SEC Proposes Amendments to Remove References to Credit Ratings from Regulation M

The Securities and Exchange Commission today voted to propose changes that would remove the references to credit rating agencies from existing exceptions provided in Rule 101 and Rule 102 of Regulation M, a set of rules designed to preserve market integrity by prohibiting activities that could artificially influence the market for an offered security.

"In Section 939A of the Dodd-Frank Act of 2010, Congress directed federal agencies, including the SEC, ‘to remove any reference to or requirement of reliance on credit ratings’ from our rules and to substitute an appropriate standard for credit-worthiness," said SEC Chair Gary Gensler. "The SEC has completed much of this work, and the only remaining references to credit ratings are in Rules 101 and 102 of Reg M. Today’s proposal, if adopted, thus would fulfill Congress’s mandate to remove all such references to credit rating agencies from our rules."

The Commission proposes to replace the credit-rating requirement included in Rule 101’s exception, which is available to distribution participants and their affiliated purchasers, with requirements that the nonconvertible debt securities and nonconvertible preferred securities meet a specified probability of default threshold, and that the asset-backed securities be offered pursuant to an effective shelf registration statement filed on the Commission’s Form SF-3. In addition, the proposed changes would eliminate Rule 102’s exception, which is available to issuers, selling security holders, and their affiliates, for investment grade nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities.

The Commission also voted to propose a recordkeeping requirement under Rule 17a-4(b)(17) for broker-dealers who make probability of default determinations in reliance on Rule 101’s proposed exception for nonconvertible debt securities and nonconvertible preferred securities.

The proposing release will be published on SEC.gov and in the Federal Register. The comment period will remain open for 60 days following publication of the proposing release on the SEC's website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.