Third-Party Due Diligence Reports (Section 932)
In August 2014, the SEC approved final rules implementing Section 932 of the Dodd-Frank Act that, among other things, adopt new requirements for issuers, underwriters and third-party due diligence service providers to promote the transparency of the findings and conclusions of third-party due diligence as it relates to asset-backed securities ("ABS"). These new requirements include:
- Disclosure of ABS Third-Party Due Diligence Reports: New Exchange Act Rule 15Ga-2 requires an issuer or underwriter of an ABS that is to be rated by a nationally recognized statistical rating organization ("NRSRO") to furnish a Form ABS-15G on the EDGAR system containing the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter. Rule 15Ga-2 applies to both registered and unregistered offerings of ABS.
- Certification of ABS Third-Party Due Diligence Provider: The Dodd-Frank Act amended the Exchange Act to require a provider of third-party due diligence services for ABS to provide a written certification to any NRSRO that produces a credit rating to which the services relate. New Rule 17g-10 establishes the form and content of that written certification in new Form ABS Due Diligence-15E. The new form elicits information about the due diligence, including a description of the work performed, a summary of the findings and conclusions of the third party, and the identification of any relevant NRSRO due diligence criteria that the third party intended to meet in performing the due diligence. The rules require the NRSRO to disclose any certification it receives with each rating action to which such certification relates.
The portions of the final rules relating to ABS third-party due diligence reports will be effective 9 months after publication of the new rules in the Federal Register.
In addition to the rules described above, which are specially aimed at regulating the ratings process for ABS, the final rules also adopt requirements that are generally applicable to NRSROs, including rules addressing internal controls, conflicts of interest, disclosure of credit rating performance statistics, procedures to protect the integrity and transparency of rating methodologies, disclosures to promote the transparency of credit ratings and standards for training, experience and competence of credit analysts. The final rules also provide for an annual certification by the CEO of an NRSRO as to the effectiveness of internal controls and additional certifications to accompany credit ratings attesting that the rating was not influenced by other business activities.
- SEC Final Rule: Nationally Recognized Statistical Rating Organizations - September 15, 2014
- SEC Proposed Rule: Nationally Recognized Statistical Rating Organizations - June 8, 2011