SEC Proposes Eliminating Credit Rating References from Rules on Market Manipulation

The SEC proposed amendments to rules on securities market manipulation ("Regulation M") that would remove references to reliance on credit rating agencies, in accordance with Section 939A of the Dodd-Frank Act ("Review of reliance on ratings").

Regulation M prevents certain parties engaged in the distribution of securities from manipulating the market for those securities. Currently, Rules 101(c)(2) and 102(d)(2) exempt nonconvertible securities and asset-backed securities from Regulation M if a nationally recognized credit rating agency rates the security as investment grade.

The proposed rule amendments would replace the current exemptions based on rating agency ratings by:

1. amending Rule 101(c)(2) to provide exemptions for: (i) nonconvertible securities of issuers determined to have a default probability of less than 0.055% using a structural credit risk model estimated from the offering price date over 12 calendar months, and (ii) asset-backed securities that are issued according to an "effective shelf registration statement filed on the Commission’s Form SF-3"; and
2. adding Rule 17a4(b)(17), which would require parties using Rule 101’s exception to keep written record of the probability of default determination for three years.