Staff Issues Guidance on Use of Credit Ratings in Asset-Backed Securities Market

The Division of Corporation Finance has issued a no-action letter to temporarily allow asset-backed issuers to omit the credit rating disclosure required under Regulation AB to provide a transition period to implement changes in the Dodd-Frank Wall Street Reform and Consumer Protection Act (SEC No-Action Letters Ind. & Summaries (WSB) #0726201001 (July 22, 2010)). The Act provided that 1933 Act Rule 436(g) has no force and effect, the result of which is that certain nationally recognized statistical rating organizations are not willing to provide consent for the inclusion of their names or ratings in registration statements or prospectuses until they have had time to assess the implication of their consent.

Ford Motor Credit Company LLC submitted a no-action request to the staff explaining that Ford Credit Auto Receivables Two LLC had filed a registration statement with respect to the issuance of asset-backed securities by Ford Credit Auto Owner Trusts established by the registrant. Since the credit rating agencies declined to provide their consent for the inclusion of their names or ratings in the registration statement, the registrant was unable to comply with Regulation AB Rules 1103(a)(9) and 1120.

Regulation AB requires the disclosure of the identities of NRSROs, their ratings and any arrangements relating to the monitoring of the ratings in the prospectuses if the issuance or sale of the securities is conditioned upon the assignment of the ratings. Ford asked the staff for assurance that it would not recommend enforcement action if the NRSROs’ identities, ratings or arrangements are not included for a specified, temporary period of time.

Items 1103(a)(9) and 1120 require the disclosure of whether an issuance or sale of any class of offered asset-backed security is conditioned upon the assignment of a rating by one or more rating agencies. If the condition applies, the registrants must disclose the minimum credit rating that must be assigned and the identity of each rating agency, along with a description of any arrangements to have the ratings monitored while the securities are outstanding.

Section 939G of the Dodd-Frank Act became effective July 22 and provided that Rule 436(g) no longer had any affect. The disclosure of a rating in a registration statement now requires the consent of a rating agency to be named as an expert. The no-action position will expire with respect to any registered offerings of asset-backed securities commencing with an initial bona fide offer on or after January 24, 2011.

Meredith Cross, the director of the Division, issued a statement about the issuance of the no-action letter and recent interpretations that have been issued by the staff. The staff believes there are few issuers currently in the asset-backed securities market. The interpretations note that the current rules for corporate debt issuances differ and the corporate debt market has not been, and should not under current rules be, meaningfully affected by the statutory change.

Compliance and Disclosure Interpretations

The staff addressed a scenario in which an issuer that is not subject to the Regulation AB disclosure requirements has a registration statement on Form S-3 or F-3 that was declared effective before July 22, 2010 and includes or incorporates by reference ratings information that is not limited to issuer disclosure-related ratings information. In this scenario, the staff would not object if the issuer continued to use its registration statement without filing a consent by the credit rating agency.

The staff said the issuer may rely upon the limited period provided in 1933 Act Rule 401(a) for the continued use of the registration statement. This position is applicable only until the next post-effective amendment is filed and only if no subsequently incorporated periodic or current report contains ratings information that is not limited to issuer disclosure-related ratings information.

The staff noted that the filing of the next annual report is deemed to be the post-effective amendment of the registration statement for purposes of 1933 Act Section 10(a)(3), so the registration statement could no longer be used after the annual report is filed without filing a consent.

For a company that is not subject to the Regulation AB disclosure requirements, a consent would be required if the company includes a credit rating in its registration or Section 10(a) prospectus unless the rating information is included only for the purpose of satisfying certain disclosure requirements.

If the disclosure of a credit rating in a filing with the SEC is related only to changes to a credit rating, the liquidity of the registrant, the cost of funds for a registrant or the terms of agreements that refer to credit ratings, then a consent would not be required.

For a company that is not subject to the Regulation AB disclosure requirements, a consent by a credit rating agency would be required if ratings information, other than issuer disclosure-related ratings information, is included in or incorporated by reference into a prospectus or a prospectus supplement first filed on or after July 22, 2010.

For a company that is not subject to the Regulation AB disclosure requirements, if ratings information is included in a free writing prospectus that complies with 1933 Act Rule 433 or in a term sheet or press release that complies with 1933 Act Rule 134, a consent is not required. Rule 436 applies only to registration statements and prospectuses. However, if any of these documents are filed as prospectuses under the rule, a consent would be required.