When the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd‑Frank Act) was signed into law by President Obama on July 21, 2010, it imposed a set of reforms designed to increase regulatory oversight of nationally recognized statistical rating organizations (NRSROs), hold rating agencies accountable for the quality of their credit ratings and enhance the transparency of credit ratings. Among the most significant changes brought about by the new legislation is the repeal of Rule 436(g) under the Securities Act of 1933, as amended (the Securities Act), which has the effect of exposing NRSROs to liability as experts under Section 11 of the Securities Act when credit ratings they provide to an issuer are included or incorporated by reference into a Securities Act registration statement or prospectus. Prior to July 22, 2010, Rule 436(g) provided an exemption for credit ratings issued by NRSROs from being viewed as a part of the registration statement or prospectus prepared or certified by an expert, so that issuers that included or incorporated by reference disclosure of their credit ratings did not need the consent of the NRSROs to do so. The repeal of Rule 436(g) means that NRSROs now must consent to the use of their credit ratings in Securities Act registration statements and prospectuses.
We understand that as of the date of this memorandum, the NRSROs have not agreed to provide consents to issuers, creating a stalemate and forcing issuers that disclose credit ratings in their periodic reports filed with the Securities and Exchange Commission (SEC) to consider whether they can continue to use public offerings to access the capital markets if they conclude the consent of an NRSRO is required. Shearman & Sterling and a number of other Wall Street law firms have discussed the issues raised by the repeal of Rule 436(g), consulted with members of the staff of the SEC’s Division of Corporation Finance and collectively issued a White Paper that sets forth possible approaches that could be available under current SEC rules to address issues raised by the repeal of Rule 436(g). It is important to note that the White Paper does not address the issue of the need for a consent from an NRSRO in the context of offerings of asset-backed securities subject to Regulation AB. Those issues are being considered separately. A copy of the White Paper is available here.