The Canadian Securities Administrators (the "CSA") have published a notice and request for comment regarding a new proposed rule, National Instrument 25-101 - Designated Rating Organizations (the "Proposed Instrument"). The Proposed Instrument will regulate credit rating agencies ("ratings agencies") for the first time in Canada. Specifically, Canadian securities regulatory authorities would have the power under the Proposed Instrument to:

  • designate ratings agencies as "designated rating organizations" ("DROs");
  • conduct compliance reviews of DROs, including the books and records and other documents and information of DROs; and
  • make an order in the public interest that a DRO submit to a review of its practices and procedures.

The Proposed Instrument will not give securities regulatory authorities the power to direct or regulate the content of credit ratings or the methodologies used to determine credit ratings, but will effectively require all rating agencies to become DROs in order to provide ratings eligible to be included in Canadian offering documents. DROs will be required to employ a compliance officer, maintain and publish a code of conduct in compliance with the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies and adopt a conflict of interest policy, as well as policies and procedures designed to prevent inappropriate dissemination of material non-public information. A DRO will be prohibited from issuing or maintaining a rating in certain circumstances that are deemed to give rise to a conflict of interest.

DROs will be required to make public filings with securities regulatory authorities on an annual basis. The annual filings will include the identity and net revenue obtained by a DRO during the financial year from each of its 20 largest customers who are issuers or subscribers and the identity and net revenue of each obligor or underwriter that, in terms of net revenue received during the financial year, equalled or exceeded its 20th largest customer who is an issuer or subscriber. The CSA is considering a discretionary exemption permitting DROs to apply to Canadian securities commissions to maintain confidentiality with respect to sensitive portions of such filings. DROs subject to the corresponding U.S. regulatory regime can satisfy the filing requirements of the Proposed Instrument by filing copies of materials filed with the Securities Exchange Commission in satisfaction of the U.S. requirements.

Related amendments to other Canadian securities regulations will require that any prospectus or annual information form referencing a credit rating include the amount paid to the DRO to obtain such rating and the amount paid to the DRO for any other service provided during the last two years.

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