In November 2009, the Securities and Exchange Commission (the “SEC”) adopted changes to Rules 17g-5(a) and 17g-5(b) under the Securities Exchange Act. These changes affect structured finance products1 rated by Rating Agencies after June 2, 2010. The rules require issuers, sponsors or underwriters (collectively, “arrangers”) to maintain information on password protected websites accessible to nationally recognized statistical rating organizations (“NRSROs” or “NRSRO”). The rules apply to any arranger that pays for a credit rating of a structured finance product.
The SEC is imposing these measures in order to address concerns that have arisen about the integrity of the credit rating procedures of the NRSROs. The website requirement will expand access to the product beyond the hired NRSROs as the website will also be accessible to non-hired NRSROs . This expansion of access to additional NRSROs, it is hoped, will reduce the effect of potential conflicts of interests between the hired NRSROs and the arrangers, and is expected to increase the quality of credit ratings for the structured finance products by offering a wider range of ratings from NRSROs that are not hired by the arranger. Any non-hired NRSRO wishing to access the website of an arranger will be required to provide an annual certification to the SEC demonstrating their intentions to determine credit ratings for the structured finance products and to maintain confidentiality.
The new rules would require all information, delivered to NRSROs, whether oral or written, to be posted on the website. A potential consequence of the more formal process of entering the information onto a secured website would be the requirement that arrangers adjust their methods of providing information to the NRSROs. For example, oral communications between arrangers and NRSROs, which have been common practice in the past, are now required to be made available in some form on the website. Further, the rules require that the NRSRO obtain a written representation from the arranger that such arranger will disclose on its website any information that the arranger has provided to the hired NRSRO to determine the initial credit rating as well as to monitor the ongoing credit rating.
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1 The proposed rule defines the term “structured finance product” to broadly refer to any security or money market instrument issued by an asset pool or as part of any asset-backed or mortgaged-backed security paid for by the arranger, including, asset-backed or mortgage-backed securities, collateralized debt, collateralized loan obligations, collateralized mortgage obligations, structured investment vehicles, synthetic collateralized debt obligations that reference debt securities or indexes, and hybrid collateralized debt obligations.
