• SEC Extends Temporary Exemption for Certain Non-US Transactions from the Requirements of Rule 17g-5(a)(3) Until December 2, 2012
  • December 16, 2011
  • Law Firm: Norton Rose Canada LLP - Montreal Office
  • Rule 17g-5

    Rule 17g-5, promulgated under the US Securities Exchange Act of 1934, as amended, was enacted to limit conflicts of interest arising in connection with the determination of ratings by Nationally Recognised Statistical Rating Organisations (“NRSROs”), which are rating agencies registered with the US Securities and Exchange Commission (the “SEC”). More specifically, Rule 17g-5(a)(3) (the “Rule”) prohibits an NRSRO from receiving payments from an issuer, sponsor or arranger in connection with issuing or maintaining credit ratings on certain structured finance products unless the information provided to the NRSRO in connection with the ratings process is made available on a password protected website accessible by other NRSROs. The Rule applies to offerings of structured finance products made in the United States, but by its terms applies equally to offerings made by non-US persons conducted entirely offshore (i.e., outside of the United States). The purpose of the Rule is to encourage unsolicited ratings and ongoing monitoring by NRSROs that are not hired by the arrangers, with the objective of providing users of credit ratings with more views on the creditworthiness of structured finance products. The Rule became effective on February 2, 2010, and the compliance date for the Rule was June 2, 2010.

    The exemption

    Securities regulators outside the United States and other market participants informed the SEC that many foreign arrangers were not prepared to comply with the Rule and expressed concern that local securitization markets would be disrupted. Additionally, concern was expressed about conflicts with European Union data protection laws, bank secrecy laws and ratings regulation. The SEC therefore determined that a delay in the application of the Rule to non-US transactions was appropriate.

    On May 19, 2010, the SEC issued an order (the “Initial Order”) delaying the application of the Rule for ratings of structured finance products which are (1) issued by a non-US person and (2) which the NRSRO has a “reasonable basis” to believe will not be offered, sold or resold within or into the United States. The SEC indicated in this order that the term non-US person would have the meaning ascribed to it in Regulation S under the US Securities Act of 1933, as amended (the “Securities Act”). The SEC thereby effectively exempted Regulation S-only issuances by European issuers from application of the Rule.

    The meaning of 'reasonable basis'

    The question of whether an NRSRO has a “reasonable basis” to conclude that the structured finance product will meet the second element of the exemption will depend on the facts and circumstances of a given situation. The SEC has noted that in order to have a reasonable basis to draw these conclusions, the NRSRO should discuss with any arranger linked to the structured finance product (i.e., the sponsor, underwriter, and issuer) the manner in which it intends to market, sell and engage in any secondary market activities with respect to the structured finance product. The SEC has also stated that an NRSRO "may choose to obtain from the arranger" a representation upon which the NRSRO can reasonably rely that sales of the structured finance product will meet this condition. Factors the SEC has identified as relevant to the analysis of whether such reliance would be reasonable include: (1) whether there have been ongoing or prior failures by the arranger to adhere to its representations; and (2) whether there exists a pattern of conduct by the arranger evidencing prior failure to promptly correct breaches of its representations.

    Extension of the exemption

    The Initial Order provided for a temporary exemption from the Rule until December 2, 2010. On November 23, 2010, the SEC extended the exemption until December 2, 2011 (the “Extension Order”). On November 16, 2011, the SEC once again ordered that the temporary exemption be extended until December 2, 2012 (the “Second Extension Order”).

    Requests for Comments

    The SEC is soliciting further comments as to the extra-territorial application of the Rule.  Procedures for submitting comments can be found in the Second Extension Order. 


    The Initial Order: http://www.sec.gov/rules/exorders/2010/34-62120.pdf

    The Extension Order: http://www.sec.gov/rules/other/2010/34-63363.pdf

    The Second Extension Order: http://www.sec.gov/rules/other/2011/34-65765.pdf