Friday, June 13, 2008

What Issuers Need To Know About SEC Credit Rating Agencies Proposal, FASB Securitization Proposals

Issuers, not only credit rating agencies (CRAs), may have new, direct disclosure obligations under the CRA-related rule proposals approved for release by the SEC earlier this week. These direct disclosure obligations would be in addition to providing information to CRAs and arrangers (underwriters) to meet their disclosure obligations.

The issuer disclosure requirement may be below the radar screen right now (prior to the proposal reaching the street), since issuers and others may have assumed, based on advance press linking the SEC’s then-anticipated proposals to similar proposals for ‘credit rating agency reform’ developed by the New York State Attorney General, that the proposals would impact how CRAs conduct their business and a presumption that related disclosures would be required of CRAs only. A similar message as to scope was implied in the SEC’s agenda which stated, “The Commission will consider whether to propose rules relating to Nationally Recognized Statistical Rating Organizations [NRSROs],” and the Sunshine Act notice which was identical, except for an added reference to “and credit ratings.”

And, virtually all the bullets citing specific requirements of the proposal in the SEC’s press release and in SEC Chairman Christopher Cox’ opening statement specify the scope of the proposals would “require CRAs to …” or “prohibit CRAs from ….”

But, issuers should look closely at the bullet in the press release (and in Cox’ opening statement) which says:

“Require the public disclosure of the information a credit rating agency uses to determine a rating on a structured product, including information on the underlying assets. That would permit broad market scrutiny, as well as competitive analysis by other rating agencies that are not paid by the issuer to rate the product.”

Notice that bullet does not say “require CRAs to disclose,” just that someone is obligated to provide “public disclosure” of certain information relating to the rated issue, including the underlying assets.

Commissioner Paul S. Atkins raised a related question during the open meeting (archived webcast available), asking, “The issuer/arranger will be making the disclosures. How will they know what information the NRSRO is using in its rating?”

SEC staffer Randall Roy of the Division of Trading and Markets responded to Atkins, “The NRSRO itself would have to come to agreement with the arranger, this is information I am going to use, before I issue my rating, you need to make sure that it is publicly available.”

We previously reported some highlights from the open commission meeting, but we wanted to flag the above point for issuers today so they don’t miss it before beginning summer vacations, since the comment deadline on the SEC’s CRA proposal will be 30 days (30 days from date the proposal is published in the Federal Register).

As always, reference should be made to the proposals when posted by the SEC, for the specifics on who will be required to do what. [UPDATE: The SEC's rule proposal was posted on the SEC website 6.16.08.]

FASB Proposals To Amend Securitization, Off-Balance Sheet Rules To Be Effective Jan. 1, 2009; Existing QSPEs to be Grandfathered One Year
Issuers (and others) will also be interested in the proposed effective date for FASB’s upcoming amendments to FIN 46 R and FAS 140 impacting securitizations and off-balance sheet treatment for certain sales and transfers of assets.

As we previously reported, among the amendments to be proposed include the removal of the Qualified Special Purpose Entity (QSPE) concept – a structure which FASB literature had presumed - and required - to be ‘passive’ (i.e. not actively managed) in order to receive and retain sale treatment.

The requirement for the QSPE to remain ‘passive’ became problematic during the subprime crisis, as it was seen as a barrier to the ability of lenders, servicers and investors to agree to modify the terms of such mortgages, even when called upon to do so by the U.S. Treasury Department, members of Congress, and others. (We covered related correspondence on this point last summer from Rep. Barney Frank, Chair of the House Financial Services Committee, to SEC Chairman Christopher Cox, Chairman Cox’ response, and correspondence from the SEC Chief Accountant earlier this year to FEI and the AICPA relating to permissibility of continued sale treatment for loan modifications under the American Securitization Forum’s standards. That letter noted the SEC had asked FASB to consider amending its standards by year-end.)

At its board meeting earlier this week, FASB agreed that for reporting purposes, the effective date of the upcoming amended standards (FIN 46R, FAS 140) would be fiscal years beginning after 11/15/2008, and interim periods in those fiscal years.

In addition, based on discussion at the board meeting:

  • the FIN 46R amendments would apply to all new entities after 1/1/09, and to all items under the existing scope of FIN 46R as of 1/1/09.
  • the FAS 140 amendments would apply to all new transfers after 1/1/09.
  • QSPEs in existence prior to 1/1/09 -since they will no longer be scoped out of the amended FIN 46R, would be grandfathered for one year (to 1/1/10).
Additionally, FASB will propose ‘transition disclosures’ that would be required in the event they are not able to finalize the full amendments in time to become effective 1/1/09 (fiscal year-end 11/15/08 reporting). [See also FEI summary of decisions reached at the June 4 FASB board meeting re: FIN 46R and FAS 140; summary downloadable by FEI members only, see info on FEI membership. Additional matters decided at the June 11 FASB board meeting were reported on in BNA's Daily Report for Executives.] The above info is based on my listening to the webcast of the June 11 FASB meeting; official results of FASB meetings are reported in FASB’s Action Alert and board minutes.

As a reminder, FASB’s forum (webcast) on “High-Quality Global Accounting Standards: Issues and Implications for U.S. Financial Reporting” will take place from 9:00 am – 4:00 pm on Mon. June 16. FEI President and CEO Michael P. Cangemi and FEI member Andy Thrower (a member of FASB’s Small Business Advisory Committee and a member of FEI’s Committee on Private Companies – Standards Subcommittee) are among those appearing on the panel. Judy O'Dell, chair of the FASB-AICPA Private Company Financial Reporting Committee will also participate, as will a host of panelists from government and private sector organizations, listed here.

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1 comment:

About Health Blog said...

That would permit broad market scrutiny, as well as competitive analysis by other rating agencies that are not paid by the issuer to rate the product.