Document ID: SEC-2009-1472-0001
Agency: sec
Document Type: Proposed Rule
Title: Credit Ratings Disclosure
Posted Date: 2009-10-15T04:00Z

[Federal Register: October 15, 2009 (Volume 74, Number 198)]
[Proposed Rules]               
[Page 53085-53114]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15oc09-27]                         

[[Page 53085]]

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Part III

Securities and Exchange Commission

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17 CFR Parts 220, 229, 239, et al.

Credit Ratings Disclosure and Concept Release on Possible Rescission of 
Rule 436(g) Under the Securities Act of 1933; Proposed Rules

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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.

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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 rule-comments@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.
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    \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.
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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.
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    \14\ See 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.
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    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

[[Page 53087]]

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 AAA-rated 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.
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    \15\ See Disclosure of Ratings in Registration Statements, 
Release No. 33-6336 (Aug. 6, 1981) [46 FR 42024].
    \16\ See 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.
    \17\ As 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 ``interest-only'' 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.
    \18\ See 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/SIFMA-CRA-
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.
    \19\ For 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].
    \20\ See 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.
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    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\
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    \21\ See Briefing Paper: Roundtable to Examine Oversight of 
Credit Rating Agencies (Apr. 2009), at http://www.sec.gov/spotlight/
cra-oversight-roundtable/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).
    \22\ See Pagano and Volpin in note 20 above.
    \23\ As 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.
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    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.
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    \24\ See 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.
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    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.
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    \25\ See 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).
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    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.
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    \29\ See 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.
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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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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\
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    \30\ See Disclosure of Ratings in Registration Statements, in 
note 15 above.
    \31\ See 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.
    \32\ See 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).
    \33\ See 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).
    \34\ Concurrent 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.
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    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 
then-proposed 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.
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    \35\ See the 1994 Ratings Release in note 16 above.
    \36\ See the 1994 Ratings Release in note 16 above.
    \37\ See 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).
    \38\ See 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.
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    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\
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    \39\ See Additional Form 8-K Disclosure Requirements and 
Acceleration of Filing Date, Release No. 33-8106 (June 17, 2002) [67 
FR 42914].
    \40\ See also the discussion of Form 8-K in Section I.D. below.
    \41\ See e.g. letter regarding File No. S7-22-02 of CIGNA 
Corporation (Aug. 26, 2002), at http://www.sec.gov/rules/proposed/
s72202.shtml.
    \42\ See 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.
    \43\ See 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.
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    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

[[Page 53089]]

the exemption would apply to all credit rating agencies, including 
those that are not NRSROs.\46\
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    \45\ See 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.
    \46\ See Security Ratings, Release No. 33-8940 (Jul.1, 2008) [73 
FR 40106].
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    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.
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    \47\ See generally http://www.sec.gov/spotlight/cra-oversight-
roundtable.htm.
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    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.
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    \48\ We 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].
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    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.
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    \49\ See proposed new paragraph (g) to Item 202 of Regulation S-
K.
    \50\ See note 67 below.
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    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 
closed-end 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.
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    \51\ Section 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.
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    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

[[Page 53090]]

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.
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    \52\ See proposed new paragraph (g) to Item 202 of Regulation S-
K.
    \53\ Form 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 stock as that term is used under 17 CFR 
230.902(a)(1).
    \54\ Form 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.
    \55\ As 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)].
    \56\ As 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)].
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    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.
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    \57\ 17 CFR 230.497. This would include closed-end 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].
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    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.
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    \58\ See proposed Instruction 3 to Item 202(g).
    \59\ These 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 No-Action 
Letter (pub. avail. July 2, 1993); Brown & Wood LLP, SEC No-Action 
Letter (pub. avail. Feb. 5, 1997).
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    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.
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    \60\ The 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.
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    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

[[Page 53091]]

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.
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78l.
---------------------------------------------------------------------------

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 fixed-
income funds, which examine credit

[[Page 53092]]

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?
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    \62\ See, 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-Fund-
Ratings/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'').
    \63\ See, e.g., Fitch's Fund and Asset Manager Ratings; Standard 
& Poor's Ratings Definitions.
    \64\ See, e.g., Standard & Poor's Ratings Definitions.
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     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?
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    \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.
    \66\ Unlike 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.
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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\
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    \67\ A 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.
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     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;

[[Page 53093]]

     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\
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    \68\ See proposed amendments to Item 202(g) of Regulation S-K, 
Item 12 of Form 20-F, and Item 10.6 of Form N-2.
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    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\
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    \69\ The 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).
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    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 non-credit 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.
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    \70\ See 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).
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    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

[[Page 53094]]

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\
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    \71\ See 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).
---------------------------------------------------------------------------

    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\
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    \72\ Proposed 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.
    \73\ The 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.
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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\
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    \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.
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     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?

[[Page 53095]]

     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 non-rating services to the registrant or its affiliates, the 
proposed rules would require a description of the other non-rating 
services and 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 such period.
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    \75\ There 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.
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    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 
non-rating 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\
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    \76\ See note 21 above.
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    We are not proposing to require disclosure of the fee paid for the 
credit rating unless disclosure of other non-rating 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\
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    \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.
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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

[[Page 53096]]

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 non-rating 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?
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    \78\ 17 CFR 229.509.
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     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 non-rating 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

[[Page 53097]]

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?
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    \79\ See note 77 above.
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     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.
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    \80\ See 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.
    \82\ See Roger Lowenstein, Triple-A Failure, N.Y. Times 
Magazine, April 27, 2008.
    \83\ See Skreta and Veldkamp and Bolton, Freixas and Shapiro in 
note 24 above.
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    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,

[[Page 53098]]

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.
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    \84\ 17 CFR 230.409.
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    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.
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    \85\ For 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.
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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?
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    \86\ For 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].
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     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

[[Page 53099]]

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.
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    \87\ As 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \88\ See note 39 above and the related discussion.
---------------------------------------------------------------------------

    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.
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    \89\ When 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.
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    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.
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    \90\ As 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.
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    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

[[Page 53100]]

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\
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    \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.
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    We are proposing to require closed-end 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\
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    \92\ 17 CFR 240.13a-11(b).
    \93\ 17 CFR 240.15d-11(b).
    \94\ Under 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, non-exclusionary 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.
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    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 closed-end 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 
closed-end 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

[[Page 53101]]

8-K or Form N-CSR \95\ 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?
---------------------------------------------------------------------------

    \95\ 17 CFR 249.331; 17 CFR 274.128. Form N-CSR is the periodic 
reporting form used by registered management investment companies.
---------------------------------------------------------------------------

     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\

    \96\ 44 U.S.C. 3501 et seq.; 5 CFR 1320.11.
    \97\ The 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.
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``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 in-house company personnel time and to be approximately 
$816,000 for the

[[Page 53102]]

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\
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    \98\ We calculated an annual average over a three-year 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.
    \99\ The 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \100\ We estimate an hourly rate of $400 as the average cost of 
outside professionals that assist registrants in preparing 
disclosure and conducting registered offerings.
---------------------------------------------------------------------------

    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.
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    \101\ All 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.
    \102\ Based 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.
---------------------------------------------------------------------------

    For current reports on Form 8-K, including Forms 8-K filed by 
closed-end 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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    \103\ The 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.

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[[Page 53103]]

[GRAPHIC] [TIFF OMITTED] TP15OC09.000

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\
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    \104\ We request comment pursuant to 44 U.S.C. 3506(c)(2)(B).
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    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, closed-end 
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.

[[Page 53104]]

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 non-ratings 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.
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    \105\ See 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.
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    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.
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    \106\ See 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.
    \107\ See 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.
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    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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    \108\ See Becker and Milbourn in note 14 above.

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[[Page 53105]]

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.
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    \109\ See 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.
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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\
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    \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.
    \111\ See 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).
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    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

[[Page 53106]]

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 
``investment-grade'' and ``non-investment grade'' securities may 
diminish in the long-term. 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 ratings-based 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.
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    \112\ See Annual Report on Nationally Recognized Statistical 
Rating Organizations (2008) at http://www.sec.gov/divisions/
marketreg/ratingagency/nrsroannrep0608.pdf.
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    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, less-
established 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.
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    \113\ These factors would also reduce the efficacy of ratings 
shopping, however, since registrants would also face some 
uncertainty about what the final rating would be.
---------------------------------------------------------------------------

    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.
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    \114\ See the proposing release related to Rule 17g-5 under the 
Exchange Act considered by the Commission on September 17, 2009.
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    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

[[Page 53107]]

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.
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    \115\ 15 U.S.C. 78w(a).
    \116\ 15 U.S.C. 77b(b).
    \117\ 15 U.S.C. 78c(f).
    \118\ 15 U.S.C. 8a-2(c).
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    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.
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    \119\ 5 U.S.C. 601.
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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

[[Page 53108]]

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.
---------------------------------------------------------------------------

    \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)
---------------------------------------------------------------------------

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 non-credit 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.

[[Page 53109]]

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:
---------------------------------------------------------------------------

    \124\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     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.
* * * * *

Sec.  229.10  [Amended]

    2. Amend Sec.  229.10 by removing and reserving paragraph (c).
    3. Amend Sec.  229.202 by:
    a. Adding paragraph (g); and
    b. Adding Instructions 1 through 5 to Item 202(g).
    The additions read as follows:

Sec.  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 non-rating 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

[[Page 53110]]

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 Sec.  230.424(b) of this 
chapter, unless, in the case of a registration statement on Form S-3 
(Sec.  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 Sec.  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 
(Sec.  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 Sec.  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 (Sec.  
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 Sec.  240.13a-11 by revising paragraph (b) to read as 
follows:

Sec.  240.13a-11  Current reports on Form 8-K (Sec.  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 Sec.  240.13a-16, issuers of American Depositary Receipts 
for securities of any foreign issuer, or investment companies required 
to file reports pursuant to Sec.  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 Sec.  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 Sec.  240.15d-11 by revising paragraph (b) to read as 
follows:

Sec.  240.15d-11  Current reports on Form 8-K (Sec.  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 Sec.  240.15d-16, issuers of American Depositary Receipts 
for securities of any

[[Page 53111]]

foreign issuer, or investment companies required to file reports 
pursuant to Sec.  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 Sec.  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 Sec.  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 non-rating 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

[[Page 53112]]

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 (Sec.  230.424(b) of this chapter), unless, in the case 
of a registration statement on Form F-3 under the Securities Act 
(referenced in Sec.  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 Sec.  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, off-balance sheet arrangement 
has the meaning set forth in Item 303(a)(4)(ii) of Regulation S-K [17 
CFR 229.303(a)(4)(ii)].
* * * * *

[[Page 53113]]

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 Sec. Sec.  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 non-rating 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

[[Page 53114]]

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