On July 16, 2010, the Canadian Securities Administrators (CSA) published for comment a proposed rule, policies and related consequential amendments that would impose requirements on those credit rating agencies or organizations (CROs) wishing to have their credit ratings eligible for use in places where credit ratings are referred to in securities legislation. Currently, the securities regulatory authorities in Canada do not formally oversee the conduct of CROs; however, as CRO ratings may have a significant impact upon financial markets and continue to be referred to within securities legislation, the CSA is proposing to develop and implement a formal securities regulatory regime for CROs that is consistent with international standards and developments.
National Instrument 25-101 Designated Rating Organizations (NI 25-101) has been developed, in part, as a response to the asset-backed commercial paper (ABCP) crisis of 2008 where the methodology used by certain CROs in determining ratings of ABCP came into question. In addition, in developing the proposed rule, the CSA has taken into consideration comments received on the consultation paper entitled Securities Regulatory Proposals Stemming from the 2007-08 Credit Market Turmoil and its Effect on the ABCP Market in Canada and the CSA published by the CSA on October 6, 2008 in modifying the proposed rule.
The CSA is requesting comments on the proposed rule in writing on or before October 25, 2010.
Proposed Instrument and Companion Policy
Pursuant to proposed NI 25-101, a CRO can apply for designation as a designated rating organization. The main requirement of NI 25-101 is that once designated, a CRO must establish, maintain and ensure compliance with a code of conduct that is substantially similar to the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies model (IOSCO Code). Currently, the IOSCO Code addresses issues such as:
- CRO conflicts of interest
- Misunderstandings by investors about what ratings mean
- Adequate staffing of CROs
- The quality of information used in making rating decisions
- The ability to rate novel products
- The differentiation of ratings for different securities
- The provision of public disclosure of historical information about the performance of ratings
In addition to requiring compliance with a code of conduct, or explanations of any deviation from such code, NI 25-101 will also impose specific requirements on a designated CRO including the following:
- To have policies and procedures reasonably designed to identify and manage any conflicts of interest that arise in connection with the issuance of credit ratings
- Not to issue or maintain a credit rating in the face of specified conflicts of interest
- To appoint a compliance officer responsible for monitoring and assessing the designated CRO's compliance with its code of conduct and the proposed regulatory framework
- To have policies and procedures reasonably designed to prevent the inappropriate use and/or dissemination of certain material non-public information, including a pending undisclosed rating action
- To file on an annual basis a form containing prescribed information
The CSA is also developing Companion Policy 25-101CP to NI 25-101 to provide interpretational guidance on elements of NI 25-101.
Proposed Legislative Amendments and Consequential Amendments
For NI 25-101 to be fully implemented, certain amendments to local securities legislation will be required. Amendments have already been introduced in Quebec, Alberta and British Columbia and are expected to come into force at the same time as NI 25-101. In addition, the adoption of NI 25-101 will require amendments to each of National Instrument 41-101 General Prospectus Requirements, National Instrument 44-101 Short Form Prospectus Distributions, and National Instrument 51-102 Continuous Disclosure Obligations.
The CSA has stated that it will continue to monitor developments in other jurisdictions which adopt changes to impose greater civil liability on CROs.
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.
