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SEC gives credit ratings the cold shoulder

By Sarah N. Lynch

WASHINGTON (Reuters) - U.S. securities regulators moved to scale back market reliance on credit rating agencies, after the financial crisis laid bare the industry's shortcomings.

The Securities and Exchange Commission voted 5-0 on Wednesday to propose that several of its key documents for securities offerings no longer require ratings references that were designed to help investors gauge the quality of securities.

The SEC's action on Wednesday is the start of a broader effort mandated by the Dodd-Frank financial reform law to strip ratings references from all federal agencies' rules, as appropriate.

Credit-raters have been blamed for helping fuel the 2007-2009 financial crisis by giving overly positive ratings to securities backed by toxic subprime mortgages.

The proposal would affect the use of ratings from firms such as Moody's Corp, McGraw-Hill Cos' Standard & Poor's, and Fimalac SA's Fitch Ratings, but is not expected to be a big hit to the industry's revenues.

The documents affected by the proposal are designed to expedite the securities offering process. The SEC's two Republican members expressed concern the proposed alternative standard for using the forms could exclude some companies.

Wednesday's proposal revives a similar SEC plan from 2008 that met with opposition and was overtaken by the financial crisis.

In 2009, the agency did strip some requirements for rating references from regulations, saying it was concerned about undue reliance on them, but the removal of all ratings references was not mandatory.

The world's Group of 20 leading economies (G20) has made a similar proposal to curb the reliance on ratings. The European Union's executive European Commission began a public consultation last November and draft legislation is expected this year.

Dodd-Frank mandates credit-rating reforms such as mitigating conflicts of interest, holding credit-raters accountable for their ratings and reducing investor reliance on them.

But the basic business of credit-raters remains intact and investors are still expected to consult ratings, even if ratings are excluded from regulatory filings.

"Standard & Poor's believes the market -- not government mandates -- should decide the value of our work, which is why we support removing rating requirements from financial regulations," spokesman Ed Sweeney said on Wednesday.

Moody's earlier this month said it was seeing an uptick in debt issuance and said conditions would be "generally favorable in 2011."

EXPEDITED OFFERINGS

The SEC's proposal would strip rating references from the conditions that the SEC places on companies seeking to qualify for "short form registration" when registering securities for a public sale.

These forms, known as S-3 and F-3, help expedite the offering process for selling securities "off the shelf." If a firm meets the qualifications, it is afforded greater flexibility in conducting future offerings and faces less tedious disclosures that can cost time and money.

A company can qualify for short-form registration if it meets certain criteria that makes the SEC comfortable giving the firm expedited access to the public securities market.

One criteria is if a company offering nonconvertible securities such as debt securities can show the debt was given an investment-grade rating.

The SEC proposed stripping out that rating requirement and replacing it with an alternative that investors can use to determine if a company is a "well-known, seasoned issuer."

Instead of relying on a high-investment grade rating, companies could file an S-3 or F-3 form if they have issued more than $1 billion in nonconvertible debt securities over a three-year period. Other forms that use the same standard would also be amended as well.

A review by the SEC suggests that if this plan had been in effect between 2006 and 2008, 45 companies that issue debt securities out of about 1,000 would have been ineligible to use the abbreviated form.

"I have concerns that the proposed changes could hinder capital formation by making it more difficult for some public companies to use the streamline registration Form S-3," said Bradley J. Bondi, a partner at Cadwalader, Wickersham & Taft LLP and former counsel to two SEC commissioners.

(Reporting by Sarah Lynch; Editing by Steve Orlofsky, Lisa Von Ahn and Tim Dobbyn)

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