On November 16, 2011, the Securities and Exchange Commission ("SEC") issued an order extending the temporary exemption for rating agencies from the requirements for Rule 17g-5 for certain non-U.S. transactions for a further one-year period, expiring December 2, 2012.
By way of background, Rule 17g-5 is a series of rules designed to deal with conflicts of interest affecting credit rating agencies. A rating agency being hired by the issuer or arranger to determine a credit rating for a structured finance product is such a conflict of interest. It is also the normal, if not universal, circumstance for any issuance of a rated structured finance product. Given that there will be a conflict of interest, Rule 17g-5(a)(3) requires that the retained rating agency must provide to other rating agencies access to an internet website containing all the information provided to the retained rating agency in issuing its rating. It was thought that making the information supporting a credit rating available to other rating agencies would both keep the retained rating agency more diligent and encourage additional rating agencies to issue ratings on the structured finance product.
In the comment period before these new rules became effective on June 2, 2010, serious concerns arose about the extra-territorial affect of these provisions. Any rating agency active in the United States would apparently have to comply with these rules for all structured finance products which it rates whether or not there was any connection between the rated transaction and the United States. In effect, it would apply to all "Canadian" transactions because all rating agencies active in Canada are also active in the United Sates. In response to those concerns, the SEC exempted rating agencies from complying with 17g-5(a)(3) in respect of transactions where the issuer was not a U.S. person and where the rating agency had a reasonable basis to conclude that the structured finance product would not be offered and sold in the United States. The initial exemption order was available until December 2, 2010. It was later extended until December 2, 2011 and now, pursuant to this most recent order of the SEC, to December 2, 2012.
The most recent extension is also framed as a request for comment. While a frequent comment is that this exemption for non-U.S. transactions should be made permanent, apparently the SEC is seeking further comment on the issue.
Peter Milligan is Chair of the Banking & Financial Services Practice Group.
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