Wednesday, July 21, 2010

Davis-Polk Guidance on Use of Credit Ratings in Securities Offerings Following Dodd-Frank

Among the many provisions contained in The Dodd-Frank Wall Street Reform and Consumer Protection Act (signed into law by the President today), is a provision which nullifies Rule 436(g) under the Securities Act beginning tomorrow . Under Rule 436, if information is included in a registration statement that is prepared or certified by an expert, that expert’s consent must be obtained. Rule 436(g) had provided an exemption for credit ratings provided by nationally recognized statistical rating organizations (or “NRSROs”) such that consent was not required even if a rating was included in the registration statement.

Many corporate issuers refer to the ratings of their outstanding debt and preferred securities in the prospectus and prospectus supplements for those securities as well as in their Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that are incorporated into their registration statements. The repeal of Rule 436(g) therefore raises certain questions regarding the continued use of ratings information given that certain rating agencies have already indicated that they are currently unwilling to consent and others are expected to take a similar position.

Please click here for a White Paper, prepared by Davis Polk along with several other law firms, after consultation with staff members of the SEC Division of Corporation Finance, which sets forth approaches that we believe are appropriate with respect to the use of NRSRO ratings in offerings of securities.[1]

[1] This white paper does not address asset-backed securities offerings governed by Regulation AB, as Regulation AB requires inclusion of ratings information.

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