On June 12, 2012, the Office of the Comptroller of the Currency (OCC) issued final rules and related guidance to:

The OCC's rules amended the definition of "investment grade" to replace references to credit ratings with alternative standards of creditworthiness in the following regulations of Title 12 of the Code of Federal Regulations (CFR):

The final rules are mandated by Section 939A of the Dodd-Frank Act.

The final rules are largely unchanged from the proposed rules issued by the OCC in November 2011 (see Legal Update, OCC Proposes Rule to Remove References to Credit Ratings and Provide Guidance on Evaluating Risks).

Banks have until January 1, 2013 to comply with the rule. Existing investments will not be grandfathered.

Parts 1 and 16 of Title 12 of the CFR are amended to consider a security investment grade only if the issuer of the security has an "adequate capacity to meet financial commitments" under the security for the projected life of the investment. This new standard replaces the reference to credit ratings and requires national banks to determine that:

The OCC considered comments expressing concerns that the new requirements of due diligence necessary to deem a security investment grade will prove too onerous specifically for smaller banks. The OCC decided that such concerns were negligible and finalized the definition of investment grade as proposed.

Currently, thrifts may not invest in corporate debt securities unless they are rated investment grade by a nationally recognized statistical rating organization. The Dodd-Frank Act provides that on July 21, 2012, this requirement will be replaced by "standards of creditworthiness established by the FDIC." In the final rule, the term "investment grade" as used in Part 160 of Title 12 of the CFR, will refer to the current ratings-based requirements until the FDIC provides the alternate standard.

Under the revised rules, federal thrifts are also permitted to invest in state or municipal revenue bonds if the issuer has an "adequate capacity to meet financial commitments" under the security for the projected life of the investment.

The OCC previously allowed foreign banks to use deposit or banker's acceptances as part of a deposit if the issuer is rated investment grade by an internationally recognized rating organization. The OCC's final rule removes this credit rating requirement and instead requires that the issuer have an adequate capacity to meet financial commitments for the projected life of the asset or exposure.

The OCC finalized rules that amend Title 12, Part 5 of the CFR to provide that a national bank that is one of the 100 largest insured banks may, directly or indirectly, control a financial subsidiary or hold an interest in a financial subsidiary only if the bank has at least one issue of outstanding eligible debt that meets the applicable standard or criteria to be established by the Treasury Department and the Federal Reserve Board. Previously, the bank's eligible debt had to satisfy certain credit rating requirements (banks not within the top 100 largest insured banks were not subject to this requirement). Until new standards are established, national banks wishing to own or invest in a financial subsidiary will not be subject to a creditworthiness standard.

For more information on financial subsidiaries, see Practice Note, Commercial Banking: Financial Subsidiaries.

In conjunction with the final rule, the OCC has issued supervisory guidance that explains the due diligence requirements that national banks and federal thrifts must conduct when purchasing investment securities. The rules require these institutions to:

For more information on how bank investments in securities are regulated, see Practice Notes, US Banking Law: Overview and Commercial Banking. To learn more about exempted bank securities offerings, see Practice Note, Bank Securities Offerings Exempt Under Section 3(a)(2).

For more information on the treatment of credit rating agencies in the Dodd-Frank Act, see Practice Notes, Summary of the Dodd-Frank Act: Credit Rating Agencies and Road Map to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010: Credit Rating Agencies.