The Canadian Securities Administrators (CSA) have issued a staff notice (CSA Staff Notice 45-307 – Regulatory Developments Regarding Securitization) and proposed a new national instrument (National Instrument 25-101 – Designated Rating Organizations), as a result of comments they received on a CSA consultation paper entitled Securities Proposals Stemming from the 2007- 08 Credit Market Turmoil and its Effect on the ABCP Market in Canada. The staff notice and proposed national instrument are also based on regulatory developments in other jurisdictions as well as recommendations of the International Organization of Securities Commissions (IOSCO).
CSA Staff Notice 45-307
CSA Staff Notice 45-307 is worth noting for issuers that offer asset-backed commercial paper and asset-backed securities. Published on June 18, 2010, the staff notice is brief, but may lead to significant policy changes in two areas.
Firstly, CSA staff are considering changes to the way in which securitized products can be issued in the exempt market. In particular, the use of the short-term debt exemption for the distribution of asset-backed commercial paper is being reconsidered. The exemption currently allows for non-convertible negotiable promissory notes or commercial paper maturing not more than one year from the date of issue that has an approved credit rating from an approved credit rating organization (CRO), to be issued without a prospectus. In addition, the staff notice indicates that CSA staff have been considering whether to impose other conditions in connection with the exempt distribution of securitized products, including requiring disclosure.
Secondly, CSA staff are considering enhancements to the disclosure required to distribute securitized products by prospectus and considering proposals for more tailored continuous disclosure.
According to the staff notice, further materials respecting the above will be published for comment in fall 2010. Proposals relating to regulation of CROs were published on July 16, 2010 and are discussed below.
Proposed National Instrument 25-101
As CROs are not currently subject to formal regulatory securities oversight in Canada, proposed National Instrument 25-101 (NI) is intended to implement an appropriate Canadian regulatory regime for CROs.
Under the proposed NI, if a CRO wishes to have its credit ratings eligible for use where credit ratings are referred to in securities legislation, the CRO must apply to the securities regulatory authorities to become a "designated rating organization". Once the application is granted, the designated rating organization must establish and comply with a code of conduct. The code of conduct must comply with the Code established by the IOSCO or, if it deviates, the designated rating organization must explain how it deviates, and how it nonetheless achieves the objectives of the provisions in the IOSCO Code. The proposed NI does not purport to regulate the content of a credit rating or the methodology used by a designated rating organization to determine a credit rating.
In order to address conflicts of interest, the proposed NI lists certain prohibitions, which are not intended to be exhaustive. The prohibitions listed in the proposed NI include a prohibition on issuing or maintaining a credit rating if, among other things, the designated rating organization or a person that participates in determining or approving the credit rating owns securities in the issuer, or where the fee paid for the rating was negotiated by a person within the designated rating organization who has responsibility for, or participates in, determining credit ratings. A designated rating organization's code of conduct must address the various conflict of interest provisions referred to in the IOSCO Code.
In addition, a designated rating organization must have policies and procedures reasonably designed to identify and manage conflicts of interest and must have a compliance officer that monitors compliance with the designated rating organization's code of conduct and securities legislation. In addition, each designated rating organization must make an annual filing no later than 90 days after the end of each financial year, which is in the same form as the initial application and is meant to provide an update of the initial application. The annual filing requires, among others things, the following information:
- organization and structure of the designated rating organization;
- information respecting the directors and executive officers of the designated rating organization (by the completion of personal information forms);
- fee structure;
- procedures and methodologies used;
- code of conduct;
- policies and procedures preventing the misuse of material non-public information of issuers;
- policies and procedures respecting conflicts of interest;
- information respecting credit analysts, including the total number of credit analysts and credit analyst supervisors and the minimum qualifications of credit analysts, such as education and work experience;
- information respecting the designated rating organization's compliance officer;
- specified revenue information;
- largest users of credit rating services, including a listing of the 20 largest issuers and subscribers in terms of revenue; and
- audited financial statements for three years.
The CSA is requesting comments on the proposed NI by October 25, 2010. Specific requests for comments include: (a) whether a code of conduct must specify that waivers of the code of conduct are prohibited; (b) whether each director, executive officer and compliance officer of a CRO applying for a designated rating organization status should be required to submit personal information forms; (c) how the principal regulator of a CRO will be determined when the CRO does not have a head office or branch office located in Canada; and (d) whether it is appropriate to maintain an exemption found in current securities legislation that does not require a CRO, whose rating is referred to in a prospectus or other disclosure document, to file an "expert's consent", the filing of which would result in the assumption of statutory liability for a rating opinion.
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