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
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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