[Federal Register Volume 59, Number 172 (Wednesday, September 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-21924]


[[Page Unknown]]

[Federal Register: September 7, 1994]


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Part III





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Parts 228, 229, 230 and 249




Disclosure of Security Ratings; Proposed Rule and Nationally Recognized 
Statistical Rating Organizations; Notice
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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 228, 229, 230 and 249

[Release Nos. 33-7086; 34-34617; IC-20509; File No. S7-24-94]
RIN 3235-AG20

 
Disclosure of Security Ratings

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: The Securities and Exchange Commission (``Commission'') today 
is publishing for comment proposals to require disclosure with respect 
to security ratings in prospectuses under the Securities Act of 1933 
and material changes in security ratings on Form 8-K under the 
Securities Exchange Act of 1934. The proposals specify the disclosure 
necessary with respect to ratings, whether disclosed voluntarily or 
pursuant to the new requirements. Today's proposals are intended to 
improve the quality and timeliness of security ratings disclosures 
provided to investors and the financial markets in prospectuses and 
periodic reports, and to reduce the potential for market 
misunderstanding and confusion over the scope and meaning of security 
ratings.

DATES: Comments should be received on or before December 6, 1994.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549. Comment letters should refer to File No. S7-
24-94. All comments received will be available for public inspection 
and copying at the Commission's Public Reference Room, 450 Fifth 
Street, NW., Washington, DC 20549.

FOR FURTHER INFORMATION CONTACT: Brian P. Miller, or Michael H. 
Mitchell, at (202) 942-2900, Division of Corporation Finance, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549. For issues relating to investment companies, contact Kenneth 
J. Berman, at (202) 942-0721, Division of Investment Management, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is publishing for comment 
proposed Item 202(g) of Regulation S-K\1\ and proposed Item 202(d) of 
Regulation S-B\2\ under the Securities Act of 1933 (``Securities 
Act'')\3\ and the Securities Exchange Act of 1934 (``Exchange 
Act'')\4\ to require disclosure of solicited security ratings assigned 
by nationally recognized statistical rating organizations (``NRSROs'') 
to registered securities or any rating, whether or not assigned by an 
NRSRO, that is used by a participant in the offering, and to mandate 
the disclosure necessary in connection with any discussion of ratings, 
voluntary or required, in prospectuses. The Commission also is 
publishing for comment new Item 9 of Form 8-K\5\ under the Exchange Act 
to require disclosure of material rating changes. The Commission is 
proposing to rescind its policy on voluntary security ratings 
disclosure set forth in Section 10 of Regulations S-K and S-B,\6\ and 
is proposing technical amendments to Rules 134(a)(14),\7\ 430A,\8\ and 
436(g)\9\ under the Securities Act.
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    \1\17 CFR 229.202(g).
    \2\17 CFR 228.202(d).
    \3\15 USC 77a-77aa.
    \4\15 USC 78a-78jj.
    \5\17 CFR 249.308.
    \6\17 CFR 229.10(c) and 228.10(c).
    \7\17 CFR 230.134(a)(14).
    \8\17 CFR 230.430A.
    \9\17 CFR 230.436(g).
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I. Background

A. Disclosure of Security Ratings--Current Policy

    In 1981, the Commission, recognizing the importance of security 
ratings to investors and to the marketplace, reversed its historic 
policy of precluding disclosure of security ratings in registration 
statements, prospectuses, and other offering documents.\10\ The 
Commission adopted a policy that permits, but that does not require, 
issuers to disclose in Commission filings security ratings assigned by 
rating organizations to classes of debt securities, convertible debt 
securities, and preferred stock.
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    \10\Securities Act Release No. 6336 (Aug. 6, 1981). While 
adopting the policy in 1981, the Commission set forth its views on 
ratings disclosure in Regulation S-K, Item 10(c), 17 CFR 229.10(c), 
in connection with adoption of its integrated disclosure system in 
1982. Securities Act Release No. 6383 (Mar. 16, 1982).
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    The policy distinguishes between security ratings assigned by 
NRSROs and those assigned by other rating organizations.\11\ The most 
significant distinction is the provision allowing the inclusion of a 
security rating by an NRSRO in a registration statement without having 
to provide a written consent from the NRSRO to be named as an expert 
for purposes of Section 11 of the Securities Act.\12\ Any non-NRSRO 
rating organization must furnish a consent and take on expert liability 
under the Securities Act if its rating is included in the registration 
statement and prospectus.\13\ In addition, under the policy, issuers 
may disclose a rating in tombstone advertisements on a limited basis, 
provided that the rating is assigned by an NRSRO.\14\ As part of the 
same initiative, the Commission incorporated eligibility criteria based 
on ratings by NRSROs into its short form registration forms under the 
Securities Act.\15\ In doing so, the Commission noted that investment 
grade securities typically were purchased on the basis of interest 
rates and ratings.\16\
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    \11\For purposes of the policy, the term ``NRSRO'' has the same 
meaning as used in the Commission's net capital rule, Rule 15c3-1. 
17 CFR 240.15c3-1. In so doing, the Commission noted that the 
purposes underlying the voluntary ratings disclosure policy differ 
from those underlying the net capital rule, but did not believe that 
a different meaning of NRSRO was necessary. The process by which 
rating organizations are recognized as NRSROs is discussed in the 
companion ratings concept release issued by the Commission today 
which solicits comment on the Commission's role in using the ratings 
of NRSROs (Exchange Act Rel. 34616 (Aug. 31, 1994)).
    \12\15 USC 77k. See also 17 CFR 230.436(g).
    \13\See Robert A. Stanger & Co., SEC No-Action Letter (Nov. 7, 
1986); See also Securities Act Release No. 6383, in which the 
Commission adopted the integrated disclosure system; 17 CFR 436(g).
    \14\See Rule 134(a)(14)(ii) under the Securities Act. 17 CFR 
230.134(a)(14)(ii).
    \15\See Securities Act Release No. 6383; Forms S-3 (17 CFR 
239.13) and F-3 (17 CFR 239.33).
    \16\See Securities Act Release No. 6383.
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    Underlying the Commission's change in policy and the disclosure 
guidance it provided in its policy statement was an understanding of 
rating practices and disclosures as they had developed through the 
1970s. In announcing the policy, the Commission noted the significance 
and usefulness of security ratings, as shown by the use of ratings ``by 
investors, by market professionals in establishing the appropriate 
price and yield for a particular security and by regulatory bodies, 
including the Commission.''\17\
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    \17\Securities Act Release No. 6336. Even before the Commission 
adopted its 1981 ratings disclosure policy, the Commission relied on 
or permitted disclosure of ratings in other contexts. The first 
regulatory use of ratings was in the Commission's net capital rule, 
which allows broker/dealers reduced deductions from net capital for 
certain holdings rated in certain investment grade categories. 17 
CFR 240.15c3-1. In addition, the Commission used ratings in certain 
of its rules under the Investment Company Act of 1940 (``Investment 
Company Act'') and permitted disclosure of certain ratings in 
investment companies' registration statements. See, e.g., Rule 10f-3 
under the Investment Company Act. 17 CFR 270.10f-3. The policy 
release also noted the extent to which state legal investment laws 
for banks, savings and loans, and insurance companies incorporated 
security ratings.
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    The security ratings encompassed by the Commission's policy were 
understood generally to be credit ratings. In the release announcing 
the policy, the Commission noted that the typical security rating at 
the time was ``an alphabetical designation which attempts to quantify 
the likelihood that an issuer will be able to comply with the terms of 
a particular obligation,''\18\ and cited one rating organization's 
designation as a ``current assessment of the creditworthiness of an 
obligor with respect to a specific debt obligation.''\19\ The release 
went on to state that a debt rating was ``an evaluation of the 
likelihood that an issuer will be able to make timely interest payments 
and will be able to repay principal,'' and a preferred stock rating was 
an ``assess[ment] of the relative security of dividend payments.''\20\
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    \18\Securities Act Release No. 6336.
    \19\Id.
    \20\Id.
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    In adopting a policy of voluntary ratings disclosure, the 
Commission noted that the state of affairs at the time did not show a 
``pressing need'' for mandatory disclosure.\21\ Underlying the 
Commission's action was an understanding that the market viewed debt 
securities and preferred stock with the same rating designation and 
comparable payment terms as fungible.
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    \21\Id.
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    The importance of security ratings continues today. Ratings 
influence a company's cost of capital. Investment bankers and issuers 
often solicit the rating organizations' views when developing new 
financial instruments or structuring financing transactions. Investors 
typically use ratings for various reasons such as establishing internal 
investment guidelines and considering alternative investments. Because 
of changes in the securities market the Commission has determined to 
reconsider its policy of voluntary ratings disclosure.

B. Growth of Customized, Structured, and Derivative Securities

    Since adoption of the Commission's policy on security ratings, 
there has been a dramatic proliferation in the types of securities 
offered in the marketplace, with the development of a vast market for 
mortgage and asset backed securities and other highly structured or 
derivative financial instruments. The rights and obligations evidenced 
by these financial instruments typically differ significantly from the 
traditional fixed obligations, evidenced by corporate debt and 
preferred stock, to pay sums certain in the form of interest and 
principal or dividends at set intervals. Moreover, in addition to the 
change in the types of securities being rated, the scope and meaning of 
ratings themselves have become more variable. Disclosure concerning 
ratings, however, has remained largely static.
1. Evolution of Financial Instruments
    Unlike the traditional debt and preferred stock instruments upon 
which the 1981 policy was based, today many securities with the same 
rating are not viewed by the market as generic and fungible. An 
investor's investment return and the issuer's payment obligations 
evidenced by these instruments often are contingent on, and highly 
sensitive to, changes in the values of underlying assets, indices, 
interest rates and cash flows. Risks relating to fluctuations in 
interest rates and other economic and market factors may be as 
important to an instrument's investment return as the issuer's 
creditworthiness. Because of these non-credit payment risks, there is 
substantially greater uncertainty relating to yield and total return 
than for traditional debt obligations of comparable credit rating. 
Moreover, the terms of these financial instruments are highly complex 
and frequently are individually tailored to specific investor demands. 
In short, today's instruments run along a spectrum from a fixed 
obligation to pay sums certain to a highly contingent residual interest 
in variable future cash flows.
    For example, structured notes offer an infinite variety of payment 
obligations and present substantial cash flow, market, and liquidity 
risks in addition to credit risk.\22\ To illustrate, a structured note 
may promise a specified interest payment monthly for two years, but 
principal payable at maturity may be determined by reference to the 
number of days an interest index exceeds a benchmark rate, subject to a 
cap. If the index never exceeds the benchmark rate during the 
measurement period, by the instrument's terms, the investor receives 
the minimum principal amount (which often is less than face or stated 
value). Such note could be assigned a ``triple-a'' rating under a 
credit analysis if issued by a highly-capitalized, financially sound 
company. The credit rating would address the likelihood that the issuer 
will be able to pay any principal due, not the likelihood that the 
investor will receive any principal payment.
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    \22\``Structured notes are debt securities whose cash flow 
characteristics (coupon, redemption amount, or stated maturity) 
depend upon one or more indices or that have imbedded forwards or 
options. Such imbedded forwards and options in the structure of the 
notes allow underwriters to create an unlimited number of risk/
reward profiles and to customize risk characteristics to fit an 
investor's desired risk exposure.'' Comptroller of the Currency, 
Administrator of National Banks, OCC Advisory Letter 94-2, Purchases 
of Structured Notes 1 (July 21, 1994).
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    Likewise, from the relatively simple mortgage-backed obligations 
(single-class securities representing equal, undivided interests in a 
pool of mortgages) that were developed in the 1970s, mortgage-backed 
and asset-backed pooled securities have evolved through financial 
engineering into highly customized instruments with unlimited potential 
variations. While credit risk remains important to investors in 
mortgage-backed securities, additional investment considerations are 
introduced by uncertain principal prepayment speeds associated with the 
underlying interest rate sensitive assets.
    Simple mortgage-backed securities may include multiple senior-
subordinated class structures, with the subordinated classes bearing a 
disproportionate share of the credit risk, but all classes sharing 
prepayment risk equally. With more complex, customized collateralized 
mortgage obligations (``CMOs''), the cash flows (i.e., the stream of 
payments on the underlying mortgage loans) are ``carved up'' into a 
multi-class bond structure so that the prepayment risk is 
disproportionately allocated to certain classes. Each class receives 
interest and/or principal payments based on the priorities in the 
payment structure. For example, a ``planned amortization class'' 
(``PAC'') is designed to produce more stable cash flows by redirecting 
prepayments on the underlying pooled assets to other classes called 
``companion classes,'' which act as ``shock absorbers'' for the PAC 
with respect to prepayments. Both the PAC and the companion classes 
could be senior securities, and rank ``pari passu'' with respect to 
credit defaults on the underlying loans and both could be rated 
``triple a,'' notwithstanding the disproportionate share of prepayment 
risk borne by the companion classes, a risk not addressed by a 
traditional credit rating.
    ``Residual'' securities, typically representing a beneficial 
interest in whatever cash flows remain in the pool of financial assets 
after obligations to pay all other outstanding classes have been 
satisfied, have been rated. In a number of cases, because of the highly 
speculative nature of these cash flows, the residual has incorporated a 
fixed promise to pay a nominal amount, e.g., $10,000 principal in the 
early months of the security's existence, to the residual holder. The 
amount of the fixed nominal obligation may have no relationship to the 
amount paid for the residual, nor to the anticipated residual cash 
flow. The credit rating for the residual represents only an evaluation 
of the likelihood that the holder will receive the promised nominal 
amount. Thus, a residual could be rated ``triple-a'' even if there are 
other securities in the offering that are not.
2. Non-Credit Payment Evaluations
    In response to developments of derivative and structured securities 
that have significant non-credit risks, rating organizations are 
developing analytical models to evaluate the non-credit risks of these 
instruments. For example, one rating organization has developed a 
``volatility'' rating (``V-Rating''), scaled V1-V5, intended to provide 
an indication of the volatility (or, conversely, predictability) of a 
security in total return, price, and cash flow over a range or various 
interest rate scenarios.23 The volatility of ``current coupon 
agency certificates''24 is used as a benchmark. Classes assigned 
ratings of V1, V2, and V3 demonstrate volatility less than or equal to 
current coupon agency certificates over the range of interest rate 
scenarios. Classes assigned ratings of V4 and V5 demonstrate greater 
volatility over the range of interest rate scenarios than do current 
coupon agency certificates.25
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    \2\3V-Ratings analyze the potential impact of interest rate 
movements on individual tranches but do not rate the probability of 
specific interest rate scenarios. Fitch Investors Service, CMO 
Volatility Ratings (Special Report) (Feb. 6, 1992).
    \2\4This term refers to current rates on new Federal National 
Mortgage Association (``FNMA''), Federal Home Loan Mortgage 
Corporation (``FHLMC''), and Government National Mortgage 
Association (``GNMA'') mortgage participation certificates. Id.
    \2\5Id.
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    Another rating organization has adopted the practice of attaching a 
symbol--the letter ``r''--to its traditional credit rating for certain 
derivative securities to alert investors that the instruments may 
experience high volatility or dramatic fluctuations in their expected 
returns because of market risk.26 The principal function of the 
``r'' symbol is to serve as an investor alert. It does not provide a 
measure or quantification of the non-credit payment risk (although the 
rating organization continues in its efforts to develop market-risk 
measures which might quantify non-credit payment risk).27 The 
rating organization notes, however, that ``[t]he absence of an ``r'' 
symbol should not be taken as an indication that an obligation will 
exhibit no volatility or variability in total return.''28
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    \2\6``r'' Added To Volatile Derivative/Hybrid Ratings, 
Creditweek (Standard & Poor's Corp.), July 11, 1994.
    \2\7Id.
    \2\8Id.
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    A new rating permutation has evolved in response to the creation of 
cash flow securities, also known as ``kitchen-sink'' bonds.29 A 
cash flow security represents an interest in a pool of several classes 
of previously issued unrelated mortgage backed securities, which 
typically are highly sensitive to principal prepayment speed and have 
volatile yields. Because each underlying security may have been issued 
at different times, be backed by different pools of mortgage loans, 
have different allocations of principal and interest among the various 
classes, and perform differently in various interest rate and 
prepayment rate environments, the performance of the cash flow security 
will reflect a combination of the performance characteristics of the 
various underlying securities. In registered cash flow bond offerings 
seen to date, where the aggregate stated principal amounts of the 
underlying pooled securities was less than the stated principal balance 
of the cash flow securities, the cash flow securities would not qualify 
for a ``triple a'' credit rating with respect to principal repayment.
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    \2\9Laura Jereski, Kitchen-Sink Bonds May Offer Everything But 
Stability, Wall St. J., Nov. 18, 1993, at C1, C17.
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    Two rating organizations separately have developed and applied a 
methodology to analyze the likelihood of receipt of a specified amount 
of cash flow (combined interest and principal payments on the 
underlying assets) from the pooled securities, without regard to 
whether such payment amount constitutes interest or principal 
repayment.30 Assessing the likelihood of receipt of this cash flow 
combines both a credit rating and non-credit payment evaluation of 
prepayments on the underlying pooled securities. Applying prepayment 
analysis to determine the likelihood of receipt of aggregate cash flows 
represents a significant development in rating techniques.
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    \3\0See, e.g., Duff & Phelps Credit Rating Co., Rating 
Prepayment-Sensitive Cash Flow Securities (Special Report) (Aug. 
1993).
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    The cash flow ratings do not address the likelihood of receipt of 
the original principal amount of the cash flow security or the receipt 
of any specified amount of interest; the rating assesses the likelihood 
of receiving a specified dollar amount of cash over the life of the 
security. Because the cash flow rating does not address the marketed or 
expected promises, a cash flow rating may be viewed as a limited scope 
rating in that it does not rate the likelihood of payment in accordance 
with the instrument's actual or expected terms.
    Initially, cash flow ratings were assigned the same rating 
designations as assigned for traditional credit ratings. One rating 
organization has appended, and the other has expressed a willingness to 
append, a suffix to rating designations for cash flow securities.
3. Security Ratings Disclosure Practices
    Notwithstanding these developments, little has changed with respect 
to most ratings disclosures and regulatory policies using such ratings. 
Today, a traditional corporate debt instrument with fixed principal and 
interest obligations, a structured note whose principal or interest is 
tied, for example to an index of securities, an ``interest-only'' strip 
(``IO''), a collateralized mortgage obligation (``CMO'') security, a 
residual interest in a CMO offering, and a cash flow (or ``kitchen-
sink'') bond all can be designated ``triple-a,'' notwithstanding that 
investment returns on most of these instruments are largely dependent 
on factors in addition to the issuer's creditworthiness and that the 
scope of the rating differs among the securities. Moreover, despite the 
differences among these securities, issuers, financial intermediaries, 
and investors have availed themselves of the regulatory accommodations 
provided for securities rated investment grade by NRSROs.31
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    \3\1In a companion concept release issued today, the Commission 
is soliciting comment on the Commission's regulatory use of the 
ratings assigned by NRSROs. The release solicits a wide range of 
comments both as to the specific regulatory uses of NRSRO ratings, 
as well as the Commission's process for designating and monitoring 
NRSROs. See Exchange Act Release No. 34616.
    The proposals contained in this release are aimed at improving 
the quality and timeliness of disclosure of ratings in Commission 
filings under the current regulatory approach to ratings and rating 
organizations.
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II. Proposals

A. General

    The growth of customized asset-backed, derivative, and structured 
securities that have significant non-credit payment risks, as well as 
the development of ``limited scope'' ratings,32 have caused the 
Commission to reconsider its voluntary ratings disclosure policy. When 
these complex, customized securities first developed, they were 
purchased by a relatively small number of large, highly sophisticated 
institutional investors. Recent evidence suggests that these securities 
are increasingly being offered and sold to a larger investor base, 
either directly or through mutual funds and pension plans.33
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    \3\2For purposes of this release, a ``limited scope'' rating 
means a rating that assesses less than the promised (or expected, if 
different from the promised) return on the security.
    \3\3See supra note 26.
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    Current rating designations and the variation in meaning and scope 
of the ratings represented, together with the widely disparate payment 
obligations of the securities rated, have a substantial potential to 
confuse, and in some cases mislead, investors. This problem is 
exacerbated in secondary market transactions where no disclosure 
document may be delivered and ratings are described simply by shorthand 
reference to the rating letter designation. Even where there is a 
delivered disclosure document, it is often difficult to understand 
clearly the scope of the rating. Likewise, many market participants 
have assumed that the same regulatory treatment should apply to 
similarly rated securities, notwithstanding significant differences in 
the nature of the payment obligations, the significant non-credit 
payment risk exposure for many of today's securities, and the limited 
scope of some security ratings. Given the extensive use of, and 
reliance on, ratings, and the wide disparity in the meaning and 
significance of the rating, the Commission today is proposing a 
mandatory ratings disclosure scheme.

B. Mandated Disclosures

    Today's proposals would replace the current voluntary ratings 
disclosure policy with a system requiring disclosure in a final 
prospectus of a rating given by an NRSRO whenever a rating with respect 
to the securities being offered is obtained by or on behalf of an 
issuer. Material changes in ratings would be required to be reported on 
Form 8-K under the Exchange Act. The new disclosure requirements are 
intended to enhance security rating disclosures so that investors 
clearly understand what terms of a security are being rated and the 
limitations, if any, on the rating, and are advised on a current basis 
of material rating changes. In particular, the proposed disclosure 
would highlight whether the assigned rating covers timely payment of 
all obligations or whether it is limited in its scope, and whether 
there are significant non-credit payment risks not addressed by the 
rating.
1. Mandated Prospectus Disclosure
    Under the proposal, when a security rating is obtained by or on 
behalf of an issuer from an NRSRO (a ``solicited rating''), the issuer 
would be required to disclose in the final prospectus34 the rating 
assigned and a discussion of the scope of the rating.35 The issuer 
would be required to keep the prospectus disclosure of ratings current 
so long as the offering continued.36 The mandated disclosure also 
would apply when any rating (whether or not assigned by an NRSRO) is 
used in connection with the offer or sale of a security by any 
participant in the offering.37 Commenters are requested to address 
the proposed treatment of ratings used by any participant in the 
offering, particularly in view of the need to provide a consent of the 
rating organization if it is not an NRSRO.
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    \3\4As used in this release, final prospectus refers to a 
prospectus complying with Section 10(a) under the Securities Act. 15 
USC 77j.
    \3\5When a final rating is not assigned until after 
effectiveness of a registration statement, a preliminary prospectus 
should disclose the preliminary rating (if any) assigned by the 
rating organization in accordance with the disclosure requirements 
described below. If a disclosed rating is materially changed or if a 
materially different rating becomes available before effectiveness, 
the issuer should file a pre-effective amendment and should consider 
recirculating the preliminary prospectus. The issuer would update 
the final prospectus to reflect the final rating assigned and all 
related disclosure. Under the proposals, the final rating is 
considered ``pricing information'' that may be included in a final 
prospectus under Rule 430A of Regulation C. 17 CFR 230.430A.
    In connection with delayed shelf offerings, the final rating 
would be disclosed in a prospectus supplement. If a consent is 
required, it would be filed as part of a post-effective amendment 
or, for companies eligible to use a short-form registration 
statement, a Form 8-K.
    \3\6Changes in the rating information during the offering period 
would be disclosed in a prospectus supplement filed with the 
Commission pursuant to Rule 424(b). 17 CFR 230.424.
    \3\7Participant refers to the issuer, any selling 
securityholder, any underwriter and any member of the selling group.
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    As proposed, the rule would require disclosure of ``obtained'' 
NRSRO ratings, whether or not the issuer (or a participant in the 
offering) chooses to use the rating in the selling effort. Commenters 
should address whether this requirement could lead to attempts to 
thwart the mandated disclosure merely by non-substantive or procedural 
modification to the practice of assigning ratings so that, for example, 
an issuer would not view a security rating as ``obtained by or on 
behalf of the issuer'' unless agreed to by the issuer. Of course, such 
attempts would raise substantial antifraud issues. If this outcome is 
possible, should the disclosure obligation be keyed off another event 
such as when an NRSRO provides the issuer with a ``preliminary'' 
indication of what the rating would be? Should the rule mandate 
disclosure only when the NRSRO rating is used in the offering? Would 
this result in use and therefore disclosure of favorable ratings, and 
non-use and non-disclosure of unfavorable ratings? Where no NRSRO 
rating is provided in the prospectus, should the rule require 
disclosure that the securities have not been rated by an NRSRO, a 
discussion of whether there were any contacts with an NRSRO about 
rating the securities, and a summary description of the contacts which 
would include any actions taken by the NRSRO, and any views expressed 
by the NRSRO? Commenters also should address the extent to which 
practices to avoid disclosure of unfavorable ratings are likely to 
occur.
    For purposes of the proposed rules, a ``security rating'' is 
defined as a credit assessment of an issuer's ability to make payments 
of principal, interest, dividends (as applicable), or other payments on 
the instrument being rated.38 The proposed rules also would 
require disclosure of any designation assigned in connection with a 
rating organization's evaluation of the security's non-credit payment 
risks. For example, the evaluations covered by such designation would 
include an organization's analysis of prepayment speeds, effects of 
interest rates or other market based factors, event risk provisions, or 
volatility assessments done in connection with or in addition to a 
solicited rating.39 Comment is requested whether all these 
evaluations should be required to be disclosed and whether any or all 
these evaluations should be required to be disclosed even if issued in 
the absence of a solicited security rating.40
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    \3\8It should be noted that the definition of security rating 
only applies in the context of determining whether a disclosure 
obligation exists. This release should not be taken to imply that 
all security ratings would qualify as ``ratings'' for all regulatory 
purposes under the Commission's other rules.
    \3\9See supra section I.B.2., ``Noncredit Payment Evaluations.''
    \4\0Neither ``security rating'' nor ``evaluation'' is intended 
to include rankings of interests in direct participation programs.
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    The proposed rules do not mandate, but would continue to permit, 
disclosure of ratings by rating organizations that are not designated 
NRSROs. However, the mandated disclosure proposals would extend to 
ratings assigned by non-NRSROs that are used voluntarily in the 
prospectus. Comment is requested, however, as to whether disclosure 
should be required when a non-NRSRO rating is used to market the 
securities. Historically, the consent requirement has, for the most 
part, foreclosed disclosure of such ratings. Disclosure of such ratings 
in the prospectus would continue to require the rating organization to 
consent to be named in the registration statement as an expert, and 
thereby assume potential Section 11 liability under the Securities 
Act.41
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    \4\115 USC 77k.
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    The Commission solicits comment on the continued appropriateness of 
its policy of exempting NRSROs from providing consents, while other 
rating organizations are required to provide consents for their ratings 
to be disclosed in prospectuses and registration statements. Would the 
proposed disclosure requirements cause issuers to forgo ratings or seek 
ratings from non-NRSROs? Should the Commission expand the consent 
exemption to all ratings organizations? Would this result in ratings 
being issued by unqualified parties and the potential for investors to 
be misled? If the exemption were extended to all rating organizations, 
should the proposed rule mandate disclosure with respect to all ratings 
obtained by or on behalf of a registrant, whether or not issued by an 
NRSRO?
    On the other hand, should the exemption be rescinded for NRSROs? If 
the exemption were rescinded, and rating disclosure were mandated, what 
would be the effect on the practice of rating securities? Would issuers 
forgo obtaining ratings? Should the exemption be rescinded even if the 
Commission were to determine to continue its voluntary disclosure 
policy? Would this cause issuers to eliminate ratings disclosure in 
prospectuses and registration statements? If so, would ratings 
disclosure be eliminated entirely for registered public offerings or 
disseminated outside the prospectus and registration statement?
    As proposed, the rules would not require disclosure of unsolicited 
ratings--ratings issued by a rating organization on securities on its 
own initiative, not at the request of the company and not used by any 
participant in the offering. Where the company does not have any 
involvement with the rating, and does not use or permit the use of a 
rating in an offering, it would appear unwarranted for it to have to 
assume disclosure responsibility and liability for such ratings. On the 
other hand, the ability to disclose a favorable solicited rating and 
not disclose a lower unsolicited rating arguably could encourage rating 
shopping and could allow companies to avoid disclosure that there are 
disagreements about the creditworthiness of a particular security. 
Should issuers be required to disclose unsolicited ratings by NRSROs if 
materially different from that disclosed? If so, to what extent should 
issuers be responsible for ascertaining whether an unsolicited rating 
has been issued? If such unsolicited ratings are required to be 
disclosed, should the mandated disclosure be limited to the rating 
assigned and name of the issuing rating organization? Would mandated 
disclosure of unsolicited ratings in effect compel issuers to obtain 
ratings from all NRSROs to protect against having to disclose 
unsolicited ratings that may be based on incomplete information?
    The Commission also solicits comment on the need to require 
disclosure in the prospectus on the method of compensating the rating 
organization. Likewise, comment is requested as to whether the extent 
of the rating organization involvement in the structuring of the 
security should be disclosed.
    Closed-end investment companies (``closed-end funds'') often issue 
senior securities that are rated by one or more NRSROs. As with non-
investment companies, closed-end funds are not required to disclose 
these ratings in their prospectuses. Form N-2,42 the form used by 
closed-end investment companies to register under the Investment 
Company Act of 194043 and to register their securities under the 
Securities Act, sets forth the disclosure requirements for ratings when 
the rating is included in a closed-end fund prospectus.44 Comment 
is requested whether the mandatory disclosure approach being proposed 
today also should be applied to closed-end funds and other investment 
companies.
---------------------------------------------------------------------------

    \4\217 CFR 274.11a-1.
    \4\315 USC 90a et seq.
    \4\4In addition, Guide 6 to Form N-2 sets forth certain risk-
related disclosures that should be made when a closed-end fund's 
senior securities are issued with an NRSRO rating. 17 CFR 274.11a-1.
---------------------------------------------------------------------------

2. Disclosure Required with Respect to Security Ratings
    Regulations S-K and S-B are proposed to be amended to specify the 
disclosure required whenever a security rating is disclosed, either 
voluntarily or pursuant to Commission rule. The ratings disclosure 
should tie directly to the description of securities so that potential 
investors may compare the actual payment obligations, expected 
payments, and risks with the promises and risks assessed by the 
assigning rating organization. The proposed rules require description 
of: (1) What elements of the securities the rating addresses; (2) all 
material limitations or qualifications on the rating; (3) any related 
designation (or other published evaluation) of non-credit payment risks 
assigned by the rating organization with respect to the security; and 
(4) any material differences between the terms of the security as 
assumed in rating the security, and the minimum obligations of the 
security as specified in the governing instruments or, if significantly 
different, the terms as marketed to investors. For example, the rating 
description should explain if the security was rated using a yield 
assumption which differs from the expected yield being marketed to 
investors. Also, by way of example, a statement that the rating 
``covers payment obligations in accordance with the terms of the 
security'' usually would not be informative where the security permits 
the issuer to defer interest payments for a specified time period. In 
this instance, the ratings discussion should explain whether the rating 
assumes that the interest deferral provision is or is not exercised.
    The issuer would disclose the required information for each 
solicited rating. If the rating designation includes a reference to a 
designation or published evaluation of non-credit payment risk (e.g., 
sensitivity to movements in interest rates), the additional analysis 
should be described. Where related evaluations are done, any use of the 
rating designation should include the designation for the related non-
credit payment evaluation so investors relying on the designation are 
not left unaware of the related evaluation. For example, where a cash 
flow security is evaluated both for likelihood of cash receipt and 
susceptibility to interest rate volatility, the designation always 
should be presented in combination.
    Not infrequently, the problem in clearly understanding the scope 
and meaning of the rating of structured instruments is exacerbated by 
the complexity and lack of clarity in the description of the securities 
being offered.45 In some cases, even the title of the securities 
could lead to investor misunderstanding of the nature of the 
securities. The description of the securities should make clear the 
extent to which payment obligations are fixed or contingent, clearly 
explaining the nature of the contingencies.
---------------------------------------------------------------------------

    \4\5See Item 202 of Regulation S-K. 17 CFR 229.202.
---------------------------------------------------------------------------

    In many cases, securities are offered on the basis of expected 
returns that can vary from the issuer's contractual commitments. For 
example, the terms of some asset-backed securities obligate the issuer 
only to pay available funds passed through from the underlying assets, 
but investors may expect a minimum stated return and, in fact, the 
security may be marketed as providing a stated return. In such cases, 
care needs to be used in both primary and secondary transaction 
disclosures to ensure that investors understand the limited obligation 
of the issuer.
    Comment is requested on the adequacy of the proposed disclosure 
requirements and whether the proposed requirements would assure that 
investors will be able to understand the limitations associated with a 
rating and will be able to compare ratings. Commenters suggesting 
alternative items should be specific in their suggestions. Commenters 
also should suggest approaches to ensure that the description of 
securities is clear and complete, and to ensure that security titles 
convey the risks involved in an investment.
    Comment also is requested as to whether issuers should be required 
to disclose activities that could be viewed as ``rating shopping''--
that is approaching a number of rating organizations to determine which 
organization will provide the highest rating on security terms most 
favorable to the issuer. To what extent does this practice occur and 
warrant such disclosure? Should the rules require issuers to disclose 
contacts with any NRSRO with respect to rating the securities being 
registered? If such disclosure is favored, should it only be required 
if the issuer discloses a rating in its prospectus? Alternatively, 
should such contacts be reported even if no rating is disclosed or 
required to be disclosed in the prospectus? If disclosure of 
preliminary contacts with NRSROs is required, what effect will such 
disclosures have on rating practices?
    Mutual funds often represent that they invest only in securities 
that have a specified rating, such as investment grade, or disclose the 
percentage of their portfolios comprised of securities with specified 
ratings. As discussed above, a rating may not convey a security's level 
of market risk, and, in the absence of appropriate disclosure, 
investors may not perceive the limitations of a rating or the 
investment characteristics it addresses. Comment is requested whether 
current mutual fund disclosure practices and requirements adequately 
address the limitations and scope of ratings and how mutual fund 
disclosure documents could be improved to improve investor 
understanding of the limitations of ratings.
3. Rating Designations
    As discussed above, rating organizations frequently have used the 
same rating designations to represent their evaluation of a wide range 
of instruments with disparate types of payment obligations and, in many 
cases, subject to substantial market, cash flow, and liquidity risks. 
In some cases, the same designation has been used to represent limited 
scope ratings such as those involving cash flow securities and 
residuals. Recently, some NRSROs, when rating various interest rate 
sensitive instruments, have begun to use modifying designations to 
indicate the existence of non-credit payment risk but not a judgment of 
the extent of this risk.
    Given the market's widespread use of ratings, and the common use of 
simple letter designations as shorthand communications of the rating, 
there is a substantial potential for investor misunderstanding. This 
problem can be particularly acute in the secondary markets.
    Comment is requested as to the potential for investors to be 
confused or misled about the nature of the security or the meaning of a 
rating as the result of current rating designation practices. Should 
the disclosure of ratings require the use of designations that clearly 
distinguish traditional credit ratings from cash flow, residual or 
other limited scope ratings? Should ratings of securities subject to 
substantial non-credit related payment risks continue to be designated 
the same as securities that do not carry such risks? To the extent that 
commentators believe that there is a significant likelihood that 
investors may be misled through rating designations, should the 
Commission rely on rating organizations' self regulation to address the 
problem, or should the Commission take regulatory action to assure that 
a rating organization's designation system avoids issuing the same 
rating designation to securities having substantially different credit 
or other non-credit payment risks?
4. Security Rating Changes
    The Commission is proposing to require issuers to report material 
changes in security ratings of their securities on Form 8-K. Not only 
is such information of importance to a company's security holders, but, 
as noted in the Commission's recent release on municipal disclosures, 
timely disclosure of such rating action is important to the efficiency 
and transparency of the debt markets.46
---------------------------------------------------------------------------

    \4\6See Securities Act Release No. 7049.
---------------------------------------------------------------------------

    Under the proposal, issuers would be required to file a Form 8-K 
report within 15 calendar days of having been advised by the rating 
organization of a material change in any NRSRO rating obtained for its 
securities, including commercial paper, or any other rating of its 
securities that has been previously disclosed in a prospectus or 
registration statement for such securities registered under the 
Securities Act. As proposed, the disclosure of the changed rating would 
be accompanied by the same disclosure specified in Item 202(g) of 
Regulation S-K.47
---------------------------------------------------------------------------

    \4\7Only information with respect to the ratings subject to 
change would be required.
---------------------------------------------------------------------------

    Comment is requested as to whether the Commission's proposal to 
mandate disclosure of material ratings upgrades is appropriate. Under 
the proposal, it is contemplated that reporting of all adverse rating 
changes would be required. The Commission requests comment as to 
whether there are rating downgrades that commenters believe should be 
viewed as immaterial. In particular, are there classes of securities as 
to which information on downgrades would not be material to a company's 
shareholders or debtholders?
    Comment also is requested as to the appropriateness of the 15 day 
calendar period for reporting the rating change. Should the period be 
shorter, e.g. 5 business days, or longer, e.g. 20 days? Should the 
period run from the date of the rating change, rather than the date of 
notice of the change to the issuer? Should rating changes be reportable 
on a quarterly basis on Form 10-Q and Form 10-K (for the fourth 
quarter) rather than Form 8-K?
    Commenters also should address the extent of the proposed 
disclosure matters. Should the proposed disclosure be streamlined to 
require only reporting: the NRSRO or other rating organization taking 
the action; the title of the securities affected; and both the prior 
and the new ratings? Comment also is requested as to whether the 
proposed disclosure requirement should be triggered when there is a 
change in a rating disclosed in any filing with the Commission (e.g., 
annual report on Form 10-K).

III. Request for Comment

    Any interested persons wishing to submit written comments on the 
proposals, as well as any other matters that might have an impact on 
the proposals set forth in the release are requested to do so. The 
Commission requests comments on the impact of the proposals on issuers, 
potential investors, security holders, broker-dealers, rating 
organizations, and others. Comments also are requested on whether the 
proposed rule would have an adverse effect on competition that is 
neither necessary nor appropriate in furthering the purposes of the 
Securities Act and the Exchange Act. The Commission will consider 
comments in complying with its responsibilities under Section 19(a) of 
the Securities Act48 and Section 23(a) of the Exchange Act.49
---------------------------------------------------------------------------

    \4\815 USC 77s(a).
    \4\915 USC 78w(a).
---------------------------------------------------------------------------

IV. Cost-Benefit Analysis

    Assist the Commission in its evaluation of the costs and benefits 
that may result from the proposals, commenters are requested to provide 
views and data relating to any costs and benefits associated with these 
proposals. The proposals are expected to increase to some extent the 
net costs to issuers associated with registering securities for sale 
and complying with reporting requirements; these costs could be 
significant if the exemption for NRSROs from the consent requirements 
under the Securities Act were rescinded and the disclosure of ratings 
were mandatory. The costs to investors associated with these proposals 
are minimal. The proposals are expected to provide additional benefits 
to investors by enlarging the mix of information available to investors 
regarding security ratings and by alleviating the potential for market 
misunderstanding. Currently, many issuers seek security ratings for 
their securities in order to make them marketable. Because the 
proposals would require disclosure of security ratings and do not 
address whether issuers should obtain security ratings, the proposals 
are not expected to affect the issuance of rated securities, assuming 
the exemption for NRSROs from the consent requirements under the 
Securities Act is retained.

V. Summary of Initial Regulatory Flexibility Analysis

    An Initial Regulatory Flexibility Analysis has been prepared in 
accordance with 5 U.S.C. 603 for the proposed amendments. The analysis 
notes that the proposals are expected to increase regulatory costs for 
small entities which offer securities registered under the Securities 
Act.
    As discussed more fully in the analysis, the proposed changes may 
affect persons that are small entities, as defined by the Commission's 
rules. While it may be unlikely that small entities will publicly sell 
rated securities (because of the costs of obtaining a rating and 
because of the exemptions from registration available), any such small 
entity would be required to prepare additional disclosure regarding 
certain ratings assigned to the small entity's securities. While this 
would increase the compliance burdens of small entities, the analysis 
notes that no other significant alternative would achieve the 
Commission's objective of reducing the potential for market confusion 
about the scope and meaning of security ratings.
    Commenters are urged to comment on any aspect of the analysis. All 
comments will be available publicly. Any comments will be considered in 
preparing the Final Regulatory Flexibility Analysis if the proposals 
are adopted. For a copy of the analysis, contact Brian P. Miller, 
Division of Corporation Finance, Securities and Exchange Commission, 
450 Fifth Street, NW., Washington, DC 20549.

VI. Statutory Basis for Rule

    All amendments are being proposed pursuant to Securities Act 
Sections 5,50 6,51 7,52 10,53 11,54 17,55 
and 19(a),56 as amended, and Exchange Act Sections 1357 and 
23(a),58 as amended.
---------------------------------------------------------------------------

    \5\015 USC 77e.
    \5\115 USC 77f.
    \5\215 USC 77g.
    \5\315 USC 77j.
    \5\415 USC 77k.
    \5\515 USC 77g.
    \5\615 USC 77s(a).
    \5\715 USC 78m.
    \5\815 USC 78w(a).
---------------------------------------------------------------------------

List of Subjects in 17 CFR Parts 228, 229, 230 and 249

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Amendments

    In accordance with the foregoing, Title 17, Chapter II, of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

    1. The authority citation for part 228 continues to read as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 
77aa(25), 77aa(26), 77ll, 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 
77sss, 78l, 78m, 78n, 78o, 78w, 80a-8, 80a-29, 80a-30, 80a-37, 80b-
11, unless otherwise noted.

    2. By removing paragraph (e) of Sec. 228.10.
    3. By amending Sec. 228.202 to add paragraph (d) and Instructions 
to Item 202 to read as follows:


Sec. 228.202   (Item 202) Description of Securities.

* * * * *
    (d) Security Ratings.
    (1)(i) If a registrant has obtained a security rating from a 
nationally recognized statistical rating organization (``NRSRO'') with 
respect to a class of securities being registered under the Securities 
Act or any rating (whether or not assigned by an NRSRO) is used in the 
offer or sale of the securities by any participant in an offering, the 
registrant shall include in the forepart of the prospectus the 
information required by this paragraph (d) for each such rating 
obtained or used.
    (ii) If a registrant voluntarily discloses any security rating 
assigned by a rating organization other than an NRSRO in a prospectus 
or registration statement under the Securities Act, the registrant 
shall include in the prospectus the information required by this 
paragraph (d).
    (iii) If a registrant is required to disclose a change in a 
security rating pursuant to Item 9 of Form 8-K (17 CFR 249.308), the 
registrant shall disclose the information required by this paragraph 
(d) to the extent not disclosed previously, or to the extent different.
    (2) Whenever a registrant discloses a security rating pursuant to 
this paragraph (d), the registrant shall disclose the following for 
each security rating disclosed:
    (i) The identity of the rating organization assigning the rating;
    (ii) The rating assigned;
    (iii) The relative rank of the rating within the assigning rating 
organization's overall classification system;
    (iv) A description of what the rating addresses;
    (v) All material scope limitations of the rating;
    (vi) Any material differences between the terms of the security as 
assumed in rating the security, and the terms of the security as 
specified in the governing instruments;
    (vii) Any material differences in the terms of the security as 
assumed in rating the security, and the terms of the security as 
marketed to investors;
    (viii) A statement informing investors that a security rating is 
not a recommendation to buy, sell, or hold securities, that it may be 
subject to revision or withdrawal at any time by the assigning rating 
organization, and that each rating should be evaluated independently of 
any other rating; and
    (ix) Any published designation reflecting the results of any other 
evaluation done by the rating organization in connection with the 
rating, along with an explanation of the designation's meaning and the 
relative rank of the designation.

Instructions to Item 202

    1. For purposes of paragraph (d), the term nationally recognized 
statistical rating organization shall have the same meaning as used in 
Sec. 240.15c3-1(c)(2)(vi)(F) of this chapter.
    2. A registrant shall disclose any material limitations to the 
security rating on the outside front cover page of the prospectus.
    3. If a registrant includes information about security ratings in a 
prospectus pursuant to paragraph (d), the registrant shall update the 
description of each rating as set forth in this instruction 3:
    A. If a change in a rating already included in the prospectus is 
available subsequent to the filing of the registration statement, but 
prior to its effectiveness, the registrant shall include such rating 
change in the final prospectus. If the rating change is material, or if 
the registrant is required to disclose a materially different rating 
from any disclosed rating which becomes available during this period, 
the registrant shall amend the registration statement to include the 
rating change or the additional rating and should consider 
recirculating the preliminary prospectus.
    B. If an additional rating that the registrant is required to 
disclose, or if a material change in a rating already included, becomes 
available during any period in which offers or sales are being made, 
the registrant shall disclose such additional rating or rating change 
by means of a post-effective amendment, or sticker to the prospectus 
pursuant to Sec. 230.424(b) of this chapter. However, a post-effective 
amendment or sticker is not required in the case of a registration 
statement on Form S-3 (Sec. 239.13 of this chapter) if the registrant 
timely discloses the additional rating or the rating change in a 
document incorporated by reference into the registration statement 
subsequent to its effectiveness and prior to termination of the 
offering.
    4. If a registrant discloses a security rating not assigned by an 
NRSRO, the registrant also should include the written consent of the 
non-NRSRO rating organization. With respect to the written consent of 
any NRSRO, see Sec. 230.436(g) of this chapter. When the registrant has 
filed a registration statement on Form F-9 (Sec. 239.39 of this 
chapter), see Sec. 230.436(g) of this chapter with respect to the 
written consent of any rating organization specified in the Instruction 
to paragraph (A)(2) of General Instruction I of Form F-9.

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K 
    4. The authority citation for part 229 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 
77sss, 78c, 78i, 78l, 78m, 78n, 78o, 78w, 78ll, 79e, 79n, 79t, 80a-
8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted.
* * * * * 
Sec. 229.10  [Amended]
    5. By removing paragraph (c) of Sec. 229.10.
    6. By amending Sec. 229.202 to add paragraph (g) and Instructions 6 
through 9 to Item 202 to read as follows: 
Sec. 229.202   (Item 202) Description of registrant's securities. 
* * * * * 
    (g) Security Ratings.
    (1)(i) If a registrant has obtained a security rating from a 
nationally recognized statistical rating organization (``NRSRO'') with 
respect to a class of securities being registered under the Securities 
Act or any rating (whether or not assigned by an NRSRO) is used in the 
offer or sale of the securities by any participant in an offering, the 
registrant shall include in the forepart of the prospectus the 
information required by this paragraph (g) for each such rating 
obtained or used.
    (ii) If a registrant voluntarily discloses any security rating 
assigned by a rating organization other than an NRSRO in a prospectus 
or registration statement under the Securities Act, the registrant 
shall include in the prospectus the information required by this 
paragraph (g).
    (iii) If a registrant is required to disclose a change in a 
security rating pursuant to Item 9 of Form 8-K (17 CFR 249.308), the 
registrant shall disclose the information required by this paragraph 
(g) to the extent not disclosed previously, or to the extent different.
    (2) Whenever a registrant discloses a security rating pursuant to 
this paragraph (g), the registrant shall disclose the following for 
each security rating disclosed:
    (i) The identity of the rating organization assigning the rating;
    (ii) The rating assigned;
    (iii) The relative rank of the rating within the assigning rating 
organization's overall classification system;
    (iv) A description of what the rating addresses;
    (v) All material scope limitations of the rating;
    (vi) Any material differences between the terms of the security as 
assumed in rating the security, and the terms of the security as 
specified in the governing instruments;
    (vii) Any material differences in the terms of the security as 
assumed in rating the security, and the terms of the security as 
marketed to investors;
    (viii) A statement informing investors that a security rating is 
not a recommendation to buy, sell, or hold securities, that it may be 
subject to revision or withdrawal at any time by the assigning rating 
organization, and that each rating should be evaluated independently of 
any other rating; and
    (ix) Any published designation reflecting the results of any other 
evaluation done by the rating organization in connection with the 
rating, along with an explanation of the designation's meaning and the 
relative rank of the designation.

Instructions to Item 202.

* * * * *
    6. For purposes of paragraph (g), the term nationally recognized 
statistical rating organization shall have the same meaning as used in 
Sec. 240.15c3-1(c)(2)(vi)(F).
    7. A registrant shall disclose any material limitations to the 
security rating on the outside front cover page of the prospectus.
    8. If a registrant includes information about security ratings in a 
prospectus pursuant to paragraph (g), the registrant shall update the 
description of each rating as set forth in this instruction 8:
    A. If a change in a rating already included in the prospectus is 
available subsequent to the filing of the registration statement, but 
prior to its effectiveness, the registrant shall include such rating 
change in the final prospectus. If the rating change is material, or if 
the registrant is required to disclose a materially different rating 
from any disclosed rating which becomes available during this period, 
the registrant shall amend the registration statement to include the 
rating change or the additional rating and should consider 
recirculating the preliminary prospectus.
    B. If an additional rating that the registrant is required to 
disclose, or if a material change in a rating already included, becomes 
available during any period in which offers or sales are being made, 
the registrant shall disclose such additional rating or rating change 
by means of a post-effective amendment, or sticker to the prospectus 
pursuant to Sec. 230.424(b) of this chapter. However, a post-effective 
amendment or sticker is not required in the case of a registration 
statement on Form S-3 (Sec. 239.13 of this chapter) if the registrant 
timely discloses the additional rating or the rating change in a 
document incorporated by reference into the registration statement 
subsequent to its effectiveness and prior to termination of the 
offering.
    9. If a registrant discloses a security rating assigned by a non-
NRSRO, the registrant also should include the written consent of the 
non-NRSRO rating organization. With respect to the written consent of 
any NRSRO, see Sec. 230.436(g) of this chapter. When the registrant has 
filed a registration statement on Form F-9 (Sec. 239.39 of this 
chapter), see Sec. 230.436(g) of this chapter with respect to the 
written consent of any rating organization specified in the Instruction 
to paragraph (A)(2) of General Instruction I of Form F-9.

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    7. The authority citation for Part 230 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 
78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-29, 80a-30, and 
80a-37, unless otherwise noted.
* * * * *
    8. By amending Sec. 230.134 by revising paragraph (a)(14) to read 
as follows:


Sec. 230.134  Communications not deemed a prospectus.

* * * * *
    (a) * * *
    (14)(i) With respect to any class of securities, the security 
rating(s) assigned to the class of securities by any nationally 
recognized statistical rating organization(s) and the name(s) of the 
nationally recognized statistical rating organization(s) which assigned 
such rating(s), and with respect to any class of securities registered 
on Form F-9 (Sec. 239.39 of this chapter), the security rating(s) 
assigned to the class of securities by any other rating organization(s) 
specified in the Instruction to paragraph (a)(2) of General Instruction 
I of Form F-9 and the name(s) of the rating organization(s) which 
assigned such rating(s).
    (ii) For the purpose of paragraph (a)(14)(i) of this section, the 
term nationally recognized statistical rating organization shall have 
the same meaning as used in Sec. 240.15c3-1(c)(2)(vi)(F) of this 
chapter.
    (iii) For the purpose of paragraph (a)(14)(i) of this section, the 
term class of securities shall not include a class of securities issued 
by a registered investment company that does not constitute a class of 
senior securities for purposes of Section 18 of the Investment Company 
Act of 1940 (15 U.S.C. Sec. 80a-18).
* * * * *
    9. By amending Sec. 230.430A by revising paragraph (a) to read as 
follows:


Sec. 230.430A  Prospectus in a registration statement at the time of 
effectiveness.

    (a) The form of prospectus filed as part of a registration 
statement that is declared effective may omit information with respect 
to the public offering price, underwriting syndicate (including any 
material relationships between the registrant and underwriters not 
named therein), underwriting discounts or commissions, discounts or 
commissions to dealers, amount of proceeds, conversion rates, call 
prices, final security ratings, and other items dependent upon the 
offering price; delivery dates, and terms of the securities dependent 
upon the offering date; and such form of prospectus need not contain 
such information in order for the registration statement to meet the 
requirements of Section 7 of the Securities Act (15 U.S.C. Sec. 77g) 
for the purposes of Section 5 of the Securities Act (15 U.S.C. 
Sec. 77e), Provided that:
    (1) The securities to be registered are offered for cash;
    (2) The registrant furnishes the undertakings required by Item 
512(i) of Regulation S-K (Sec. 229.512(i) of this chapter); and
    (3) The information omitted in reliance upon this paragraph (a) 
from the form of prospectus filed as part of a registration statement 
that is declared effective is contained in a form of prospectus filed 
with the Commission pursuant to Sec. 230.424(b) or Sec. 230.497(h); 
except that if such form of prospectus is not so filed by the later of 
five business days after the effective date of the registration 
statement or five business days after the effectiveness of a post-
effective amendment thereto that contains a form of prospectus, or 
transmitted by a means reasonably calculated to result in filing with 
the Commission by that date, the information omitted in reliance upon 
this paragraph (a) must be contained in an effective post-effective 
amendment to the registration statement.
* * * * *
    10. By amending Sec. 230.436 by revising paragraph (g) to read as 
follows:


Sec. 230.436  Consents required in special cases.

* * * * *
    (g)(1) Notwithstanding the provisions of paragraphs (a) and (b) of 
this section, the security rating assigned to a class of securities by 
a nationally recognized statistical rating organization, or, with 
respect to registration statements on Form F-9 (Sec. 239.39 of this 
chapter), by any other rating organization specified in the Instruction 
to paragraph (a)(2) of General Instruction I of Form F-9, shall not be 
considered a part of the registration statement prepared or certified 
by a person within the meaning of Sections 7 and 11 of the Act (15 
U.S.C. Secs. 776, 77k).
    (2) For the purpose of paragraph (g)(1) of this section, the term 
nationally recognized statistical rating organization shall have the 
same meaning as used in Sec. 240.15c3-1(c)(2)(vi)(F) of this chapter.
    (3) For the purpose of paragraph (g)(1) of this section, the term 
class of securities shall not include a class of securities issued by a 
registered investment company that does not constitute a class of 
senior securities for purposes of Section 18 of the Investment Company 
Act of 1940 (15 U.S.C. Sec. 80a-18).

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    11. The authority citation for Part 249 continues to read as 
follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
    12. By amending Form 8-K (referenced in Sec. 249.308) by revising 
General Instruction B.1. to read as follows:
    Form 8-K
* * * * *
    General Instructions
* * * * *
    B. Events to be Reported and Time for Filing of Reports
    1. A report on this form is required to be filed upon the 
occurrence of any one or more of the events specified in Items 1-4, 6, 
8, and 9 of this form. A report of an event specified in Items 1-3 is 
to be filed within 15 calendar days after the occurrence of the event. 
A report of an event specified in Items 4 or 6 is to be filed within 5 
business days after the occurrence of the event; if the event occurs on 
a Saturday, Sunday, or holiday on which the Commission is not open for 
business, then the 5 business day period shall begin to run on and 
include the first business day thereafter. A report on this form 
pursuant to Item 8 is required to be filed within 15 calendar days 
after the date on which the registrant makes the determination to use a 
fiscal year end different from that used in its most recent filing with 
the Commission. A report on this form pursuant to Item 9 is required to 
be filed within 15 calendar days after the date on which a rating 
organization advises the registrant of a material change in rating(s).
* * * * *
    13. By amending Form 8-K (referenced in Sec. 249.308) to add Item 9 
to read as follows:
    Form 8-K
* * * * *
    Item 9. Change in Security Ratings. (a) If there is a material 
change in a security rating assigned to any outstanding class of a 
registrant's securities, which rating either has been obtained from a 
nationally recognized statistical rating organization (as defined in 
Item 202(g)(1)(i) of Regulation S-K or Item 202(d)(1)(i) of Regulation 
S-B), or has been disclosed by the registrant in a registration 
statement or prospectus filed under the Securities Act, the registrant 
shall describe the rating change and shall disclose all information 
required by Item 202(g)(2) of Regulation S-K (Sec. 229.202(g)(2) of 
this chapter) (or Item 202(d)(2) of Regulation S-B, if applicable 
(Sec. 228.202(d)(2) of this chapter)), to the extent not disclosed 
previously.
    (b) For the purpose of paragraph (a) of this item, the term 
``nationally recognized statistical rating organization'' shall have 
the same meaning as used in Sec. 240.15c3-1(c)(2)(vi)(F) of this 
chapter.
* * * * *
    Dated: August 31, 1994.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-21924 Filed 9-6-94; 8:45 am]
BILLING CODE 8010-01-P