As mandated by Section 939A of the Dodd-Frank Act, the Office of the Comptroller of the Currency (OCC) on November 29, 2011 issued proposed rules and related proposed guidance to:

The OCC's proposed rules would amend the definition of "investment grade" to replace references to credit ratings with alternative standards of creditworthiness in its regulations at 12 C.F.R. Parts 1 and 16 (see National Bank Regulations), Part 160 (see Federal Savings Association Regulations) and Part 5 (see Financial Subsidiaries).

Parts 1 and 16 would be amended to make 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. The quoted language would replace the reference to credit ratings and require national banks to determine that the risk of default by the obligor is low and the full and timely repayment of principal and interest is expected.

In addition, the proposed rule would remove the concentration limit on a national bank's purchases of covered small business-related securities for its own account. Under the proposed rule, national banks will no longer face a limit on these purchases if the securities meet the alternative creditworthiness criteria being established by the SEC (for more on the SEC credit ratings rulemaking, see Legal Update, SEC Proposes Rule Changes Removing References to Credit Ratings from Exchange Act Rules and Forms).

Currently savings associations may not invest in corporate debt securities unless they are rated investment grade by a nationally recognized statistical rating organization (NRSRO). The Dodd-Frank Act provides that on July 21, 2012, this requirement will be replaced by "standards of creditworthiness established by the FDIC." Under the proposed rules, the term "investment grade," as used in Part 160, will refer to the current ratings-based requirements until the FDIC provides the alternative standard.

The proposed rules would also permit federal saving associations to invest in commercial paper that meets the FDIC's new creditworthiness standard after July 21, 2012. The proposed rules would remove the differing lending limitations that currently apply to corporate debt securities and commercial paper by applying the less restrictive lending limitation to all commercial paper and corporate debt securities that meet the FDIC's new creditworthiness standard.

The Dodd-Frank Act removed the reference to investment grade ratings in Section 5136A of Title LXII of the Revised Statutes, which permitted a national bank to, directly or indirectly, control a financial subsidiary or hold an interest in a financial subsidiary if the bank was one of the largest 100 insured depository institutions and had at least one issue of outstanding debt rated in one of the top three investment grade categories by an NRSRO.

The proposed rules would amend 12 C.F.R. Part 5 to conform it to the revised Section 5163A to provide that a national bank may, directly or indirectly, control a financial subsidiary or hold an interest in a financial subsidiary only if the bank is one of the 100 largest insured banks and the bank has at least one issue of outstanding debt that meets the applicable standard or criteria established by the Treasury Department and the Federal Reserve Board.

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

The OCC is accepting public comments on the proposed rules and guidance until December 29, 2011.

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.