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    SEC Adopts Amendments to Codify Exemption to Credit Rating Agency Rule

    August 14, 2019

    SEC adopted amendments that codify an existing exemption for credit rating agencies registered with SEC as nationally recognized statistical rating organizations (NRSROs). The amendments provide an exemption from a rule for NRSROs with respect to credit ratings if the issuer of the security or money market instrument referred to in the rule is not a U.S. person and the NRSRO has a reasonable basis to conclude that all offers and sales of such security or money market instrument by any issuer, sponsor, or underwriter linked to such security or money market instrument will occur outside the United States. The final rule will become effective on September 13, 2019.

    Rule 17g-5(a)(3) under the Securities Exchange Act provides for the ability of information necessary to determine a structured finance product’s credit rating to NRSROs that were not hired by the issuer, sponsor, or underwriter of the structured finance product. Prior to the compliance date for Rule 17g‑5(a)(3), SEC granted a temporary conditional exemption to the rule for certain structured finance products issued by non-U.S. persons and offered and sold outside the United States. SEC subsequently extended this exemption. The amendments adopted by SEC codify the existing exemption to Rule 17g-5(a)(3) and clarify the exemption’s conditions. The amendment to Rule 17g-5(a)(3) adds a new paragraph to the rule to provide that the rule will not apply to an NRSRO when issuing or maintaining a credit rating for a security or money market instrument issued by an asset pool or as part of any asset-backed securities transaction, if:

    • the issuer of the security or money market instrument is not a U.S. person (as defined in Securities Act Rule 902(k)); and
    • the NRSRO has a reasonable basis to conclude that all offers and sales of the security or money market instrument by any issuer, sponsor, or underwriter linked to the security or money market instrument will occur outside the U.S. (as that phrase is used in Regulation S under the Securities Act)

    The amendments to Rules 17g-7(a) and 15Ga-2 conform the conditions of the existing exemptions to such rules to the conditions of the exemption to Rule 17g-5(a)(3). The amendment to Rule 17g-7(a) also clarifies that the application of the conditions to the exemption applies differently in the case of rated obligors than it does in the case of rated securities or money market instruments. Rule 17g-7(a) requires an NRSRO to disclose certain information when it publishes a rating action. Rule 15Ga-2 requires an issuer or underwriter to disclose the findings and conclusions of any third-party due diligence report it obtains with respect to an asset-backed security that is to be rated by an NRSRO. 

     

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    Effective Date: September 13, 2019

    Keywords: Americas, US, Banking, Securities, NRSRO, Structured Finance, Credit Ratings, CRA, SEC

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