CSA Releases Proposal to Regulate Credit Rating Agencies

The Canadian Securities Administrators have released a draft of National Instrument 25-101 a proposal to regulate credit rating agencies whose ratings are used in places where credit ratings are referred to in securities legislation.

NI 25-101 is dependent on the enactment of legislation to give the various commissions jurisdiction to regulate the agencies. Legislation is already in place in British Columbia, Alberta and Quebec and is expected to come in to force concurrent with NI 25-101.

NI 25-101 is a voluntary framework for credit rating agencies that wish to become "designated credit rating organizations." An agency does not have to apply for designation, but if it does not, its ratings cannot be used to support, for example, an exemption from the prospectus requirements for a distribution of securities that have a minimum credit rating. NI 25-101 would replace the current regime of "approved" credit rating agencies in securities legislation.

An applicant to become a designated credit rating organization must file Form 25-101F1 with the applicable commissions. The disclosure in the form includes

• whether the applicant makes its ratings generally accessible for free or for a fee,
  
• the procedures and methodologies used by the applicant to determine credit ratings, including unsolicited ratings,
  
• the applicant's code of conduct,
• the applicant's policies and procedures for containment of non-public information and for identifying and managing conflicts of interest,
• the number of credit analysts and supervisors and their qualifications,
• the name of the compliance officer,
• information concerning revenues from credit ratings, subscribers and licences to publish ratings, and
• a list of the largest users of the rating service.

A designated credit rating organization must ensure compliance with the revised IOSCO Code of Conduct Fundamentals for Credit Rating Agencies. An agency will be allowed to deviate from the Code provided it explains the reasons for the deviation and how it meets the objectives of the Code notwithstanding the deviation.

In addition, designated credit rating organizations must have policies and procedures to identify and manage conflicts of interest and to prevent the inappropriate use of non-public material information, including pending rating changes. The firm will not be permitted to issue a credit rating if a conflict of interest exists and must designate an officer as responsible for compliance with NI 25-101. The agency must also make prescribed filings with the commissions.

While it is expected that the enabling legislation would prohibit commissions from regulating the content of credit ratings or the methodologies used, this may not be the case in all jurisdictions. In addition, the proposal does not address whether the current exclusion of credit rating agencies from the provisions imposing civil liability for misrepresentations should be maintained.

The deadline for comments is October 25.