SEC Votes to Propose Amendments to Replace references to credit Ratings in Rules and Forms, including Form S-3

By Cydney Posner

This morning, the SEC voted to propose amendments to a number of rules and forms under the Securities Act and Schedule 14A under the Exchange Act to replace references to credit ratings with alternative criteria. These amendments were proposed pursuant to Section 939A of the Dodd-Frank Act. References to credit ratings appear throughout the securities laws, and this proposal is apparently only the first in a series aimed at eliminating these references. Chair Schapiro described the proposal as part of a worldwide effort to reduce over-reliance on credit ratings, cited as one of the factors contributing to the financial crisis of 2008.

The most significant change is with respect to eligibility under Forms S-3 and F-3. Currently, issuers are eligible to use those short-form registration statements to register non-convertible debt securities to be offered for cash if, among other things, those securities are rated investment grade by an NRSRO. The SEC proposes to replace that eligibility standard with one of the criteria used to define WKSIs: as of a date within 60 days of the filing date, the company has issued in the last three years at least $1 billion aggregate principal amount of non-convertible securities, other than common equity, in primary offerings for cash, not exchange, registered under the Act. The proposal would also rescind Rule 134(a) (17) and Form F-9 as well as remove references to credit ratings and make corresponding changes to Forms S-4 and F-4, Schedule 14A and Rules 138, 139 and 168.

The SEC proposed this same test for S-3 eligibility in 2008, but it was almost uniformly rejected in public comments. Now, the DFA requires agencies to remove credit rating references, and the SEC believes that this definition would be an appropriate alternative because companies that meet the proposed test are typically widely followed in the marketplace. However, several of the Commissioners emphasized that the SEC is very open to hearing alternatives as part of the comment process. In particular, Commissioner Paredes, who had reservations about the proposal but voted to move forward anyway, sought input on ways to address the potential loss of shelf eligibility that would result from the change for a number of issuers. He contended that the data used to support the proposal (showing that only 45 issuers would have been rendered ineligible had the change been in place during the period reviewed (2006-2008)) understated the impact on eligibility because the review period was limited and the examination considered only issuers that actually made registered debt offerings during the review period; it did not examine the number of issuers that did not make a registered offering during the review period but that were Form S-3 eligible and would have lost their eligibility had the proposal been in place.