53114 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

1See the proposing release considered by the 

Commission on September 17, 2009 regarding 

proposed disclosure regarding credit ratings in 

registration statements. 

2 15 U.S.C. 78a et seq. 

3 17 CFR 229.10 through 1123. 

4 15 U.S.C. 77a et seq. 

5 15 U.S.C. 80a–1 et seq. 

6 17 CFR 220.436(g). 

7 15 U.S.C. 77g. 

8 15 U.S.C. 77k. 

and all other preliminary indications of 

a rating. A preliminary rating includes 

ratings on a particular structure of a 

security even if not tied to a specific 

registrant or group of assets. Disclosure 

of a preliminary rating is required even 

if there have been changes to the 

security for which a final rating is 

disclosed pursuant to this paragraph 6. 

5. For purposes of determining 

whether disclosure of any preliminary 

rating or unused final rating is required, 

a credit rating is obtained from a credit 

rating agency if it is solicited by or on 

behalf of a Registrant from a credit 

rating agency. 

6. If the prospectus relates to 

securities other than senior securities of 

the Registrant that have been assigned a 

credit rating by a credit rating agency, 

the information required by this 

paragraph may be provided in the 

Statement of Additional Information 

unless the rating criteria will materially 

affect the investment policies of the 

Registrant (e.g., if the rating agency 

establishes criteria for selection of the 

Registrant’s portfolio securities with 

which the Registrant intends to 

comply), in which case it should be 

included in the prospectus. 

* * * * * 

By the Commission. 

Dated: October 7, 2009. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. E9–24546 Filed 10–14–09; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 220 

[Release Nos. 33–9071; 34–60798; IC– 

28943; File No. S7–21–09] 

RIN 3235–AK45 

Concept Release on Possible 

Rescission of Rule 436(g) Under The 

Securities Act of 1933 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Concept release; request for 

comments. 

SUMMARY: As part of the Commission’s 

review of the role of credit rating 

agencies in the operation of the 

securities markets, and in light of 

disclosure regarding credit ratings that 

is being proposed in a companion 

release, the Commission is seeking 

comment on whether Rule 436(g) under 

the Securities Act of 1933 should be 

rescinded. In particular, we would like 

to understand whether there continues 

to be a sufficient basis to exempt 

nationally recognized statistical rating 

organizations from Section 7 and 11 of 

the Securities Act. 

DATES: Comments should be received on 

or before December 14, 2009. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/concept.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–21–09 on the subject line; 

or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–21–09. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Web site (http:// 

www.sec.gov/rules/concept.shtml). 

Comments are also available for public 

inspection and copying in the 

Commission’s Public Reference Room, 

100 F Street, NE., Washington, DC 

20549, on official business days 

between the hours of 10 a.m. and 3 p.m.. 

All comments received will be posted 

without change; we do not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. 

FOR FURTHER INFORMATION CONTACT: 

Blair F. Petrillo, Special Counsel in the 

Office of Rulemaking, Division of 

Corporation Finance, at (202) 551–3430, 

100 F Street, NE., Washington, DC 

20549. 

SUPPLEMENTARY INFORMATION: In a 

companion release,1 the Commission is 

proposing amendments to rules under 

the Securities Exchange Act of 1934 2

and Regulation S–K,3 and forms under 

the Securities Act of 1933,4 the 

Exchange Act and the Investment 

Company Act of 1940 5 to require 

disclosure by registrants regarding 

credit ratings in their registration 

statements under the Securities Act and 

the Exchange Act, and by closed-end 

management investment companies in 

registration statements under the 

Securities Act and the Investment 

Company Act, if the registrant uses the 

rating in connection with a registered 

offering. In connection with the 

proposed amendments, we are soliciting 

comment on whether the Commission 

should rescind Rule 436(g) under the 

Securities Act.6

I. Introduction 

We are considering whether we 

should propose rescinding Rule 436(g) 

under the Securities Act. Rule 436(g) 

provides an exemption for credit ratings 

provided by nationally recognized 

statistical rating organizations 

(‘‘NRSROs’’) from being considered a 

part of the registration statement 

prepared or certified by a person within 

the meaning of Sections 7 7 and 11 8 of 

the Securities Act. The exemption 

currently does not apply to credit rating 

agencies that are not NRSROs. We are 

concerned that there is no longer a 

sufficient basis to exempt NRSROs and 

to distinguish between NRSROs and 

credit rating agencies that are not 

NRSROs for purposes of liability under 

Section 11 of the Securities Act. 

Rescinding the exemption would cause 

NRSROs to be included in the liability 

scheme for experts set forth in Section 

11, as is currently the case for credit 

rating agencies that are not NRSROs. 

We solicit comment on what impact 

removing the rule would have on 

markets and their participants. Scrutiny 

of credit ratings and the process of 

obtaining a credit rating appears to have 

increased as a result of the turmoil in 

the credit markets over the past few 

years. As discussed below and in the 

companion release proposing to require 

disclosure regarding credit ratings, as 

credit ratings have become more 

significant, we have sought to protect 

investors while recognizing the role 

credit ratings play in the offer and sale 

of securities. In that regard, we are now 

exploring whether Rule 436(g) is still 

appropriate in light of the growth and 

development of the credit rating 

industry and investors’ use of credit 

ratings. We are mindful of the potential 

significant impact that rescinding Rule 

436(g) could have on registrants, 


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9See Section 7 of the Securities Act in note 7 

above. 

10See William O. Douglas and George E. Bates, 

The Federal Securities Act of 1933, 43 Yale L.J. 171 

(1933); Herman & Maclean v. Huddleston, 459 U.S. 

375 (1983). 

11See Section 11 of the Securities Act in note 8 

above. 

12See Section 11(b) of the Securities Act [15 

U.S.C. 77k(b)]. 

13See Section 11(b)(3)(C) of the Securities Act [15 

U.S.C. 77k(b)(3)(C)]. 

14Rule 436(g) applies to ratings disclosed in Form 

F–9 [17 CFR 239.39.] registration statements by 

ratings organizations specified in the Instruction to 

paragraph (a)(2) of General Instruction I of that 

form. Form F–9 is the Multijurisdictional 

Disclosure System (‘‘MJDS’’) form used to register 

investment grade debt or preferred securities under 

the Securities Act by eligible Canadian issuers. 

Under Form F–9, securities are deemed to be 

investment grade if, at the time of sale, at least one 

NRSRO or Approved Rating Organization, as 

specified in the above-referenced Instruction, has 

rated the securities in a category signifying 

investment grade. 

15See Disclosure of Security Ratings, Release No. 

33–5882 (Nov. 9, 1977) [42 FR 58414]. 

16The Commission sought comment on two 

questions regarding NRSROs and liability under 

Section 11 of the Securities Act: 

A. (5) Is an entity issuing a security rating the 

type of person referred to in Section 7 of the 

Securities Act of 1933 whose consent is required to 

be filed by the issuer of the security? If so, what 

costs or other burdens may be associated with the 

issuer obtaining a consent from the rating agency 

or, in the case of multiple ratings, from all the rating 

agencies involved? Assuming, arguendo, that such 

consents may be waived by the Commission under 

Section 7, should waivers be granted and, if so, 

under what circumstances? 

A. (6) What impact may result, directly or 

indirectly, from a rating entity being subject to 

Section 11 under the Securities Act of 1933, with 

respect to its rating being disclosed in a prospectus? 

See the 1977 Release in note 15 above. 

17See Disclosure of Ratings in Registration 

Statements, Release No. 33–6336 (Aug. 6, 1981) [46 

FR 42024]. 

18 Id. 

NRSROs and other credit rating 

agencies, investors and the financial 

markets in general, and we seek 

comment on any burdens or benefits 

that may result. Therefore, we are 

requesting input on the possible 

elimination of Rule 436(g) from all 

market participants and other members 

of the public. 

A. Section 7 and Section 11 of the 

Securities Act 

Section 7 of the Securities Act 

provides that ‘‘[i]f any accountant, 

engineer, or appraiser, or any person 

whose profession gives authority to a 

statement made by him, is named as 

having prepared or certified any part of 

the registration statement, or is named 

as having prepared or certified a report 

or valuation for use in connection with 

the registration statement, the written 

consent of such person shall be filed 

with the registration statement.’’ 9 These 

persons are referred to as experts for 

purposes of the securities laws. 

Registrants are required to file the 

consents of experts as exhibits to their 

registration statements. 

Section 11 of the Securities Act 

imposes liability on various parties who 

are involved in the preparation of 

registration statements filed under the 

Securities Act. Section 11 was enacted 

so that those persons with a direct role 

in a registered offering would be subject 

to a rigorous standard of liability to 

assure that disclosure regarding 

securities is accurate.10 It was also 

designed to give investors additional 

protection not available under common 

law due to the barriers to recovery 

presented by the common law fraud 

requirements of scienter, reliance and 

causation. Liability under Section 11 

extends to the issuer, officers and 

directors who sign the registration 

statement, underwriters, and persons 

who prepare or certify any part of the 

registration statement or who are named 

as having prepared or certified a report 

or valuation for use in connection with 

the registration statement.11 Section 11 

provides that an expert may be held 

liable if, when the registration statement 

became effective, the part of the 

registration statement purporting to be 

made on his or her authority contained 

an untrue statement of material fact or 

omitted to state a material fact necessary 

to make the statements therein not 

misleading, unless he can establish that 

he had, after reasonable investigation, 

reasonable grounds to believe and did 

believe at the time such part of the 

registration statement became effective, 

that the statements in the registration 

statement were true and that there was 

no omission to state a material fact 

necessary to make the statements 

therein not misleading.12 Under Section 

11, persons other than the issuer may be 

able to assert as a defense to Section 11 

liability that they relied upon an expert 

that consented to be named in the 

registration statement (the ‘‘experts’ 

defense’’).13

B. Background of Rule 436(g) 

Securities Act Rule 436(g) provides 

that a credit rating assigned by an 

NRSRO to a class of debt securities, a 

class of convertible debt securities, or a 

class of preferred stock is not a part of 

a registration statement prepared or 

certified by a person within the meaning 

of Sections 7 and 11 of the Securities 

Act. With one limited exception arising 

in connection with our 

Multijurisdictional Disclosure System 

with Canada, there is no similar 

provision for credit rating agencies that 

are not NRSROs.14 As a result, 

disclosure of credit ratings in a 

registration statement currently results 

in different treatment for NRSROs and 

for credit rating agencies that are not 

NRSROs. By virtue of Rule 436(g), an 

NRSRO is not subject to liability under 

Section 11 even if its rating is disclosed 

in a registration statement. A registrant 

is not required to file consent of an 

NRSRO with its registration statement, 

and the experts’ defense is not available 

to other persons involved in the 

registration statement, regardless of 

whether they relied on the expertized 

portion of the registration statement. By 

contrast, if a credit rating assigned by a 

credit rating agency that is not an 

NRSRO is disclosed in a registration 

statement, the credit rating agency 

would be subject to potential liability 

under Section 11. The registrant is 

required to file the credit rating agency’s 

consent with its registration statement, 

and the experts’ defense may be 

available. 

In 1977, the Commission published a 

concept release announcing that it was 

considering a change in policy to permit 

disclosure of credit ratings in 

documents filed with the 

Commission.15 In that release the 

Commission solicited comment on 

whether an NRSRO is the type of person 

from whom a consent would be required 

under Section 7 of the Securities Act 

(thereby also subjecting it to liability 

under Section 11). That release 

contained a list of questions regarding 

the Commission’s then-current policy of 

discouraging the disclosure of credit 

ratings and whether the Commission 

should change that policy or retain it.16

According to the 1981 release ultimately 

announcing the Commission’s change in 

position, commenters on the 1977 

release generally were opposed to 

subjecting NRSROs to liability under 

Section 11 and argued, among other 

things, that it would interfere with the 

substance and timing of the registration 

process, that it would result in changes 

to the way credit ratings were issued, 

and that it would result in increased 

costs and uncertainty over the scope of 

liability.17 The NRSROs in existence in 

1977 indicated that they would not 

provide consents to be named in the 

registration statement.18 The 1981 

release also indicated that commenters 

were concerned that requiring consent 

and subjecting NRSROs to Section 11 

liability would affect their 

independence if they were 

‘‘participants’’ in the offering and would 

lessen the quality of ratings because 

NRSROs likely would rely only on 


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53116 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

19 Id. 

20 Id. 

21 Id. 

22 Id. 

23 15 U.S.C. 80b–1 et seq. At the time Rule 436(g) 

was proposed, NRSROs generally were required to 

register as investment advisers. Congress provided 

an exclusion from the Advisers Act for NRSROs 

when it passed the Credit Rating Agency Reform 

Act of 2006, Public Law. 109–291, 120 Stat. 1327 

(Sept. 29, 2006). See Section 202(a)(11)(F) of the 

Advisers Act [15 U.S.C. 80b–202(a)(11)(F)]. 

24See Disclosure of Ratings in Registration 

Statements in note 17 above. 

25See Adoption of Integrated Disclosure System, 

Release No. 33–6383 (Mar. 3, 1982) [47 FR 11380]. 

26See Disclosure of Security Ratings by Money 

Market Funds, Release No. 33–6630 (March 21, 

1986) [51 FR 9838]. 

27 Id. 

28See Disclosure of Security Ratings, Release No. 

33–7086 (Aug. 31, 1994) [59 FR 46304]. 

29 Id. 

30See letter regarding File No. S7–24–94 of 

Moody’s Investor Service, Inc. (Dec. 5, 1994). See 

also letter regarding File No. S7–24–94 of Fitch 

Investors Service Inc. (Dec. 6, 1994). 

31 Id. 

32NRSROs have taken the position that they 

‘‘publish’’ their ratings and that their ratings are 

protected under the First Amendment. Cases in 

which NRSROs have asserted this position include: 

Compuware Corp. v. Moody’s Inv. Servs., Inc., 499 

F.3d 520 (6th Cir. 2007); Jefferson County Sch. Dist. 

No. R–1 v. Moody’s Inv. Servs., Inc., 175 F.3d 848 

(10th Cir. 1999); First Equity Corp. v. Standard & 

Poor’s Corp., 690 F.Supp. 256 (S.D.N.Y. 1988); and 

Abu Dhabi Commer. Bank v. Morgan Stanley & Co. 

et al., 2009 U.S. Dist. Lexis 79607 (S.D.N.Y. 2009). 

33See note 30 above. 

34See Security Ratings Release No. 33–8940 (July 

1, 2008) [73 FR 40106]. 

35See letter regarding File No. S7–17–08 of 

American Securitization Forum (Sept. 5, 2008), at 

http://www.sec.gov/comments/s7-18-08/ 

s71808.shtml. 

36See letter regarding File No. S7–17–08 of the 

American Bar Association (Oct. 10, 2008), 

at http://www.sec.gov/comments/s7-18-08/ 

s71808.shtml. 

37See letter regarding File No. S7–17–08 of 

Realpoint LLC (Sept. 8, 2008), at http:// 

www.sec.gov/comments/s7-18-08/s71808.shtml. 

The commenter appears to be concerned with the 

potential negative ramifications for subscriber-paid 

credit rating agencies whose ratings are disclosed 

publicly in a registration statement. 

objective, quantifiable information.19

The commenters in favor of subjecting 

NRSROs to liability under Section 11 

cited the incentive that NRSROs would 

take more care in determining ratings.20

As noted above, in 1981, the 

Commission announced the shift in 

policy to permit, but not require, 

disclosure of credit ratings in 

registration statements. In addition, the 

Commission proposed Securities Act 

Rule 436(g) to provide that a security 

rating assigned to a class of debt 

securities, a class of convertible debt 

securities, or a class of preferred stock 

by an NRSRO would not be considered 

a part of the registration statement 

prepared or certified by a person within 

the meaning of Section 7 and Section 11 

of the Securities Act.21 In proposing 

Rule 436(g), the Commission noted that 

if NRSROs refused to provide consents, 

then disclosure of credit ratings would 

not be provided even if permitted by the 

Commission. As a result, the 

Commission proposed Rule 436(g) in 

order to make its new policy position on 

the disclosure of credit ratings 

meaningful.22 The Commission also 

cited the fact that NRSROs already were 

subject to substantial liability under the 

antifraud provisions of the securities 

laws and to regulation by the 

Commission under the Investment 

Advisers Act of 1940.23 The 

Commission then expected that, because 

of antifraud liability, NRSROs would be 

required ‘‘to adhere to the highest 

professional standards in determining 

security ratings.’’ 24 When Rule 436(g) 

was adopted in 1982, the Commission 

stated its belief that exempting NRSROs 

from liability under Section 11 of the 

Securities Act was appropriate and cited 

the rationale provided in the proposing 

release that practical problems would 

arise in obtaining the consents and that 

NRSROs were subject to the antifraud 

provisions of the securities laws.25

In 1986, the Commission proposed to 

expand the Rule 436(g) exemption to 

include ratings assigned by NRSROs to 

money market funds.26 In proposing the 

rule, the Commission stated ‘‘because 

money market fund shares are equity 

securities, a money market fund which 

has received an NRSRO rating must 

obtain the consent of the NRSRO or seek 

a waiver of consent under Rule 437 [17 

CFR 230.437] before using the rating in 

its registration statement.’’ 27 The 

Commission did not act on this 

proposal, and Rule 436(g) was not 

amended. 

In 1994, the Commission proposed to 

require disclosure about credit ratings in 

registration statements.28 In the 1994 

release, the Commission noted that the 

policy announced in 1981 created a 

distinction between NRSROs and credit 

rating agencies that were not NRSROs. 

The Commission noted that the 

distinction was most significant in the 

context of Rule 436(g). While an NRSRO 

would not be required to provide a 

consent if its rating was disclosed in a 

registration statement pursuant to Rule 

436(g), ‘‘[a]ny non-NRSRO rating 

organization must furnish a consent and 

take on expert liability under the 

Securities Act if its rating is included in 

the registration statement and 

prospectus.’’ 29

The 1994 release did not propose any 

change to Rule 436(g), but it did solicit 

comment on whether there should 

continue to be a distinction between 

NRSROs and credit rating agencies that 

are not NRSROs for purposes of Rule 

436(g). The release also sought comment 

on whether Rule 436(g) should be 

expanded to include credit rating 

agencies that are not NRSROs or 

whether the rule should be rescinded. 

Commenters generally were opposed to 

subjecting NRSROs and other credit 

rating agencies to liability under Section 

11 of the Securities Act. In particular, 

one commenter provided several 

arguments as to why Section 11 liability 

was not appropriate for NRSROs.30

Among other things, the commenter 

argued that: Ratings published by 

NRSROs ‘‘are expressions of opinion 

about risk, not statements,’’ and even if 

the security defaults in an individual 

case, it would not necessarily be an 

indication that the opinion was 

wrong; 31 Section 11 liability would 

violate the NRSROs’ First Amendment 

rights; 32 and Section 11 liability could 

eliminate the disclosure of security 

ratings in prospectuses.33 The 

Commission did not act on the 

proposals in the 1994 release. 

In July 2008, the Commission 

proposed to amend Rule 436(g) to 

extend the exemption to ratings 

provided by any ‘‘credit rating agency,’’ 

as defined in 15 U.S.C. 78c(a)(61),34

rather than only to ratings provided by 

NRSROs. The Commission cited its 

belief that, among other things, 

amending Rule 436(g) would foster 

competition between credit rating 

agencies. Only three commenters 

addressed the proposed amendment to 

Rule 436(g). One commenter opposed it 

because credit rating agencies that are 

not NRSROs are not subject to 

Commission oversight.35 Another 

commenter supported extending the 

exemption in Rule 436(g) to credit rating 

agencies that are not NRSROs.36 That 

commenter did not believe references to 

ratings should be considered 

‘‘expertized.’’ The commenter also cited 

the costs that registrants have to incur 

absent the amendment of Rule 436(g) to 

obtain a consent from a credit rating 

agency that was not an NRSRO. In 

addition, the commenter discussed the 

possibility that a rating obtained from a 

credit rating agency that was not an 

NRSRO would be omitted, thus offering 

investors an incomplete view of the 

ratings for a particular security. A third 

commenter objected to requiring 

disclosure of credit rating agency 

information without the consent of the 

relevant credit rating agency but did not 

cite any concerns about liability.37 The 

Commission did not adopt the proposal. 


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38See Roundtable on Oversight of Credit Rating 

Agencies, Release No. 34–59753 (Apr. 13, 2009) [74 

FR 17698]. 

39See Statement regarding File No. S7–04–09 of 

Investment Company Institute (Apr. 15, 2009), at 

http://www.sec.gov/comments/4-579/4-579.shtml. 

40 Id. 

41See Frank Partnoy, Rethinking Regulation of 

Credit Rating Agencies: An Institutional Investor 

Perspective, April 2009, at http://www.cii.org/ 

UserFiles/file/CRAWhitePaper04-14-09.pdf (white 

paper commissioned by Council of Institutional 

Investors). 

42See e.g. statement regarding File No. S7–04–09 

of Standard & Poor’s (Apr. 15, 2009) at http:// 

www.sec.gov/comments/4-579/4-579.shtml (noting 

that some percentage of securities will default and 

that such a default does not automatically mean the 

credit rating was inappropriate). 

43See Roger Lowenstein, Triple-A Failure, N.Y. 

Times Magazine, Apr. 27, 2008 (discussing the 

dramatic growth in revenues of NRSROs). See also 

Summary Report of Issues Identified in the 

Commission Staff’s Examinations of Select Credit 

Rating Agencies (July 2008), at http://www.sec.gov/ 

news/studies/2008/craexamination070808.pdf 

(noting that some rating agencies struggled with the 

substantial growth of the number of deals to be 

rated beginning in 2002); Marco Pagano and Paolo 

Volpin, Credit Ratings Failures: Causes and Policy 

Options, Working Paper (Feb. 9, 2009), at http:// 

www.italianacademy.columbia.edu/publications/ 

working_papers/2008_2009/ 

pagano_volpin_seminar_IA.pdf (discussing the role 

of credit rating agencies in the growth of the market 

for structured products). 

44See note 17 above. 

45See note 23 above. 

46 Id. 

47See e.g. Partnoy in note 41 above (noting that 

credit rating agencies ‘‘have been sued relatively 

infrequently, and rarely have been held liable’’). 

48See note 24 above and the related discussion. 

49We are aware that NRSROs generally do not 

consider themselves as experts because they believe 

they are providing opinions on risk. See letter of 

Moody’s Investor Service, Inc. in note 30 above. We 

do not at this time believe, however, that the nature 

of the credit rating provided by a credit rating 

agency, including an NRSRO, is in and of itself so 

distinct from the parts of registration statements 

provided by other experts that they should be 

subject to a different standard of liability. 

In April 2009, the Commission hosted 

a roundtable regarding the oversight of 

credit rating agencies. In connection 

with the roundtable, the Commission 

also solicited comment on the topics to 

be covered at the roundtable, including 

the appropriate oversight and liability 

for NRSROs and credit rating agencies 

that are not NRSROs.38 One commenter 

suggested that the Commission 

reconsider the exemption from liability 

for NRSROs.39 That commenter also 

expressed skepticism regarding the First 

Amendment arguments asserted by 

NRSROs against being held liable for 

their credit ratings because credit rating 

agencies have become involved in the 

structuring of complex securities and no 

longer rate most or all securities, 

regardless of whether or not they have 

been hired to do so.40 In addition, 

another commenter commissioned a 

white paper in connection with the 

roundtable discussion.41 The paper 

argues that in order to make NRSROs 

more accountable, they must be subject 

to a credible threat of liability. Some 

commenters expressed concern 

regarding any liability that would allow 

for second-guessing of judgments made 

by credit rating agencies.42

II. Solicitation of Comment on 

Rescinding Rule 436(g) 

In light of market developments and 

our proposal to require disclosure of 

credit ratings and information about 

credit ratings, we are considering 

proposing to rescind Rule 436(g) under 

the Securities Act, and we solicit 

comment on what impact removing the 

rule would have on market participants. 

If we were to rescind Rule 436(g), then 

NRSROs and credit rating agencies that 

are not NRSROs would be treated in the 

same manner for purposes of liability 

under Section 11 of the Securities Act 

if their credit ratings are disclosed in 

registration statements. If we adopt the 

amendments to require certain 

disclosure regarding credit ratings in 

registration statements, and if we were 

to rescind Rule 436(g), then a registrant 

who uses a credit rating assigned by an 

NRSRO or a credit rating agency that is 

not an NRSRO in connection with a 

registered offering would be required to 

file the consent of the rating agency as 

an exhibit to its registration statement. 

As a result, both NRSROs and credit 

rating agencies that are not NRSROs 

would be subject to potential liability 

under Section 11 of the Securities Act. 

We believe that it may be appropriate 

to rescind Rule 436(g) for four primary 

reasons. First, we believe that the 

original reasons supporting adoption of 

Rule 436(g) may no longer provide a 

sufficient basis to continue to provide 

the exemption to NRSROs. If this is the 

case, then we believe it is appropriate to 

reconsider whether NRSROs should 

continue to be insulated from liability 

under Section 11. In the nearly 30 years 

that Rule 436(g) has been in place, the 

credit ratings industry has grown 

dramatically in terms of the number of 

ratings issued and the types of securities 

being rated.43 We believe that it is now 

appropriate to revisit the purposes 

underlying the adoption of Rule 436(g), 

particularly in light of the disclosure 

regarding credit ratings that we are 

proposing in a companion release. The 

Commission, in proposing Rule 436(g), 

stated that the rule was necessary to 

make its policy of permitting voluntary 

disclosure about security ratings 

meaningful. Without the exemption 

provided by Rule 436(g), the 

Commission was concerned that 

registrants would not voluntarily 

disclose security ratings in their 

registration statements because of the 

liability concerns of the NRSROs who 

provided the ratings. If we adopt the 

proposal to require disclosure regarding 

credit ratings if they are used in 

connection with a registered offering of 

securities, then we believe the rationale 

cited by the Commission in 1981 is no 

longer applicable because we would no 

longer need to provide a means to 

encourage disclosure about credit 

ratings. Registrants would be required to 

provide such disclosure if they use a 

credit rating in connection with a 

registered offering. In addition, when 

Rule 436(g) was adopted, the 

Commission believed that the liability 

that was already applicable to NRSROs 

was sufficient for the protection of 

investors.44 At the time, the 

Commission noted that NRSROs were 

subject to liability under both Section 

10(b) of the Exchange Act and the 

Investment Advisers Act.45 As noted 

above, NRSROs are no longer required 

to register under the Investment 

Advisers Act.46 NRSROs remain subject 

to liability under Section 10(b) of the 

Exchange Act, but they are held liable 

infrequently.47 In addition, questions 

could be raised about whether NRSROs’ 

performance has ‘‘adhere[d] to the 

highest professional standards in 

determining security ratings’’ that the 

Commission expected when Rule 436(g) 

was adopted.48

Second, we believe that when credit 

ratings are used to sell securities, 

investors rely on NRSROs and other 

credit rating agencies as experts and that 

it may be appropriate for our liability 

scheme for experts to apply to them. In 

our view, NRSROs represent themselves 

to registrants and investors as experts at 

analyzing credit and risk.49 Investors 

rely on the information provided by 

credit rating agencies for a key part of 

their investment decision. NRSROs 

describe the credit ratings that they 

provide as opinions with respect to the 

registrant or security of the registrant, 

and the Commission notes that other 

professionals provide opinions upon 

which investors rely, such as legal 

opinions, valuation opinions, fairness 

opinions and audit reports, and we treat 

these opinions as subject to the 

Securities Act’s provisions for experts, 

including our requirements that 

registrants include the consents of such 

professionals if their reports are 

referenced in registration statements. It 

appears to us that NRSROs and other 

credit rating agencies are experts similar 

to other parties subject to liability under 

Section 11 and that it may no longer be 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
53118 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

50 In the merger context, for example, if the 

fairness opinion provided by the investment banker 

is disclosed in the registration statement, then the 

party preparing the opinion must consent to be 

named as an expert in the registration statement. 

We note that fairness opinions generally include 

language that the financial advisor relied upon 

information provided by the parties to the business 

combination. In this regard, see In re Global 

Crossing, Ltd. Sec. Litig., 313 F.Supp. 2d 189 

(S.D.N.Y. 2003) and In re AOL Time Warner, Inc. 

Sec. and ERISA Litig., 381 F.Supp 2d 192 (S.D.N.Y. 

2004). See also Virginia Bankshares, Inc. v. 

Sandberg, 501 U.S. 1083 (1991). 

51For ‘‘corporate issuers’’ in 2007, for example, 

Standard and Poor’s, Moody’s, and Fitch issued 

39%, 33%, and 21% of outstanding credit ratings, 

respectively, for a total of 93% of outstanding credit 

ratings. See Annual Report on Nationally 

Recognized Statistical Rating Organizations (2008), 

at http://www.sec.gov/divisions/marketreg/ 

ratingagency/nrsroannrep0608.pdf. 

52 In the companion release proposing to require 

disclosure regarding credit ratings, we are 

proposing to require disclosure of preliminary 

ratings under certain circumstances. At this stage, 

we preliminarily believe we should not require 

consents regarding disclosure of preliminary ratings 

or unused final ratings. The preliminary rating may 

be based on preliminary information and may not 

have been subject to all of the credit rating agency’s 

internal processes for determining credit ratings. 

53As noted in the companion release proposing 

to require disclosure regarding credit ratings, the 

proposed disclosure requirement regarding credit 

consistent with investor protection to 

exempt NRSROs from the provisions of 

the Securities Act applicable to 

experts.50

Third, we believe that rescinding Rule 

436(g), and therefore potentially 

increasing the risk of liability under the 

federal securities laws, could 

significantly improve investor 

protection. Enhancing the 

accountability of NRSROs may help to 

address concerns about the quality of 

credit ratings. In light of the proposal to 

require mandatory disclosure of 

information about credit ratings, 

rescinding Rule 436(g) could encourage 

both NRSROs and credit rating agencies 

that are not NRSROs to improve the 

quality of their ratings and analysis in 

order to reduce the risk of liability 

under Section 11. An improvement in 

the quality of credit ratings should, 

consistent with the goals of the federal 

securities laws, better protect investors. 

Of course, we are mindful of the 

possibility that a risk of greater NRSRO 

liability as a result of subjecting 

NRSROs to Section 11 may undermine 

competition if credit rating agencies 

decide that they are unable to bear the 

risk of liability and thus exit the ratings 

business. Similarly, firms considering 

entering the ratings business may 

reconsider in the face of an increased 

risk of legal liability. The threat of 

liability may particularly affect smaller, 

less-established rating agencies that may 

find it more difficult to negotiate for 

indemnification or bear the risk of 

additional liability. It also is possible 

that, in response to the rescission of 

Rule 436(g), registrants would begin to 

take greater advantage of private 

placements instead of public offerings. 

Finally, we believe that the 

distinction in Rule 436(g) between 

NRSROs and credit rating agencies that 

are not NRSROs may contribute to 

competitive disadvantages. We 

understand that investors rely on credit 

ratings issued by NRSROs as much as, 

if not more than, credit ratings issued by 

credit rating agencies that are not 

NRSROs, particularly because the 

NRSROs dominate the credit rating 

market.51 Distinguishing between 

NRSROs and credit rating agencies that 

are not NRSROs may create a 

competitive barrier for those credit 

rating agencies because they are subject 

to a higher standard of liability under 

the securities laws than NRSROs. For 

credit ratings disclosed in registration 

statements, it may be more time 

consuming or costly for a credit rating 

agency that is not an NRSRO to provide 

a credit rating to a registrant than it 

would be for an NRSRO to provide a 

credit rating because of the potential for 

liability under Section 11 for the credit 

rating agency that is not an NRSRO. As 

discussed above, in 2008 we proposed 

to amend Rule 436(g) to extend the 

exemption to cover ratings issued by 

credit rating agencies that are not 

NRSROs in order to foster competition 

in the credit rating agency industry. We 

did not at that time, however, propose 

to require disclosure regarding credit 

ratings. In light of the proposal to 

require disclosure regarding credit 

ratings used in connection with 

registered offerings, we believe that the 

rationale for extending the exemption to 

credit rating agencies that are not 

NRSROs may be achieved by 

eliminating Rule 436(g) and subjecting 

both NRSROs and credit rating agencies 

that are not NRSROs to potential 

liability under Section 11 of the 

Securities Act. We now believe this 

approach to fostering competition may 

be preferable in order to protect 

investors by including the proposed 

disclosure of the credit rating within the 

liability scheme of Section 11 of the 

Securities Act to which similar 

disclosure is subject. At the same time, 

we are mindful that the increased risk 

of legal liability could undercut 

competition if certain NRSROs are 

unable to bear the risk of increased 

liability. 

We are aware that rescinding Rule 

436(g) may have significant impact on 

the market and on market participants. 

We want to be cognizant of all the 

implications of our proposed 

amendments to require disclosure 

regarding credit ratings as well as a 

possible future proposal to rescind Rule 

436(g). Therefore we are soliciting 

comments on all of the potential 

implications that a rescission of Rule 

436(g) might have. 

We solicit comment below on 

whether rescinding Rule 436(g) might 

increase reliance on credit ratings. 

Preliminarily, we do not believe that 

requiring registrants to obtain consents 

from NRSROs and treating NRSROs as 

experts under the federal securities laws 

should increase reliance on credit 

ratings. Rescinding Rule 436(g) would 

not change the fundamental nature of 

what a credit rating is. The information 

credit rating agencies provide is already 

being relied upon by investors. 

Rescinding Rule 436(g) would require 

that, before such information can be 

used in connection with a registered 

offering, the registrant would have to 

obtain the NRSROs’ consent to take 

responsibility for it (in addition to any 

liability that would be applicable 

pursuant to Section 10(b) of the 

Exchange Act).52

While we believe that elimination of 

Rule 436(g) may have important 

benefits, as discussed above, we also 

recognize that NRSROs have in the past 

expressed an unwillingness to be 

subject to Section 11 liability. However, 

we are also aware that providing credit 

ratings for registrants is the key 

component of revenues for NRSROs. As 

a result, we seek comment on how 

NRSROs would adapt if Rule 436(g) 

were rescinded and whether they 

would, in fact, stop issuing credit 

ratings permanently. 

If we were to propose the elimination 

of Rule 436(g) and require disclosure 

regarding credit ratings as proposed, we 

recognize that obtaining and filing 

consents of all credit rating agencies 

may raise some practical and timing 

concerns. Assuming NRSROs are 

willing to grant consents, we do not 

wish to create a process that is unduly 

costly and burdensome or that 

unnecessarily delays completion of 

offerings. We have outlined below a 

potential approach to the question of 

when consents would be required to be 

filed and when a new consent would be 

required to be obtained. We solicit 

comment on whether this approach 

would be workable, whether there is a 

better approach and what other changes 

to our rules may have to be made in 

order for this process to work.53


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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 53119 

ratings would not be triggered if the only disclosure 

of a credit rating in a filing with the Commission 

is related to 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, and the credit rating is not otherwise used 

in connection with a registered offering. We 

preliminarily believe that a consent would not be 

required for such disclosure. 

54 17 CFR 230.415. 

55 17 CFR 230.430B. 

56 17 CFR 230.430C. 

57 In the event a new consent is required, we 

anticipate that the consent could be filed by a posteffective amendment to the registration statement or 

by filing an Exchange Act report, such as an annual 

report on Form 10–K or a report on Form 8–K or 

Form 6–K, which is incorporated by reference into 

the registration statement. The consent would need 

to be filed prior to the filing of a prospectus under 

Rule 424 of the Securities Act. Rule 424 requires a 

prospectus to be filed not later than the second 

business day following the earlier of the date of the 

determination of the offering price or the date the 

prospectus is first used after effectiveness in 

connection with a public offering or sale of 

securities. We also anticipate that a new consent 

would be required for an update pursuant to 

Section 10(a)(3) of the Securities Act. See 15 U.S.C. 

77j(a)(3). 

The question of when consents need 

to be filed may turn, in part, on what the 

credit rating relates to and what form is 

being used to register the offering. We 

believe an offering registered on Form 

S–1, for example, would require a 

consent for the offering, and the consent 

would need to be filed prior to the 

effectiveness of the registration 

statement. In the context of registered 

offerings made on a delayed or 

continuous basis in reliance on Rule 415 

under the Securities Act,54 prospectus 

supplements are used rather than standalone registration statements. As a 

result, the following different types of 

ratings may result in different consent 

filing requirements: (1) A credit rating 

that is applicable to the issuer and does 

not necessarily change with each 

offering; (2) a credit rating that applies 

to a specific program or type of security, 

such as a credit rating assigned to a 

medium-term note program or one for 

long-term debt and one for short-term 

debt; and (3) credit ratings that are 

specific to each issuance of a security. 

In the first instance, we believe the 

rating would be disclosed in the 

prospectus that is part of a registration 

statement, and the consent would need 

to be filed prior to the time the 

registration statement is declared 

effective. 

Rule 430B55 and Rule 430C56 under 

the Securities Act deem information 

contained in prospectus supplements to 

be part of and included in the 

registration statement. The prospectus 

supplement filing does not create a new 

effective date for experts, and we 

believe it would not require the filing of 

a consent, unless the prospectus 

supplement (including incorporated 

Exchange Act reports such as current 

reports on Form 8–K) includes a new 

report or opinion of an expert. Thus, in 

the case of an issuer rating or a rating 

on a class of securities such as a 

medium-term note facility, we believe 

only a new or changed rating issued 

after the date of the last consent by the 

rating agency or change in any other 

information as to which the rating 

agency is an expert would require a new 

consent. We believe a new consent 

would always be required in the case of 

a credit rating that is specific to each 

issuance of a security.57

Request for Comments 

We request comment below on 

specific aspects of a possible proposal to 

rescind Rule 436(g). While we have 

grouped comments by how any such 

proposal might affect a group of market 

participants, we encourage all market 

participants to comment on all aspects 

of this concept release. 

Impact on Registrants and Access to 

Capital 

• If we were to subject all credit 

rating agencies to Sections 7 and 11 of 

the Securities Act by rescinding Rule 

436(g), would registrants be able to 

obtain the consent required to use 

ratings in connection with registered 

offerings of rated securities? What 

effects would rescinding Rule 436(g) 

have on the practice of offering 

securities? In particular, would doing so 

affect the use of credit ratings in 

registered offerings, affect investor 

reliance on credit ratings, affect the cost 

of obtaining a credit rating, or affect the 

decisions of registrants and investors 

regarding whether to raise capital in 

registered or unregistered offerings? 

• Would access to capital be 

disrupted if Rule 436(g) were rescinded, 

or would market participants adjust 

their practices to accommodate the 

change? How long would it take market 

participants to adjust their practices? 

Would a long phase-in period help to 

mitigate any disruptions in access to 

capital? Why or why not? Would a 

phase-in period of 12 months be 

sufficient? How long would the phasein period need to be? 

• Would registrants be able to obtain 

the consent if the rating is not available 

until after the registration statement 

goes effective? Are there circumstances 

where the rating would be available 

prior to effectiveness? 

• Would smaller companies be able to 

afford any increased costs to obtain a 

credit rating? What alternatives would 

these companies have for raising 

capital? What could we do to help limit 

any such impact? 

• If we propose to rescind Rule 

436(g), should we distinguish among 

issuers of corporate debt, issuers of 

structured products and closed-end 

management investment company 

securities? Are there differences among 

the markets for corporate debt, 

structured products and closed-end 

management investment companies that 

justify treating the same NRSRO as an 

expert for purposes of Sections 7 and 11 

of the Securities Act for ratings issued 

on some kinds of securities but not 

others? 

• If the proposal to require disclosure 

regarding credit ratings is adopted, and 

we do not eliminate Rule 436(g), 

officers, directors and underwriters will 

not be able to rely on NRSROs as 

experts with respect to the disclosure of 

credit ratings. Is this appropriate? Why 

or why not? 

• Are there circumstances where a 

credit rating agency issuing a 

preliminary rating should be treated as 

an expert? 

• Practically speaking, how would 

the filing of a consent work in the 

context of a shelf offering if we propose 

to rescind Rule 436(g)? Would the 

approach outlined above work? What 

other changes to our rules would be 

necessary? 

• Do rating agencies view the 

issuance of each security issued by a 

company they rate, including each 

issuance within a class of securities, as 

the issuance of a new rating? Do 

investors or registrants view the 

issuance of each security by a company 

as the issuance of a new rating by the 

rating agency? For instance, does each 

issuance under a medium-term note 

facility constitute the issuance of a new 

rating that should require a consent? 

• In the context of an issuer rating, 

are there concerns for the rating 

agencies with not having to provide a 

consent each time the registrant issues 

a new security? 

• We believe investors would view a 

credit rating as current when it is used 

in connection with an offering of 

securities off a shelf registration 

statement. If that is the case, should we 

require a new consent for each takedown regardless of the type of rating or 

type of security? If issuing a new 

consent each time would be too 

burdensome, should we propose a rule 

that would deem the consent filed each 

time a take-down is made? 

• Should a new consent be required 

if the company has been put on a watch 

list or the company has been given a 

positive outlook or negative outlook 


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53120 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

58See Item 1120 of Regulation AB. 

59 17 CFR 220.430A. 

designation, or there has been some 

change other than an actual change in 

the rating? 

• If the proposal to require disclosure 

regarding credit ratings is adopted, 

regardless of whether we rescind Rule 

436(g), would market practices develop 

in the context of a take-down from a 

shelf registration statement where 

underwriters or other parties would 

require the credit rating agency to reaffirm its rating? 

• In the context of asset-backed 

securities, if Rule 436(g) is eliminated, 

should we retain our requirement to 

disclose whether an issuance is 

conditioned on the assignment of that 

rating and the minimum rating that 

must be assigned? Should we require a 

consent related to the expected rating 58

and then require a subsequent consent 

for the final rating only if that rating 

changes? Should we instead treat the 

consent similar to pricing information 

under 430A 59 so that it may be filed as 

part of a pricing supplement but would 

relate back to the effective date? 

• Form F–9 is the MJDS form used by 

eligible Canadian issuers to register 

investment grade debt or preferred 

securities. Under the MJDS, Canadian 

MJDS filers are largely permitted to use 

their Canadian provincial disclosure 

documents when registering their 

securities with the Commission, 

although the liability provisions under 

the Securities Act apply whether or not 

the registration statement is filed under 

the MJDS. If we eliminate Rule 436(g) in 

its entirety, a Form F–9 filer would need 

to obtain the consent of an NRSRO or 

Approved Rating Organization in the 

same circumstances as a similarly 

situated U.S. issuer, notwithstanding 

that the Canadian filer may not be 

required to do so under Canadian 

provincial law or regulation. How 

would the elimination of Rule 436(g) 

affect Form F–9 filers, and why? Should 

the Rule 436(g) exemption be retained 

in connection with an NRSRO or 

Approved Rating Organization rating 

disclosed in a Form F–9 to maintain 

consistency of consent requirements 

with Canadian provincial law or 

regulation? Should the exemption be 

retained for an Approved Rating 

Organization rating only, and 

eliminated for an NRSRO rating, 

disclosed in a Form F–9 registration 

statement? Or, insofar as Rule 436(g) 

concerns the allocation of liability for 

portions of a registrations statement, 

and liability under the Securities Act 

applies without regard to whether a 

registration statement is filed pursuant 

to the MJDS, should we eliminate 

completely the Rule 436(g) exemption 

for ratings disclosed in a Form F–9? 

Impact on NRSROs and Credit Rating 

Agencies 

• Are there reasons to continue to 

distinguish between NRSROs and credit 

rating agencies that are not NRSROs for 

purposes of Section 11 liability? Is the 

fact that NRSROs are subject to 

Commission oversight, a reasonable 

basis upon which to distinguish 

between NRSROs and credit rating 

agencies that are not NRSROs for this 

purpose? 

• How would the financial markets be 

affected if NRSROs and other credit 

rating agencies temporarily or 

permanently stopped issuing credit 

ratings in registered offerings? 

• As noted above, NRSROs have 

previously indicated that they would 

not provide consent. However, because 

we are proposing to require disclosure 

regarding credit ratings in registration 

statements, we are seeking to 

understand the practical implications 

that requiring a consent would have on 

NRSROs. Would NRSROs and other 

credit rating agencies initially or 

permanently refuse to provide consent? 

Would they initially or permanently 

stop issuing credit ratings in registered 

offerings? How would NRSROs adapt if 

Rule 436(g) were rescinded? How long 

is it likely such adaptation would take? 

Are NRSROs likely to adapt in different 

ways? 

• Would rescinding Rule 436(g) 

reduce or eliminate the incentive for a 

credit rating agency to become an 

NRSRO? 

• How would rescission of Rule 

436(g) affect the process of issuing a 

credit rating? Would the process take 

longer? Would the NRSROs and credit 

rating agencies that are not NRSROs 

change their procedures? If so, how? 

Would credit rating agencies seek more, 

less or different information from 

registrants in order to provide a credit 

rating? How would requiring consents 

from both NRSROs and credit rating 

agencies that are not NRSROs affect 

their interactions with registrants and 

underwriters? Would there be any 

inflation or deflation of ratings? Why or 

why not? 

• Would rescinding Rule 436(g) affect 

the types of products that credit rating 

agencies are willing to rate? How? 

Would they be less likely to rate lower 

grade products or products issued by 

smaller or less well-established 

registrants? 

• Would any additional disclosure be 

necessary in order for the rating and 

other statements regarding the rating not 

to contain an untrue statement of a 

material fact or fail to state a material 

fact required to be stated in order to 

make the statements therein not 

misleading? What other information 

would be necessary to make the 

disclosure not misleading? Should we 

revise the proposed disclosure in the 

companion release to include additional 

items? 

• What costs would potential liability 

under Section 11 impose on NRSROs 

and other credit rating agencies? Would 

those costs be passed on to registrants 

or, ultimately, to investors? What steps 

would NRSROs and other credit rating 

agencies take to protect themselves from 

potential liability under Section 11? 

• If we propose to rescind Rule 

436(g), should we specify that the credit 

rating itself would be considered 

prepared or certified by a person, or a 

report or valuation prepared or certified 

by a person within the meaning of 

Sections 7 and 11 of the Securities Act? 

Should it include more than just the 

actual rating? Are there other parts of 

the registration statement that would be 

considered prepared or certified by the 

credit rating agency? How would 

determining which portions of the 

registration statement would be 

considered prepared or certified by a 

person, or a report or valuation prepared 

or certified by a person impact other 

potential defendants who might rely on 

that portion as a defense to liability? 

• Are there issues related to the 

liability of other experts, such as 

lawyers, investment bankers and 

accountants, that we should consider in 

deciding whether to rescind Rule 

436(g)? Are credit rating agencies 

different from other types of experts 

from whom we require consent? If so, 

how? What steps could we take to 

account for those differences? How 

would the elimination of Rule 436(g) 

change the standard of liability to which 

NRSROs are currently subject for the 

use of credit ratings in connection with 

a registered offering? Is there any reason 

to believe the liability standards 

applicable to other experts may be 

applied differently to NRSROs and 

credit rating agencies that are not 

NRSROs? 

• Is Section 11 liability appropriate 

for NRSROs and credit rating agencies 

that are not NRSROs? What is the 

expected standard of liability for a 

credit rating to be actionable under 

Section 11, and how does it compare to 

the standard of liability under Section 

10(b) of the Exchange Act? If Section 11 

were applicable, what is the practical 

impact of the different pleading 

standards under Section 10(b) of the 

Exchange Act and Section 11 of the 


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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 53121 

60Should NRSROs refuse to issue ratings, money 

market funds subject to Rule 2a–7 [17 CFR 270.2a– 

7] under the Investment Company Act may, for 

example, be affected to the extent the rule requires 

certain securities in which they invest to be rated 

by an NRSRO. See Rule 2a–7(a)(10)(ii)(A) (longterm security with a remaining maturity of less than 

397 days that does not have a short-term rating is 

not an ‘‘eligible security’’ unless it has at least one 

long-term rating from an NRSRO); Rule 2a– 

7(a)(10)(ii) (asset backed security must be rated by 

an NRSRO to be an ‘‘eligible security’’); and Rules 

2a–7(c)(3)(iii) and (a)(10)(iii)(A) (together permitting 

funds to substitute the credit quality of a guarantor 

for the credit quality of the issuer only if the 

guarantee (or guarantor) is rated by an NRSRO). The 

Commission has requested comment on whether 

use of these ratings requirements ought to be 

removed from Rule 2a–7. See Money Market Fund 

Reform, Release No. IC–28807 (June 30, 2009) [74 

FR 32688]. 

Securities Act? How would any claims 

of First Amendment protection 

applicable to NRSROs be impacted by 

potential Section 11 liability? 

• To reduce the risk of legal liability, 

would NRSROs issue more ‘‘defensive’’ 

ratings than are warranted? If so, how 

would this affect the cost of capital for 

registrants? 

Impact on Investors 

• Would eliminating the exemption 

in Rule 436(g) so that NRSROs are 

subject to potential liability under 

Section 11 be beneficial to investors? 

What effects would there be for 

investors if we eliminate the exemption 

for NRSROs in Rule 436(g)? Would the 

protections afforded by potential 

Section 11 liability for NRSROs be offset 

by any changes in the credit rating 

process, such as possible increases in 

the use of unregistered offerings or 

potential disruptions to registrants’ 

access to capital? 

• To what extent do the concerns 

expressed regarding possible undue 

reliance by investors on credit ratings 

suggest that investors actually do 

consider NRSROs to be persons whose 

profession gives authority to statements 

they make, as contemplated by Sections 

7 and 11 of the Securities Act? 

• How would the elimination of Rule 

436(g) affect the quality of credit 

ratings? Would potential liability under 

Section 11 provide an incentive for 

NRSROs to provide higher-quality 

ratings? Would quality decline? Why? 

• If credit rating agencies, including 

NRSROs, initially refuse to provide 

consent or stop issuing credit ratings, 

how would investors be affected? 60

Would investors with guidelines that 

require them to invest in rated securities 

be able to continue to invest? Would 

such investors change their investing 

guidelines? How long would it take for 

any such changes to be implemented? 

• What effect would rescinding Rule 

436(g) have on investors’ reliance on 

credit ratings? Would any investors rely 

more or less on credit ratings? Would 

investors view credit ratings as more 

reliable? 

Impact on Competition 

• How would rescinding Rule 436(g) 

affect competition among credit rating 

agencies? Would treating NRSROs and 

credit rating agencies that are not 

NRSROs the same for purposes of 

liability under Section 11 of the 

Securities Act lower competitive 

barriers for credit rating agencies that 

are not NRSROs? Would it have any 

impact on the number of companies 

seeking to be an NRSRO? 

• If NRSROs are unable to absorb the 

litigation costs and risks of Section 11 

liability, and competition is reduced as 

a result, what impact, if any, would that 

reduced competition have on investor 

protection? 

• Would rescinding Rule 436(g) have 

negative consequences for smaller 

NRSROs? Would it increase their costs 

of doing business? Would it make 

registrants more likely to seek ratings 

from the larger NRSROs? Would it make 

smaller NRSROs unable to issue ratings 

in connection with registered offerings? 

Would smaller NRSROs be able to adapt 

to the changes that might occur? Are 

there ways to mitigate negative 

competitive consequences if Rule 436(g) 

were eliminated? 

III. General Request for Comments 

We request and encourage any 

interested person to submit comments 

regarding: 

• The concepts that are the subject of 

this release; 

• additional or different changes; or 

• other matters that may have an 

effect on the concepts contained in this 

release. 

We request comment from the point 

of view of companies, investors, and 

other market participants, including 

NRSROs and other credit rating 

agencies. With regard to any comments, 

we note that such comments are of 

greater assistance to us if accompanied 

by supporting data and analysis of the 

issues addressed in those comments. 

By the Commission. 

Dated: October 7, 2009. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. E9–24547 Filed 10–14–09; 8:45 am] 

BILLING CODE 8011–01–P 


srobinson on DSKHWCL6B1PROD with PROPOSALS2