New SEC C&DIs Regarding Consents of Credit Rating Agencies

By Cyndey Posner

The SEC has released several new C&DIs regarding Securities Act rules in light of provisions of the Dodd-Frank Act, particularly the repeal of  Rule 436(g) by Section 939G of the DFA.  In general, Rule 436 requires companies to obtain the consent of an expert whose opinion is expressed or summarized in a registration statement or prospectus.  Rule 436(g) provided an exemption from that requirement with respect to the security rating assigned to a class of debt securities, convertible debt securities or preferred stock by a nationally recognized statistical rating organization, essentially a credit rating agency such as Moody's or S&P.  Fortunately, the interps offer some flexibility with regard to the need to obtain the consent of a credit rating agency, especially since, as reported in Corporate Counsel this morning, the rating agencies have indicated that, for now,  they are not giving consents. (Note that all of these new interps apply to companies not subject to Reg AB disclosure requirements.) 

 Rule 401 — Requirements as to Proper Form

• Where a registration statement on Form S-3 or Form F-3 that was declared effective before July 22, 2010 includes or incorporates by reference ratings information that is not limited to "issuer disclosure-related ratings information" (defined below), the issuer can still continue to use its registration statement without filing a consent by the credit rating agency. In this fact pattern, the 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 that Rule, but only if no subsequently incorporated periodic or current report contains ratings information that is not limited to issuer disclosure-related ratings information. Rule 401(a) provides that the form and contents of a registration statement and prospectus must  conform to the applicable rules and forms as in effect on the initial filing date of the registration statement and prospectus. Rule 401(b) provides that, upon filing of a Section 10(a)(3) amendment to the registration statement and prospectus, the form and contents of the amendment must conform to the applicable rules and forms as in effect on the filing date of the amendment.  Note 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 the registration statement for purposes of Section 10(a)(3), so that in accordance with Rule 401, the registration statement could no longer be used after the annual report is filed without the filing of the consent. [Note that this C&DI also applies under Rule 436 below.}

Rule 436 — Consents Required in Special Cases

• A consent by a credit rating agency would be required if information about a company's credit ratings is included in, or incorporated by reference into, a Securities Act registration statement or a Section 10(a) prospectus if the company includes the credit rating in its registration statement or Section 10(a) prospectus (directly or through incorporation by reference), except where the rating information is included only for the purposes of satisfying the disclosure requirements described below.

  A consent by the credit rating agency would not be required if the disclosure of a credit rating in an SEC filing relates only to the following "issuer disclosure-related ratings information":

  • the 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.

  The C&DI cites these as  examples of that disclosure: 

  • noting the rating 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;
  • referring to or describing the rating in the context of the liquidity discussion in MD&A; or
  • discussing ratings as part of the company's description of debt covenants, interest or dividends that are tied to credit ratings or potential support to variable interest entities. (See Release No. 33-9070 (Oct. 7, 2009))

• consent by a credit rating agency would 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.

• A consent from a credit rating agency is not required If ratings information is included in a free writing prospectus that complies with  Rule 433 or in a term sheet or press release that complies with  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.

•   If a registration statement or post-effective amendment 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, a consent by a credit rating agency is required to be filed with the registration statement or post-effective amendment.

Please note also that C&DI 255.13, relating to Rule 501 under Reg D has been withdrawn in light of the DFA.

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