SEC Publishes Temporary Guidance on Mortgage-related and Small Business-related Security Definitions | Practical Law

SEC Publishes Temporary Guidance on Mortgage-related and Small Business-related Security Definitions | Practical Law

The SEC published guidance setting temporary creditworthiness standards for purposes of the Exchange Act's definitions of "mortgage-related security" and "small business-related security." The guidance responds to Section 939(e) of the Dodd-Frank Act, which strikes references to credit ratings in these definitions.

SEC Publishes Temporary Guidance on Mortgage-related and Small Business-related Security Definitions

by PLC Corporate & Securities
Published on 20 Jul 2012 • USA (National/Federal)
The SEC published guidance setting temporary creditworthiness standards for purposes of the Exchange Act's definitions of "mortgage-related security" and "small business-related security." The guidance responds to Section 939(e) of the Dodd-Frank Act, which strikes references to credit ratings in these definitions.
The SEC published temporary interpretive guidance on the Exchange Act's definitions of mortgage-related security and small business-related security (Sections 3(a)(41) and 3(a)(53)(A)). Section 939(e) of Dodd-Frank, which becomes effective on July 21, 2012, strikes references to credit ratings in these definitions and requires the SEC to establish substitute standards of creditworthiness. The temporary guidance, which became effective on July 20, 2012, preserves the status quo reliance on credit ratings pending additional SEC rulemaking.
Citing the SEC's need for more time to develop and establish permanent new standards, the guidance states that the standard of creditworthiness for purposes of the definition of the term:
  • "Mortgage-related security" is a security that is rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization (NRSRO).
  • "Small business-related security" is a security that is rated in one of the four highest rating categories by at least one NRSRO.
This transitional interpretation will apply until the SEC issues final rules establishing the new standards of creditworthiness. The SEC is also seeking public comment on potential standards of creditworthiness and is accepting comments until 30 days after publication of its interpretative release in the Federal Register.
For more information on the removal of credit ratings from federal securities laws and rules under Dodd-Frank, see Practice Notes, Credit Ratings and Credit Rating Agencies and Summary of the Dodd-Frank Act: Credit Rating Agencies.