TheCorporateCounsel.net

The SEC has scheduled an open meeting for next Wednesday to consider three rulemakings from the Division of Trading and Markets, and one of them is the removal of credit ratings in Regulation M. Regulation M is the set of rules designed to prevent the manipulation of securities prices at the time of a distribution. The removal of credit ratings from SEC rules is yet another legacy of the Dodd-Frank Act. Section 939A of the Dodd-Frank Act directed the SEC to review its rules that use credit ratings to assess the creditworthiness of a security or money market instrument, remove any reference to or requirement of reliance on credit ratings and substitute such standard of creditworthiness as the SEC determines to be appropriate.

The SEC’s efforts to remove credit ratings from Rules 101 and 102 of Regulation M has been a bit of an odyssey. The SEC proposed amendments in 2008 and 2011 to remove references to credit ratings from Regulation M and replace them with alternative measures of creditworthiness, but those proposed amendments were never adopted. In March 2022, the SEC again proposed changes to Regulation M. Under the latest proposal, the SEC would replace the investment grade exception in Rule 101 of Regulation M with two alternative standards. For nonconvertible debt securities and nonconvertible preferred securities, the proposed standard is based on the issuer’s probability of default, while for asset-backed securities, the proposed amendments would except asset-backed securities that are offered pursuant to an effective shelf registration statement filed on Form SF-3. In addition, the SEC proposed to eliminate the investment grade exception in Rule 102 entirely and not replace it with any alternative standard.

The adoption of final rules would represent another example of Chair Gensler’s effort to clean up the outstanding Dodd-Frank Act rulemakings as we approach the thirteenth anniversary of the enactment of that legislation.

– Dave Lynn