TheCorporateCounsel.net

As I noted in this blog from back in April, some major changes have been under consideration for credit ratings. Yesterday, the SEC proposed the first two parts of a three part package of proposals targeted at reforming the credit ratings business. Here is the press release announcing the proposal, Chairman Cox’s opening statement, and the statement of Commission Atkins. The third set of proposals is slated for consideration on June 25th.

One set of recommendations is focused on regulating some troubling practices of the NRSROs, including rules that would:

– prohibit the issuance of ratings on structured products unless information about the assets underlying the products is available;

– prohibit credit rating agencies from structuring the same products that they rate;

– require that credit ratings (and subsequent rating actions) be made publicly available;

– prohibit anyone who participates in determining a credit rating from negotiating the fee that the issuer pays for it;

– ban gifts from those who receive ratings to those who rate them in any amount over $25 (that is a pretty low threshold!);

– require publication of performance statistics over 1, 3, and 10 year periods within each rating category in order to facilitate competitive comparisons across NRSROs;

– require disclosure about reliance on due diligence of others in order to verify the assets underlying structured products;

– require disclosure of how frequently credit ratings are reviewed, whether different models are used for ratings surveillance than for initial ratings, and whether changes made to models are applied retroactively to existing ratings;

– require an annual report of the number of ratings actions, along with an XBRL database of all rating actions maintained on the agency’s website;

– require public disclosure of the information a credit rating agency uses to determine a rating on a structured product, including information on the underlying assets; and

– require documentation of the rationale for any significant “out-of-model” adjustments.

The second set of proposals (approved by a 2-1 vote, with Commissioner Atkins dissenting) is focused on differentiating ratings issued on structured products from those issued on bonds. The SEC proposed that such differentiation might occur either through the use of different symbols – such as attaching an identifier to the rating (maybe they should adopt the “skull and crossbones” approach used by the Pink Sheets) – or by issuing a report that discloses the differences between ratings of structured products and other securities.

The proposals scheduled for consideration on June 25th will focus on revising the broad range of SEC rules that look to credit ratings. The concern expressed by some is that, by referencing the credit ratings in the SEC’s rules, the government’s imprimatur is somehow implied. On the Corp Fin side, this would of course mean looking at things like the use of credit ratings in determining eligibility to use Form S-3.

This first round of proposals is out for a very short comment period – only 30 days – perhaps reflecting the accelerated pace of SEC rulemaking as we rapidly move through 2008. It is hard to imagine that the SEC will be able to get really thoughtful comments on these major proposals within such a short timeframe.

Corp Fin Guidance on the Filing Review Process

The Corp Fin Staff recently posted some helpful guidance detailing its process for reviewing filings, including information about the structure of the Operations offices and how to “appeal” a Staff determination.

You can refer to our SEC Staff Organization Chart for more information on the line-up of Corp Fin’s Staff, as well as the telephone numbers for each of the Offices.

On The Way: Romeo & Dye Section 16 Deskbook

For those of you that subscribe to the popular Romeo & Dye Section 16 Annual Service, you will be happy to hear that Peter and Alan have finished the 2008 edition of the Section 16 Deskbook – and it will be dropped in the mail shortly. If you are not yet a subscriber, try a no-risk trial now (or if you haven’t renewed, it’s time to do so).

– Dave Lynn