have directed the Commission to remove ratings from SEC regulations, it does not necessarily follow that the proposed $1 billion threshold is the right substitute for determining whether an issuer is eligible to use Form S-3.
In describing the proposal’s impact, the release explains: “Based on a review of non-convertible securities issued in the U.S. from January 1, 2006 through August 15, 2008, we estimate that approximately 45 issuers who were previously eligible to use Form S-3 (and who had made an offering during the review period) would no longer be able to use Form S-3 for offerings of non-convertible securities other than equity securities.”
The 45 issuer figure is informative insofar as it sheds light on the number of issuers that actually issued securities during the ’06 to ’08 review period that could not have used Form S-3 had the $1 billion threshold test been in place. The 45 issuer figure, however, sheds only so much light. First, if one were to examine a different period, a different perspective on the proposal might emerge. Second, the 45 issuer figure tends to understate the impact of the proposed rule change. For example, as I understand it, this figure does not capture the number of issuers that did not make a registered offering during the review period but that were Form S-3 eligible and would lose their eligibility if the proposal were adopted.
This raises my primary reservation with today’s recommendation: I am concerned that, if the proposal were adopted, a number of issuers that presently are permitted to conduct offerings using Form S-3 might not be eligible to. Issuers that are not Form S-3 eligible may not be able to raise capital as quickly and efficiently as if they could use the Form. In giving effect to Section 939A of Dodd-Frank, we need to guard against a rule change that could frustrate capital formation by denying issuers that could have used Form S-3 the ability to do so.
Having said this, in the interest of moving this rulemaking forward, I am willing to support the recommendation before us. As always, I look forward to the comments we will receive. I am keenly interested in hearing commenters’ views on the extent to which the proposal, if adopted, might limit the number of issuers that are Form S-3 eligible. Any data that could be provided would be helpful. I also welcome commenters’ input in response to the many questions the release asks concerning alternatives to the proposed $1 billion threshold for testing an issuer’s Form S-3 eligibility.
In concluding, I join my colleagues in thanking the staff — particularly those from the Division of Corporation Finance and the Division of Risk, Strategy, and Financial Innovation — for your hard work on this rulemaking.