Monday, July 26, 2010

SEC Responds Quickly to Concerns Over Dodd-Frank Nullification of Securities Act Rule 436(g)

Effective July 22, 2010, Section 939G of the Dodd-Frank Act provides that Securities Act Rule 436(g) will have no force or effect, which effectively removes the ``expert’’ exemption for credit ratings included in a registration statement, As a result, disclosure of a rating in a registration statement requires inclusion of the consent by the rating agency to be named as an expert. Issuers must now obtain credit rating agency's experts consent for use in filings, as is the case with other experts. The NRSROs have indicated that they are not willing to provide their consent at this time.

In order to facilitate a transition for issuers of asset-backed securities, an SEC no-action letter provides that the Division of Corporation Finance will not object if an asset-backed securities issuer as defined in Item 1101 of Regulation AB omits the ratings disclosure required by Item 1103(a)(9) and 1120 of Regulation AB from a prospectus that is part of a registration statement relating to an offering of asset-backed securities. This no-action position will expire with respect to any registered offerings of asset-backed securities commencing with an initial bona fide offer on or after January 24, 2011. (Ford Motor Credit Company LLC, July 22, 2010).

Items 1103(a)(9) and 1120 of Regulation AB require disclosure of whether an issuance or sale of any class of offered asset-backed securities is conditioned on the assignment of a rating by one or more rating agencies. If so conditioned, those items require disclosure about the minimum credit rating that must be assigned and the identity of each rating agency. Item 1120 also requires a description of any arrangements to have such ratings monitored while the asset-backed securities are outstanding.

According to Meredith Cross, Director of the Division of Corporation Finance, this no action letter allows issuers for a period of six months to omit credit ratings from registration statements filed under Regulation AB. Although there are currently few issuers in the registered asset-backed securities market, she noted, some issuers cannot currently obtain credit rating agency consent to include the credit ratings in these Regulation AB filings. This action will provide issuers, rating agencies and other market participants with a transition period in order to implement changes to comply with the new statutory requirement while still conducting registered ABS offerings.

The Securities Industry and Financial Markets Association (SIFMA) applauded the SEC for its timely recognition of the unintended effect that the interaction of Section 939G with Regulation AB has had on the public asset-backed securities markets. SIFMA said that the no-action letter will allow issuers, credit rating agencies and other market participants to conduct registered ABS offerings, avoiding the potential for negative impact on the availability of financing.
SIFMA has expressed deep concern that this provision of Dodd-Frank has created a roadblock to the issuance of any deals in these markets due to the interaction of provisions of Regulation AB and the refusal of the major rating agencies to consent to the inclusion of their ratings in transaction documents. The alternative for issuers would be to only place deals into the private market, which decreases transparency to both market participants and regulators.

The Division of Corporation Finance staff has also responded with a series of Compliance and Disclosure Interpretations. Presaging these interpretations, The Corp Fin Director assured that the current rules for corporate debt issuances differ in this respect and that the Commission believes that the corporate debt market has not been, and should not under current rules be, meaningfully affected by the statutory change that nullified Rule 436(g).

The Corp Fin staff said that, for companies not subject to Regulation AB disclosure rules, a consent by a credit rating agency would be required if the company includes the credit rating in its registration statement or Section 10(a) prospectus either directly or through incorporation by reference. However, if the disclosure of a credit rating in an SEC filing relates only to changes to a credit rating, the liquidity of the registrant, the cost of funds for a registrant or the terms of agreements that refer to credit ratings (issuer disclosure-related ratings information), then a consent by the credit rating agency would not be required. For example, some companies note their ratings in the context of a risk factor discussion regarding the risk of failure to maintain a certain rating and the potential impact a change in credit rating would have on the company. A company also may refer to, or describe, its ratings in the context of its liquidity discussion in the MD&A Companies may also need to discuss ratings when they describe debt covenants, interest or dividends that are tied to credit ratings or potential support to variable entities. (Division of Corporation Finance, Compliance and Disclosure Interpretations, Q. 233.04)

For a company not subject to Regulation AB disclosure, consent by a credit rating agency would also be required if ratings information, other than issuer disclosure-related ratings information, is included in, or incorporated by reference into, a prospectus or prospectus supplement first filed on or after July 22, 2010. (Division of Corporation Finance, Compliance and Disclosure Interpretations, Q. 233.05).

But, consent from a credit rating agency would not be required if ratings information is included in a free writing prospectus that complies with Securities Act Rule 433 or in a term sheet or press release that complies with Securities Act Rule 134. Rule 436, which requires the filing of written consents by experts, applies only to registration statements and to prospectuses. A Rule 433 free writing prospectus is not part of a registration statement, nor, as a Section 10(b) prospectus, is it included in the definition of prospectus in Securities Act Rule 405. Communications that are in compliance with Rule 134 are not prospectuses. If any of these documents are also filed as prospectuses under Rule 424, a consent would be required. (Division of Corporation Finance, Compliance and Disclosure Interpretations, Q. 233.06)

A company not subject to Regulation AB disclosure can continue to use its registration statement without filing a consent by the credit rating agency if it has a registration statement on Form S-3 or Form F-3 that was declared effective before July 22, 2010 and includes or incorporates by reference ratings information that is not limited to issuer disclosure-related ratings information. Under this scenario, the SEC staff would not object to reliance upon Rule 401(a) under the Securities Act to allow continued use of the registration statement for the limited period permitted under Rule 401(a). This would be applicable only until the next post-effective amendment to such registration statement and only if no subsequently incorporated periodic or current report contains ratings information that is not limited to issuer disclosure-related ratings information. It should be noted that the filing of the issuer’s next annual report on Forms 10-K, 20-F or 40-F is deemed to be the post-effective amendment of such registration statement for purposes of Securities Act Section 10(a)(3), so that in accordance with Rule 401(a), the registration statement could no longer be used after the annual report is filed without the filing of the consent. (Division of Corporation Finance, Compliance and Disclosure Interpretations, Q. 233.07).

A consent by a credit rating agency is required to be filed with a registration statement or post-effective amendment that becomes effective on or after July 22, 2010 and includes or incorporates by reference ratings information that is not limited to issuer disclosure-related ratings information. (Division of Corporation Finance, Compliance and Disclosure Interpretations, Q. 233.08).

No comments: