SEC Adopts New Short Form Criteria to Replace Credit Ratings

SEC SealIt is a well known fact that the overreliance on credit rating agencies was a major cause of credit bubble. In a move to curb the powers of credit rating agencies, the US Security and Exchange Commission adopted a new criteria where companies seeking ‘Short Form’ while registering for new securities for public sale will not require ratings from a Credit Rating Agency. The new rules eliminate the credit ratings criteria and replace it with four new tests, one of which must be satisfied for an issuer to use Form S-3 or Form F-3. In order to ease transition for companies, the rules include a temporary, three-year grandfather provision. In a report released by SEC on Tuesday, it said:

The Securities and Exchange Commission today voted unanimously to adopt new rules in light of the Dodd-Frank Wall Street Reform and Consumer Protection Act to remove credit ratings as eligibility criteria for companies seeking to use “short form” registration when registering securities for public sale.

Instead of the ratings criteria, the final rules allow for the use of Form S-3 or Form F-3 if the issuer satisfies one of the following four tests:

  1. The issuer has issued (as of a date within 60 days prior to the filing of the registration statement) at least $1 billion in non-convertible securities other than common equity, in primary offerings for cash, not exchange, registered under the Securities Act, over the prior three years.
  2. The issuer has outstanding (as of a date within 60 days prior to the filing of the registration statement) at least $750 million of non-convertible securities other than common equity, issued in primary offerings for cash, not exchange, registered under the Securities Act.
  3. The issuer is a wholly-owned subsidiary of a well-known seasoned issuer as defined under the Securities Act.
  4. The issuer is a majority-owned operating partnership of a real estate investment trust that qualifies as a well-known seasoned issuer.

This step by US SEC can be seen in two ways:

First, that is US is seriously considering to curb the powers enjoyed by Credit Rating Agencies in order to have fairer market valuations of securities and avoid any credit bubble in the future. This, of course, is a good move if looked at that way.

Secondly, we are about to see a downgrade of US from Credit Ratings Agencies which means US government is trying to prove that Ratings are no more the criteria for investing or selling assets in US and there are other ways in which securities would be valued by US.

Hitesh Anand

I am a post graduate from Newcastle University, UK. I like studying and analyzing economic data and financial health of world.

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