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Sep 26, 2018

SEC Proposes Amendments to Codify Exemption to Credit Rating Agency Rule:SEC Press Release.


Washington D.C., Sept. 26, 2018 —
The Securities and Exchange Commission today announced that it has voted to propose rule amendments to codify an existing temporary exemption for credit rating agencies registered with the Commission as nationally recognized statistical rating organizations (NRSROs).
Rule 17g-5(a)(3) under the Securities Exchange Act established a program to provide information necessary to determine a structured finance product’s credit rating to NRSROs that were not hired by the issuer, sponsor, or underwriter of the structured finance product.  Prior to the compliance date for Rule 17g‑5(a)(3), the Commission granted a temporary conditional exemption to the rule for certain structured finance products issued by non-U.S. persons and offered and sold outside the United States.  The Commission subsequently extended this exemption.
The amendments proposed by the Commission today would codify the existing temporary exemption to Rule 17g-5(a)(3) and clarify the exemption’s conditions.  The proposed amendments would also clarify the conditions applicable to similar exemptions in Exchange Act Rules 17g-7(a) and 15Ga-2 so that the approach among these exemptions remains consistent.  Rule 17g-7(a) requires an NRSRO to disclose certain information when it publishes a rating action.  Rule 15Ga-2 requires an issuer or underwriter to disclose the findings and conclusions of any third-party due diligence report it obtains with respect to an asset-backed security that is to be rated by an NRSRO.
“Proposing permanent relief in this area is a common sense step,” said Chairman Jay Clayton.  “The relief applies to products that are issued by non-U.S. persons and are offered and sold outside of the United States, and is consistent with the approach taken by the Commission in other contexts.”
The public comment period will remain open for 30 days following publication of the proposing release in the Federal Register.
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FACT SHEET

Action
The Commission today proposed amendments that would codify an existing exemption to Exchange Act Rule 17g-5(a)(3) relating to ratings of structured finance products.  The proposed amendments would also clarify that the exemptions to Exchange Act Rules 17g-5(a)(3), 17g-7(a), and 15Ga-2 apply only if all offers and sales of a security or money market instrument by any issuer, sponsor, or underwriter linked to the security or money market instrument will occur outside the United States.
Highlights
The proposed amendment to Rule 17g-5(a)(3) would add a new paragraph to the rule to provide that the rule will not apply to an NRSRO when issuing or maintaining a credit rating for a security or money market instrument issued by an asset pool or as part of any asset-backed securities transaction, if:
  • the issuer of the security or money market instrument is not a U.S. person (as defined in Securities Act Rule 902(k)); and
  • the NRSRO has a reasonable basis to conclude that all offers and sales of the security or money market instrument by any issuer, sponsor, or underwriter linked to the security or money market instrument will occur outside the U.S. (as that phrase is used in Regulation S under the Securities Act).
The proposed amendments to Rules 17g-7(a) and 15Ga-2 would conform the conditions of the existing exemptions to such rules to the conditions of the proposed exemption to Rule 17g-5(a)(3).  The proposed amendment to Rule 17g-7(a) would also clarify that the application of the conditions to the exemption applies differently in the case of rated obligors than it does in the case of rated securities or money market instruments.
Background
In 2009, the Commission adopted amendments to Rule 17g-5 that established a program by which an NRSRO that is not hired by an issuer, sponsor, or underwriter of a security or money market instrument issued by an asset pool or as part of any asset-backed securities transaction is able to obtain the same information that the issuer, sponsor, or underwriter provides to an NRSRO hired to determine a credit rating for such security or money market instrument.  The rule requires an NRSRO to maintain on a password-protected website a list of each structured finance product for which it currently is in the process of determining an initial credit rating and to provide free and unlimited access to any NRSRO that, among other things, certifies it will access the website solely for the purpose of determining and monitoring credit ratings.  The rule also requires, among other things, an NRSRO to obtain from the applicable arranger a written representation that can reasonably be relied upon that the arranger will maintain on a password-protected website the information it provides to the NRSRO and will provide access to the website to any NRSRO that, among other things, certifies it will access the website solely for the purpose of determining and monitoring credit ratings.  Prior to the June 2, 2010 compliance date for Rule 17g-5(a)(3), the Commission granted a temporary conditional exemption to the rule for certain offshore transactions issued by non-U.S. persons.  Such exemption has been extended several times and remains in effect.
In 2014, the Commission adopted Rules 17g-7(a) and 15Ga-2.  Rule 17g-7(a) requires an NRSRO, when taking a rating action, to publish an information disclosure form containing specified information about the related credit rating.  Rule 15Ga-2 requires the issuer or underwriter of an asset-backed security that is to be rated by an NRSRO to furnish a form to the Commission containing the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter.  Both rules include an exemption from the disclosure requirements for securities offered and sold outside the U.S.
What’s Next
The Commission will seek public comment on the proposed amendments to Rule 17g-5(a)(3), Rule 17g-7(a), and Rule 15Ga-2 for 30 days following publication in the Federal Register.