The Canadian Securities Administrators (CSA) are adopting
National Instrument 25-101 Designated Rating Organizations (NI
25-101), related policies and related consequential amendments,
that will impose new requirements on credit rating agencies or
organizations (CROs) that wish to have their credit ratings
eligible for use in securities legislation. The new instrument,
related policies and related consequential amendments will come
into force on April 20, 2012.
CROs play a significant role in credit markets, and ratings
issued by CROs are routinely referred to in offering and continuous
disclosure documents of reporting issuers. However, CROs are not
currently subject to formal securities oversight in Canada.
The role of CROs in capital markets came under heavy scrutiny
after the recent global credit crisis and asset-backed commercial
paper crisis, when many assets highly rated by CROs and widely
distributed to financial institutions worldwide turned out to be
toxic assets. Since then, securities regulators in the United
States and Europe have implemented new regulatory frameworks for
CROs. The adoption of NI 25-101 is a first step to develop a
securities regulatory regime in Canada for CROs that is consistent
with international standards and developments.
Designated Rating Organizations
Pursuant to NI 25-101, a CRO may apply for designation as a
"designated rating organization" (DRO). The application
will be made by filing Form 25-101F1, which will have to be
re-filed on an annual basis within 90 days of each DRO's
financial year end. Although NI 25-101 will not make it mandatory
for CROs to be designated as DROs in order for their credit ratings
to be used in offering and continuous disclosure documents, the DRO
concept will eventually replace existing references to
"approved rating organization" and similar concepts
currently found in Canadian securities legislation.
DROs will have to establish, maintain and ensure compliance with
a code of conduct that complies with each provision of the IOSCO
Code of Conduct Fundamentals for Credit Rating Agencies. A
DRO will not be permitted to deviate from its code of conduct
unless exemptive relief is obtained from applicable securities
In addition to the establishment of, and compliance with a code
of conduct, DROs will also be required to:
have policies and procedures in place to identify and manage
conflicts of interest and to prevent inappropriate use or
disclosure of certain confidential information;
not issue or maintain a credit rating in the face of specified
conflicts of interest;
appoint a compliance officer responsible for monitoring and
assessing the DRO's compliance with its code of conduct and
securities legislation; and
post a copy of their code of conduct prominently on their
Enhanced Disclosure Requirements
In addition, issuers will now be required to provide enhanced
disclosure in offering and continuous disclosure documents if they
have asked for or received a credit rating from a CRO for any of
their outstanding securities, including disclosure of any payments
made to a CRO with respect to the provision of such rating or any
other services provided by the CRO to the issuer during the last
Civil Liability of CROs
The CSA has indicated that it will continue to monitor
developments in the United States, Europe and other jurisdictions
and will assess methods of imposing greater civil liability on CROs
and increasing CRO accountability.
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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