SEC Sets Effective Date to Eliminate Credit Rating References from Rules on Market Manipulation

The SEC set an effective date of August 21, 2023, for amendments that will remove references to credit ratings from existing exceptions to rules on market manipulation (Regulation M), in accordance with Dodd-Frank Section 939A. The effective date was published in the Federal Register.

As previously covered, Regulation M prevents certain parties engaged in the distribution of securities from manipulating the market for those securities. Currently, Rules 101(c)(2) ("Activities by distribution participants") and 102(d)(2) ("Activities by issuers and selling security holders during a distribution") exempt nonconvertible securities and asset-backed securities from Regulation M if a nationally recognized credit rating agency rates the security as investment grade. Under the final rule, the SEC is removing investment grade exceptions.

The SEC amendments will replace the current exemptions based on rating agency ratings by:

• 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 percent 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
• adding new Rule 17a4(b)(17), which would require parties using the Rule 101 exception to keep written records of the probability of default determination for three years.