The SEC proposed amendments that would remove the investment grade rating exemptions from Rules 101(c)(2) and 102(d)(2) of Regulation M. The Dodd-Frank Wall Street Reform and Consumer Protection Act called for the SEC to review its rules that used credit ratings as an assessment of credit-worthiness and to replace those references with other appropriate standards. The SEC has done so, with Regulation M being the last such rule to retain references to credit ratings.

Rule 101(c)(2) and Rule 102(d)(2) of Regulation M currently except nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities that are rated investment grade by at least one nationally recognized statistical rating organization. Rule 101 applies to distribution participants and their affiliated purchasers, and Rule 102 applies to issuers, selling security holders, and their affiliated purchasers. In place of the investment grade rating requirement, under Rule 101, the Commission is proposing to except (1) nonconvertible debt securities and nonconvertible preferred securities of issuers having a probability of default of less than 0.055%, as measured over certain period of time and as determined and documented using a “structural credit risk model,” as defined in the rule, and (2) asset-backed securities that are offered pursuant to an effective shelf registration statement filed on the Commission’s Form SF-3. The Commission is proposing to eliminate from Rule 102 the existing exception for investment grade nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities.

The proposing release is available here. The comment period is open for 60 days following the publication of the proposing release on the SEC’s website, which occurred on March 25, 2022.

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