53086 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

1 17 CFR 229.10 through 1123. 

2 15 U.S.C. 77a et seq. 

3 15 U.S.C. 78a et seq. 

4 15 U.S.C. 80a–1 et seq. 

5 17 CFR 229.10. 

6 17 CFR 229.202. 

7 17 CFR 239.13. 

8 17 CFR 239.25. 

9 17 CFR 240.13a–11. 

10 17 CFR 240.15d–11. 

11 17 CFR 249.308. 

12 17 CFR 249.220f. 

13 17 CFR 239.14; 17 CFR 274.11a–1. 

14See Report on the Role and Function of Credit 

Rating Agencies in the Operation of the Securities 

Markets, January 2003, at http://www.sec.gov/news/ 

studies/credratingreport0103.pdf (noting that 

issuers use credit ratings in part ‘‘to improve the 

marketability or pricing of their financial 

obligations.’’). See also Bo Becker and Todd 

Milbourn, Reputation and Competition: Evidence 

from the Credit Rating Industry, Working Paper, 

(June 2009) at http://www.hbs.edu/research/pdf/09- 

051.pdf. 

15See Disclosure of Ratings in Registration 

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

FR 42024]. 

16See Disclosure of Security Ratings, Release No. 

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

Ratings Release’’) (noting that ‘‘[b]ecause of these 

non-credit payment risks, there is substantially 

greater uncertainty relating to yield and total return 

than for traditional debt obligations of comparable 

credit rating’’). See also Joseph Mason and Joshua 

Rosner, Where Did the Risk Go? How Misapplied 

Bond Ratings Cause Mortgage Backed Securities 

and Collateralized Debt Obligation Market 

Disruptions, Working Paper, (May 2007), at 

http://ssrn.com/abstract=1027475. 

17As we noted in 1994: 

Today, a traditional corporate debt instrument 

with fixed principal and interest obligations, a 

structured note whose principal and interest is tied, 

for example, to an index of securities, an ‘‘interestonly’’ strip, a collateralized mortgage obligation 

security, a residual interest in a CMO offering, and 

a cash flow (or ‘‘kitchen-sink’’) bond all can be 

designated ‘‘triple-a,’’ notwithstanding that 

investment returns on most of these instruments are 

largely dependent on factors in addition to the 

issuer’s creditworthiness and that the scope of the 

rating differs among the securities. 

See 1994 Ratings Release in note 16 above. See 

also Alan Blinder, Six Fingers of Blame in the 

Mortgage Mess, N.Y. Times, Sept. 30, 2007. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 229, 239, 240, 249 and 

274 

[Release Nos. 33–9070; 34–60797; IC– 

28942; File No. S7–20–09] 

RIN 3235–AK41 

Credit Ratings Disclosure 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: We are proposing 

amendments to our rules to require 

disclosure of information regarding 

credit ratings used by registrants, 

including closed-end management 

investment companies, in connection 

with a registered offering of securities so 

that investors will better understand the 

credit rating and its limitations. The 

amendments we are proposing today 

also would require additional disclosure 

that would inform investors about 

potential conflicts of interest that could 

affect the credit rating. In addition, we 

are proposing amendments to require 

disclosure of preliminary credit ratings 

in certain circumstances so that 

investors have enhanced information 

about the credit ratings process that may 

bear on the quality or reliability of the 

rating. The proposed amendments 

would be applicable to registration 

statements filed under the Securities 

Act of 1933, the Securities Exchange Act 

of 1934 and the Investment Company 

Act of 1940, and Forms 8–K and 20–F. 

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/proposed.shtml); or 

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

Number S7–20–09 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 S7–20–09. 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/proposed.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, 

or with respect to questions regarding 

investment companies, Devin F. 

Sullivan, Staff Attorney in the Office of 

Disclosure Regulation, Division of 

Investment Management, at (202) 551– 

6784, 100 F Street, NE., Washington, DC 

20549. 

SUPPLEMENTARY INFORMATION: The 

Commission is proposing amendments 

to Regulation S–K,1 and forms under the 

Securities Act of 1933,2 the Securities 

Exchange Act of 1934 3 and the 

Investment Company Act of 1940.4 In 

Regulation S–K, the Commission is 

proposing to amend Items 10 5 and 202.6

Under the Securities Act, the 

Commission is proposing to amend 

Form S–3 7 and Form S–4.8 Under the 

Exchange Act, the Commission is 

proposing to amend Rule 13a–11 9 and 

Rule 15d–11,10 as well as Form 8–K 11

and Form 20–F.12 The Commission is 

also proposing amendments to Form 

N–2 13 under the Securities Act and the 

Investment Company Act. 

I. Proposed Amendments 

A. Introduction 

The disclosure requirements we are 

proposing today are intended to 

enhance credit rating disclosure so that 

investors will better understand credit 

ratings and their limitations. These 

proposals reflect our concerns that even 

though credit ratings appear to be a 

major factor in the investment decision 

for investors and play a key role in 

marketing and pricing of the 

securities,14 investors may not have 

access to sufficient information about 

credit ratings. We believe our proposed 

rules would improve investor protection 

by providing information about credit 

ratings that will place the credit rating 

in an appropriate context. 

We have four principal areas of 

concern. First, we are concerned that 

investors may not be provided with 

sufficient information to understand the 

scope or meaning of ratings being used 

to market various securities. 

Historically, credit ratings were 

intended to be a measure of the 

registrant’s ability to repay its corporate 

debt.15 As the types of investment 

products expand and become more 

complex, however, the returns 

(including the prospect of repayment) 

on these securities often are dependent 

on factors other than the 

creditworthiness of the registrant.16 As 

a result, the information conveyed by 

ratings has become increasingly less 

comparable across types of securities.17

Investors, however, may not be aware of 

the differences underlying two 


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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 53087 

18See e.g. Recommendations of the Securities 

Industry and Financial Markets Association Credit 

Rating Agency Task Force (July 2008), at 

http://www.sifma.org/capital_markets/docs/SIFMACRA-Recommendations.pdf (recommending that 

investor education regarding the nature and 

limitations of the credit rating process is necessary 

to prevent over-reliance on credit ratings). See also 

Report of the Financial Stability Forum on 

Enhancing Market and Institutional Resilience 

(Apr. 7, 2008), at 

http://www.financialstabilityboard.org/

publications/r_0804.pdf. 

19For a more detailed discussion of the role of 

nationally recognized statistical rating organizations 

(‘‘NRSROs’’) in determining ratings for structured 

products, particularly subprime residential 

mortgage backed securities and collateralized debt 

obligations, in the time period leading up to the 

credit crisis, see Proposed Rules for Nationally 

Recognized Statistical Rating Organizations, 

Release No. 34–57967 (June 16, 2008) [73 FR 

36212]. 

20See e.g., 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. 

21See Briefing Paper: Roundtable to Examine 

Oversight of Credit Rating Agencies (Apr. 2009), at 

http://www.sec.gov/spotlight/cra-oversightroundtable/briefing-paper.htm (noting that seven of 

the ten NRSROs registered with the Commission 

operate under the issuer-pay model and that the 

issuer-pay NRSROs have determined 98% of the 

currently outstanding credit ratings issued by 

NRSROs). 

22See Pagano and Volpin in note 20 above. 

23As discussed below, Exchange Act Section 

15E(h) and (i) and Exchange Act Rule 17g–5 [17 

CFR 240.17g–5] identify a series of conflicts arising 

from the business of determining credit ratings. 

Under the rule, some of these conflicts must be 

disclosed and managed, while others are prohibited 

outright. 

24See e.g. Vasiliki Skreta and Laura Veldkamp, 

Ratings Shopping and Asset Complexity: A Theory 

of Ratings Inflation, working paper, (Feb. 2009), at 

http://pages.stern.nyu.edu/%7Elveldkam/pdfs/ 

ratings.pdf; Patrick Bolton, Xavier Freixas and Joel 

Shapiro, The Credit Ratings Game, Working Paper, 

(Feb. 2009), at http://www.nber.org/papers/w14712; 

Becker and Milbourn in note 14 above. 

25See the companion concept release considered 

by the Commission on September 17, 2009 

regarding Rule 436(g) under the Securities Act. 26 15 U.S.C. 77g. 27 15 U.S.C. 77k. 28 17 CFR 220.436(g). 29See the releases considered by the Commission 

on September 17, 2009 regarding (i) amendments to 

Rule 17g–2 under the Exchange Act; (ii) 

amendments to Rule 17g–5 under the Exchange Act; 

(iii) amendments to Regulation FD; (iv) proposed 

amendments to Rule 17g–3 under the Exchange Act; 

(v) proposed amendments to the Instructions to 

Exhibit 6 of Form NRSRO; and (vi) proposed new 

Rule 17g–7 under the Exchange Act. 

30See Disclosure of Ratings in Registration 

Statements, in note 15 above. 

securities with the same credit rating 

even if the securities were issued by the 

same registrant. The recent turmoil in 

the credit markets has raised serious 

concerns that investors may not have 

fully understood what credit ratings 

mean, or the limits inherent in them.18

Even when securities are highly rated, 

investors can suffer significant losses, as 

was evident during the recent market 

crisis.19 For example, the value of AAArated mortgage-backed securities fell 70 

percent from January 2007 to January 

2008.20 As a result, we believe that 

investors should be provided with 

additional disclosure regarding credit 

ratings so that investors can choose how 

much weight to place on a credit rating 

when making an investment decision. 

Second, we are concerned that 

investors may not have access to 

information allowing them to appreciate 

fully the potential conflicts of interest 

faced by credit rating agencies and how 

these conflicts may impact ratings. For 

example, most credit rating agencies are 

paid by the registrants who receive the 

credit ratings.21 This situation creates 

the potential for a rating to be inflated 

by a credit rating agency as a result of 

the credit rating agency’s desire to keep 

the registrant’s business for future 

ratings.22 Credit rating agencies also 

may provide additional services to 

registrants, which can be an important 

source of revenue for the credit rating 

agency.23

Third, there has been significant 

discussion of the possibility that 

‘‘ratings shopping’’ may lead to inflated 

ratings.24 Ratings shopping occurs when 

a registrant, or someone acting on its 

behalf, seeks the highest credit rating 

available from multiple credit rating 

agencies. We are concerned that 

investors have not been informed about 

this practice, which we believe could 

color their assessment of the reliability 

of the credit ratings ultimately obtained. 

Finally, even though credit ratings 

appear to be a key part of investment 

decisions and are used to market 

securities, disclosure about ratings is 

not required in prospectuses currently. 

As a result, we are concerned that 

investors may not be receiving even 

basic information about a potentially 

key element of their investment 

decisions. 

To address these concerns, we are 

proposing several enhancements to our 

disclosure rules. As a threshold matter, 

we are proposing 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 (‘‘closed-end 

funds’’) in registration statements under 

the Securities Act and the Investment 

Company Act, if the registrant uses the 

rating in connection with a registered 

offering. The disclosure requirements 

are intended to address the concerns 

noted above. To keep investors apprised 

of developments relating to credit 

ratings for their investments, we are also 

proposing amendments to Exchange Act 

reports to require registrants to disclose 

changes to credit ratings. We are not 

proposing to require registrants to 

obtain credit ratings; instead, we are 

proposing to require disclosure about 

credit ratings used by registrants and 

other offering participants in connection 

with a registered offering in order to 

place the credit rating in its proper 

context for investors. 

In a companion concept release,25 we 

seek comment on whether we should 

propose to repeal the exemption for 

credit ratings provided by NRSROs from 

being considered a part of the 

registration statement prepared or 

certified by a person within the meaning 

of Sections 7 26 and 11 27 of the 

Securities Act currently contained in 

Rule 436(g) under the Securities Act.28

If Rule 436(g) were eliminated, there 

would no longer be a distinction 

between NRSROs and credit rating 

agencies that are not NRSROs for 

purposes of liability under Section 11 of 

the Securities Act. 

As we noted, we continue to have 

concerns about the appropriate use of 

credit ratings by investors, but we 

recognize the reality that credit ratings 

are important to investors. Therefore, 

we seek to improve investor protection 

through enhanced disclosure about 

credit ratings. In addition to proposing 

the rule amendments set forth in this 

release, the Commission today is also 

adopting certain amendments to its 

existing rules regulating NRSROs, as 

well as proposing additional 

amendments and a new rule.29 We 

believe that today’s proposals could 

help reduce undue reliance on credit 

ratings by providing investors with 

information about what a credit rating 

is, and what it is not, and other 

information bearing on the reliability of 

ratings to place the credit rating in its 

proper context. In light of the 

importance of credit ratings to investors 

and their use by registrants in marketing 

securities, we believe it is appropriate to 

require that this information be 

included in a registrant’s prospectus so 

that all investors receive this 

information. 

B. Background 

In 1981, the Commission issued a 

statement of policy regarding its view of 

disclosure of credit ratings in 

registration statements under the 

Securities Act.30 This statement marked 

a clear shift from the Commission’s 

historic practice of discouraging the 


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53088 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

31See Release No. 33–6336 in note 15 above. The 

Commission announced ‘‘that, contrary to prior 

general staff positions on this matter, it will now 

permit the disclosure of security ratings assigned by 

rating organizations in registration statements.’’ In 

support of this shift in policy, the Commission cited 

‘‘the general usefulness’’ of credit ratings to 

investors and the ‘‘importance that the Commission 

and other regulatory entities have attached to the 

issuance’’ of a credit rating. Id. 

32See Adoption of Integrated Disclosure System, 

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

(‘‘Integrated Disclosure Release’’). See also 

Registration Form for Closed-End Management 

Investment Companies, Release No. 33–6967 

(November 20, 1992) [57 FR 56826] (adopting 

amendment to Form N–2 regarding voluntary 

disclosure of credit ratings for closed-end funds). 

33See Integrated Disclosure Release in note 32 

above (adopting amendments to Rule 134(a) under 

the Securities Act to provide that certain 

communications containing a security rating or 

ratings of a class of debt securities, convertible debt 

securities and preferred stock and the name(s) of 

the rating organization would not be deemed to be 

a prospectus under Section 2(10) of the Securities 

Act). 

34Concurrent with the adoption of these rules 

and guidance, the Commission adopted Securities 

Act Form S–3, the short-form Securities Act 

registration statement for eligible domestic issuers 

[17 CFR 239.13]. Form S–3 provides that a primary 

offering of non-convertible debt securities may be 

eligible for registration on the form if rated 

investment grade. A non-convertible security is an 

‘‘investment grade security’’ for purposes of form 

eligibility if at the time of sale, at least one NRSRO 

has rated the security in one of its generic rating 

categories which signifies investment grade, 

typically one of the four highest rating categories. 

In adopting this requirement, the Commission 

specifically noted that commenters believed that 

the component relating to investment grade ratings 

was appropriate because non-convertible debt 

securities generally are purchased on the basis of 

interest rates and credit ratings. See Section III.A.1 

of the Integrated Disclosure Release in note 32 

above. Later, in 1992, the Commission expanded 

the eligibility requirement to delete references to 

debt or preferred securities and to provide Form S– 

3 eligibility for other investment grade securities 

(such as foreign currency or other cash settled 

derivative securities). See Simplification of 

Registration Procedures for Securities Offerings, 

Release No. 33–6964 (Oct. 22, 1992) [57 FR 48970]. 

Consistent with Form S–3, the Commission adopted 

a provision in Form F–3 [17 CFR 239.33] providing 

for the eligibility of a primary offering of investment 

grade non-convertible debt securities by eligible 

foreign private issuers. Shelf registration 

requirements for asset-backed securities, originally 

adopted in 1992, also depend on a credit ratings 

component. See General Instruction I.B.5 of Form 

S–3. 35See the 1994 Ratings Release in note 16 above. 36See the 1994 Ratings Release in note 16 above. 37See e.g. letter regarding File No. S7–24–94 of 

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

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

Service Inc. (Dec. 6, 1994). 

38See e.g. letter regarding File No. S7–24–94 of 

Savings & Community Bankers of America; and 

letter regarding file No. S7–24–94 of A.G. Edwards 

& Sons, Inc. 

39See Additional Form 8–K Disclosure 

Requirements and Acceleration of Filing Date, 

Release No. 33–8106 (June 17, 2002) [67 FR 42914]. 

40See also the discussion of Form 8–K in Section 

I.D. below. 

41See e.g. letter regarding File No. S7–22–02 of 

CIGNA Corporation (Aug. 26, 2002), at http:// 

www.sec.gov/rules/proposed/s72202.shtml. 

42See e.g. letter regarding File No. S7–22–02 of 

Investment Counsel Association of America (Aug. 

26, 2002), at http://www.sec.gov/rules/proposed/ 

s72202.shtml. 

43See Additional Form 8–K Filing Requirements 

and Acceleration of Filing Date, Release No. 33– 

8400 (Mar. 16, 2004) [69 FR 15594], amended by 

Additional Form 8–K Disclosure Requirements and 

Acceleration of Filing Dates; Correction, Release No. 

33–8400A (Aug. 4, 2004) [69 FR 48370]. 

44 Id. 

45See Rating Agencies and the Use of Credit 

Ratings under the Federal Securities Laws, Release 

No. 33–8236 (June 4, 2003) [68 FR 35258] (‘‘2003 

Concept Release’’). Most of the commenters that 

addressed the issue supported retaining the 

requirement to use NRSRO ratings for purposes of 

Form S–3 eligibility. Comments on the concept 

release are available at http://www.sec.gov/rules/ 

concept/s71203.shtml. See also the extensive 

discussion of market developments in Release No. 

34–57967 in note 19. 

disclosure of credit ratings in these 

filings and reflected the Commission’s 

then-developing acknowledgement of 

the growing importance of credit ratings 

in the securities markets and in the 

regulation of those markets.31 Soon 

thereafter, the Commission amended 

Regulation S–K to reflect its new policy 

of permitting the voluntary disclosure of 

credit ratings in registration statements 

along with clear disclosure explaining 

the rating.32 The Commission also 

adopted rules to permit the voluntary 

disclosure of credit ratings in tombstone 

advertisements,33 and provided that a 

credit rating by an NRSRO generally is 

not part of a registration statement or 

report prepared or certified by a person 

within the meaning of Sections 7 and 11 

of the Securities Act.34

At various times since the policy 

statement and the adoption of these 

rules and form eligibility requirements, 

the Commission has reviewed and 

reconsidered its approach to the 

disclosure of credit ratings in filings and 

the reliance on ratings in the 

Commission’s form eligibility 

requirements. For example, in 1994, the 

Commission published a proposing 

release that would have mandated 

disclosure in Securities Act 

prospectuses of a credit rating given by 

an NRSRO whenever a credit rating 

with respect to the securities being 

offered is ‘‘obtained by or on behalf of 

an issuer.’’ 35 The proposals would have 

required disclosure of specified 

information with respect to credit 

ratings, whether or not disclosed 

voluntarily or mandated by the thenproposed rules. In addition, the release 

sought comment on various areas 

relating to the disclosure of credit 

ratings. The release also proposed to 

require disclosure on a Form 8–K of any 

material change in the credit rating 

assigned to the registrant’s securities by 

an NRSRO.36 The Commission received 

wide-ranging comments on those 

proposals. Commenters’ views on 

whether registrants should be required 

to provide disclosure regarding credit 

ratings of their securities in a final 

prospectus reflected a wide variety of 

opinions. Commenters who were against 

the mandatory disclosure of credit 

ratings argued, among other things, that: 

NRSROs have incentives to provide 

quality ratings; information about credit 

ratings is widely available and 

understood; requiring disclosure would 

be costly and burdensome; and 

requiring disclosure of ratings may 

increase investors’ reliance on them.37

Commenters who supported mandatory 

disclosure regarding credit ratings 

argued, among other things, that: credit 

ratings have the potential to confuse and 

mislead investors; investors do not 

receive sufficient information about the 

credit rating; and investors expect to 

know the credit rating when buying a 

security, so the proposed required 

disclosure would comport with investor 

expectations.38 The Commission did not 

act on the proposals. 

In 2002, as part of the broader changes 

to the Form 8–K current reporting 

requirements, the Commission again 

proposed to require a registrant to file a 

Form 8–K current report when it 

received a notice or other 

communication from any rating agency 

regarding, for example, a change or 

withdrawal of a particular rating.39

Comments were mixed on whether 

changes to a credit rating should be 

reported on a Form 8–K.40 Commenters 

against the requirement generally 

believed it was unnecessary because the 

information was publicly available.41

Commenters who supported the 

requirement generally believed it should 

be limited to ratings provided by 

NRSROs.42 The new Form 8–K filing 

regime adopted in 2004 did not include 

this requirement.43 In declining to adopt 

a Form 8–K reporting requirement for 

credit rating changes, the Commission 

noted that it was continuing to consider 

the appropriate regulatory approach for 

rating agencies.44

In 2003, the Commission issued a 

concept release requesting comment on 

whether it should cease using the 

NRSRO designation and, as an 

alternative to the ratings criteria, 

provide for Form S–3 eligibility where 

investor sophistication or large size 

denomination criteria are met.45 In 

2008, the Commission proposed 

changes to certain of its forms and rules 

that would have removed references to 

credit ratings and would have amended 

Securities Act Rule 436(g), which 

exempts NRSROs from liability under 

Section 11 of the Securities Act, so that 


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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 53089 

46See Security Ratings, Release No. 33–8940 

(Jul.1, 2008) [73 FR 40106]. 

47See generally http://www.sec.gov/spotlight/craoversight-roundtable.htm. 

48We understand that only a small number of 

registrants include disclosure regarding credit 

ratings in their prospectuses. Generally, if ratings 

are disclosed, they are disclosed in free writing 

prospectuses filed pursuant to Rule 433 [17 CFR 

230.433]. 

49See proposed new paragraph (g) to Item 202 of 

Regulation S–K. 

50See note 67 below. 

51Section 18(f) of the Investment Company Act 

[15 U.S.C. 80a-18(f)] generally prohibits a registered 

open-end management investment company (i.e., 

mutual fund) from issuing senior securities. 

52See proposed new paragraph (g) to Item 202 of 

Regulation S–K. 

53Form 20–F is the combined registration 

statement and annual report form for foreign private 

issuers under the Exchange Act. It also sets forth 

disclosure requirements for registration statements 

filed by foreign private issuers under the Securities 

Act. ‘‘Foreign private issuer’’ is defined in 

Securities Act Rule 405 [17 CFR 230.405] and 

Exchange Act Rule 12b-2 [17 CFR 240.12b-2]. We 

are proposing to amend Item 12 of Form 20–F, 

which pertains to securities other than equity 

securities, to elicit the same disclosure that would 

be required by proposed Item 202(g) of Regulation 

S–K. We also propose to amend Item 10 of Form 

20–F to require the same disclosure under proposed 

Regulation S–K Item 202(g) for a class of preferred 

securities, including non-participatory preferred 

Continued 

the exemption would apply to all credit 

rating agencies, including those that are 

not NRSROs.46

In April 2009, the Commission held a 

roundtable to examine the oversight of 

credit rating agencies.47 Topics 

addressed by the panels at the 

roundtable included current actions 

being taken by NRSROs, competition 

within the industry and how to improve 

oversight of the industry. Participants 

and the public were invited to submit 

comments regarding the issues 

addressed at the roundtable. 

Commenters addressed a wide range of 

issues. 

The Commission’s history in 

considering the possibility of mandating 

disclosure of credit ratings reflects the 

complexity of the issues raised by 

investors’ reliance on them. Our rules 

under the Securities Act and the 

Exchange Act require that investors be 

provided material information in order 

to evaluate investment opportunities. 

We understand that investors will 

continue to use credit ratings in making 

investment decisions; therefore, we are 

proposing disclosure requirements we 

believe will provide investors with 

additional meaningful information that 

they can use to make those decisions. 

We acknowledge the risk that requiring 

disclosure of credit ratings could 

emphasize their significance and draw 

attention away from other, more 

important information about the 

registrant and its securities. However, 

we believe the recent market crisis and 

questions about the use of credit ratings 

suggest that investors may not have 

sufficient information to understand 

credit ratings fully. In light of the 

concerns discussed above, we believe 

all investors would benefit from the 

proposed revisions to our disclosure 

rules to require specific disclosures 

about ratings. 

C. Mandatory Disclosure of Credit 

Ratings 

As noted above, the Commission’s 

policy on credit ratings currently is set 

forth in Item 10(c) of Regulation S–K. 

Specifically, the policy permits 

registrants to voluntarily disclose 

ratings assigned by credit rating 

agencies to classes of debt securities, 

convertible debt securities and preferred 

stock in registration statements and 

periodic reports.48 Item 10(c) also 

provides the Commission’s views on 

important matters registrants should 

consider in disclosing credit ratings in 

Securities Act and Exchange Act filings. 

So that all investors are provided with 

appropriate information about credit 

ratings, the amendments we propose 

today would mandate much of the 

disclosure permitted under Item 10(c) 

when a registrant uses a credit rating in 

connection with a registered offering 

and would remove the policy statement 

and recommended disclosure from that 

Item. 

Specifically, we are proposing a new 

paragraph in Item 202 of Regulation S– 

K that would require much of the 

specific disclosure currently permitted 

under Item 10(c).49 As more fully 

described below, proposed Item 202(g) 

would require disclosure of all material 

scope limitations of the credit rating and 

any related published designation, such 

as non-credit payment risks, assigned by 

the rating organization with respect to 

the security.50 In addition, in order to 

highlight potential conflicts of interest, 

the proposed rule would require 

disclosure of the source of payment for 

the credit rating; and if any additional 

non-rating services have been provided 

by the credit rating agency or its 

affiliates to the registrant or its affiliates 

over a specified period of time, 

disclosure of the services and the fees 

paid for those services would be 

required. Disclosure required pursuant 

to proposed Item 202(g) of Regulation 

S–K would be required in Securities Act 

and Exchange Act registration 

statements. We are proposing to amend 

Item 9 of Form S–3 and Item 4(a)(3) of 

Form S–4 so that disclosure regarding 

credit ratings is provided in all 

registration statements on that form 

when the trigger for disclosure is met. 

We also are proposing to require, in 

certain circumstances, disclosure of 

preliminary ratings, as well as final 

ratings not used by a registrant, so that 

investors will be informed when a 

registrant may have engaged in ratings 

shopping. Finally, we are proposing to 

amend Exchange Act reports to require 

reporting of changes in credit ratings in 

certain circumstances. 

We are proposing to apply similar 

mandatory disclosure requirements 

regarding credit ratings of senior 

securities issued by closed-end funds 

registered under the Investment 

Company Act. Like other companies, 

closed-end funds sometimes issue 

senior securities that are rated by one or 

more credit rating agency and currently 

are permitted to voluntarily disclose 

these credit ratings in their registration 

statements.51 We are proposing to 

amend Form N–2 to require that closedend funds include credit ratings 

disclosure in their registration 

statements under the Securities Act and 

the Investment Company Act. We are 

also proposing to amend Exchange Act 

Rules 13a-11 and 15d-11 to require 

reporting by closed-end funds of 

changes in credit ratings in certain 

circumstances. 

We believe that the proposed 

amendments to require disclosure of 

certain information regarding credit 

ratings, rather than permitting voluntary 

disclosure, would provide investors 

with the information they need about 

credit ratings to put the rating in the 

appropriate context. The proposed 

amendments also may benefit 

companies that in the past may have 

hesitated to provide disclosure 

voluntarily by leveling the playing field 

so that all companies using credit 

ratings in connection with a registered 

offering of securities would be required 

to provide disclosure. 

1. Trigger for Required Disclosure 

We believe that it is appropriate for 

registrants to provide the proposed 

disclosure when they use a credit rating 

in connection with a registered offering 

of their securities. As discussed above, 

investors rely on credit ratings in 

making investment decisions. We 

believe requiring disclosure when a 

registrant uses the credit rating to offer 

or sell securities would provide 

investors with the information they 

need about the credit rating to put the 

credit rating in its appropriate context. 

Specifically, we are proposing to amend 

Item 202 of Regulation S–K,52 Item 12 

of Form 20–F,53 and Item 10.6 of Form 


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stock as that term is used under 17 CFR 

230.902(a)(1). 

54Form N–2 is the registration form used by 

closed-end funds to register under the Investment 

Company Act and to offer their securities under the 

Securities Act. We are proposing to amend Item 

10.6 of Form N–2 to elicit the same disclosure that 

would be required by proposed Item 202(g) of 

Regulation S–K. 

55As proposed, a ‘‘credit rating’’ would have the 

same meaning as the definition in Section 3(a)(60) 

of the Securities Exchange Act [15 U.S.C. 

78c(a)(60)]. 

56As proposed, a ‘‘credit rating agency’’ would 

have the same meaning as the definition in Section 

3(a)(61) of the Securities Exchange Act [15 U.S.C. 

78c(a)(61)]. 

57 17 CFR 230.497. This would include closedend fund advertisements that, under Rule 497(i) [17 

CFR 230.497(i)], are considered to be filed with the 

Commission upon filing with a national securities 

association registered under Section 15A of the 

Exchange Act [15 U.S.C. 78o]. 

58See proposed Instruction 3 to Item 202(g). 

59These transactions are sometimes referred to as 

Exxon Capital exchange offers based on a series of 

no-action letters issued by the staff beginning in 

May 1988 that outline the staff’s interpretive 

positions regarding such exchange offers. In a 

typical Exxon Capital exchange offer, an issuer sells 

debt securities to a broker-dealer in reliance on the 

exemption in Section 4(2) of the Securities Act [15 

U.S.C. 77d(2)]. The broker-dealer then immediately 

resells those securities to qualified institutional 

buyers in reliance on Rule 144A under the 

Securities Act. [17 CFR 230.144A]. The issuer then 

files a registration statement on Form S–4 to register 

the exchange of the securities for substantially 

identical securities. Upon effectiveness of the S–4 

registration statement, the qualified institutional 

buyers exchange restricted securities for registered 

securities, and therefore, may resell the securities 

they receive in the exchange offer without further 

registration or prospectus delivery. See Exxon 

Capital Holdings Corporation, SEC No-Action Letter 

(pub. avail. May 13, 1988); Morgan Stanley & Co., 

Inc., SEC No-Action Letter (pub. avail. June 5, 

1991); Mary Kay Cosmetics, Inc., SEC No-Action 

Letter (pub. avail. June 5, 1991); K–III 

Communications Corp., SEC No-Action Letter (pub. 

avail. May 14, 1993); Shearman & Sterling, SEC NoAction Letter (pub. avail. July 2, 1993); Brown & 

Wood LLP, SEC No-Action Letter (pub. avail. 

Feb. 5, 1997). 

60The Commission is adopting today various 

changes to Exchange Act Rule 17g–5 [17 CFR 

240.17g–5] that would provide the opportunity for 

other credit rating agencies to use the information 

provided to NRSROs by the registrant to develop 

‘‘unsolicited ratings’’ for certain rated asset-backed 

securities. See the adopting release considered by 

the Commission on September 17, 2009. 

N–2 54 to require registrants to provide 

detailed disclosure regarding credit 

ratings if the registrant, any selling 

security holder, any underwriter, or any 

member of a selling group uses a credit 

rating 55 from a credit rating agency 56

with respect to the registrant or a class 

of securities issued by the registrant, in 

connection with a registered offering. 

The proposed rule would not require 

that registrants obtain a credit rating on 

any security; however, if a registrant 

uses a credit rating in connection with 

a registered offering, then disclosure 

would be required. 

We have proposed to require 

disclosure regarding credit ratings if the 

registrant, a selling security holder, 

underwriter or any member of a selling 

group uses a credit rating in connection 

with a registered offering. We included 

selling security holders, underwriters 

and other members of the selling group 

in the proposed trigger for disclosure so 

that registrants would not be able to 

structure their selling efforts in a 

manner that would avoid triggering 

disclosure under the proposed rule. In 

addition, there are circumstances where 

the underwriter obtains the credit rating 

on behalf of the registrant, and if the 

underwriter uses that rating, we believe 

disclosure should be required. 

A credit rating may be ‘‘used’’ in a 

variety of ways. For example, in 

addition to oral and written selling 

efforts of the registrant and other 

members of the selling group, we would 

consider a credit rating to be used in 

connection with a registered offering of 

securities when it is disclosed in a 

prospectus or a term sheet filed 

pursuant to Rule 433 or Rule 497 57

under the Securities Act. 

Furthermore, as proposed, a credit 

rating also would be considered to be 

used in connection with a registered 

offering of securities if it is used in 

connection with a private offering of 

securities that is made in reliance on an 

exemption from registration under the 

Securities Act when the privately 

offered securities are exchanged shortly 

thereafter for substantially identical 

registered securities.58 Disclosure would 

be required even if the rating was not 

disclosed in the registered exchange 

offer.59 As a result, registrants would 

not be able to avoid the proposed 

disclosure requirements regarding credit 

ratings by disclosing a credit rating to 

investors in a private offering but not 

using it in connection with the 

registered exchange offer to those same 

investors of substantially identical 

securities. 

We intend for the proposed rule to 

apply to both oral and written selling 

efforts. Thus, for example, disclosure 

would be required when a credit rating 

is disclosed to potential purchasers by 

the registrant, any selling security 

holder, any underwriter or any member 

of a selling group in response to an 

inquiry from an investor. A registrant 

would not be able to avoid providing 

the proposed disclosure by using a 

rating only in oral selling efforts and not 

including it in written communications 

related to an offering, by not 

‘‘volunteering’’ the information about 

the credit rating except upon request or 

by referring an investor to a Web site 

that discloses the credit rating. We 

believe that if a credit rating is used in 

connection with a registered offering, 

then investors should have the benefit 

of all of the disclosure required by our 

proposed amendments. 

We have not proposed to require that 

a registrant provide disclosure when it 

has not sought or otherwise solicited the 

credit rating unless the rating is used in 

connection with a registered offering of 

its securities, as we believe that such a 

requirement may create an undue 

burden for registrants to follow and 

provide disclosure on all of the ratings 

outstanding on their securities. In this 

regard, we note that regulatory changes 

could increase the number of 

unsolicited ratings being provided. 60 If 

we were to require disclosure of 

unsolicited ratings not used in 

connection with a registered offering of 

a security, a registrant would have to 

monitor all of the credit rating agencies 

to determine not only whether a credit 

rating had been issued with respect to 

a security, but also whether the rating 

has been changed or withdrawn. 

We are aware that some registrants 

discuss their credit rating in other 

contexts in their periodic reports or 

Securities Act registration statements. 

As proposed, the disclosure requirement 

regarding credit 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. 

For instance, some registrants note their 

ratings 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 registrant. A 

registrant also may refer to its rating in 

the context of its liquidity discussion in 

Management’s Discussion and Analysis 

of Financial Condition and Results of 

Operations (‘‘MD&A’’). Registrants may 

need to discuss ratings when they 

describe debt covenants, interest or 

dividends that are tied to credit ratings 

or potential support to variable interest 

entities. We have proposed to exclude 

these references to credit ratings from 

the trigger that would require additional 

disclosure regarding credit ratings 

because we believe that the additional 

information is not necessary in that 

setting. We believe that the material 

information to be conveyed in that 

setting relates to the fact that a credit 

rating has the potential to have a 

material impact on the registrant. We 

believe additional information about 


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61 15 U.S.C. 78l. 

scope limitations, conflicts of interest, 

preliminary ratings and other matters 

does not appear to be necessary to 

understand that disclosure. 

We are proposing to amend Item 9 of 

Form S–3 and Item 4(a)(3) of Form S– 

4 so that disclosure regarding credit 

ratings is included in all registration 

statements where appropriate. 

Currently, Item 9 requires registrants to 

include the disclosure required by Item 

202 of Regulation S–K in a registration 

statement on Form S–3 unless capital 

stock is to be registered and securities 

of the same class are registered pursuant 

to Section 12 of the Exchange Act.61

Item 4(a)(3) of Form S–4 requires 

registrants to include the disclosure 

required by Item 202 of Regulation 

S–K unless the registrant would meet 

the requirements for use of Form S–3 

and capital stock is to be registered, 

securities of the same class are 

registered pursuant to Section 12 of the 

Exchange Act, and the security is listed 

on a national securities exchange. We 

are proposing to amend these items so 

that the disclosure required by proposed 

Item 202(g) of Regulation S–K would be 

included in a registration statement on 

Form S–3 or Form S–4 even if securities 

of the same class are registered under 

Section 12 of the Exchange Act so long 

as the trigger for disclosure under 

proposed Item 202(g) has been met. We 

believe these amendments are 

appropriate so that investors would 

receive information about credit ratings 

in circumstances where securities of the 

same class have been previously 

registered because securities of the same 

class that are issued at different times 

may have different ratings. 

Request for Comments 

• As proposed, we would require 

disclosure of credit ratings if the 

registrant, any selling securityholder, 

underwriter or member of a selling 

group uses a credit rating in connection 

with a registered offering. Are there any 

other persons that should be included as 

persons who could cause the disclosure 

requirement to be triggered? Are there 

reasons to exclude any of the persons or 

entities currently included in the 

proposal? 

• Should the proposed rule mandate 

disclosure of a credit rating obtained by 

a registrant regardless of whether the 

rating is used in connection with a 

registered offering? For example, should 

we require disclosure whenever a 

registrant discloses a rating? Do the 

triggers in the requirement encourage 

the use and related disclosure of only 

favorable ratings? Are there other 

circumstances that should trigger the 

proposed disclosure? 

• Would the rule, as proposed, have 

an effect on the frequency with which 

registrants seek credit ratings? Why or 

why not? 

• As proposed, we would consider a 

credit rating to be used in connection 

with a registered offering of securities if 

it is disclosed upon request of an 

investor. We believe this approach 

should reduce the risk that practices 

might develop that would undermine 

the purpose of our proposal, such as a 

registrant or member of a selling group 

not offering the information about a 

credit rating unless asked. Is this 

approach necessary or appropriate? 

Should registrants be excluded from the 

proposed requirement to provide 

disclosure regarding credit ratings if 

they and the offering participants decide 

not to use the rating in selling efforts, 

but disclose the rating in response to an 

investor who specifically asks about the 

rating? 

• Would registrants and other 

members of a selling group be able to 

circumvent the rule as proposed? How 

would they be able to do that? How 

could we modify the rule proposal to 

avoid circumvention? Could the 

proposed trigger for disclosure lead to 

procedural modifications to the practice 

of assigning credit ratings so that 

registrants could avoid the disclosure 

requirement even though the credit 

rating is used in connection with a 

registered offering? If so, how could we 

modify the proposal to avoid such 

modifications? 

• As proposed, a credit rating would 

be considered used for purposes of the 

proposed disclosure trigger if it is used 

in connection with a private offering 

even if not used in a subsequent 

registered exchange offering for 

substantially identical securities made 

to the purchasers in the private 

placement. Is this trigger for disclosure 

appropriate in light of the unique 

structure of these transactions? Should 

we expand the instruction to include a 

credit rating obtained in connection 

with a private offering if those securities 

are subsequently registered for resale? 

• Is the instruction, as proposed, that 

a credit rating would be considered 

used if it is used in connection with a 

private offering but not used in a 

subsequent registered exchange offering 

for substantially identical securities, 

appropriate for closed-end funds? 

• As proposed, a registrant would not 

be required to make disclosure with 

regard to solicited or unsolicited ratings 

unless the rating is used in connection 

with the registered offering of a security. 

Is there a difference between solicited 

and unsolicited ratings such that they 

should be treated differently for 

purposes of this proposal? Would 

requiring disclosure of all unsolicited 

ratings regardless of whether they are 

used in connection with a registered 

offering be too burdensome for 

registrants? Should disclosure be 

triggered only if the registrant, or 

someone acting on its behalf, obtains the 

credit rating (i.e., a solicited rating) and 

uses the rating in connection with a 

registered offering? If we were to require 

disclosure of unsolicited ratings 

regardless of whether they are used in 

connection with a registered offering of 

securities, should we impose limitations 

on how many ratings, or which credit 

rating agencies’ ratings, should be 

required to be disclosed? For example, 

should we require disclosure for 

unsolicited ratings issued by NRSROs 

only? Would such disclosure impose an 

undue burden on the registrant? 

• Should the proposed mandatory 

disclosure of credit ratings apply to 

closed-end funds? 

• Investment companies, including 

both closed-end funds and mutual 

funds, sometimes represent that they 

invest only in securities that have a 

specified credit rating, such as 

investment grade, or disclose the 

percentage of their portfolios comprised 

of securities with specified ratings. As 

noted above, investors may not have 

access to sufficient information in order 

to understand fully what credit ratings 

mean, or the limits inherent in them. Do 

current investment company disclosure 

requirements adequately address the 

meaning and limitations of credit 

ratings of portfolio securities? If not, 

how could investment company 

disclosure requirements be changed to 

better promote investor understanding 

of credit ratings of portfolio securities? 

• The proposed amendments apply to 

the disclosure of credit ratings. Mutual 

funds sometimes obtain other non-credit 

ratings and use such ratings in 

connection with the offer or sale of their 

securities. For example, rating agencies 

issue credit quality ratings to fixedincome funds, which examine credit 


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62See, e.g., Fitch’s Fund and Asset Manager 

Ratings, at http://www.fitchratings.com/jsp/sector/ 

Sector.faces?selectedTab=Overview&Ne=

11%2b4293330821 (last visited on Aug. 11, 2009) 

(‘‘Fitch’s Fund and Asset Manager Ratings’’); 

Moody’s Ratings Definitions, Money Market and 

Bond Fund Ratings, at http://v3.moodys.com/ 

ratings-process/Money-Market-and-Bond-FundRatings/002001018 (last visited Aug. 11, 2009) 

(‘‘Moody’s Ratings Definitions’’); Standard & Poor’s 

Ratings Definitions, Ratings Direct, (Apr. 30, 2009), 

available at http://www2.standardandpoors.com/ 

spf/pdf/fixedincome/Ratings_Definitions_

Update.pdf (‘‘Standard & Poor’s Ratings 

Definitions’’). 

63See, e.g., Fitch’s Fund and Asset Manager 

Ratings; Standard & Poor’s Ratings Definitions. 

64See, e.g., Standard & Poor’s Ratings Definitions. 

65 ‘‘Foreign government’’ refers to any issuer that 

is eligible to register securities under Schedule B of 

the Securities Act, including political subdivisions 

and some quasi-governmental entities. 

66Unlike other issuers, foreign government 

issuers that register securities under Schedule B of 

the Securities Act are not subject to reporting 

obligations under Section 15(d) of the Exchange Act 

[15 U.S.C. 78o(d)]. However, foreign government 

securities listed on a U.S. exchange must be 

registered under Section 12(b) of the Exchange Act 

[15 U.S.C. 78l(b)], as is the case with the securities 

of other issuers. Foreign governments that have 

securities registered under Section 12(b) file annual 

reports with the Commission on Form 18. 

67A limited scope rating is a rating that assesses 

less than the promised or expected return on a 

security. We are proposing disclosure of any 

material scope limitations in order to mitigate the 

potential risk that investors may not understand the 

limited scope of the rating. See the 1994 Release in 

note 15 above. 

risk in the fund’s underlying portfolio.62

Ratings agencies may also issue 

volatility ratings, which are designed to 

identify the potential volatility of the 

market value of a fund’s shares.63 In 

addition, at least one rating agency 

issues principal stability ratings that are 

designed to identify a money market 

fund’s capacity to maintain stable 

principal or a stable net asset value.64

Should we require the mandatory 

disclosure of these additional fund 

ratings as part of a fund’s prospectus or 

statement of additional information if 

the ratings are used in connection with 

the offer or sale of an investment 

company’s securities? If so, what 

disclosures should we require? 

• The proposed disclosure item 

includes an instruction that provides 

that a registrant would not trigger the 

disclosure requirement regarding credit 

ratings if the credit rating is not 

otherwise used in connection with a 

registered offering, and 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. Is this 

approach appropriate? Are there other 

disclosures about credit ratings of a 

similar nature that should be added to 

this instruction? Would registrants 

avoid such references because of 

concerns that it might trigger the 

proposed additional disclosure 

requirements? Would this instruction be 

used to circumvent the disclosure 

requirement? 

• We are proposing to amend Item 9 

of Form S–3 and Item 4(a)(3) of Form 

S–4 so that disclosure regarding credit 

ratings would be included (if 

applicable) in registration statements for 

offerings of capital stock even if 

securities of the same class have 

previously been registered pursuant to 

Section 12 of the Exchange Act. Are 

there any other circumstances where we 

need to amend forms so that 

information regarding credit ratings is 

provided to investors when a credit 

rating is used in connection with a 

registered offering? 

• Schedule B under the Securities Act 

provides the disclosure requirements for 

foreign governments or political 

subdivisions thereof that register their 

securities for public offering in the 

United States. The disclosure 

requirements for those issuers are 

located directly in the Securities Act, 

and there are no corresponding 

disclosure regulations or forms under 

Schedule B applicable to foreign 

governments 65 or their political 

subdivisions.66 However, through 

market practice and investor 

expectation, registration statements 

prepared under Schedule B generally 

contain disclosure beyond the 

requirements of the statute, and may 

include, for example, credit rating 

information relating to the sovereign 

issuer’s debt. Should we extend the 

proposals for the disclosure of credit 

ratings to foreign government issuers? 

Or should we continue to permit foreign 

governments to disclose credit ratings 

on a voluntary basis? Should a foreign 

government be required to disclose 

credit ratings in Schedule B registration 

statements under the Securities Act and 

in Exchange Act documents, including 

the annual report on Form 18–K and the 

registration statement on Form 18, if it 

uses the credit rating in connection with 

a registered offering of its debt 

securities? If we extend the credit rating 

disclosure requirements to foreign 

governments, are there some forms or 

documents that in whole or in part 

should be exempt from these 

requirements? Would disclosure of 

credit ratings be appropriate for foreign 

government issuers? If so, why? If not, 

why should they be exempt? If 

mandatory credit ratings disclosure in 

filings under the Securities Act or the 

Exchange Act is appropriate for foreign 

government issuers, should they be 

subject to requirements analogous to 

those proposed for other issuers or are 

there different factors that should be 

considered in any amendments that may 

be adopted for foreign government 

issuers? What are those considerations? 

2. Required Disclosure 

Under the proposed amendments, a 

registrant would be required to disclose 

the information for each credit rating 

that triggers disclosure. The proposed 

disclosure seeks to provide investors 

with a specific description of the ratings 

and to make clear to investors: 

• The elements of the securities that 

the credit rating addresses; 

• The material limitations or 

qualifications on the credit rating; and 

• Any related published designation, 

such as non-credit payment risks, 

assigned by the credit rating agency 

with respect to the security. 

The disclosure would be required in 

registration statements under the 

Securities Act and the Exchange Act, 

including Form 10 and Form 20–F, and 

in registration statements filed by 

closed-end funds on Form N–2 under 

the Securities Act and the Investment 

Company Act. 

(a) General Information Including Scope 

and Limitations 

As proposed, our amendments would 

require disclosure of certain general 

information regarding credit ratings, 

including the scope of the rating and 

any limitations on the scope of the 

rating. In this regard, our proposed rules 

would require: 

• The identity of the credit rating 

agency assigning the rating and whether 

such organization is an NRSRO; 

• The credit rating assigned by the 

credit rating agency; 

• The date the credit rating was 

assigned; 

• The relative rank of the credit rating 

within the credit rating agency’s 

classification system; 

• A credit rating agency’s definition 

or description of the category in which 

the credit rating agency rated the class 

of securities; 

• All material scope limitations of the 

credit rating; 67

• How any contingencies related to 

the securities are or are not reflected in 

the credit rating; 

• Any published designation 

reflecting the results of any other 

evaluation done by the credit rating 

agency in connection with the rating, 

along with an explanation of the 

designation’s meaning and the relative 

rank of the designation; 


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68See proposed amendments to Item 202(g) of 

Regulation S–K, Item 12 of Form 20–F, and Item 

10.6 of Form N–2. 

69The registrant could also disclose the credit 

rating in a free writing prospectus, such as a term 

sheet, as long as it was also included in the 

registration statement (including through disclosure 

in a prospectus supplement that becomes a part of 

the registration statement in accordance with Rule 

430B). 

70See e.g., Moody’s Global Credit Policy, Rating 

Methodology, Updated Report on V Scores and 

Parameter Sensitivities for Structured Finance 

Securities (Dec. 2008), at http://www.moodys.com 

indicating that the evaluations are intended to 

address the degree of uncertainty underlying the 

assumptions made in determining ratings and how 

sensitive the ratings are to changes in those 

assumptions); Fitch Ratings Structured Finance 

Global Criteria Report, Criteria for Structured 

Finance Loss Severity Ratings (Feb. 2009), at 

http://www.fitchratings.com indicating that a Loss 

Severity Rating is intended to indicate the relative 

risk that a security will incur a severe loss in the 

event of default). 

• Any material differences between 

the terms of the securities as assumed or 

considered by the credit rating agency 

in rating the securities and (i) the 

minimum obligations of the security as 

specified in the governing instruments 

of the security; and (ii) the terms of the 

securities as used in any marketing or 

selling efforts; and 

• A statement informing investors 

that a credit rating is not a 

recommendation to buy, sell, or hold 

securities; that it may be subject to 

revision or withdrawal at any time by 

the assigning credit rating agency; that 

each credit rating is applicable only to 

the specific class of securities to which 

it applies; and that investors should 

perform their own evaluation as to 

whether an investment in the security is 

appropriate.68

A preliminary prospectus would 

include information about any credit 

rating that is used in connection with a 

registered offering of securities. For 

example, a registrant would disclose the 

initial rating (if any) assigned by the 

credit rating agency in the preliminary 

prospectus when a final rating is not 

assigned until after the effectiveness of 

a registration statement. If a disclosed 

rating is changed or if a different rating 

becomes available before effectiveness, 

the registrant would be required to 

convey the rating change to the 

purchaser. The registrant would be 

required to update the final prospectus 

to reflect the final rating assigned and 

all related disclosure. In connection 

with delayed shelf offerings, the final 

rating would be disclosed in a 

prospectus supplement.69

We are proposing to require 

disclosure of the relative rank of the 

credit rating within the credit rating 

agency’s classification system and the 

credit rating agency’s definition or 

description of the category in which the 

credit rating agency rated the class of 

securities. We believe this disclosure 

will help put the credit rating in its 

appropriate context and provide 

investors with important information 

about the credit rating agency’s 

assessment of the degree of risk 

presented by the security. 

Under the proposed amendments, a 

registrant would be required to disclose 

any material limitations on the scope of 

the credit rating and how any 

contingencies related to the securities 

are or are not reflected in the credit 

rating. For example, a registrant would 

be required to disclose if the credit 

rating takes into account less than the 

promised return on a security. A 

residual security, for example, typically 

represents a beneficial interest in 

whatever cash flows remain in a pool of 

financial assets after obligations to pay 

all other outstanding classes have been 

satisfied. Sometimes, because of the 

highly speculative nature of these cash 

flows, a residual security incorporates a 

fixed promise to pay a nominal amount 

of principal to the residual holder in the 

early months of the securities’’ 

existence. The amount of the nominal 

fixed obligation may have no 

relationship to the amount paid for the 

residual security, nor to the anticipated 

residual cash flow. The credit rating for 

the residual interest represents only an 

evaluation of the likelihood that the 

nominal fixed obligation would be paid. 

It does not evaluate whether there will 

be any residual cash flow. Under the 

proposed rule, such a limitation would 

be required to be disclosed. We believe 

this type of disclosure would help 

investors understand what the rating is 

intended to cover, and, just as 

importantly, the limitations on the 

rating issued. In addition, if the security 

is subject to contingent payment 

obligations, registrants would be 

required to disclose how those 

contingencies are reflected in the credit 

rating. We believe these requirements 

will provide investors with better 

information so that they can make 

important distinctions about the nature 

of risks presented by securities with the 

same or similar ratings. 

If the credit rating includes a related 

published designation, such as noncredit payment risk assessments, 

volatility assessments or other analyses 

performed by the credit rating agency 

that do not solely reflect credit risk, the 

proposed amendments would require a 

description of the additional analysis, so 

that investors relying on the designation 

are not left unaware of the related 

evaluation. For example, the related 

evaluations covered by such designation 

could include an analysis of 

prepayment speeds, effects of interest 

rates or other market based factors, or 

volatility assessments done in 

connection with a credit rating.70 We 

believe disclosure of these published 

designations together with a description 

of the analysis would provide 

meaningful additional information to 

investors regarding the information 

taken into consideration by the credit 

rating agency. We also believe 

disclosure of these related designations 

would signal to investors that 

significant differences may exist 

between a security with a credit rating 

that includes a published designation 

indicating that an evaluation of 

additional risk was done by the credit 

rating agency and a security with a 

similar credit rating without such a 

designation. In addition, we believe 

disclosure of published designations 

would help investors understand the 

limitations on comparing credit ratings 

across different types of securities. 

Under the proposed amendments, 

registrants would be required to disclose 

any material differences between the 

terms of the security as considered or 

assumed by the credit rating agency for 

purposes of determining the rating, the 

terms in the governing documents of the 

securities and the terms of the securities 

as marketed to investors. We believe 

this disclosure may allow investors to 

better evaluate the credit rating and the 

security to which it applies because 

they would understand if the credit 

rating was based on assumptions or 

terms different from the information 

provided to investors. For example, this 

item would require disclosure if the 

security was rated using a yield 

assumption which differs from the 

expected yield being disclosed to 

investors. 

We have also proposed to require that 

registrants include a statement 

informing investors that a credit rating 

is not a recommendation to buy, sell, or 

hold securities; that it may be subject to 

revision or withdrawal at any time by 

the assigning credit rating agency; that 

each credit rating is applicable only to 

the specific class of securities to which 

it applies; and that investors should 

perform their own evaluation as to 

whether an investment in the security is 

appropriate. We believe this statement 

will alert investors to some of the 

limitations inherent in a credit rating so 

that the credit rating is placed in an 

appropriate context. 

Under the proposed amendments, a 

closed-end fund would be required to 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
53094 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

71See proposed Instruction 4 to Item 10.6 of Form 

N–2. Cf. Item 10.6 of Form N–2 (similar current 

provision regarding inclusion of disclosure in 

statement of additional information). 

72Proposed Item 10.6 of Form N–2 is 

substantially similar to current Item 10.6 in that a 

registrant would be required to disclose the relative 

rank of the credit rating within the rating agency’s 

overall classification system, the rating agency’s 

definition or description of the category in which 

the rating agency rated the class of securities, all 

material scope limitations, how any contingencies 

related to the securities are or are not reflected in 

the credit rating, and any material differences 

between the terms of the securities as assumed or 

considered by the rating agency and (i) the 

minimum obligations of the security as specified in 

its governing instruments and (ii) the terms of the 

security as used in any marketing or selling efforts. 

Rather than require disclosure of the material terms 

of any agreement between the registrant or its 

affiliates and the NRSRO under which the NRSRO 

provides the rating as set forth in current Item 10.6, 

proposed Item 10.6 would require disclosure of the 

identity of the person compensating the rating 

agency for providing the rating and a description of 

any other non-rating services provided by the rating 

agency to the registrant or its affiliates and any fees 

paid for such non-rating services. 

73The current instructions to Item 10.6 define 

NRSRO, cross-reference Rule 436(g)(1) under the 

Securities Act, and cross-reference Item 10(c) of 

Regulation S–K. 

74 17 CFR 230.408. Rule 408 provides that, in 

addition to the information expressly required to be 

included in a registration statement, the registrant 

is required to include any additional material 

information necessary to make the required 

statements, in the light of the circumstances under 

which they are made, not misleading. 

include the disclosure concerning credit 

ratings in its prospectus, unless the 

prospectus relates to securities other 

than senior securities that have been 

rated by a credit rating agency, in which 

case such disclosure may be provided in 

the statement of additional information 

unless the rating criteria will materially 

affect the registrant’s investment 

policies.71

For closed-end funds, current Item 

10.6 of Form N–2 requires that, if a 

registrant discloses a rating assigned by 

an NRSRO in its prospectus, the 

registrant must briefly discuss the 

significance of the rating, the basis upon 

which ratings are issued, any conditions 

or guidelines imposed by the NRSRO for 

the registrant to maintain the rating, and 

whether or not the registrant intends, or 

has any contractual obligation, to 

comply with these conditions or 

guidelines. Current Item 10.6 also 

requires disclosure of the material terms 

of any agreement between the registrant 

or its affiliates and the NRSRO under 

which the NRSRO provides the rating. 

The proposed amendments would, if 

adopted, replace those requirements 

with the same disclosure requirements 

contained in proposed Item 202(g) of 

Regulation S-K, which, in some cases, 

are substantially similar to the current 

requirements and, in other cases, 

provide information that is intended to 

allow investors to more easily put the 

credit rating in its appropriate context 

than the disclosure requirements of 

current Item 10.6 of Form N–2.72 We are 

also proposing technical amendments to 

remove the current instructions to Item 

10.6.73

Request for Comments 

• We have proposed to require 

disclosure similar to the disclosure 

recommended in Item 10(c) of 

Regulation S–K. Is there a better model 

for providing disclosure about credit 

ratings? Should we adopt a general rule 

that all material elements of a credit 

rating be disclosed and give examples of 

the types of information that should be 

disclosed? Does our proposed approach 

capture the information that investors 

would need to make informed 

investment decisions? 

• Does the proposed disclosure 

requirement add too much weight to the 

credit rating? 

• Non-investment company 

registrants would be required to make 

the Item 202(g) disclosures in their 

Securities Act and Exchange Act 

registration statements, and closed-end 

funds would be required to make 

similar disclosures in their Securities 

Act and Investment Company Act 

registration statements. Is disclosure 

about a registrant’s credit ratings 

appropriate disclosure for such filings? 

Are there alternative or additional 

filings in which the disclosure should 

be made? Should we also require that 

similar disclosure be provided in any 

written selling materials that disclose 

the rating? Should this disclosure be 

recommended rather than required? 

• Is there another means that could be 

used to provide investors with this 

information, and the information 

described below, when a credit rating is 

used in connection with a registered 

offering? 

• Is the proposed disclosure regarding 

credit ratings adequate to provide 

investors with sufficient information to 

be able to understand the ratings 

assigned by a credit rating agency and 

to understand the limitations associated 

with a rating? Is there other information 

that would be useful? 

• As proposed, Item 202(g) and Item 

10.6 of Form N–2 include a list of 

specific items that must be disclosed 

about the credit rating. Is this approach 

appropriate? Should we also include a 

‘‘catch-all’’ provision that would require 

any other information necessary to 

understand the credit rating? Would 

including a catch-all help to assure that 

our rules will be flexible enough to 

elicit material information about credit 

ratings, as securities and credit ratings 

change in response to innovations and 

market developments? Would Rule 408 

under the Securities Act be sufficient to 

capture any additional material 

information? 74

• Should our proposed disclosure 

distinguish between corporate debt and 

structured finance products? Is there 

different information that would be 

relevant for ratings of corporate debt 

and structured finance products? 

Should we require disclosure of the 

differences in risk characteristics 

between corporate debt and structured 

finance products? Is this information 

already available to investors in all 

cases? 

• Would investors benefit from the 

disclosure of the relative rank of the 

credit rating within the credit rating 

agency’s classification system and the 

credit rating agency’s definition or 

description of the category in which the 

credit rating agency rated the class of 

securities? Is there other or additional 

information that would assist investors 

in placing the credit rating in context? 

• In addition to requiring the 

disclosure about a credit rating that 

currently is recommended in Item 10(c) 

of Regulation S–K, proposed Item 202(g) 

of Regulation S–K, Item 12 of Form 20– 

F and Item 10.6 of Form N–2 would 

require disclosure of all material scope 

limitations of the rating, how any 

contingencies are or are not reflected in 

the credit rating and any related 

designation (or other published 

evaluation) of non-credit payment risks 

assigned by the rating agency with 

respect to the security. Would this 

additional disclosure assist investors in 

better understanding the credit rating 

and assessing the risks of an investment 

in the security? What additional 

disclosure would be helpful to investors 

in making these assessments? 

• As noted above, under proposed 

Item 12 to Form 20–F, foreign private 

issuers would be required to provide the 

same disclosure that would be required 

by proposed Item 202(g) of Regulation 

S–K for domestic issuers. Is this type of 

ratings information disclosed by foreign 

private issuers in their home 

jurisdictions? Should foreign private 

issuers be required to provide this type 

of information? Is there a basis on which 

to distinguish between foreign private 

issuers and other registrants for this 

purpose? If so, please explain. Is there 

any other type of credit ratings 

information that foreign private issuers 

should disclose? 


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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 53095 

75There are rules applicable to NRSROs currently 

in place that are designed to address certain 

conflicts of interest of NRSROs. Pursuant to 

Exchange Act Rule 17g–5 [17 CFR 240.17g–5], an 

NRSRO must disclose and manage certain conflicts 

of interest, while certain other conflicts are 

prohibited outright. Paragraph (b) of Rule 17g–5 

identifies nine types of conflicts to be disclosed and 

managed by an NRSRO, including a new type of 

conflict being adopted today by the Commission in 

a companion adopting release: 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 or mortgage-backed securities 

transaction that was paid for by the issuer, sponsor, 

or underwriter of the security or money market 

instrument. Paragraph (c) of Rule 17g–5 identifies 

seven conflicts of interest that are prohibited 

outright, including three added by the Commission 

in February 2009: issuing or maintaining a credit 

rating with respect to an obligor or security where 

the NRSRO or a person associated with the NRSRO 

made recommendations to the obligor or the issuer, 

underwriter, or sponsor of the security about the 

corporate or legal structure, assets, liabilities, or 

activities of the obligor or issuer of the security; 

issuing or maintaining a credit rating where the fee 

paid for the rating was negotiated, discussed, or 

arranged by a person within the NRSRO who has 

responsibility for participating in determining or 

approving credit ratings or for developing or 

approving procedures or methodologies used for 

determining credit ratings, including qualitative 

and quantitative models; and issuing or maintaining 

a credit rating where a credit analyst who 

participated in determining or monitoring the credit 

rating, or a person responsible for approving the 

credit rating received gifts, including entertainment, 

from the obligor being rated, or from the issuer, 

underwriter, or sponsor of the securities being 

rated, other than items provided in the context of 

normal business activities such as meetings that 

have an aggregate value greater that $25. 

76See note 21 above. 

77 In a companion proposing release, the 

Commission is also today proposing a new rule that 

would require an NRSRO, on an annual basis, to 

make publicly available on its Internet Web site a 

consolidated report that shows three items of 

information with respect to each person that paid 

an NRSRO to issue or maintain a credit rating; 

specifically, (1) the percent of the net revenue 

attributable to the person that was earned by the 

NRSRO for that fiscal for year from providing 

services and products other than credit rating 

services; (2) the relative standing (top 10%, top 

25%, top 50%, bottom 50%, and bottom 25%) of 

the person in terms of the person’s contribution to 

the total net revenue of the NRSRO for the fiscal 

year as compared with other persons who provided 

the NRSRO with revenue; and (3) all outstanding 

credit ratings paid for by the person. The proposed 

rule also would provide that the NRSRO must 

include a generic disclosure statement each time 

the NRSRO publishes a credit rating or credit 

ratings indicating where on its Internet Web site the 

consolidated report is located. See the proposing 

release considered by the Commission on 

September 17, 2009 related to proposed new Rule 

17g–7 under the Exchange Act. 

• As proposed, a registrant would be 

required to disclose additional 

information about any published 

designation that reflects the results of 

any other evaluation done by a credit 

rating agency. Should we require 

disclosure for any evaluation by a credit 

rating agency that is communicated to 

the registrant, regardless of whether it is 

published? Do credit rating agencies 

communicate information of this type to 

the registrant? If so, what types of 

information would this cover? 

• We are proposing to require 

registrants to disclose any material 

differences between the terms of the 

security as assumed or considered by 

the credit rating agency in rating the 

security and (i) the minimum 

obligations of the security as specified 

in the governing instruments, and (ii) 

the terms of the security as marketed to 

investors. Would this disclosure be 

helpful to investors in making an 

investment decision? 

• Does the proposed requirement that 

registrants include a statement 

informing investors that a credit rating 

is not a recommendation to buy, sell, or 

hold securities; that it may be subject to 

revision or withdrawal at any time by 

the assigning credit rating agency; that 

each credit rating is applicable only to 

the specific class of securities to which 

it applies; and that investors should 

perform their own evaluation as to 

whether an investment in the security is 

appropriate provide meaningful 

information to investors? Would this 

statement help to place the credit rating 

in an appropriate context? Why or why 

not? 

• Are the proposed disclosure 

requirements appropriate for closed-end 

funds or should they be modified? 

Should we instead, or in addition, 

require all or any of the disclosures that 

are enumerated in current Item 10.6 of 

Form N–2? For example, should we 

expressly require disclosure of the basis 

upon which ratings are issued by the 

credit rating agency or disclosure of any 

conditions or guidelines imposed by a 

credit rating agency for the registrant to 

maintain a credit rating? Is it 

appropriate, as proposed, to permit 

closed-end funds to include the 

proposed disclosure in the statement of 

additional information, rather than the 

prospectus, if the prospectus relates to 

securities other than senior securities of 

the registrant that have been rated by a 

credit rating agency unless the rating 

criteria will materially affect the 

registrant’s investment policies? 

(b) Potential Conflicts of Interest 

We also are proposing to require 

disclosure regarding credit ratings that 

would address potential conflicts of 

interest.75 Specifically, our proposed 

rules would require disclosure of the 

identity of the party who is 

compensating the credit rating agency 

for providing the credit rating. In 

addition, if during the registrant’s last 

completed fiscal year and any 

subsequent interim period up to the 

date of the filing, the credit rating 

agency or its affiliates has provided nonrating services to the registrant or its 

affiliates, the proposed rules would 

require a description of the other nonrating services and separate disclosure 

of the fee paid for the credit rating 

required to be disclosed and the 

aggregate fees paid for any other nonrating services provided during such 

period. 

We believe that the proposed 

disclosure regarding fees and services 

would alert investors to potential 

conflicts of interest that may have 

influenced the rating decision of the 

credit rating agency. We believe 

investors should know who paid for the 

rating since that may influence their 

assessment of the impartiality of the 

credit rating agency in assigning the 

rating. For example, many of the 

NRSROs are paid by the registrants for 

whom they are providing the credit 

rating. This business model can create a 

conflict of interest because the NRSRO 

providing the credit rating may be 

concerned that if it issues a lower rating 

than the registrant expects, the 

registrant would no longer seek credit 

ratings from that NRSRO. As a result, an 

NRSRO that is paid by a registrant may 

have an incentive to give a higher credit 

rating than it would have if no potential 

conflict of interest existed. In addition, 

we believe that the disclosure we are 

proposing to require regarding nonrating services and related fees paid to 

the credit rating agency should help 

investors gauge whether the credit 

rating agency’s decision may have been 

influenced by a desire to gain or retain 

other business from the registrant.76

We are not proposing to require 

disclosure of the fee paid for the credit 

rating unless disclosure of other nonrating services is required as described 

above. We preliminarily believe that 

when no such other non-rating services 

are provided, disclosure of the source of 

the payment for the rating as proposed 

would sufficiently convey the potential 

conflict of interest. We are requesting 

comment, however, on whether we 

should require the amount of the fee to 

be disclosed in all cases.77

Request for Comments 

• We have proposed to require 

disclosure of information related to the 

party paying for the rating, as well as 

any additional non-rating services 

provided by the credit rating agency or 

its affiliates to the registrant or its 

affiliates. Would the proposed 

disclosure provide helpful information 

for investors in order for them to judge 

whether potential conflicts of interest 

may have impacted the rating? Is the 

provision of other services indicative of 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
53096 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

78 17 CFR 229.509. 

potential conflicts of interest? Would 

requiring disclosure regarding other 

services decrease the other services 

being provided? Would that have an 

effect on the quality of ratings? If so, 

how? Is there other disclosure that 

would provide additional or better 

information regarding potential conflicts 

of interest? If so, what information 

would provide investors the ability to 

assess potential conflicts of interest? 

• Is the information that we have 

proposed to require meaningful? Should 

we require additional context such as 

the percentage of revenue that the 

NRSRO or other credit rating agency 

earns from the registrant so that an 

investor would be aware of when a 

registrant accounts for a significant 

percentage of the NRSRO’s revenue? 

Would requiring disclosure only if nonrating services are provided place too 

much emphasis on the mix of revenue 

that the registrant provides to the credit 

rating agency, rather than the total 

revenue earned from the registrant? In 

proposed Exchange Act Rule 17g–7, the 

Commission is proposing to require that 

NRSROs publish a report on an annual 

basis with respect to each person that 

paid an NRSRO to issue or maintain a 

rating disclosing (1) the percent of the 

net revenue attributable to the person 

that was earned by the NRSRO for that 

fiscal year from providing services and 

products other than credit rating 

services; (2) the relative standing (top 

10%, top 25%, top 50%, bottom 50%, 

and bottom 25%) of the person in terms 

of the person’s contribution to the total 

net revenue of the NRSRO for the fiscal 

year as compared with other persons 

who provided the NRSRO with revenue; 

and (3) all outstanding credit ratings 

paid for by the person. Should 

registrants be required to disclose the 

aggregate fees paid by the registrant to 

the credit rating agency for ratings and 

non-rating services, regardless of 

whether non-rating services have been 

provided, and the relative standing of 

the registrant in terms of the registrant’s 

contribution to the total net revenue of 

the credit rating agency in registration 

statements? If we were to require this 

disclosure, should it be updated to the 

date of the registration statement instead 

of being provided as of the end of the 

last fiscal year? Would registrants have 

access to this information? If not, could 

they negotiate with the credit rating 

agency so that this information could be 

obtained from the credit rating agency, 

such as through the contract for 

services? What would the costs of 

providing such disclosure be? Would 

requiring this disclosure affect a 

registrant’s ability to obtain a rating or 

to raise capital? Would investors benefit 

from having this information in the 

registration statement? 

• Our proposed disclosure 

requirements relate only to fees paid to 

the credit rating agency. We are aware 

that there are other relationships that 

could present potential conflicts of 

interest. Item 509 of Regulation S–K 78

currently requires disclosure by a credit 

rating agency that is not an NRSRO 

when it (i) is paid on a contingent basis, 

(ii) has a substantial direct or indirect 

interest in the registrant, or (iii) has a 

connection to the registrant as a 

promoter, underwriter, officer, director 

or employee or voting trustee. Is this 

disclosure sufficient, or should there be 

a more specific disclosure requirement? 

For example, Exchange Act Rule 17g– 

5(a) and (b) provides that certain 

conflicts are permitted if they are 

disclosed and managed by the NRSRO. 

Such permitted conflicts include: 

Conflicts related to being paid by issuers 

for rating and non-rating services; 

conflicts related to subscription based 

services; conflicts related to ownership 

interests in entities being rated by the 

NRSRO; conflicts related to business 

relationships with issuers being rated by 

the NRSRO; conflicts related to the 

NRSRO having a broker or dealer 

associated with it; and any other 

conflict that would be material to the 

NRSRO. Should registrants be required 

to disclose conflicts: Conflicts related to 

being paid by a registrant for rating and 

non-rating services, regardless of 

whether non-rating services are being 

provided, paying the credit rating 

agency for subscription-based services, 

any ownership interest by the credit 

rating agency in the registrants or its 

affiliates, any business relationships 

between the credit rating agency and the 

registrant and its affiliates, any interest 

the credit rating agency has in a broker 

or dealer associated with it and any 

other material conflicts? Would all of 

the information be relevant to investors? 

Would registrants have access to this 

information? If not, could they negotiate 

with the credit rating agency so that this 

information could be obtained from the 

credit rating agency, such as through the 

contract for services? Rule 17g–5 

currently requires annual reporting by 

NRSROs of these conflicts. If registrants 

were also required to disclose these 

types of conflicts, should we require the 

disclosure to be updated to the date of 

the registration statement? What would 

the costs of providing such disclosure 

be? Would requiring this disclosure 

affect a registrant’s ability to obtain a 

rating or to raise capital? Would 

investors benefit from having this 

disclosure in the registration statement? 

• Exchange Act Rule 17g–5(c) 

provides a category of conflicts that an 

NRSRO is prohibited from having with 

respect to a credit rating. These 

prohibited conflicts include: Providing a 

rating to an entity that accounted for 

10% or more of the NRSRO’s net 

revenue; direct ownership interests by 

the NRSRO or an analyst preparing the 

rating in the issuer; issuing or 

maintaining a rating on a person 

associated with the NRSRO; issuing or 

maintaining a rating where a person 

determining or approving the rating is 

an officer or director of the issuer; 

issuing or maintaining a rating where 

the NRSRO made recommendations 

with respect to the structure of the 

rating; issuing or maintaining a rating 

where the fee for such rating was 

discussed or negotiated by a person at 

the NRSRO with responsibility for 

determining or approving the rating; 

and issuing or maintaining a rating 

where a person determining or 

approving the rating received gifts in 

excess of $25. These prohibitions are 

only applicable to NRSROs. To the 

extent not otherwise required to be 

disclosed by Item 509 of Regulation S– 

K, should we require disclosure of the 

conflicts described above if credit rating 

agencies that are not NRSROs provide a 

rating to a registrant and if these 

conflicts exist or have existed during the 

registrant’s previous two fiscal years 

through the date of the registration 

statement so that investors would be 

aware of such conflicts? Would 

registrants have this information? If not, 

could they negotiate with the credit 

rating agency so that this information 

could be obtained from the credit rating 

agency, such as through the contract for 

services? What would the costs of 

providing such disclosure be? Would 

requiring this disclosure affect a 

registrant’s ability to obtain a rating or 

to raise capital? Would investors benefit 

from having this disclosure in the 

registration statement? 

• Are there competitive or proprietary 

concerns that the proposed disclosed 

requirements should account for? If so, 

how? For example, will disclosing fees 

have any effect on the ability to 

negotiate for services? 

• If non-rating services have been 

provided to the registrant or any of its 

affiliates by the credit rating agency or 

any of its affiliates, we have proposed to 

require a description of the other nonrating services and separate disclosure 

of the fee paid for the credit rating and 

the aggregate fees paid for any other 

non-rating services provided by the 

credit rating agency or its affiliates 


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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 53097 

79See note 77 above. 80See note 24 above. 81 In this regard, we note that three of the largest 

NRSROs entered into an agreement with the 

Attorney General for the State of New York in June 

2008 that provides for certain disclosure regarding 

preliminary ratings. See Press Release, Office of the 

Attorney General, ‘‘Attorney General Cuomo 

Announces Landmark Reform Agreements with the 

Nation’s Three Principal Credit Rating Agencies,’’ 

(June 5, 2008), at http://www.oag.state.ny.us/ 

media_center/2008/jun/june5a_08.html. Our 

proposed rule, however, would apply to all credit 

rating agencies. In addition, because our proposed 

rules apply to registrants, investors would be able 

to find disclosure regarding preliminary ratings on 

a registrant-by-registrant and offering-by-offering 

basis instead of having to search the disclosure of 

the NRSROs. 

82See Roger Lowenstein, Triple-A Failure, N.Y. 

Times Magazine, April 27, 2008. 

83See Skreta and Veldkamp and Bolton, Freixas 

and Shapiro in note 24 above. 

during the registrant’s last completed 

fiscal year and any subsequent interim 

periods up to the filing date. Should we 

require disclosure for fees paid over a 

longer period such as two or five years? 

Should we require disclosure of fees for 

non-rating services that have been 

contracted and paid for but not yet 

delivered? Should we require disclosure 

for services that have been proposed or 

solicited but not yet finalized? 

• Should we require disclosure of 

fees paid by the underwriter or its 

affiliates to the credit rating agency or 

its affiliates for non-rating services if the 

underwriter is the party paying for the 

rating? Should we require disclosure 

about services provided by the credit 

rating agency to the underwriter if the 

underwriter is paying for the rating? 

Should the underwriter be treated as 

acting on behalf of the issuer in such 

circumstances? Would the registrant be 

able to obtain this information? If not, 

should we consider initiating 

rulemaking to provide that underwriters 

shall make this information available to 

issuers upon reasonable request? Is 

there any additional information 

regarding credit rating agency fees that 

would be important to investors? 

Should we require disclosure of any 

current or anticipated arrangements or 

agreements regarding future services? If 

so, should we require an estimate of the 

fees to be paid for such services? 

• Under our proposal, disclosure of 

fees would not be triggered if the 

services in addition to the credit rating 

are other credit rating services, such as 

fees to rate another security of the 

registrant. Is this approach appropriate? 

Do fees for other credit rating services 

raise conflict of interest issues similar to 

fees for non-rating services? Is the 

distinction between a credit rating 

service and a non-credit rating service 

sufficiently clear? Should we provide 

further guidance on this point? Should 

we reference the categories in Form 

NRSRO in this regard? 

• Should we require disclosure of the 

fee paid for the credit rating regardless 

of whether additional services have 

been provided? Would this disclosure 

provide information that is important in 

evaluating potential conflicts of interest 

inherent in the issuer-paid ratings 

model? Is the information useful 

without additional context, such as the 

significance of the fee to the credit 

rating agency? If context is necessary to 

make the disclosure of fees meaningful, 

should we require disclosure of the 

significance of the fee to the credit 

rating agency? For example, should we 

require a registrant to disclose the 

percentage of revenue derived from the 

fee? 79 Would registrants have access to 

this information? Is there other 

information that would convey the 

significance of the fee to the credit 

rating agency? Should we require 

registrants to disclose the total amount 

of rating-related fees paid to the credit 

rating agency during the most recent 

fiscal year completed and any interim 

periods? During the two most recent 

fiscal years (or longer?) completed and 

any interim periods? 

• Would disclosure of fees paid to 

credit rating agencies affect the amount 

of fees charged, or otherwise affect the 

competitive landscape for credit rating 

agencies? 

• We note that there may be other 

factors that could influence the 

independence of the credit rating 

agency, such as a reliance on 

underwriters that refer business to the 

credit rating agency or the general 

importance of a particular registrant to 

the credit rating agency. Should we 

require disclosure of these sorts of 

relationships? 

(c) Ratings Shopping 

Reports that registrants, or persons 

acting on behalf of registrants, may 

engage in ‘‘ratings shopping’’ raise 

serious issues about the integrity of the 

credit ratings process.80 We believe 

investors should be made aware of 

when a registrant (or a person acting on 

a registrant’s behalf) may have engaged 

in ratings shopping.81 It is our 

understanding that ratings shopping 

occurs because registrants, among 

others, can solicit preliminary credit 

ratings from a rating agency. If the 

registrant believes the preliminary 

rating is too low, the registrant can seek 

a different credit rating from another 

credit rating agency.82 When a registrant 

can choose which ratings to disclose, 

including which final ratings to 

disclose, we believe the registrant will 

most likely choose the most favorable 

rating. If less favorable ratings are not 

disclosed, then investors may not have 

access to potentially important 

information that may suggest that the 

credit rating that is disclosed may be 

inflated.83 Similarly, when the credit 

rating agency knows that the registrant 

will likely choose to use the credit 

rating agency that provides the most 

favorable rating, there may be an 

incentive for ratings to be inflated by the 

credit rating agency in order to keep the 

business of the registrant. Currently, our 

rules do not require disclosure of any 

credit ratings, whether preliminary or 

not. As a result, investors are not aware 

of when registrants seek a preliminary 

rating or when registrants obtain 

additional credit ratings but choose not 

to use them, and investors are not aware 

of any differences between the 

preliminary rating and the final rating. 

We are proposing that if a registrant 

has obtained a credit rating and is 

required to disclose that credit rating, 

then all preliminary ratings of the same 

class of securities as the final rating that 

are obtained from credit rating agencies 

other than the credit rating agency 

providing the final rating must also be 

disclosed. In addition, we are proposing 

that if a rating is disclosed pursuant to 

the trigger described above, then any 

credit rating obtained by the registrant 

but not used must also be disclosed. We 

believe this disclosure requirement 

would provide investors with important 

information to assess whether any 

ratings shopping may have occurred, 

and whether any rating inflation may 

have occurred between the preliminary 

rating and the final rating obtained by 

a registrant as a result of the ratings 

shopping, or whether the registrant has 

other credit ratings that it has not used 

in connection with the offering. 

We have not proposed to require 

disclosure of preliminary ratings 

obtained by a registrant from the credit 

rating agency that issues the final rating. 

We are concerned that such a disclosure 

requirement may impede useful 

communications between credit rating 

agencies and registrants as the credit 

rating agencies determine their initial 

ratings and perform continuing work 

related to monitoring the rating. In 

addition, there are rules applicable to 

NRSROs that are intended to prevent 

some of the problematic practices in this 

area. For example, Rule 17g–5 under the 

Exchange Act prohibits an NRSRO from 

issuing or maintaining a rating where it 

made recommendations with respect to 

the structure of the security. 

When disclosure of any preliminary 

rating or unused final rating is required, 


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53098 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

84 17 CFR 230.409. 

85For instance, an underwriter may approach a 

rating agency about a newly developed or refined 

structure for an asset-backed offering of a certain 

class of assets generally. In some cases, the rating 

agency may be asked to provide an indication of a 

rating on that structure without knowledge of the 

specific pool assets or names of the originators for 

the assets, although certain criteria for the assets 

could be outlined. The preliminary rating that is 

assigned to the structure would need to be 

disclosed under our proposal if a rating is used in 

connection with a registered offering of securities 

by the underwriter with that structure. 

86For example, in the context of roll-up 

transactions, Item 911(a)(5) of Regulation S–K [17 

CFR 229.911(a)(5)] requires disclosure of any 

contacts between the sponsor or general partner and 

a third party providing a report, opinion or 

appraisal on the roll-up transaction. See also Item 

1005 of Regulation M–A [17 CFR 229.1105]. 

we are proposing to require similar 

disclosure as is proposed to be required 

for a final rating. Because preliminary 

ratings may vary in their form and level 

of detail, it is possible that all of the 

information required to be disclosed 

about a particular rating would not be 

available to the registrant. In preparing 

this disclosure, registrants would be 

able to rely on Securities Act Rule 409 84

if the information otherwise required to 

be disclosed cannot be obtained without 

unreasonable effort or expense. 

We believe disclosure of preliminary 

ratings as described above would 

provide important information for 

investors about potential ratings 

shopping. We believe registrants could 

identify any preliminary ratings 

required to be disclosed in the 

registration statement in a manner that 

would avoid confusion for investors. 

For example, registrants could disclose 

any preliminary ratings under a separate 

sub-heading, or the registrant could 

include written disclosure as to the 

limitations of preliminary ratings. 

For purposes of this proposed 

disclosure requirement, a credit rating, 

including a preliminary credit rating, 

generally would be obtained from a 

credit rating agency if it is solicited by 

or on behalf of a registrant from a credit 

rating agency. For these purposes, we 

would view an underwriter and others 

involved in structuring a deal, such as 

a sponsor or depositor, who obtains a 

credit rating, including a preliminary 

credit rating, for a deal structure to be 

acting on behalf of the registrant. 

We intend for the phrase ‘‘preliminary 

credit rating’’ to be read broadly and to 

include any rating that is not published, 

any range of ratings, any oral or other 

indications of a potential rating or range 

of ratings and all other preliminary 

indications of a rating. We believe that 

a broad reading would better facilitate 

the purpose of the proposed disclosure 

in order to alert investors if the 

registrant has obtained indications of a 

rating from one credit rating agency but 

chooses to use a credit rating from 

another. We are not proposing to limit 

the required disclosure of preliminary 

ratings to ratings specific to the 

registrant. For example, a preliminary 

rating would include ratings on a 

particular structure of a security even if 

not tied to a specific registrant or pool 

of assets.85 As proposed, disclosure of a 

preliminary rating would be required 

even if there have been changes to the 

security for which a final rating is 

disclosed. We believe this disclosure 

would place the information about 

ratings in context. 

Request for Comments 

• Should we require disclosure of 

preliminary ratings, as proposed? Is 

there any other information regarding 

preliminary ratings that should be 

required to be disclosed? Would the rule 

as proposed capture all potential ratings 

shopping practices? As an alternative, 

should the rule require disclosure of 

contacts between the registrant and the 

credit rating agency as a means of 

disclosing preliminary ratings and 

negotiations between the registrant and 

the credit rating agency? 86 Would the 

rule reduce the number of preliminary 

ratings sought? 

• We have expressed our concerns 

about ratings shopping by registrants 

and the potential for credit rating 

agencies to use less conservative rating 

methodologies in order to gain or retain 

business, presumably lessening the 

value of the ratings. As proposed, a 

registrant would only be required to 

provide disclosure of a preliminary 

rating if it is of the same class of 

securities as a final rating otherwise 

required to be disclosed by the rule and 

is received from a credit rating agency 

other than the credit rating agency 

providing the final rating. Are these 

limitations appropriate? Are there 

circumstances where disclosure of 

preliminary ratings would be important 

even if a final rating was never 

obtained? Should we require disclosure 

of all preliminary ratings obtained by a 

registrant, including from the credit 

rating agency that issues the final 

rating? 

• We have proposed to require 

disclosure of unused final credit ratings 

obtained by a registrant if a credit rating 

is otherwise disclosed pursuant to the 

proposed rules so that investors would 

be aware of any potential ratings 

shopping by the registrant in choosing 

which credit rating to use. Would this 

provide important information for 

investors? Do registrants ever obtain 

final ratings but not use them? Why 

might a registrant choose not to use a 

credit rating? Would requiring 

disclosure of such ratings reveal 

potential ratings shopping practices of 

registrants? If not, is there other 

disclosure that would elicit disclosure 

about potential ratings shopping? 

• Would requiring the proposed 

disclosure for preliminary or unused 

final ratings enhance investors’ 

understanding of, and therefore the 

value of, the ratings? Would such 

disclosure help to address our concerns 

with ratings shopping? If you do not 

believe such disclosure would be 

helpful, how would you suggest that we 

address these concerns? Is disclosure of 

an indication from a credit rating agency 

of a likely or possible rating 

appropriate? What effect would our 

proposed rule have on ratings shopping? 

Would it encourage or discourage the 

practice? Why? 

• To the extent that a preliminary 

rating that would be required to be 

disclosed pursuant to the proposed rule 

is not based on final and full 

information, to what extent would 

disclosure of such preliminary rating 

present a risk that investors could form 

a mistaken impression about the credit 

quality of the security or the registrant’s 

ratings shopping? 

• How would our proposed rule affect 

communications between registrants 

and credit rating agencies? Would the 

proposed requirement result in fewer 

discussions between credit rating 

agencies and registrants? Would it affect 

the quality of information provided by 

registrants to obtain a rating? 

• What types of activities might 

replace the issuance of preliminary 

ratings if the proposed rule is adopted? 

To what extent might some alternative 

ratings shopping behavior develop? 

• Would the proposal have a negative 

impact on smaller or newer credit rating 

agencies? Would smaller or newer credit 

rating agencies have a difficult time 

establishing their market position if 

registrants no longer seek multiple 

preliminary ratings? For example, 

would registrants be less likely to 

engage in initial conversations with 

smaller or newer credit rating agencies 

in order to understand their 

methodologies and procedures if we 

require the disclosure of preliminary 

ratings? 

• How would changes in the structure 

of a security affect disclosure of 

preliminary ratings? Would it be 

difficult for registrants to track 

preliminary ratings? 

• As proposed, a credit rating, 

including a preliminary credit rating, 

would be ‘‘obtained’’ if it is solicited by 


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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 53099 

87As discussed in this section, we are proposing 

that foreign private issuers be required to provide 

disclosure regarding credit rating changes in their 

annual reports on Form 20–F. As a result, the 

disclosure for foreign private issuers would not be 

required to be made within four business days of 

the rating change. 

88See note 39 above and the related discussion. 

89When revisions were adopted to the 8–K 

reporting requirements in 2004, the Commission 

noted that it was not adopting requirements for 

certain new items such as Item 2.04—Triggering 

Events that Accelerate or Increase a Direct Financial 

Obligation or an Obligation under an Off-Balance 

Sheet Arrangement that would have required 

registrants to provide a management’s analysis of 

the change to be included in the Form 8–K. The 

Commission noted that the analysis might be 

difficult to provide in the time period required for 

the filing of the 8–K and that the analysis might be 

more relevant and complete in the context of 

financial statements. The Commission reminded 

registrants, however, that any disclosure made in a 

report on Form 8–K must include all other material 

information, if any, that is necessary to make the 

required disclosure, in the light of the 

circumstances under which it is made, not 

misleading. See Additional Form 8–K Disclosure 

Requirements and Acceleration of Filing Date in 

note 43 above. 

90As proposed, this new item in Form 8–K would 

also be applicable to asset-backed issuers. However, 

such issuers are unlikely to have additional 

disclosure in their periodic reports because a 

change in a rating of an asset-backed issuer’s own 

securities typically does not affect that issuer. 

or on behalf of a registrant from a credit 

rating agency. Is this sufficient to 

capture all of the preliminary ratings 

sought from other credit rating agencies? 

• Should we include additional 

guidance as to what constitutes a 

preliminary rating? Would additional 

guidance allow registrants and credit 

rating agencies to structure their 

dealings to avoid disclosure? Are there 

less formal preliminary indications 

given by credit rating agencies that 

should be included in the required 

disclosure? Would requiring disclosure 

of preliminary ratings interfere with 

other types of communications between 

registrants and credit rating agencies, 

such as discussions related to 

surveillance or maintenance ratings that 

credit rating agencies may provide on 

other classes of securities issued by the 

same registrant for which credit ratings 

have been provided? If so, how should 

we address this concern? Would the 

broad view of ‘‘preliminary credit 

rating’’ as proposed interfere with any 

non-rating services provided to the 

registrant? If so, how could we address 

this? 

• Are there any concerns about the 

availability of the information about 

preliminary ratings that we are 

proposing registrants be required to 

disclose? Would credit rating agencies 

object to registrant’s disclosure of 

preliminary ratings where no 

compensation was paid to the credit 

rating agency? 

• Would disclosure of preliminary 

ratings have negative effects for 

investors, registrants or credit rating 

agencies? For example, would investors 

be confused by disclosure of 

preliminary ratings? Would disclosure 

of preliminary ratings be confusing or 

misleading? If so, how could we revise 

the proposal to reduce the risk that 

investors would be confused or misled? 

Would credit rating agencies change 

their practices if preliminary ratings are 

required to be disclosed? If so, how 

might their practices change? 

• Should our proposed disclosure 

regarding preliminary ratings 

distinguish among issuers of corporate 

debt, structured finance products and/or 

closed-end funds? Do corporate issuers, 

issuers of structured finance products 

and closed-end funds engage in ratings 

shopping equally or in the same 

manner? What are the differences? Is 

there different information regarding 

preliminary ratings that would be 

relevant for corporate debt, structured 

finance products and closed-end funds? 

D. Disclosure in Exchange Act Reports 

We are proposing to amend Exchange 

Act reports and rules to require a 

registrant to provide investors with 

updated disclosure regarding changes to 

a previously disclosed credit rating. 

If a credit rating that was previously 

disclosed under the rules proposed 

above has been changed, including 

when a rating has been withdrawn or is 

no longer being updated, that change 

would be required to be disclosed in a 

current report on Form 8–K.87 We are 

proposing a new item requirement to 

Form 8–K, which would require a 

registrant (including a closed-end fund) 

to file a report within four business days 

of receiving a notice or other 

communication from any credit rating 

agency, that the organization has 

decided to change or withdraw a credit 

rating assigned to the registrant or any 

class of debt or preferred security or 

other indebtedness of the registrant 

(including securities or obligations as to 

which the registrant is a guarantor or 

has a contingent financial obligation) or 

take any similar action with respect to 

a credit rating that was previously 

disclosed pursuant to proposed Item 

202(g) of Regulation S–K or proposed 

Item 10.6 of Form N–2. 

As discussed above, we previously 

proposed in 2002 to require disclosure 

in current reports of changes in credit 

ratings when we amended the item 

requirements for current reports on 

Form 8–K. We did not adopt the 

proposal at the time.88

Under the proposed item, the 

registrant would have to disclose the 

date that the registrant received the 

credit rating agency’s notice or 

communication, the name of the rating 

agency, and the nature of the rating 

agency’s decision. We are not proposing 

to require the registrant also discuss the 

impact of the change or other decision 

on the registrant, though it would be 

permitted to do so. Rather, consistent 

with similar Form 8–K items, we believe 

that a discussion of any material impact 

of the change in credit rating would be 

required to be disclosed in a registrant’s 

periodic reports.89 We believe this 

would provide the registrant with 

additional time to analyze the impact of 

the rating change to the registrant 

between the filing of a current report 

and the filing of its next periodic 

reports. We note, though, that a change 

in a credit rating may require the 

registrant to make related disclosures 

under other Form 8–K items, such as 

Item 2.04—Triggering Events that 

Accelerate or Increase a Direct Financial 

Obligation or an Obligation under an 

Off-Balance Sheet Arrangement. 

Disclosure under this item would not 

be required until the rating agency 

notifies the registrant that the rating 

agency has made a decision to change 

the credit rating. If the registrant is still 

in negotiations or appealing a 

preliminary indication that a credit 

rating agency intends an action covered 

by the proposed item, no disclosure 

would be required. However, once good 

faith negotiations and appeals cease, 

disclosure would be required. 

As noted above, we believe the 

application of our current rules would 

require a registrant to disclose in its 

periodic reports the impact on it, if 

material, of any change in a rating that 

was previously disclosed under the 

rules proposed above.90 For example, if 

a credit rating agency withdraws or 

stops updating a rating, the registrant 

would be required by the proposed 

amendment to disclose that fact in a 

current report on Form 8–K, and our 

current rule requirements would require 

the registrant to discuss the impact of 

the change on the company, if material, 

either in MD&A or in an appropriate 

location in its next periodic report. 

We have proposed to limit the 

disclosure regarding changes to a credit 

rating in a current report to credit 

ratings that were disclosed previously 

pursuant to the rules we propose today. 

Thus, a registrant would not be subject 

to the new requirement to disclose 

changes to credit ratings that were 

obtained or used prior to the 

effectiveness of any new disclosure 

requirements adopted as a result of this 

proposal. We believe this distinction 


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53100 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

91 Disclosure may also be required pursuant to 

Exchange Act Rule 12b–20 [17 CFR 240.12b–20], 

which requires that in addition to the information 

expressly required to be included in a report, the 

report is required to include any further material 

information necessary to make the required 

statements, in the light of the circumstances under 

which they are made not misleading. 

92 17 CFR 240.13a–11(b). 

93 17 CFR 240.15d–11(b). 

94Under Regulation FD [17 CFR 243.100 et seq.], 

closed-end funds are currently required to make 

public disclosure of certain material information on 

Form 8–K unless they disseminate the information 

through other methods of disclosure that are 

reasonably designed to provide broad, nonexclusionary distribution of the information to the 

public. In addition, pursuant to Rule 104 of 

Regulation BTR [17 CFR 245.104], closed-end funds 

are required to file notice of a blackout period, if 

any, on Form 8–K. 

strikes an appropriate balance between 

the burden on registrants in preparing 

the disclosure and the needs of 

investors for information about credit 

ratings. Although our new requirements 

would not be applicable in that setting, 

we note that disclosure of credit ratings 

and changes in ratings may be required 

in periodic reports under our current 

rules as discussed above.91

We are proposing to require closedend funds to make the same disclosures 

regarding changes to a credit rating as 

other registrants because we believe that 

this information is of similar relevance 

to investors in closed-end funds and 

other registrants. Specifically, we 

propose to amend Exchange Act Rules 

13a–11(b) 92 and 15d–11(b) 93 to require 

a closed-end fund to file a current report 

on Form 8–K containing the disclosures 

regarding changes to a credit rating 

within the period specified in Form 8– 

K unless substantially the same 

information has been previously 

reported by the fund.94

We are proposing to require foreign 

private issuers to provide disclosure 

regarding changes to a credit rating 

annually in their reports on Form 20–F. 

While the disclosure would not be 

required as frequently or timely as it 

would be for domestic issuers, investors 

would still have access to the 

information in a foreign private issuer’s 

annual report. 

In proposing these amendments, we 

recognize that credit rating changes can 

be important information to an investor 

in making investment and voting 

decisions. Credit rating agencies 

typically disclose rating changes 

publicly via press release at the same 

time or shortly after they notify affected 

companies of the changes. Therefore, 

investors already can obtain access to 

information about rating changes if they 

know where to find the press releases 

and are willing to routinely monitor 

these releases to find information about 

particular companies and securities. 

However, we believe some investors 

may not routinely monitor all press 

releases issued by credit rating agencies 

and therefore likely would benefit from 

disclosure about ratings changes filed by 

companies on Form 8–K. 

Once a credit rating agency stops 

rating the securities, a registrant would 

be required to disclose that information 

in a current report, update a prospectus 

if necessary, and include any relevant 

analysis in its next periodic report but 

would then have no further disclosure 

obligation related to that rating in 

subsequent filings. 

Request for Comments 

• As proposed, we would require 

disclosure about changes to previously 

disclosed credit ratings in a registrant’s 

Exchange Act reports, including 

whether a rating has been withdrawn or 

will no longer be updated. Would the 

proposed disclosure provide helpful 

information for investors? Is there other 

information about ratings that would be 

more important to investors? For 

example, should we include a 

requirement that the reason for the 

change in rating be disclosed? Would 

the disclosure increase reliance on 

credit ratings? If so, how? 

• We have proposed to limit the 

disclosure regarding changes to a rating 

to ratings previously disclosed pursuant 

to proposed Item 202(g) of Regulation 

S–K or proposed Item 10.6 of Form N– 

2. As a result, changes to ratings that 

were obtained prior to the effectiveness 

of the rule, if adopted, will not be 

required to be disclosed. Should we 

expand the scope of the proposed rule 

to require that all changes to ratings be 

disclosed regardless of whether they 

were disclosed previously? Would this 

create a burden on registrants not in the 

public interest? Why or why not? How 

could this information be disclosed at 

the least cost to registrants? 

• Is a requirement to file a current 

report on Form 8–K necessary in view 

of the typical practice by credit rating 

agencies to promptly issue press 

releases about rating changes under the 

subscriber paid model? Is current 

disclosure by credit rating agencies 

through press releases adequate? Would 

investors benefit from having companies 

disclose this information in a uniform 

place? 

• Could registrants provide an 

analysis of the credit rating change in a 

Form 8–K in the time allowed for filing 

a Form 8–K? How does this disclosure 

compare to disclosure of other matters 

such as the acceleration of a direct or 

off-balance sheet obligation where 

disclosure of the event is required in a 

Form 8–K, and analysis of the impact is 

allowed to be deferred to the next 

periodic report? 

• We believe our current rules would 

require registrants to discuss the 

significance of a credit rating change in 

its next periodic report if the impact 

would be material to the company. Are 

there circumstances where a credit 

rating change would not trigger 

disclosure in the next periodic report? 

Should we adopt an explicit 

requirement that any credit rating 

change disclosed on Form 8–K would be 

required to be analyzed and discussed 

in the following periodic report? 

• We have proposed to require 

disclosure when a rating has changed. 

Should we also require disclosure of 

other ratings actions, such as placing an 

issuer on ‘‘credit watch’’ or assigning a 

different outlook to the registrant’s 

rating? Are these actions viewed as 

important by investors? Would 

requiring this disclosure create a burden 

for registrants not in the public interest? 

• The proposed disclosure would 

apply only to credit ratings originally 

used in connection with registered 

offerings. Are there reasons that 

disclosure should be limited to 

registered offerings? Should we require 

disclosure of credit ratings used in 

connection with private offerings? Are 

there any concerns regarding disclosure 

of credit ratings related to private 

offerings? 

• Is it appropriate to require closedend funds to file reports on Form 8–K 

disclosing credit rating changes? Instead 

of filing reports on Form 8–K, should 

closed-end funds be permitted to 

disclose changes to credit ratings 

through other methods, such as a 

different filing with the Commission or 

a notice posted on an internet Web site 

and/or issuance of a press release? Is 

there empirical or other evidence 

demonstrating that one or more of those 

other methods would provide better 

dissemination of the information with 

respect to closed-end funds? What 

would be the disadvantages, if any, of 

not requiring a filing that would be 

available in the Commission’s EDGAR 

system? 

• Is the content of the proposed 

disclosure requirements on Form 8–K 

appropriate for closed-end funds or 

should it be modified? Are there 

additional disclosures regarding 

changes to a credit rating that closedend funds should be required to make? 

For example, closed-end funds are not 

required to include MD&A in their 

periodic reports. Should a closed-end 

fund be required to disclose in a Form 


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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 53101 

95 17 CFR 249.331; 17 CFR 274.128. Form N–CSR 

is the periodic reporting form used by registered 

management investment companies. 

96 44 U.S.C. 3501 et seq.; 5 CFR 1320.11. 

97The paperwork burden from Regulation S–K is 

imposed through the forms that are subject to the 

requirements in those regulations and is reflected 

in the analysis of those forms. To avoid a 

Paperwork Reduction Act inventory reflecting 

duplicative burdens and for administrative 

convenience, we assign a one-hour burden to 

Regulation S–K. 

8–K or Form N–CSR95 the impact on it, 

if material, of any change in a credit 

rating that was previously disclosed 

under proposed Item 10.6 of Form N–2? 

• Are the proposed amendments for 

foreign private issuers appropriate? 

Should they be modified? Are there 

additional disclosures that foreign 

private issuers should make? Is the 

information relevant to investors if it is 

only required in the next annual report? 

II. General Request for Comments 

We request and encourage any 

interested person to submit comments 

regarding: 

• The proposed amendments that are 

the subject of this release; 

• additional or different changes; or 

• other matters that may have an 

effect on the proposals 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 great 

assistance to our rulemaking initiative if 

accompanied by supporting data and 

analysis of the issues addressed in those 

comments. 

In addition, we request comment on 

the following: 

• Should the Commission include a 

phase-in for registrants beyond the 

effective date to accommodate pending 

offerings? As proposed, compliance 

with the new standards would begin on 

the effective date of the new rules. Will 

a significant number of registrants have 

their offerings limited by the proposed 

rules? If a phase-in is appropriate, 

should it be for a certain period of time 

(for example, six months or one year or 

longer) or only for the term of a pending 

registration statement? 

III. Paperwork Reduction Act 

A. Background 

Certain provisions of the proposed 

rule amendments contain a ‘‘collection 

of information’’ within the meaning of 

the Paperwork Reduction Act of 1995 

(PRA).96 The Commission is submitting 

these proposed amendments and 

proposed rules to the Office of 

Management and Budget (OMB) for 

review in accordance with the PRA. An 

agency may not conduct or sponsor, and 

a person is not required to comply with, 

a collection of information unless it 

displays a currently valid control 

number. The titles for the collections of 

information are: 97

‘‘Regulation S–K’’ (OMB Control No. 

3235–0071); 

‘‘Form S–1’’ (OMB Control No. 3235– 

0065); 

‘‘Form S–3’’ (OMB Control No. 3235– 

0073); 

‘‘Form S–4’’ (OMB Control No. 3235– 

0324); 

‘‘Form S–8’’ (OMB Control No. 3235– 

0066); 

‘‘Form S–11’’ (OMB Control No. 3235– 

0067); 

‘‘Form 10’’ (OMB Control No. 3235– 

0064); 

‘‘Form 8–A’’ (OMB Control No. 3235– 

0056); 

‘‘Form 8–K’’ (OMB Control No. 3235– 

0060); 

‘‘Form F–1’’ (OMB Control No. 3235– 

0258); 

‘‘Form F–3’’ (OMB Control No. 3235– 

0256); 

‘‘Form F–4’’ (OMB Control No. 3235– 

0325); 

‘‘Form 20–F’’ (OMB Control No. 3235– 

0288); and 

‘‘Form N–2’’ (OMB Control No. 3235– 

0026). 

We adopted all of the existing 

regulations and forms pursuant to the 

Securities Act, the Exchange Act or the 

Investment Company Act. These 

regulations and forms set forth the 

disclosure requirements for registration 

statements and Exchange Act reports 

that are prepared by registrants to 

provide investors with information to 

make investment decisions in registered 

offerings and in secondary market 

transactions. 

The hours and costs associated with 

preparing disclosure, filing forms, and 

retaining records constitute reporting 

and cost burdens imposed by the 

collection of information. There is no 

mandatory retention period for the 

information disclosed, and the 

information disclosed would be made 

publicly available on the EDGAR filing 

system. 

B. Summary of Collection of 

Information Requirements 

We are proposing to amend Item 202 

of Regulation S–K to mandate disclosure 

by registrants regarding their credit 

ratings in their registration statements 

when a credit rating is used in 

connection with a registered offering. 

We are proposing parallel amendments 

for closed-end funds and foreign private 

issuers. We are also proposing to amend 

Exchange Act reporting requirements to 

require disclosure when there has been 

a change to a previously disclosed credit 

rating. 

If a credit rating is used by the 

registrant, a selling securityholder, an 

underwriter or a member of a selling 

group in connection with a registered 

offering, then the registrant would be 

required to provide information about 

the credit rating in the registration 

statement. Such information would 

include general information about the 

rating, including any scope limitations 

on the rating, the identity of the person 

paying for the rating, a description of 

any non-rating services provided to the 

registrant within a specified period of 

time, including disclosure of the fees 

paid for such non-rating services, and 

disclosure of preliminary ratings 

obtained from a credit rating agency 

other than the credit rating agency 

providing the final rating and unused 

final ratings. A registrant would also be 

required to update the prospectus if a 

final rating is changed or is not available 

until after the effectiveness of the 

registration statement. 

We are also proposing amendments to 

Form 8–K (for operating companies and 

closed-end funds) and to Form 20–F (for 

foreign private issuers) to require 

disclosure of changes in a credit rating, 

including when the rating is no longer 

being updated or has been withdrawn. 

For operating companies and closed-end 

funds, the change in a credit rating 

would be required to be reported within 

four business days on Form 8–K. For 

foreign private issuers, disclosure would 

be required annually on Form 20–F. 

The proposals would increase existing 

disclosure burdens for Exchange Act 

reports on Form 8–K and registration 

statements by requiring disclosure of 

credit ratings, whether or not issued by 

an NRSRO, in registrants’’ registration 

statements and reports. 

C. Paperwork Reduction Act Burden 

Estimates 

For purposes of the Paperwork 

Reduction Act, we estimate that over a 

three-year period the average annual 

incremental increase in the paperwork 

burden for non-investment company 

registrants to comply with our proposed 

collection of information requirements 

to be approximately 2,120 hours of inhouse company personnel time and to 

be approximately $816,000 for the 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
53102 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

98We calculated an annual average over a threeyear period because OMB approval of Paperwork 

Reduction Act submissions covers a three-year 

period. For administrative convenience, the 

presentation of the totals related to the paperwork 

burden hours have been rounded to the nearest 

whole number and the cost totals have been 

rounded to the nearest thousand. 

99The estimates reflect the burden of collecting 

and disclosing information under the PRA. Other 

costs associated with the proposed amendments are 

discussed in Section IV below. 

100We estimate an hourly rate of $400 as the 

average cost of outside professionals that assist 

registrants in preparing disclosure and conducting 

registered offerings. 

101All of the registration statements would be 

required to contain the proposed disclosure if the 

proposed trigger for the disclosure has been 

satisfied. We have assumed for purposes of this 

PRA analysis that the distribution of the estimated 

500 filings will be proportional to the number of 

Forms S–1, S–3 and S–4 registration statements 

filed for debt offerings with approximately 60% of 

filings on Form S–3, 20% on Form S–1, and 20% 

on Form S–4. We have not included estimates for 

Form 10, Form S–8 and Form S–11 as we believe 

a negligible number of registrants use those forms 

to register debt securities. 

102Based on Commission filings, we estimate that 

there are approximately 802 active registered 

closed-end funds and approximately 205 annual 

responses to Form N–2. According to statistics 

maintained by the Investment Company Institute, 

approximately 322 of these closed-end funds have 

issued senior securities. See Investment Company 

Institute, Total Net Assets of Closed-End Funds, 

2009: Q1, available at http://www.ici.org/pdf/ 

cef_ql_09_sup_tables.pdf (last visited on Aug. 17, 

2009) (showing data as of Mar. 31, 2009). Based on 

the proportion of the number of closed-end funds 

that have issued senior securities to the total 

number of active registered closed-end funds, we 

have assumed, for purposes of the PRA, that 

approximately 40% (322 divided by 802) of the 

annual Form N–2 responses will involve closed-end 

funds that have issued senior securities. We have 

further assumed that all closed-end funds issuing 

senior securities also will be required to disclose 

credit ratings in their registration statements under 

the proposed amendments. Therefore, we estimate 

that approximately 82 (40% of 205) registration 

statements on Form N–2 filed annually would 

include disclosure of credit ratings under the 

proposed amendments. 

103The number of responses for Form N–2 

reflected in the table equals the actual number of 

forms filed with the Commission during the 2008 

fiscal year. This amount is an increase from the 

current approved number of annual responses to 

Form N–2 of 200. 

services of outside professionals.98 For 

closed-end funds, we estimate the 

annual incremental increase to be 

approximately 157 hours of in-house 

company personnel time and 

approximately $108,400 for the services 

of outside professionals. These 

estimates include the time and the cost 

of preparing and reviewing disclosure 

and filing documents. Our 

methodologies for deriving the above 

estimates are discussed below.99

Our methodologies for deriving the 

burden hour and cost estimates 

presented below represent the average 

burdens for all registrants who are 

required to provide the disclosure, both 

large and small. For registration 

statements, we estimate that 25% of the 

burden of preparation is carried by the 

company internally and that 75% of the 

burden is carried by outside 

professionals retained by the registrant 

at an average cost of $400 per hour.100

The portion of the burden carried by 

outside professionals is reflected as a 

cost, while the portion of the burden 

carried by the company internally is 

reflected in hours. 

Our estimates are based on the 

assumption that the proposed disclosure 

would add disclosure for a subset of 

affected registrants (i.e. those issuing 

rated securities). We further assume that 

the new disclosure requirement would 

not affect the number of registrants. For 

registration statements, we estimate that 

the proposed amendments would 

impose an average of a 60 minute 

burden of preparation carried by the 

company internally and a $1,200 cost 

for outside professionals retained by the 

registrant reflecting three hours of their 

time. This estimate includes the time 

necessary to obtain the relevant 

information, including certain 

information that would likely be 

provided by the credit rating agency 

such as the relative rank of the rating in 

the credit rating agency’s classification 

system. Further, based on statistics 

related to the number of registration 

statements filed for debt offerings in 

fiscal years 2007 and 2008 from our 

Office of EDGAR Information and 

Analysis, we estimate that 500 

registration statements on Forms S–1, 

S–3, and S–4 will be affected annually 

by the disclosure requirements.101 We 

have attempted to be conservative in our 

estimates of affected filings. We 

recognize that not all debt offerings have 

credit ratings associated with them; 

however, given the relatively low 

number of debt filings over the past two 

fiscal years, we have included most of 

those filings within our estimate. For 

closed-end funds, we also estimate that 

approximately 82 registration 

statements on Form N–2 102 would be 

affected annually by the disclosure 

requirements. For purposes of Form 20– 

F, there would be an increased burden 

in Forms 20–F used as registration 

statements and as annual reports. There 

were an average of 77 Forms 20–F filed 

as registration statements in fiscal years 

2007 and 2008. Based on a review of a 

sample of these filings, we estimate that 

20 Form 20–F registration statements 

would include the required disclosure 

and that 20 Form 20–F annual reports 

would include disclosure regarding 

changes to a credit rating. 

For current reports on Form 8–K, 

including Forms 8–K filed by closedend funds, we estimate that registrants 

spend, on average, five hours 

completing the form. We estimate that 

75% of that burden is carried by the 

company while 25% is carried by 

outside counsel at a cost of $400 per 

hour. In order to estimate the number of 

additional Form 8–Ks that would be 

required to be filed pursuant to our 

proposed amendments, we have looked 

to the number of Forms 8–K filed with 

disclosure pursuant to Item 2.04- 

Triggering Events That Accelerate or 

Increase a Direct Financial Obligation or 

an Obligation under an Off-Balance 

Sheet Arrangement. We believe that 

many rating changes may also accelerate 

financial obligations, so that looking to 

Item 2.04 gives some indication of the 

number of Forms 8–K that may be filed 

even though it does not cover the same 

disclosure. For example, we are aware 

that Item 2.04 likely would not be 

triggered by a credit rating upgrade. We 

solicit comment on better ways to 

estimate the number of 8–Ks that would 

be filed pursuant to our proposed 

requirements. In our fiscal year 2007 

and 2008, there were an average of 396 

Forms 8–K filed pursuant to Item 2.04. 

In addition, based on publicly available 

information concerning changes in 

credit ratings of senior securities issued 

by closed-end funds occurring during 

calendar years 2007 and 2008, 

Commission staff estimates that 

approximately 20 additional Forms 8–K 

would be filed annually by closed-end 

funds pursuant to proposed Item 3.04. 

As a result, we estimate that 420 

additional Forms 8–K would be filed 

pursuant to proposed Item 3.04. 

Table 1 below illustrates the 

incremental annual compliance burden 

in the collection of information in hours 

and cost for current reports and 

registration statements.103


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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 53103 

104We request comment pursuant to 44 U.S.C. 

3506(c)(2)(B). 

D. Solicitation of Comments 

We request comments in order to 

evaluate: (1) Whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of the agency, including 

whether the information would have 

practical utility; (2) the accuracy of our 

estimate of the burden of the proposed 

collection of information; (3) whether 

there are ways to enhance the quality, 

utility, and clarity of the information to 

be collected; and (4) whether there are 

ways to minimize the burden of the 

collection of information on those who 

are to respond, including through the 

use of automated collection techniques 

or other forms of information 

technology.104

Any member of the public may direct 

to us any comments concerning the 

accuracy of these burden estimates and 

any suggestions for reducing these 

burdens. Persons submitting comments 

on the collection of information 

requirements should direct the 

comments to the Office of Management 

and Budget, Attention: Desk Officer for 

the Securities and Exchange 

Commission, Office of Information and 

Regulatory Affairs, Washington, DC 

20503, and should send a copy to 

Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090, with reference to File No. 

S7–20–09. Requests for materials 

submitted to OMB by the Commission 

with regard to these collections of 

information should be in writing, refer 

to File No. S7–20–09, and be submitted 

to the Securities and Exchange 

Commission, Records Management, 

Office of Filings and Information 

Services, 100 F Street, NE., Washington, 

DC 20549. OMB is required to make a 

decision concerning the collection of 

information between 30 and 60 days 

after publication of this release. 

Consequently, a comment to OMB is 

best assured of having its full effect if 

OMB receives it within 30 days of 

publication. 

IV. Cost-Benefit Analysis 

A. Proposed Amendments 

The proposed amendments would 

require disclosure regarding credit 

ratings by registrants in their 

registration statements under the 

Securities Act, Exchange Act and 

Investment Company Act if the 

registrant uses the rating in connection 

with the offer or sale of securities in a 

registered offering. Under proposed new 

paragraph (g) to Item 202 of Regulation 

S–K, Item 12 of Form 20–F and Item 

10.6 of Form N–2, registrants would be 

required to disclose much of the specific 

disclosure currently permitted under 

Item 10(c) of Regulation S–K. The 

proposal would require disclosure of all 

material scope limitations of the credit 

rating and any related published 

designation, such as non-credit payment 

risks, assigned by the rating agency with 

respect to the security. The proposed 

changes would also require disclosure 

of the source of the payment for the 

credit rating. If any non-rating services 

have been provided by the credit rating 

agency to the registrant, disclosure of 

the fees paid for those services also 

would be required, so that investors 

would be aware of potential conflicts of 

interest with respect to the credit rating 

used by the registrant. Under the 

proposed amendments, if a registrant is 

required to disclose a credit rating, then 

it would also be required to disclose all 

preliminary ratings and unused final 

ratings it received from rating agencies 

other than the credit rating agency that 

provided the final rating. This 

disclosure is intended to provide 

investors with useful information to 

assess whether a registrant may have 

engaged in ratings shopping. In 

addition, we are proposing to amend 

Exchange Act reports to require 

disclosure of a change in previously 

disclosed credit rating. 

The additional information and 

transparency provided by our proposed 

amendments are intended to help 

provide investors with the information 

they need about credit ratings to put the 

rating in the appropriate context. The 

proposed amendments are aimed at 

addressing concerns that investors may 

not have sufficient information to 

understand the scope or meaning of 

ratings being used to market various 

securities, that they may not fully 

appreciate the potential conflicts of 

interest faced by credit rating agencies 

and how these conflicts may impact 

ratings, that ratings shopping may be 

occurring and may be leading to inflated 

ratings, and that our current disclosure 

rules do not require certain basic 

information about a potentially key 

element of their investment decision. 

The proposed amendments may affect 

economic behavior if the amendments 

alter (a) the use of ratings by investors, 

(b) registrants’ security issuance and 

ratings-seeking behavior, and (c) the 

credit rating agencies’ behavior when 

providing ratings, These effects will 

likely vary depending on the asset class 

(e.g., corporate issues, structured 

finance products), the type of the 

registrant (e.g., corporate registrant, 

sponsor of the financial product, closedend funds), the type of credit rating 

agency (e.g., subscriber-paid rating 

agencies, issuer-paid NRSROs, 

unregistered credit rating agencies), the 

type of investor (e.g., retail investors, 

institutional investors), and the ongoing 

changes in the regulatory environment. 

The economic benefits and costs on 

market participants associated with 

these economic effects are discussed 

below. 


srobinson on DSKHWCL6B1PROD with PROPOSALS2EP15OC09.000</GPH>
53104 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

105See Frank Partnoy, How and Why Credit 

Rating Agencies are Not Like Other Gatekeepers, 

(2006) at http://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=900257 for a discussion of 

non-rating services provided by credit rating 

agencies. 

106See Aaron Lucchetti and Serena Ng, How 

Rating Firms’ Calls Fueled Subprime Mess, (Aug. 

16, 2007), at http://www.realestatejournal.com/ 

buysell/mortgages/20070816-lucchetti.html. See 

also Skreta and Veldkamp, and Bolton, Freixas and 

Shapiro in note 24 above. 107See Dion Bongaerts, Martijn Cremers, and 

William N. Goetzmann Multiple Ratings and Credit 

Spreads (June 30, 2009), at http://papers.ssrn.com/ 

sol3/papers.cfm?abstract_id=1307782. 108See Becker and Milbourn in note 14 above. 

B. Benefits 

Benefits to investors resulting from 

increased contextual information about 

ratings 

The proposed amendments would 

require disclosure of information related 

to the rating used in a registered 

offering, such as the relative rank of the 

credit rating within the assigning credit 

rating agency’s overall classification 

system, all material scope limitations of 

the rating, and any published 

designation that reflects the results of 

any other evaluation done by the credit 

rating agency in connection with the 

credit rating. Some investors may 

benefit from an improved understanding 

of the meaning and scope of ratings 

resulting from these new disclosures. 

While much of this information is 

publicly available, requiring it to be 

presented in the registration statement 

may increase the degree to which 

investors understand what the rating 

means. Additionally, new information, 

such as changes in ratings, would be 

disclosed in Exchange Act reports. 

While ratings are typically public 

information, available through news 

services or from the credit rating agency, 

investors may find it easier to access 

ratings in a central repository that is 

available over time. Investors should be 

better able to put the ratings in context 

when ratings and the proposed 

disclosure are presented together with 

other information in the registration 

statement. Less sophisticated investors 

may benefit more from these 

disclosures, as sophisticated investors 

may already have absorbed this 

information from other sources. 

Disclosure of potential conflicts of 

interests faced by credit rating agencies 

would provide information to investors 

that is not currently available. Potential 

conflicts of interest may arise when a 

credit rating agency derives significant 

revenue from a registrant whose 

securities it also rates. Credit rating 

agencies, in some cases, offer nonratings services to registrants, such as 

consulting services.105 Both 

sophisticated and unsophisticated 

investors could benefit from 

understanding whether the rating was 

received in the context of other services; 

in particular, they may place less weight 

on ratings in which the agency was 

substantially compensated for other 

services. This additional information 

may, in some cases, reduce the 

possibility of investors placing undue 

reliance on ratings. Alternatively, 

however, if new disclosures cause 

investors to believe that ratings are not 

subject to any potential conflict of 

interest, the additional disclosures may 

increase the degree to which investors 

rely on ratings. 

The proposed amendments would 

enable investors to distinguish between 

solicited ratings (which can rely on both 

public and non-public information) and 

unsolicited ratings (which generally rely 

on only public information). Currently, 

it is not possible in every case for 

investors to make this distinction. 

Under the proposed amendments, if 

registrants use a rating to sell a security 

in a registered offering, it will be 

included in the registration statement; 

in other cases, it may not be. If a rating 

is disclosed in a registration statement, 

the registrant would be required to 

disclose who paid for the rating. 

Benefits to Investors From Increased 

Informativeness of Ratings 

The proposed amendments may have 

the long-term benefit of increasing the 

informativeness of credit ratings to 

investors, that is, the degree to which 

ratings correspond to the credit quality 

of the rated security or entity. Investors 

benefit from increased informativeness 

in several ways. Entities with different 

credit quality are exposed to distinct 

economic factors, and investors may 

take this fact into account when making 

investment decisions. Additionally, 

investors can use credit ratings in 

conducting fundamental analysis of 

individual securities. As a result, 

investors benefit from credit ratings that 

are more informative. 

Increased informativeness of ratings 

can result from a reduction in ‘‘ratings 

shopping.’’ 106 Currently registrants may 

solicit more ratings than they intend to 

use, choosing from among ratings 

providers without making any 

disclosure regarding the other solicited 

ratings. Criteria for selecting ratings 

agencies include the reputation of the 

agency and the rating itself.107 There 

may be other, non-shopping reasons for 

soliciting multiple ratings, such as 

obtaining multiple expert views on the 

registrant’s financial health. If the 

proposed amendments are adopted and 

registrants continue to solicit more 

ratings than they intend to use, 

preliminary and unused final ratings 

would be made public if the registrant 

used a rating in connection with a 

registered offering. Credit rating 

agencies would know that their ratings 

would be disclosed if the registrant uses 

a final rating from a different credit 

rating agency in connection with a 

registered offering. Thus, the market 

could assess the relative 

informativeness of ratings used to sell 

the security and ratings from other 

agencies. This ability to compare a 

broader group of ratings, including 

preliminary ratings, for the same issue 

may allow investors to identify agencies 

whose ratings they perceive to be less 

reliable. This ability may be limited, 

however, as direct comparisons between 

preliminary ratings and final ratings 

may be affected by factors such as 

changes in information made available 

to the credit rating agency throughout 

the ratings process. The proposed 

disclosure could cause credit rating 

agencies to expend greater effort to 

examine the financial health of the 

underlying entity. Ultimately, increased 

efforts in the ratings process could 

improve ratings informativeness. 

The proposed amendments may 

change the way rating agencies compete. 

This may indirectly improve ratings 

informativeness. Rating agencies may 

compete on the quality of ratings or they 

may engage in ratings-based 

competition that focuses on producing 

high ratings. Any potential reduction in 

ratings-based competition may result in 

credit rating agencies focusing on 

enhancing their reputations for 

producing quality ratings and 

competing on that basis, rather than 

competing to produce high ratings so 

that registrants select them. Rating 

agencies may have greater incentives to 

compete on the basis of the quality of 

ratings as they are likely to face reduced 

incentives to produce optimistic ratings 

in the hopes of being selected, since 

registrants’’ incentives to obtain a higher 

rating would be reduced. These changes 

in registrants’’ incentives and their 

consequent effect on credit rating 

agencies’’ incentives, however, will be 

limited, to the extent that preliminary 

ratings are incomplete or based on less 

than full and final information, or that 

registrants replace the use of 

preliminary ratings for ratings shopping 

with new alternative mechanisms. Any 

potential reduction in the rating-based 

competition is likely to result in more 

informative ratings.108


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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 53105 

109See Jeremy Fons, Rating Competition and 

Structured Finance, J. Structured Fin. (Fall 2008), 

at http://www.iijournals.com/doi/abs/10.3905/ 

JSF.2008.14.3.007. 

110 In the discussion of their rating 

methodologies, Standard and Poor’s and Moody’s 

explain how they use confidential non-public 

information that registrants provide for the purpose 

of assigning ratings. See http:// 

www2.standardandpoors.com/aboutcreditratings/ 

RatingsManual_PrintGuide.html for the Standard 

and Poor’s rating methodology. See http:// 

v3.moodys.com/sites/products/ 

AboutMoodysRatingsAttachments/ 

2001400000389218.pdf?frameOfRef=corporatefor 

Moody’s description of their use of non-public 

information. 

111See David Easley and Maureen O’Hara, 

Information and the Cost of Capital, J. Fin. (2004) 

(arguing that the information composition between 

public and non-public information affects the cost 

of capital since investors demand a higher return 

from their investments when they face asymmetric 

information). 

Benefits to Certain Rating Agencies 

From Enhanced Competitive Position 

The proposed amendments may 

benefit certain rating agencies by 

enhancing their competitive position, 

relative to others. Enhanced competitive 

position may result in these agencies 

charging higher fees, rating more 

securities, or being more selective in the 

securities they rate. These effects result 

from two factors. First, smaller agencies 

may be asked to provide preliminary 

ratings less frequently, and may 

therefore see information about fewer 

rated securities, thereby limiting their 

ability to assess the credit quality of the 

issue that they are rating relative to the 

rest of the rated issues.109 Second, 

registrants may not choose to use ratings 

from smaller agencies if the registrants 

elect not to seek the smaller agencies’’ 

preliminary ratings. Competitive 

realignment may represent a cost to the 

credit rating agencies who are not 

market leaders. Competitive effects are 

discussed in detail in the Costs section, 

below. 

Reductions in Cost of Capital for Some 

Registrants 

As discussed, the proposed 

amendments may increase the 

informativeness of ratings. Credit rating 

agencies interpret non-public 

information to which they have access, 

together with public information.110

This practice may reduce the asymmetry 

of information between registrants and 

investors. Additionally, the mandatory 

disclosure of information about credit 

ratings used in connection with a 

registered offering could level the 

playing field for all registrants and 

would benefit registrants that in the past 

may have hesitated to provide such 

disclosure voluntarily. These reductions 

in the asymmetry of information 

between registrants and investors could 

reduce registrants’’ cost of capital as 

investors may demand a lower risk 

premium when they have access to 

more information.111

If the proposed amendments have the 

effect of reducing ratings shopping and 

ratings inflation that may result from 

such shopping, ratings scales may shift 

downward that is, debt issues of the 

same credit quality may receive a lower 

rating than currently as an indirect 

effect of the proposed amendments. In 

some cases, because of ratings-based 

investment restrictions faced by some 

institutional investors, this may result 

in changes in the cost of capital for 

registrants, including potential increases 

and decreases. For example, registrants 

of securities that would currently be 

given an investment grade rating, but 

that would receive a lower rating as an 

indirect result of the proposed 

amendments, could face a higher cost of 

capital. Those registrants whose 

securities would be investment grade 

under both sets of circumstances may 

face a lower cost of capital. Reductions 

in cost of capital constitute benefits to 

registrants. Additional potential costs 

are discussed in more detail in the Costs 

section, below. 

C. Costs 

Costs of New Disclosures 

Registrants will face costs associated 

with the process of preparing and 

reporting the proposed disclosures. For 

purposes of the Paperwork Reduction 

Act, we estimate that over a three-year 

period the average annual incremental 

increase in the paperwork burden for 

non-investment company registrants to 

comply with our proposed collection of 

information requirements to be 

approximately 2,120 hours of in-house 

company personnel time and to be 

approximately $816,000 for the services 

of outside professionals. For closed-end 

funds, we estimate the annual 

incremental increase to be 

approximately 157 hours of in-house 

company personnel time and 

approximately $108,400 for the services 

of outside professionals. These 

estimates include the time and the cost 

of preparing and reviewing disclosure 

and filing documents. These disclosure 

costs may be limited by the fact that 

close-end funds that disclose ratings in 

their registration statements are already 

subject to comparable disclosure 

requirements and that some operating 

companies may already be providing 

this information voluntarily. 

Temporary Uncertainty Resulting From 

Potential Shift in Ratings 

As discussed, the proposed 

amendments may cause ratings scales to 

shift downward; disclosure of 

preliminary and unused final ratings in 

certain circumstances may reduce 

ratings shopping, in turn reducing the 

upward bias in ratings resulting from 

registrants choosing the highest of 

several ratings. The amount of this shift 

is uncertain. This uncertainty represents 

a potential cost to investors, who may 

temporarily have fewer highly rated 

investment options. It also represents a 

cost to registrants, who may be less sure 

of the rating they will receive for 

securities. 

Costs to Investors Resulting From 

Potential Undue Reliance on Ratings 

Requiring ratings disclosure may 

reinforce the importance of ratings, 

possibly causing investors to place 

undue reliance on the rating. This effect 

may be mitigated by accompanying 

contextual disclosures, such as 

disclosures on ratings limitations and by 

any improvements in the quality of 

ratings. 

Costs to Registrants Resulting From 

Increased Prices of Ratings 

Any enhancement of the competitive 

position of market leaders that may arise 

in the medium- or long-term may result 

in higher prices for assigning ratings, 

both through a reduction in potential 

price competition among existing 

agencies and a reduction in the threat of 

entry by new agencies. Competitive 

effects of the proposed amendments are 

discussed below in this section, as well 

as in the Competition, Efficiency, and 

Capital Formation section. 

Increases in Cost of Capital for Some 

Registrants Resulting From Potential 

Declines in the Level of Ratings 

As mentioned in the Benefits section, 

in some cases, the proposed 

amendments may alter issuance 

behavior by affecting investor demand 

for securities with specific ratings. Some 

investors are limited, either by 

regulation or custom, to investing only 

in the highest rated securities, while 

others are limited to investing in 

‘‘investment grade’’ securities. If ratings 

shift downward as a result of the 

proposed amendments, there may be 

fewer securities available meeting these 

investment criteria, potentially resulting 

in a larger price premium for top-rated 

securities and for investment-grade 

securities. These price premia may 

affect issuance behavior. For example, 

registrants of securities that would 

currently be given an investment grade 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
53106 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

112See Annual Report on Nationally Recognized 

Statistical Rating Organizations (2008) at http:// 

www.sec.gov/divisions/marketreg/ratingagency/ 

nrsroannrep0608.pdf. 

113These factors would also reduce the efficacy 

of ratings shopping, however, since registrants 

would also face some uncertainty about what the 

final rating would be. 

114See the proposing release related to Rule 17g– 

5 under the Exchange Act considered by the 

Commission on September 17, 2009. 

115 15 U.S.C. 78w(a). 

rating, but that would receive a lower 

rating as an indirect result of the 

proposed amendments, would 

potentially face a higher cost of capital, 

while those registrants whose securities 

would be investment grade under both 

sets of circumstances may face a lower 

cost of capital. These changes in cost of 

capital may, in turn, affect issuance 

decisions. In particular, registrants 

whose securities would no longer be 

considered investment grade may face 

greater difficulty in raising capital. 

These differences in the cost of capital 

across new classes of ‘‘investmentgrade’’ and ‘‘non-investment grade’’ 

securities may diminish in the longterm. In the short-term, however, the 

differential in the cost of capital across 

these two classes of securities are likely 

to remain due to the limited access to 

‘‘non-investment grade’’ securities by 

certain investors. Similar considerations 

apply to the ratings at the top of the 

scale. Some registrants may be 

effectively shut out from the commercial 

paper market, for example, if they can 

no longer obtain top ratings. 

These effects depend on the rigidity of 

institutional ratings-based constraints. If 

ratings scale downward, these 

constraints may adapt. For example, a 

wider range of ratings may be 

considered investment grade, and the 

commercial paper market may become 

viable for lower rated registrants. Any 

such adaptation is more likely to occur 

in the long term, however, as ratingsbased investment restrictions are costly 

to modify. 

Costs to Certain Rating Agencies 

Resulting From Potential Changes in 

Competitive Environment 

Although NRSROs and other credit 

rating agencies are not subject to the 

proposed amendments, some of these 

rating agencies may incur costs. As 

mentioned in the benefits section, 

established market leaders in ratings 

may indirectly benefit from the 

proposed amendments, at the expense 

of smaller, less established credit rating 

agencies. Currently, the credit ratings 

industry is highly concentrated. For 

‘‘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.112 This concentration could 

increase in several ways as described 

below, such as an increase in market 

share of certain ratings agencies among 

the dominant agencies or a reduction in 

market share of the remaining agencies. 

The proposed disclosure requirements 

for preliminary and unused final ratings 

may lead registrants to solicit fewer 

ratings, potentially only as many as they 

intend to ultimately use. In structured 

financial products, for example, the 

market may customarily require 

registrants to obtain two ratings, but 

registrants can solicit preliminary 

ratings from more than two agencies. If 

the registrant knows that preliminary 

ratings must be disclosed in certain 

circumstances, including the most 

optimistic ratings, then its incentive to 

shop for ratings may be reduced, 

because such a practice would become 

apparent to the market, and its selection 

of the higher rating may be discounted. 

Registrants may instead choose to 

initially solicit ratings only from 

agencies who are market leaders in the 

type of product they are issuing. 

Specifically, they may gravitate toward 

agencies that have established 

reputations for high quality ratings and 

agencies that, for other reasons, such as 

branding or market share, are best 

known to investors. They may choose to 

involve other credit rating agencies only 

if they do not meet specific ratings 

hurdles, such as the top rating category, 

or investment grade. Agencies who are 

not market leaders may, as a result, 

receive information about fewer issues, 

potentially affecting the perceived 

quality of their ratings. This may cause 

registrants to purchase fewer ratings 

from such agencies. Ultimately, this 

could strengthen the relative position of 

market leaders and potentially harm the 

competitive position of other rating 

agencies. Relatedly, registrants’ 

conversations with smaller, lessestablished NRSROs and other credit 

rating agencies may help them to 

understand the agencies’ methodologies 

and procedures; these conversations 

may help smaller NRSROs introduce 

themselves to registrants. To the extent 

that registrants contact only established 

NRSROs, they may not develop this 

understanding of other agencies’ 

methodologies. 

The effect on market leaders’ 

competitive position could be mitigated 

by an additional factor. A decrease in 

ratings shopping depends in part on the 

ability of investors to easily compare 

final and preliminary ratings. However, 

investors may feel that they cannot 

easily compare these ratings. When 

rating agencies make preliminary 

ratings, they do so with a more limited 

set of information. As the ratings 

process proceeds to a final rating, more 

information can become available. For 

example, as time passes, material 

information about the industry or 

registrant from public sources may 

become available. Additionally, the 

registrant (or those acting on its behalf) 

may continue to share information with 

rating agencies. Consequently, investors 

may consider preliminary ratings to be 

informative only in a limited sense, and 

registrants may not experience a 

significant penalty for using a final 

rating that is substantially different than 

preliminary ratings.113 Thus, to some 

degree, registrants may still shop for 

ratings, and agencies may continue to 

compete based on the level of ratings. 

The changes in the competitive 

position of rating agencies discussed 

above may not occur for structured 

finance products because of the 

amendments to Rule 17g–5 being 

adopted today, since all NRSRO’s would 

be entitled to receive information about 

all such issues.114 This would depend, 

however, on whether credit rating 

agencies choose to access this 

information. Access comes with certain 

obligations, including the obligation to 

rate 10% of the securities for which 

information is received. 

Another factor that could potentially 

impact the competitive forces among the 

credit rating agencies is the mandatory 

disclosure that a fee was paid for the 

credit rating and the aggregate fees paid 

for any other non-rating services 

provided during such period. This 

disclosure may present some costs to 

the extent that it reveals competitive or 

proprietary information about the 

business model of the credit rating 

agency proving the credit rating. To the 

extent that there are negative 

competitive effects, some rating 

agencies may stop providing some of 

these non-rating services which could 

result in declines in their revenues. 

V. Consideration of Burden on 

Competition and Promotion of 

Efficiency, Competition, and Capital 

Formation 

Section 23(a) of the Exchange Act 115

requires the Commission, when making 

rules and regulations under the 

Exchange Act, to consider the impact a 

new rule would have on competition. 

Section 23(a)(2) prohibits the 

Commission from adopting any rule 

which would impose a burden on 

competition not necessary or 

appropriate in furtherance of the 


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Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 53107 

116 15 U.S.C. 77b(b). 

117 15 U.S.C. 78c(f). 

118 15 U.S.C. 8a–2(c). 119 5 U.S.C. 601. 

purposes of the Exchange Act. Section 

2(b) of the Securities Act,116 Section 3(f) 

of the Exchange Act,117 and Section 2(c) 

of the Investment Company Act 118

require the Commission, when engaging 

in rulemaking that requires it to 

consider or determine whether an action 

is necessary or appropriate in the public 

interest, to consider, in addition to the 

protection of investors, whether the 

action would promote efficiency, 

competition, and capital formation. 

The proposed amendments would 

require registrants to make specified 

disclosure to investors regarding credit 

ratings if credit ratings are used in 

connection with a registered offering. 

We believe these disclosures would 

help investors understand the limits and 

purposes of credit ratings as well as 

potential conflicts of interest or ratings 

shopping practices that could affect the 

quality of the credit rating. Therefore, if 

adopted, the Commission believes that 

the disclosure required by these 

amendments would promote investor 

protection. We believe that if investors 

have more information regarding credit 

ratings, including the scope of the 

rating, they will be better able to place 

the rating in its proper context. The 

Commission anticipates that these 

proposed amendments could improve 

investors’ ability to make informed 

investment decisions, which will, 

therefore, lead to potential increased 

efficiency and competitiveness of the 

U.S. capital markets. The Commission 

expects that this increased market 

efficiency and investor confidence also 

may encourage more efficient capital 

formation for the reasons discussed 

below and in Section IV above. 

Specifically, the proposed amendments 

would enhance the availability of 

information to investors and the markets 

with regard to credit ratings so that 

investors will more clearly understand 

the terms of the credit rating and its 

limitations. 

As discussed in more detail in Section 

IV, the proposed amendments may 

reduce the level of ratings-based 

competition among credit rating 

agencies. This may indirectly improve 

ratings informativeness. Any potential 

reduction in ratings-based competition 

may result in credit rating agencies 

increasingly focusing on enhancing 

their reputations for producing quality 

ratings and competing on that basis, 

rather than competing to produce high 

ratings so that registrants select them. 

These changes in registrants’ incentives 

and their consequent effect on credit 

rating agencies’ incentives, however, 

will be limited, to the extent that 

preliminary ratings are incomplete or 

based on less than full and final 

information, or that registrants replace 

the use of preliminary ratings for ratings 

shopping with new alternative 

mechanisms. 

Furthermore, the proposed 

amendments may also increase the 

informativeness of ratings by reducing 

the asymmetry of information between 

registrants and investors. The 

mandatory disclosure of credit ratings in 

registration documents would level the 

playing field for all companies and 

would benefit companies that in the 

past may have hesitated to provide such 

disclosure voluntarily, thereby 

promoting competition. Furthermore, 

these reductions in the asymmetry of 

information between registrants and 

investors could reduce registrants’ cost 

of capital as investors may demand a 

lower risk premium when they have 

access to more information. 

Market efficiency and capital 

formation may be enhanced by more 

informative ratings because investors 

would have access to better information 

and could act on that information 

accordingly. 

The Commission recognizes that 

requiring disclosure of preliminary 

ratings and unused final ratings could 

have an effect on competition among the 

credit rating agencies. To the extent that 

the proposed disclosure reduces ratings 

shopping, then competition among 

credit rating agencies may be reduced as 

registrants seek only ratings they intend 

to use and do not shop around among 

many agencies. The proposed 

amendments may benefit the 

competitive position of certain rating 

agencies if, for example, registrants seek 

fewer credit ratings. Enhanced 

competitive position would enable these 

agencies to charge higher fees, to rate 

more securities, or to be more selective 

in the securities they rate. Competitive 

realignment may represent a cost to the 

credit rating agencies who are not 

market leaders. This may increase the 

cost of capital for issuers who use 

smaller credit rating agencies if they are 

unable to pay the increased fees of the 

larger credit rating agencies or if the 

larger credit rating agencies elect not to 

rate them. 

If the proposed amendments have the 

effect of reducing ratings shopping and 

ratings inflation resulting from such 

shopping, rating scales may shift 

downward—that is, debt issues may 

receive a lower rating than currently as 

an indirect effect of the proposed 

amendments. In some cases, because of 

ratings-based investment restrictions 

faced by some institutional investors, 

this may result in changes in the cost of 

capital for registrants, including 

potential increases and decreases. For 

example, registrants of securities that 

would currently be given an investment 

grade rating, but that would receive a 

lower rating as an indirect result of the 

proposed amendments, would 

potentially face a higher cost of capital, 

while those registrants whose securities 

would be investment grade under both 

sets of circumstances may face a lower 

cost of capital. 

The Commission solicits comment on 

the effects of the proposed amendments 

on efficiency, competition, and capital 

formation. The Commission requests 

comment on whether the required 

disclosure of ratings in registration 

statements, especially ratings that a 

registrant would otherwise choose not 

to disclose, may affect positively or 

negatively registrants’ ability to raise 

capital. The Commission requests 

comment on the anticipated effect of the 

new disclosure requirements on 

competition in the market for credit 

rating agencies. The Commission 

requests commenters to provide 

empirical data and other factual support 

for their views, if possible. 

VI. Initial Regulatory Flexibility Act 

Analysis 

This Initial Regulatory Flexibility 

Analysis (IRFA) has been prepared in 

accordance with the Regulatory 

Flexibility Act.119 It relates to proposed 

revisions to Regulation S–K, rules under 

the Securities Act, and forms under the 

Exchange Act, the Securities Act, and 

the Investment Company Act regarding 

disclosure regarding credit ratings. 

A. Reasons for, and Objectives of, the 

Proposed Action 

As discussed throughout the release, 

we are proposing amendments to our 

rules to require disclosure of 

information regarding credit ratings 

used by registrants in connection with 

a registered offering of securities so that 

investors will better understand the 

credit rating and its limitations. The 

amendments we are proposing today 

also would require additional disclosure 

that would inform investors about 

potential conflicts of interest that could 

affect the credit rating. In addition, we 

are proposing amendments to require 

disclosure of preliminary credit ratings 

and unused final ratings in certain 

circumstances so that investors have 

enhanced information about the credit 

ratings process that may bear on the 

quality or reliability of the rating. The 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
53108 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

120 5 U.S.C. 601(6). 

121 17 CFR 230.157. 

122 17 CFR 240.0–10(a). 

123 15 U.S.C. 270.0–10(a) 

proposed amendments would be 

applicable to registration statements 

filed under the Securities Act, the 

Securities Exchange Act and the 

Investment Company Act, and Forms 8– 

K and 20–F. 

B. Legal Basis 

We are proposing the amendments 

contained in this document under the 

authority set forth in Sections 6, 7, 10, 

and 19(a) of the Securities Act, Sections 

12, 13, 15(d) and 23(a) of the Exchange 

Act, and Sections 8, 24(a), 30, and 38 of 

the Investment Company Act. 

C. Small Entities Subject to the 

Proposed Action 

The proposed amendments could 

affect some companies that are small 

entities. The disclosure requirements as 

proposed would apply to any registrant 

that uses a credit rating in connection 

with a registered offering, though based 

on the staff’s observations of market 

practice, we believe it is unlikely that a 

small entity would use a credit rating in 

connection with a registered offering. 

The Regulatory Flexibility Act defines 

‘‘small entity’’ to mean ‘‘small 

business,’’ ‘‘small organization,’’ or 

‘‘small governmental jurisdiction.’’ 120

The Commission’s rules define ‘‘small 

business’’ and ‘‘small organization’’ for 

purposes of the Regulatory Flexibility 

Act for each of the types of entities 

regulated by the Commission. Securities 

Act Rule 157 121 and Exchange Act Rule 

0–10(a) 122 defines a company, other 

than an investment company, to be a 

‘‘small business’’ or ‘‘small 

organization’’ if it had total assets of $5 

million or less on the last day of its most 

recent fiscal year. We estimate that there 

are approximately 1,229 companies, 

other than registered investment 

companies, that may be considered 

small entities. Investment Company Act 

Rule 0–10(a) 123 defines a ‘‘small 

business’’ or ‘‘small organization’’ for 

purposes of the Investment Company 

Act as an investment company that, 

together with other investment 

companies in the same group of related 

investment companies, has net assets of 

$50 million or less as of the end of its 

most recent fiscal year. We estimate that 

there are approximately 30 registered 

closed-end funds that may be 

considered small entities. The proposed 

amendments could affect small entities 

that have a class of securities that are 

registered under Section 12 of the 

Exchange Act or that are required to file 

reports under Section 15(d) of the 

Exchange Act or Section 30 of the 

Investment Company Act. In addition, 

the proposals also could affect small 

entities that file, or have filed, a 

registration statement that has not yet 

become effective under the Securities 

Act or the Investment Company Act and 

that has not been withdrawn. 

D. Reporting, Recordkeeping, and Other 

Compliance Requirements 

The disclosure requirements we are 

proposing today are intended to 

enhance credit rating disclosure so that 

investors will better understand credit 

ratings and their limitations. These 

amendments would require small 

entities that are operating companies or 

closed-end funds to provide the same 

disclosure as larger entities if they use 

a credit rating in connection with a 

registered offering. The disclosure 

required would include general 

information about the credit rating, 

including all material scope limitations 

of the credit rating and any related 

published designation, such as noncredit payment risks, assigned by the 

rating organization with respect to the 

security. In addition, the proposed 

amendments would require disclosure 

of additional non-rating services 

provided by the credit rating agency and 

its affiliates to the registrant and its 

affiliates, including disclosure of the 

fees paid for those services, so that 

investors will be aware of potential 

conflicts of interest with respect to the 

credit rating obtained by the registrant. 

Small entities would be required to 

include the disclosure in their 

Securities Act, Exchange Act, and 

Investment Company Act registration 

statements. In addition, small entities 

would be required to provide updating 

of the rating disclosure. In certain 

circumstances, small entities would be 

required to provide disclosure of 

preliminary ratings or unused final 

ratings so that investors will be 

informed of when a registrant may have 

engaged in ratings shopping. 

E. Duplicative, Overlapping, or 

Conflicting Federal Rules 

We believe the proposed amendments 

would not duplicate, overlap, or conflict 

with other federal rules. 

F. Significant Alternatives 

The Regulatory Flexibility Act directs 

us to consider alternatives that would 

accomplish our stated objectives, while 

minimizing any significant adverse 

impact on small entities subject to the 

rules. In connection with the proposed 

disclosure amendments, we considered 

the following alternatives: 

• Establishing different compliance or 

reporting requirements or timetables 

that take into account the resources 

available to small entities; 

• Clarifying, consolidating or 

simplifying compliance and reporting 

requirements under the rules for small 

entities; 

• Use of performance rather than 

design standards; and 

• Exempting small entities from all or 

part of the requirements. 

The proposed amendments would 

provide investors with more 

information regarding credit ratings and 

their limitations so that investors will be 

able to place the credit rating in its 

appropriate context. We do not believe 

these disclosures will create a 

significant new burden on smaller 

entities subject to the proposed 

amendments. To the extent that a small 

entity must comply with the proposed 

amendments, we believe uniform, 

comparable disclosures across all 

companies will help investors and the 

markets. Therefore, we are not 

proposing special requirements, 

standards or exemptions for small 

entities. However, because small entities 

rarely receive credit ratings from credit 

rating agencies in connection with their 

offerings, it is unlikely that the 

proposed amendments would have a 

significant impact on a substantial 

number of small entities. 

G. Solicitation of Comments 

We encourage the submission of 

comments with respect to any aspect of 

this Initial Regulatory Flexibility 

Analysis. In particular, we request 

comments regarding: 

• How the proposed amendments can 

achieve their objective while lowering 

the burden on smaller entities subject to 

the rules; 

• The number of small entity 

companies that may be affected by the 

proposed amendments; 

• The existence or nature of the 

potential impact of the proposed 

amendments on small entity companies 

discussed in the analysis; and 

• How to quantify the impact of the 

proposed amendments. 

Respondents are asked to describe the 

nature of any impact and provide 

empirical data supporting the extent of 

the impact. Such comments will be 

considered in the preparation of the 

Final Regulatory Flexibility Analysis, if 

the proposed rule amendments are 

adopted, and will be placed in the same 

public file as comments on the proposed 

amendments themselves. 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 53109 

124Pub. L. No. 104–121, Title II, 110 Stat. 857 

(1996). 

VII. Small Business Regulatory 

Enforcement Fairness Act 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996,124 a rule is ‘‘major’’ if it has 

resulted, or is likely to result in: 

• An annual effect on the U.S. 

economy of $100 million or more; 

• A major increase in costs or prices 

for consumers or individual industries; 

or 

• Significant adverse effects on 

competition, investment, or innovation. 

We request comment on whether our 

proposal would be a ‘‘major rule’’ for 

purposes of the Small Business 

Regulatory Enforcement Fairness Act. 

We solicit comment and empirical data 

on: 

• The potential effect on the U.S. 

economy on an annual basis; 

• Any potential increase in costs or 

prices for consumers or individual 

industries; and 

• Any potential effect on competition, 

investment, or innovation. 

VIII. Statutory Authority and Text of 

Rule and Form Amendments 

We are proposing the amendments 

contained in this document under the 

authority set forth in Sections 6, 7, 10, 

and 19(a) of the Securities Act; Sections 

12, 13, 15(d) and 23(a) of the Exchange 

Act; and Sections 8, 24(a), 30, and 38 of 

the Investment Company Act. 

List of Subjects 

17 CFR Parts 229, 239, 240, 249 and 274 

Reporting and recordkeeping 

requirements, Securities. 

For the reasons set out in the 

preamble, Title 17, Chapter II of the 

Code of Federal Regulations is proposed 

to be amended as follows: 

PART 229—STANDARD 

INSTRUCTIONS FOR FILING FORMS 

UNDER SECURITIES ACT OF 1933, 

SECURITIES EXCHANGE ACT OF 1934 

AND ENERGY POLICY AND 

CONSERVATION ACT OF 1975— 

REGULATION S–K 

1. The authority citation for part 229 

continues to read in part as follows: 

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 

77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26), 

77ddd, 77eee, 77ggg, 77hhh, 777iii, 77jjj, 

77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 

78o, 78u–5, 78w, 78ll, 78mm, 80a–8, 80a–9, 

80a–20, 80a–29, 80a–30, 80a–31(c), 80a–37, 

80a–38(a), 80a–39, 80b–11, and 7201 et seq.; 

18 U.S.C. 1350, unless otherwise noted. 

* * * * * 

§ 229.10 [Amended] 

2. Amend § 229.10 by removing and 

reserving paragraph (c). 

3. Amend § 229.202 by: 

a. Adding paragraph (g); and 

b. Adding Instructions 1 through 5 to 

Item 202(g). 

The additions read as follows: 

§ 229.202 (Item 202) Description of 

registrant’s securities. 

* * * * * 

(g) Credit ratings. If a registrant, any 

selling security holder, any underwriter, 

or any member of a selling group in a 

registered offering uses a credit rating, 

as that term is defined in 15 U.S.C. 

78c(a)(60), from a credit rating agency, 

as that term is defined in 15 U.S.C. 

78c(a)(61), with respect to the registrant 

or a class of securities issued by the 

registrant, in connection with a 

registered offering, the registrant shall 

disclose the following information for 

each rating used: 

(1) The identity of the credit rating 

agency assigning the credit rating and 

whether such organization is a 

nationally recognized statistical rating 

organization as that term is defined in 

15 U.S.C. 78c(a)(62); 

(2) The credit rating assigned; 

(3) The relative rank of the credit 

rating within the assigning credit rating 

agency’s overall classification system; 

(4) The date the credit rating was 

assigned; 

(5) The credit rating agency’s 

definition or description of the category 

in which the credit rating agency rated 

the class of securities; 

(6) The identity of the party who is 

compensating the credit rating agency 

for providing the credit rating; 

(7) A description of any other nonrating services provided by the credit 

rating agency or its affiliates to the 

registrant or its affiliates, and if such 

other services have been provided, 

separate disclosure of the fee paid for 

the credit rating required to be disclosed 

and the aggregate fees paid for any other 

non-rating services provided during the 

registrant’s last completed fiscal year 

and any subsequent interim period up 

to the date of the filing; 

(8) All material scope limitations of 

the credit rating; 

(9) How any contingencies related to 

the securities are or are not reflected in 

the credit rating; 

(10) Any published designation 

reflecting the results of any other 

evaluation done by the credit rating 

agency in connection with the credit 

rating, along with an explanation of the 

designation’s meaning and the relative 

rank of the designation; 

(11) Any material differences between 

the terms of the securities as assumed or 

considered by the credit rating agency 

in rating the securities and: 

(i) The minimum obligations of the 

security as specified in the governing 

instruments of the security; and 

(ii) The terms of the securities as used 

in any marketing or selling efforts; 

(12) A statement informing investors 

that a credit rating is not a 

recommendation to buy, sell, or hold 

securities; that it may be subject to 

revision or withdrawal at any time by 

the assigning credit rating agency; that 

each credit rating is applicable only to 

the specific security to which it applies; 

and that investors should make their 

own evaluation as to whether an 

investment in the security is 

appropriate; 

(13) A description of a final rating 

obtained by the registrant but not used 

in connection with the offering, 

including the information set forth in 

paragraphs (g)(1) through (12) of this 

section; and 

(14) A description of any preliminary 

rating of the class of securities that 

received the rating being disclosed 

pursuant to this Item 202(g) of this part 

if such preliminary rating was obtained 

by or on behalf of the registrant and 

received from a credit rating agency 

other than the credit rating agency that 

provided the credit rating disclosed 

pursuant to this Item 202(g) of this part. 

Such description shall include: 

(i) The identity of the credit rating 

agency that determined or indicated the 

rating and an indication of whether 

such organization is a nationally 

recognized statistical rating organization 

as that term is defined in 15 U.S.C. 

78c(a)(62); 

(ii) The preliminary rating determined 

or indicated or a description of the 

category or range of categories in which 

the preliminary credit rating agency 

placed the class of securities; 

(iii) The date the preliminary rating 

was conveyed to the registrant, any 

party acting on the registrant’s behalf or 

the underwriters; 

(iv) The relative rank of the 

preliminary rating within the 

preliminary credit rating agency’s 

overall classification system; 

(v) Any material scope limitations of 

the preliminary rating; and 

(vi) Any material differences between 

the terms of the securities on which the 

preliminary rating was determined and 

the terms of the securities on which the 

final rating was determined. 

* * * * * 

Instructions to Item 202(g): 

1. Disclosure is not required by this 

Item 202(g) if the only disclosure of a 

credit rating in a filing with the 


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53110 Federal Register / Vol. 74, No. 198 / Thursday, October 15, 2009 / Proposed Rules 

Commission relates to changes to a 

credit rating, liquidity of the registrant, 

the cost of funds of 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. 

2. If a registrant includes information 

about credit ratings in a prospectus 

pursuant to this Item 202(g) and the 

rating has not yet been issued in final 

form, the registrant shall update the 

description of each rating as set forth 

below: 

A. If a change in a rating, including 

the assignment of a final rating, already 

included in the prospectus is available 

subsequent to the filing of the 

registration statement, but prior to its 

effectiveness, the registrant shall convey 

to the purchaser the rating change. 

B. If an additional rating, including a 

final rating, that the registrant is 

required to disclose, or if a material 

change in a rating already included, 

becomes available during any period in 

which offers or sales are being made, the 

registrant shall disclose such additional 

rating or rating change by means of a 

post-effective amendment, or 

supplement to the prospectus pursuant 

to § 230.424(b) of this chapter, unless, in 

the case of a registration statement on 

Form S–3 (§ 239.13 of this chapter), it 

has been disclosed in a document 

incorporated by reference into the 

registration statement subsequent to its 

effectiveness and prior to the 

termination of the offering or 

completion of sales. 

3. For purposes of this Item 202(g), a 

credit rating is ‘‘used in connection with 

a registered offering of securities’’ in 

circumstances, including but limited to, 

when such rating is used in connection 

with an unregistered offering of 

securities, and the securities offered 

privately are subsequently exchanged 

for substantially similar registered 

securities even if the credit rating was 

not used in connection with the 

registered exchange offering. 

4. A preliminary rating includes any 

rating that is not published, any range 

of ratings, any oral or other indications 

of a potential rating or range of ratings 

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 Item 202(g). 

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. 

* * * * * 

PART 239—FORMS PRESCRIBED 

UNDER THE SECURITIES ACT OF 1933 

4. The authority citation for part 239 

continues to read in part as follows: 

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 

77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n, 

78o(d), 78u–5, 78w(a), 78ll, 78mm, 80a–2(a), 

80a–3, 80a–8, 80a–9, 80a–10, 80a–13, 80a– 

24, 80a–26, 80a–29, 80a–30, and 80a–37, 

unless otherwise noted. 

* * * * * 

5. Amend Form S–3 (referenced in 

§ 239.13) by revising Part I, Item 9 to 

read as follows: 

Note The text of Form S–3 does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

FORM S–3 

REGISTRATION STATEMENT UNDER 

THE SECURITIES ACT OF 1933 

* * * * * 

Item 9. Description of Securities To Be 

Registered 

Furnish the information required by 

Item 202 of Regulation S–K (§ 229.202 of 

this chapter), unless capital stock is to 

be registered and securities of the same 

class are registered pursuant to Section 

12 of the Exchange Act, in which case 

furnish only the information required by 

Item 202(g) of Regulation S–K. 

* * * * * 

6. Amend Form S–4 (referenced in 

§ 239.25) by revising Part I, Item 4(a)(3) 

to read as follows: 

Note The text of Form S–4 does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

FORM S–4 

REGISTRATION STATEMENT UNDER 

THE SECURITIES ACT OF 1933 

* * * * * 

Item 4. Terms of the Transaction 

(a) Furnish a summary of the material 

features of the proposed transaction. 

The summary should include, where 

applicable: 

* * * * * 

(3) The information required by Item 

202 of Regulation S–K (§ 229.202 of this 

chapter), description of registrant’s 

securities, unless: (i) The registrant 

would meet the requirements for use of 

Form S–3, (ii) capital stock is to be 

registered and (iii) securities of the same 

class are registered pursuant to Section 

12 of the Exchange Act and (i) listed for 

trading or admitted to unlisted trading 

privileges on a national securities 

exchange; or (ii) are securities for which 

bid and offer quotations are reported in 

an automated quotations system 

operated by a national securities 

association. Notwithstanding the 

foregoing, furnish the information 

required by Item 202(g) of Regulation 

S–K. 

* * * * * 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

7. The authority citation for part 240 

continues to read, in part, as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 

78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 

78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a– 

20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4, 

80b–11, and 7201, et seq.; and 18 U.S.C. 

1350, unless otherwise noted. 

* * * * * 

8. Amend § 240.13a–11 by revising 

paragraph (b) to read as follows: 

§ 240.13a–11 Current reports on Form 8–K 

(§ 249.308 of this chapter). 

* * * * * 

(b) This section shall not apply to 

foreign governments, foreign private 

issuers required to make reports on 

Form 6–K (17 CFR 249.306) pursuant to 

§ 240.13a–16, issuers of American 

Depositary Receipts for securities of any 

foreign issuer, or investment companies 

required to file reports pursuant to 

§ 270.30b1–1 of this chapter under the 

Investment Company Act of 1940, 

except: 

(1) Where such investment companies 

are required to file notice of a blackout 

period pursuant to § 245.104 of this 

chapter; and 

(2) A closed-end company (as defined 

in 15 U.S.C. 80a–5(a)(2)) is required to 

file a current report on Form 8–K 

containing the information required by 

Item 3.04 of Form 8–K within the period 

specified in that form unless 

substantially the same information as 

required by that item has been 

previously reported by the registrant. 

* * * * * 

9. Amend § 240.15d–11 by revising 

paragraph (b) to read as follows: 

§ 240.15d–11 Current reports on Form 8–K 

(§ 249.308 of this chapter). 

* * * * * 

(b) This section shall not apply to 

foreign governments, foreign private 

issuers required to make reports on 

Form 6–K (17 CFR 249.306) pursuant to 

§ 240.15d–16, issuers of American 

Depositary Receipts for securities of any 


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foreign issuer, or investment companies 

required to file reports pursuant to 

§ 270.30b1–1 of this chapter under the 

Investment Company Act of 1940, 

except: 

(1) Where such investment companies 

are required to file notice of a blackout 

period pursuant to § 245.104 of this 

chapter; and 

(2) A closed-end company (as defined 

in 15 U.S.C. 80a–5(a)(2)) is required to 

file a current report on Form 8–K 

containing the information required by 

Item 3.04 of Form 8–K within the period 

specified in that form unless 

substantially the same information as 

required by that item has been 

previously reported by the registrant. 

* * * * * 

PART 249—FORMS, SECURITIES 

EXCHANGE ACT OF 1934 

10. The authority citation for part 249 

continues to read in part as follows: 

Authority: 15 U.S.C. 78a et seq., 7201 et 

seq., and 18 U.S.C. 1350, unless otherwise 

noted. 

* * * * * 

11. Amend Form 20–F (referenced in 

§ 249.220f) by redesignating Instruction 

3 to Item 10 as Instruction 4, adding 

new Instruction 3 to Item 10, 

redesignating Items 12.C. and 12.D. as 

Items 12.D. and 12.E., adding new Item 

12.C. and the Instructions to Item 12.C., 

and revising Instruction 1 to Item 12. to 

read as follows: 

Note: The text of Form 20–F does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

FORM 20–F 

* * * * * 

Item 10. Additional Information 

* * * * * 

Instructions to Item 10 

* * * * * 

3. In registration statements filed 

under the Securities Act or Exchange 

Act that relate to a class of preferred 

securities for which a credit rating, as 

that term is defined in 15 U.S.C. 

78c(a)(60), from a credit rating agency, 

as that term is defined in 15 U.S.C. 

78c(a)(61), is being used in connection 

with the registered offering, disclose the 

information required under Item 12.C.1 

of Form 20–F. If filing Form 20–F as an 

annual report, furnish the information 

required by Item 12.C.2 of Form 20–F if 

there have been any changes to a rating 

required to be disclosed by Item 12.C.1 

of Form 20–F. 

* * * * * 

Item 12. Description of Securities Other 

than Equity Securities 

* * * * * 

C. Credit ratings. 

1. If a company, any selling security 

holder, any underwriter, or any member 

of a selling group in a registered offering 

uses use a credit rating, as that term is 

defined in 15 U.S.C. 78c(a)(60), from a 

credit rating agency, as that term is 

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

respect to the company or a class of 

securities issued by the company, in 

connection with a registered offering, 

the company shall disclose the 

following information for each rating 

used: 

(a) The identity of the credit rating 

agency assigning the credit rating and 

whether such organization is a 

nationally recognized statistical rating 

organization as that term is defined in 

15 U.S.C. 78c(a)(62); 

(b) The credit rating assigned; 

(c) The relative rank of the credit 

rating within the assigning credit rating 

agency’s overall classification system; 

(d) The date the credit rating was 

assigned; 

(e) The credit rating agency’s 

definition or description of the category 

in which the credit rating agency rated 

the class of securities; 

(f) The identity of the party who is 

compensating the credit rating agency 

for providing the rating; 

(g) A description of any other nonrating services provided by the credit 

rating agency or its affiliates to the 

company or its affiliates, and if such 

other services have been provided, 

separate disclosure of the fee paid for 

the credit rating required to be disclosed 

and the aggregate fees paid for any other 

non-rating services provided during the 

company’s last completed fiscal year 

and any subsequent interim period up 

to the date of the filing; 

(h) All material scope limitations of 

the credit rating; 

(i) How any contingencies related to 

the securities are or are not reflected in 

the credit rating; 

(j) Any published designation 

reflecting the results of any other 

evaluation done by the credit rating 

agency in connection with the credit 

rating, along with an explanation of the 

designation’s meaning and the relative 

rank of the designation; 

(k) Any material differences between 

the terms of the securities as assumed or 

considered by the credit rating agency 

in rating the securities and: 

(i) The minimum obligations of the 

security as specified in the governing 

instruments of the security; and 

(ii) The terms of the securities as used 

in any marketing or selling efforts; 

(l) A statement informing investors 

that a credit rating is not a 

recommendation to buy, sell, or hold 

securities; that it may be subject to 

revision or withdrawal at any time by 

the assigning credit rating agency; that 

each credit rating is applicable only to 

the specific security to which it applies; 

and that investors should make their 

own evaluation as to whether an 

investment in the security is 

appropriate; 

(m) A description of a final rating 

obtained by the company but not used 

in connection with the offering, 

including the information set forth in 

paragraphs (a)–(l) of this item; and 

(n) A description of any preliminary 

rating of the class of securities that 

received the rating being disclosed 

pursuant to this Item 12 if such 

preliminary rating was obtained by or 

on behalf of the company and received 

from a credit rating agency other than 

the credit rating agency that provided 

the credit rating disclosed pursuant to 

this Item 12. Such description shall 

include: 

(i) The identity of the credit rating 

agency that determined or indicated the 

rating and whether such organization is 

a nationally recognized statistical rating 

organization as that term is defined in 

15 U.S.C. 78c(a)(62); 

(ii) The preliminary rating determined 

or indicated or a description of the 

category or range of categories in which 

the preliminary credit rating agency 

placed the class of securities; 

(iii) The date the preliminary rating 

was conveyed to the company, any 

party acting on the company’s behalf or 

the underwriters; 

(iv) The relative rank of the 

preliminary rating within the 

preliminary credit rating agency’s 

overall classification system; 

(v) Any material scope limitations of 

the preliminary rating; and 

(vi) Any material differences between 

the terms of the securities on which the 

preliminary rating was determined and 

the terms of the securities on which the 

final rating was determined. 

2. Credit rating agency decisions. 

(a) Disclose the information required 

by paragraph (b) of this Item 12.C.2. if 

the company is notified by, or receives 

any communication from, any credit 

rating agency to the effect that the 

organization has decided to change or 

withdraw the credit rating assigned to 

the company or any class of debt or 

preferred security or other indebtedness 

of the company (including securities or 

obligations as to which the company is 

a guarantor, or may become directly or 

contingently liable for arising out of an 

off-balance sheet arrangement) that was 


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previously required to be disclosed 

pursuant to Item 12.C.1 of this Form. 

(b) If the registrant has received any 

notification or other communication as 

described in paragraph (a) of this Item 

12.C.2., file the notice as an exhibit to 

the annual report on Form 20–F and 

disclose the following information: 

(i) The date the company received the 

notification or communication; 

(ii) The name of the credit rating 

agency and whether such organization 

is a nationally recognized statistical 

rating organization as that term is 

defined in 15 U.S.C. 78c(a)(62); and 

(iii) The nature of the rating agency’s 

decision. 

* * * * * 

Instructions to Item 12 

1. You do not need to provide the 

information called for by this Item 12 if 

you are using the form as an annual 

report for your fiscal years ending before 

December 15, 2009. For your fiscal years 

ending on or after December 15, 2009, 

except for Item 12.C.2, Item 12.E.3. and 

Item 12.E.4 of this Form, you do not 

need to provide the information called 

for by this Item 12 if you are using this 

form as an annual report. You do not 

need to provide the information 

required by Item 12.C.2. of this Form if 

you are using the form as a registration 

statement. 

* * * * * 

Instructions to Item 12.C.1. 

1. Disclosure is not required by this 

Item 12.C.1. of this Form if the only 

disclosure of a credit rating in a filing 

with the Commission relates to changes 

to a credit rating, liquidity of the 

company, the cost of funds of a 

company or terms of agreements that 

refer to credit ratings, and the credit 

rating is not otherwise used in 

connection with a registered offering. 

2. If a company includes information 

about credit ratings in a prospectus 

pursuant to Item 12.C.1. of this Form 

and the rating has not yet been issued 

in final form, the company shall update 

the description of each rating as set 

forth below: 

A. If a change in a rating, including 

the assignment of a final rating, already 

included in the prospectus is available 

subsequent to the filing of the 

registration statement, but prior to its 

effectiveness, the company shall convey 

to the purchaser the rating change. 

B. If an additional rating, including a 

final rating, that the company is 

required to disclose, or if a material 

change in a rating already included, 

becomes available during any period in 

which offers or sales are being made, the 

company shall disclose such additional 

rating or rating change by means of a 

post-effective amendment, or 

supplement to the prospectus pursuant 

to Rule 424(b) under the Securities Act 

(§ 230.424(b) of this chapter), unless, in 

the case of a registration statement on 

Form F–3 under the Securities Act 

(referenced in § 239.33 of this chapter), 

it has been disclosed in a document 

incorporated by reference into the 

registration statement subsequent to its 

effectiveness and prior to the 

termination of the offering or 

completion of sales. 

3. For purposes of this Item 12, a 

credit rating is ‘‘used in connection with 

a registered offering’’ in circumstances, 

including but limited to, when such 

rating is used in connection with an 

unregistered offering of securities, and 

the securities offered privately are 

subsequently exchanged for 

substantially similar registered 

securities even if the credit rating was 

not used in connection with the 

registered exchange offering. 

4. A preliminary rating includes any 

rating that is not published, any range 

of ratings, any oral or other indications 

of a potential rating or range of ratings 

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 

company 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 Item 12. 

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 company from a credit rating 

agency. 

Instructions to Item 12.C.2. 

1. No disclosure need be made under 

Item 12.C.2. of this Form during any 

discussions between the company and 

any credit rating agency regarding any 

decision required to be disclosed unless 

and until the credit rating agency 

notifies the company that the credit 

rating agency has made a final decision 

to take such action. 

2. For purposes of Item 12.C.2. of this 

Form, the term ‘‘credit rating agency’’ 

has the meaning set forth in Section 

3(a)(60) of the Exchange Act [15 U.S.C. 

78c(a)(60]. 

3. For purposes of Item 12.C.2. of this 

Form, off-balance sheet arrangement has 

the meaning set forth in Item 5.E.2. of 

this Form. 

* * * * * 

12. Amend Form 8–K (referenced in 

§ 249.308) by revising Section 3— 

Securities and Trading Markets to add 

Item 3.04 to read as follows: 

Note: The text of Form 8–K does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

Form 8–K 

* * * * * 

Item 3.04. Credit Rating Agency 

Decisions 

(a) Furnish the information required 

by paragraph (b) of this Item 3.04 if the 

registrant is notified by, or receives any 

communication from, any credit rating 

agency to the effect that the organization 

has decided to change or withdraw the 

credit rating assigned to the registrant or 

any class of debt or preferred security or 

other indebtedness of the registrant 

(including securities or obligations as to 

which the registrant is a guarantor or 

may become directly or contingently 

liable for arising out of an off-balance 

sheet arrangement) that was previously 

required to be disclosed pursuant to 

Item 202(g) of Regulation S–K or Item 

10.6 of Form N–2. 

(b) If the registrant has received any 

notification or other communication as 

described in paragraph (a) of this Item 

3.04, file the notice as an exhibit to the 

report on Form 8–K and furnish the 

following information: 

(1) The date the registrant received 

the notification or communication; 

(2) The name of the credit rating 

agency and whether such organization 

is a nationally recognized statistical 

rating organization as that term is 

defined in 15 U.S.C. 78c(a)(62); and 

(3) The nature of the rating agency’s 

decision. 

Instructions to Item 3.04 

1. No disclosure need be made under 

this Item 3.04 during any discussions 

between the registrant and any credit 

rating agency regarding any decision 

required to be disclosed unless and 

until the credit rating agency notifies 

the registrant that the credit rating 

agency has made a final decision to take 

such action. 

2. For purposes of this Item 3.04, the 

term ‘‘credit rating agency’’ has the 

meaning set forth in Section 3(a)(60) of 

the Exchange Act [15 U.S.C. 78c(a)(60]. 

3. For purposes of this Item 3.04, offbalance sheet arrangement has the 

meaning set forth in Item 303(a)(4)(ii) of 

Regulation S–K [17 CFR 

229.303(a)(4)(ii)]. 

* * * * * 


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PART 239—FORMS PRESCRIBED 

UNDER THE SECURITIES ACT OF 1933 

PART 274—FORMS PRESCRIBED 

UNDER THE INVESTMENT COMPANY 

ACT OF 1940 

13. The authority citation for part 274 

continues to read in part as follows: 

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 

78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 80a–24, 

80a–26, and 80a–29, unless otherwise noted. 

* * * * * 

14. Amend Form N–2 (referenced in 

§§ 239.14 and 274.11a–1), Item 10 by 

revising paragraph 6 and Instructions to 

read as follows: 

Note: The text of Form N–2 does not, and 

these amendments will not, appear in the 

Code of Federal Regulations. 

FORM N–2 

* * * * * 

Item 10. Capital Stock, Long-Term Debt, 

and Other Securities 

* * * * * 

6. Credit ratings: If the Registrant, any 

selling security holder, any underwriter, 

or any member of a selling group in a 

registered offering uses a credit rating, 

as that term is defined in section 

3(a)(60) of the Exchange Act [15 U.S.C. 

78c(a)(60)], from a credit rating agency, 

as that term is defined in section 

3(a)(61) of the Exchange Act [15 U.S.C. 

78c(a)(61)], with respect to the registrant 

or a class of securities issued by the 

Registrant, in connection with a 

registered offering, the Registrant shall 

disclose the following information for 

each rating used: 

a. The identity of the credit rating 

agency assigning the credit rating and 

whether such organization is a 

nationally recognized statistical rating 

organization as that term is defined in 

section 3(a)(62) of the Exchange Act [15 

U.S.C. 78c(a)(62)]; 

b. The credit rating assigned; 

c. The relative rank of the credit rating 

within the assigning credit rating 

agency’s overall classification system; 

d. The date the credit rating was 

assigned; 

e. The credit rating agency’s 

definition or description of the category 

in which the credit rating agency rated 

the class of securities; 

f. The identity of the party who is 

compensating the credit rating agency 

for providing the credit rating; 

g. A description of any other nonrating services provided by the credit 

rating agency or its affiliates to the 

Registrant or its affiliates, and if such 

other services have been provided, 

separate disclosure of the fee paid for 

the credit rating required to be disclosed 

and the aggregate fees paid for any other 

non-rating services provided during the 

Registrant’s last completed fiscal year 

and any subsequent interim period up 

to the date of the filing; 

h. All material scope limitations of 

the credit rating; 

i. How any contingencies related to 

the securities are or are not reflected in 

the credit rating; 

j. Any published designation 

reflecting the results of any other 

evaluation done by the credit rating 

agency in connection with the credit 

rating, along with an explanation of the 

designation’s meaning and the relative 

rank of the designation; 

k. Any material differences between 

the terms of the securities as assumed or 

considered by the credit rating agency 

in rating the securities and (1) the 

minimum obligations of the security as 

specified in the governing instruments 

of the security; and (2) the terms of the 

securities as used in any marketing or 

selling efforts; 

l. A statement informing investors 

that a credit rating is not a 

recommendation to buy, sell, or hold 

securities; that it may be subject to 

revision or withdrawal at any time by 

the assigning credit rating agency; that 

each credit rating is applicable only to 

the specific security to which it applies; 

and that investors should make their 

own evaluation as to whether an 

investment in the security is 

appropriate; 

m. A description of a final rating 

obtained by the registrant but not used 

in connection with the offering, 

including the information set forth in 

paragraphs (a)–(l) of this item; and 

n. A description of any preliminary 

rating of the class of securities that 

received the rating being disclosed 

pursuant to this paragraph 6 if such 

preliminary rating was obtained by or 

on behalf of the Registrant and received 

from a credit rating agency other than 

the credit rating agency that provided 

the credit rating disclosed pursuant to 

this paragraph 6. Such description shall 

include: 

(1) The identity of the credit rating 

agency that determined or indicated the 

rating and an indication of whether 

such organization is a nationally 

recognized statistical rating organization 

as that term is defined in section 

3(a)(62) of the Exchange Act [15 U.S.C. 

78c(a)(62)]; 

(2) The preliminary rating determined 

or indicated or a description of the 

category or range of categories in which 

the preliminary credit rating agency 

placed the class of securities; 

(3) The date the preliminary rating 

was conveyed to the Registrant, any 

party acting on the Registrant’s behalf, 

or the underwriters; 

(4) The relative rank of the 

preliminary rating within the 

preliminary credit rating agency’s 

overall classification system; 

(5) Any material scope limitations of 

the preliminary rating; and 

(6) Any material differences between 

the terms of the securities on which the 

preliminary rating was determined and 

the terms of the securities on which the 

final rating was determined. 

Instructions: 

1. Disclosure is not required by 

paragraph 6 of this item if the only 

disclosure of a credit rating in a filing 

with the Commission relates to changes 

to a credit rating, liquidity of the 

Registrant, the cost of funds of 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. 

2. If a Registrant includes information 

about credit ratings in a prospectus 

pursuant to paragraph 6 of this item and 

the rating has not yet been issued in 

final form, the Registrant shall update 

the description of each rating as set 

forth below: 

a. If a change in a rating, including the 

assignment of a final rating, already 

included in the prospectus is available 

subsequent to the filing of the 

registration statement, but prior to its 

effectiveness, the Registrant shall 

convey to the purchaser the rating 

change. 

b. If an additional rating, including a 

final rating, that the Registrant is 

required to disclose, or if a material 

change in a rating already included, 

becomes available during any period in 

which offers or sales are being made, the 

Registrant shall disclose such additional 

rating or rating change by means of a 

post-effective amendment, or 

supplement to the prospectus pursuant 

to Rule 497 under the 1933 Act [17 CFR 

230.497]. 

3. For purposes of paragraph 6 of this 

item, a credit rating is ‘‘used in 

connection with a registered offering of 

securities’’ in circumstances, including 

but limited to, when such rating is used 

in connection with an unregistered 

offering of securities, and the securities 

offered privately are subsequently 

exchanged for substantially similar 

registered securities even if the credit 

rating was not used in connection with 

the registered exchange offering. 

4. A preliminary rating includes any 

rating that is not published, any range 

of ratings, any oral or other indications 

of a potential rating or range of ratings 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
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, 


srobinson on DSKHWCL6B1PROD with PROPOSALS2