SEC Adopts Rules Regarding Third-Party Due Diligence

September 02, 2014

Recently, the Securities and Exchange Commission adopted a series of new rules for nationally recognized statistical ratings organizations (“NRSROs”), some of which have particular importance to issuers and underwriters of asset-backed securities. These new rules, which implement requirements imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, significantly enhance the SEC’s regulatory authority over NRSROs. One of the new rules will require either an issuer or underwriter of rated, publicly or privately offered ABS to file a form on the SEC’s EDGAR system that contains information about any third-party due diligence report. A third-party due diligence report is not limited to reports that are obtained at the request of an NRSRO, but is broadly defined as any report containing findings and conclusions of third-party due diligence services. In turn, due diligence services broadly encompass any review of the pool assets for the purposes of making findings with respect to the accuracy of the asset data, conformity to stated underwriting standards, asset value, legal compliance by the originator, and any other factor material to the likelihood that the issuer will make the required payments on the ABS. The rules also will require providers of third-party due diligence services to deliver a certification to each NRSRO rating the ABS. This may be done directly, or by providing the certification to the issuer or underwriter for posting on its Rule 17g-5 website. The SEC also adopted a variety of other NRSRO reforms with respect to actions on credit ratings, internal controls, conflicts of interest, disclosure of ratings performance history, credit ratings methodologies, competence of personnel, ratings symbols, and an annual report from a designated compliance officer.

For more information, please refer to this lawflash.