Various postmortems of the financial crisis have resulted in a consistent theory: that to some extent, regulators, investors, and companies have been overly reliant on credit-rating agencies, an industry dominated by three players (Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings). To ease up on this dependence, the Dodd-Frank Act called on regulators to examine and consider changing their rules for references of the raters.
On Tuesday the Securities and Exchange Commission took a small step in that direction by revising how companies determine whether they can file a shelf registration for their debt securities with the regulator. Previously, in order to qualify, a company had to show its offering was considered investment-grade quality by at least one NRSRO (nationally recognized statistical rating organization), the label the SEC uses for what it considers valid rating agencies.
That caveat had inadvertently required that investors and companies trust the ratings and rely on their assessments. The SEC acknowledged this point earlier this year with its proposal for changing the requirement for its registration forms S-3 and F-3. (Companies use these forms to set up a securities offering for a quick release at a later date, as much as three years in advance.) “We want to avoid using credit ratings in a manner that suggests in any way a ‘seal of approval’ on the quality of any particular credit rating or [NRSRO],” the SEC said in its proposal.
Now, the NRSRO assessment doesn’t matter for the forms. Instead, companies will have to meet one of the following four tests to qualify for S-3 and F-3 filings.
• Within 60 days of the registration filing, the securities issuer has issued at least $1 billion in nonconvertible securities other than common equity, in primary offerings for cash, over the previous three years.
• The issuer has at least $750 million of nonconvertible securities other than common equity, issued in primary offerings for cash.
• The issuer is a wholly owned subsidiary of what the SEC considers a “well-known seasoned issuer.”
• The issuer is a majority-owned operating partnership of a real estate investment trust that qualifies as a well-known seasoned issuer.
The SEC tread carefully with the changes. The agency is temporarily grandfathering in companies that would have qualified under the old criteria, for three years. The vote in favor of the changes was unanimous, but some commissioners suggested they be revisited if any companies that would have been able to use a shelf registration under the old rules cannot do so now. Indeed, critics of the original proposal, including finance executives, were concerned that the more limited requirements in the proposal would exclude more companies from this capital-raising option.
But SEC chairman Mary Schapiro sounded a reassuring note on Tuesday. “Just about all issuers that currently could rely on the existing test would be able to qualify for the revised forms,” she said.
The SEC last made changes to its shelf-registration rules three years ago by allowing smaller companies — those with a public float below $75 million — to use the forms. Chronically late filers and companies not listed on a national securities exchange are still ineligible to use the service.