U.S. Securities and Exchange Commission efforts (SEC) to reduce reliance on the credit rating agencies could make SEC reporting procedures more complicated for some insurers, the SEC says.
The SEC now lets companies register many non-convertible securities using the Form S-3 and Form F-3 “short forms” if the securities have investment-grade ratings from at least of the big “nationally recognized statistical rating organizations” (NRSROs).
In the future, the SEC would like to eliminate the reference to NRSRO ratings. Instead of qualifying on the basis of having a good credit rating, an offering could qualify for using the short forms if the issuer had issued at least $1 billion of non-convertible securities in transactions registered under the Securities Act of 1933, other than equity securities, for cash during the past 3 years.
The NRSRO investment grade rating provision was originally proposed in 1981 and was a looser form of a short form eligibility rule adopted in 1954, officials say.
The SEC is developing the rule to implement Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which calls for the agency to reduce reliance on the credit ratings in official proceedings.
The SEC started working on the rule in 2008, before the Dodd-Frank Act passed.
“While we recognize that credit ratings play a significant role in the investment decision of many investors, 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 nationally recognized statistical rating organization,” officials say in a preamble to the proposed securities ratings rule that appeared in the Federal Register Wednesday.
Issuers like being eligible to use the short forms, because,
when they use the short forms, they can hold down the length of filings by including references to previously filed filings.
For issuers, a more important reason to qualify to use the short forms is to gain eligibility to conduct fast, flexible “off-the-shelf” offerings under Securities Act Rule 415.
Issuers that register off-the shelf offerings can prepare their paperwork in advance, then sell the securities when market conditions are right, without waiting for further SEC action.
The SEC says it believes the change might keep about 45 issuers, including 5 insurers, from continuing to use the short forms.
Insurance industry commenters and other commenters who responded to an earlier version of the changed proposed in 2008 suggested that the change would affect more companies than the SEC expects, officials say.
Some commenters predicted that the change would lead companies to conduct more private and offshore offerings, officials say.
In a call for comments, the SEC specifically asks about how it could create a special provision that would help the insurers that now use the short forms to continue to do so, even if they do not meeting the $1 billion issuance threshold.
Officials ask whether the special provision should require insurers using the short forms and off-the-shelf offerings to be regulated by state insurance commissioners or the equivalent; whether the provision should require that the insurers undergo regular financial examinations; and whether an insurer should be allowed to use Form S-3 to issue a security with a value that varies according to the investment experience of a separate account.
Comments o the proposed rule are due March 28.