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Regulation and Compliance > Federal Regulation > IRS

IRS Cuts Rating Agencies from Internal Revenue Code Regs

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The Internal Revenue Service (IRS) is starting the formal process of removing direct references to credit rating agencies from the regulations implementing the Internal Revenue Code (IRC).

The IRS, an arm of the U.S. Treasury Department, is making the changes to implement Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which requires federal financial services regulators to remove references to, or requirements for reliance on, credit ratings, from agency regulations.

Congress included the provision in Dodd-Frank Act because of concerns that excessive reliance on ratings had contributed to the severity of the credit market crisis that started in 2007 and the recession that started in 2008.

The IRS is making the changes by publishing final and temporary rating reference removal regulations and a notice announcing that the IRS will be developing additional final rating reference removal regulations.

The temporary regulations, final regulations and notice of proposed rule making appear today in the Federal Register.

The final regulations and temporary regulations, which take effect today, affect many different sections of the Internal Revenue Code regulations, IRS officials say in a preamble to the regulations.

“Some changes involve simple word deletions or substitutions,” officials say. “Others reflect the revision of a sentence to remove the credit rating references. In some cases, multiple sentences have been modified. Where appropriate, substitute standards of credit-worthiness replace the prior references to credit ratings, credit agencies or functionally similar terms.”

The IRS has made the changes solely to eliminate prohibited references, and “no additional changes are intended,” officials say.

In a section listing examples of securities underwriters’ issuance costs, the existing regulations have referred to “rating agency fees.” The IRS is changing that reference to “fees paid to an organization to evaluate the credit quality of the issue.”

“No substantive change is intended,” officials say.

Elsewhere, the IRS gives examples of cases in which it would be appropriate for a securities dealer to take a credit risk adjustment, to “describe the credit risk adjustment implicit in the yield curve used to discount the present value of the cash flows,” officials say. “This adjustment affects whether any additional credit risk adjustments are warranted.”

In the examples, the IRS referred to credit ratings and rating agencies.

The IRS has now deleted those references.

“The changes that have been made to the language of the examples do not alter the purpose of the illustrations and present the factual issues in a more generalized way,” officials say.

In the notice of proposed rulemaking for the additional final regulations, officials note that the proposed regulations would be identical to the temporary regulations posted today.

Comments on the proposed regulations are due Aug. 30.

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