[co-author: Marc Leong]

During yesterday's open meeting of the U.S. Securities and Exchange Commission (the “SEC”), the Commissioners unanimously voted to adopt amendments to remove references to credit ratings from Regulation M, and replace these with alternative standards of creditworthiness. The existing exceptions in Rules 101 and 102 of Regulation M for certain investment grade rated securities will be replaced with exceptions for: (1) nonconvertible debt securities and nonconvertible preferred securities of issuers having a probability of default of 0.055% or less, measured over a certain period of time, and as determined and documented by the lead manager of the distribution using a “structural credit risk model” as defined in the final rules; and (2) asset-backed securities that are offered pursuant to an effective shelf registration statement filed on Form SF-3. The SEC also added a record preservation requirement for broker-dealers in connection with their probability of default determinations in reliance on the new exception in Rule 101.

The final rules adopted are largely similar to the amendments originally proposed by the SEC in March 2022, with certain modifications implemented to address feedback received during the comment period.

The final rules will become effective 60 days after publication in the Federal Register.

For more information, see the SEC’s Adopting Release and Fact Sheet. A legal update will follow.

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