[Federal Register: July 11, 2008 (Volume 73, Number 134)]
[Proposed Rules]
[Page 40106-40124]
[DOCID:fr11jy08-17]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229, 230, 239, and 240

[Release No. 33-8940; 34-58071; File No. S7-18-08]
RIN 3235-AK18

Security Ratings

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This is one of three releases that the Commission is
publishing simultaneously relating to the use of security ratings by
nationally recognized statistical rating organizations in its rules and
forms. In this release, the Commission proposes to replace rule and
form requirements under the Securities Act of 1933 and the Securities
Exchange Act of 1934 that rely on security ratings (for example, Forms
S-3 and F-3 eligibility criteria) with alternative requirements. In
addition, the Commission requests comment on its rules relating to the
disclosure of security ratings.

DATES: Comments should be received on or before September 5, 2008.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number S7-18-08 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-18-08. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's Web
site (http://www.sec.gov/rules/proposed.shtml). Comments are also
available for public inspection and copying in the Commission's Public
Reference Room, 100 F Street, NE., Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. All comments
received will be posted without change; we do not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Steven Hearne, Eduardo Aleman, or
Katherine Hsu, Special Counsels in the Office of Rulemaking, Division
of Corporation Finance, at<PHONE_NUMBER>, 100 F Street NE.,
Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to
Regulation S-K,\1\ and rules and forms under the Securities Act of 1933
(Securities Act),\2\ and the Securities Exchange Act of 1934 (Exchange
Act).\3\ In Regulation S-K, the Commission is proposing to amend Items
10,\4\ 1100,\5\ 1112,\6\ and 1114.\7\ Under the Securities Act, the
Commission is proposing to amend Rules 134,\8\ 138,\9\ 139,\10\
168,\11\ 415,\12\ 436,\13\ Form S-3,\14\ Form S-4,\15\ Form F-1,\16\
Form F-3,\17\ Form F-4,\18\ and Form F-9.\19\ The Commission is also
proposing to amend Schedule 14A \20\ under the Exchange Act.
---------------------------------------------------------------------------

    \1\ 17 CFR 229.10 through 1123.
    \2\ 15 U.S.C. 77a et seq.
    \3\ 15 U.S.C. 78a et seq.
    \4\ 17 CFR 229.10.
    \5\ 17 CFR 229.1100.
    \6\ 17 CFR 229.1112.
    \7\ 17 CFR 229.1114.
    \8\ 17 CFR 230.134.
    \9\ 17 CFR 230.138.
    \10\ 17 CFR 230.139.
    \11\ 17 CFR 230.168.
    \12\ 17 CFR 230.415.
    \13\ 17 CFR 230.436.
    \14\ 17 CFR 239.13.
    \15\ 17 CFR 239.25.
    \16\ 17 CFR 239.31.
    \17\ 17 CFR 239.33.
    \18\ 17 CFR 239.34.
    \19\ 17 CFR 239.39.
    \20\ 17 CFR 240.14a-101.
---------------------------------------------------------------------------

I. Background

    On June 16, 2008, in furtherance of the Credit Rating Agency Reform
Act of 2006,\21\ the Commission published for notice and public comment
two rulemaking initiatives.\22\ The first proposes additional
requirements for nationally recognized statistical rating organizations
(NRSROs) that were directed at reducing conflicts of interest in the
credit rating process, fostering competition and comparability among
credit rating agencies, and increasing transparency of the credit
rating

process.\23\ The second is designed to improve investor understanding
of the risk characteristics of structured finance products. These
proposals address concerns about the integrity of the credit rating
procedures and methodologies of NRSROs in light of the role they played
in determining the security ratings for securities that were the
subject of the recent turmoil in the credit markets.
---------------------------------------------------------------------------

    \21\ Pub. L. No. 109-291, 120 Stat. 1327 (2006).
    \22\ Proposed Rules for Nationally Recognized Statistical Rating
Organizations, Release No. 34-57967 (Jun. 16, 2008).
    \23\ See Press Release No. 2008-110 (Jun. 11, 2008). As
described in more detail below, an NRSRO is an organization that
issues ratings that assess the creditworthiness of an obligor itself
or with regard to specific securities or money market instruments,
has been in existence as a credit rating agency for at least three
years, and meets certain other criteria. The term is defined in
section 3(a)(62) of the Exchange Act (15 U.S.C. 78c(a)(62)). A
credit rating agency must apply with the Commission to register as
an NRSRO, and currently there are nine registered NRSROs.
---------------------------------------------------------------------------

    Today's proposals comprise the third of these three rulemaking
initiatives relating to security ratings by an NRSRO that the
Commission is proposing. This release, together with two companion
releases, sets forth the results of the Commission's review of the
requirements in its rules and forms that rely on security ratings by an
NRSRO. The proposals also address recent recommendations issued by the
President's Working Group on Financial Markets, the Financial Stability
Forum on Enhancing Market and Institutional Resilience, and the
Technical Committee of the International Organization of Securities
Commissions.\24\ Consistent with these recommendations, the Commission
is considering whether the inclusion of requirements related to
security ratings in its rules and forms has, in effect, placed an
``official seal of approval'' on ratings that could adversely affect
the quality of due diligence and investment analysis. The Commission
believes that today's proposals could reduce undue reliance on ratings
and result in improvements in the analysis that underlies investment
decisions.
---------------------------------------------------------------------------

    \24\ See President's Working Group on Financial Markets, Policy
Statement on Financial Market Developments (March 2008), available
at www.ustreas.gov; The Report of the Financial Stability Forum on
Enhancing Market and Institutional Resilience (April 2008),
available at www.fsforum.org; Technical Committee of the
International Organization of Securities Commissions, Consultation
Report: The Role of Credit Rating Agencies in Structured Finance
Markets (March 2008), page 9, available at www.iosco.org.
---------------------------------------------------------------------------

    In 1981, the Commission issued a statement of policy regarding its
view of disclosure of security ratings in registration statements under
the Securities Act.\25\ This statement marked a clear delineation
between the Commission's historic practice of precluding the disclosure
of security ratings in these filings and the Commission's then-
developing acknowledgement of the growing importance of ratings in the
securities markets and in the regulation of those markets. Soon
thereafter, the Commission adopted rules that not only set forth its
new policy of permitting the voluntary disclosure of security ratings
in registration statements but that also encouraged such disclosure by
the issuer.\26\ The rules permitted the voluntary disclosure of
security ratings in a communication deemed not to be a prospectus and
provided that a security rating by an NRSRO is generally not part of a
registration statement or report prepared or certified by a person
within the meaning of Sections 7 \27\ and 11 \28\ of the Securities
Act.
---------------------------------------------------------------------------

    \25\ See Disclosure of Ratings in Registration Statements,
Release No. 33-6336 (Aug. 6, 1981) [46 FR 42024]. The Commission
first began using ratings by an NRSRO in 1975 for purposes of
determining capital charges on different grades of debt securities
under Rule 15c3-1 under the Exchange Act (Net Capital Rule). See 17
CFR 240.15c-31(c)(2)(vi)(E) and Adoption of Amendments to Rule 15c3-
1 and Adoption of Alternative Net Capital Requirement for Certain
Brokers and Dealers, Release No. 34-11497 (Jun. 26, 1975) [40 FR
29795].
    \26\ See Adoption of Integrated Disclosure System, Release No.
33-6383 (Mar. 3, 1982) [47 FR 11380] (``Integrated Disclosure
Release'').
    \27\ 15 U.S.C. 77g.
    \28\ 15 U.S.C. 77k.
---------------------------------------------------------------------------

    Concurrent with the adoption of these rules regarding security
ratings, the Commission adopted Securities Act Form S-3, the short-form
Securities Act registration statement for eligible domestic
issuers.\29\ The Commission adopted a provision in Form S-3 that a
primary offering of non-convertible debt securities may be eligible for
registration on the form if rated investment grade.\30\ This provision
provided debt securities issuers whose public float did not reach the
required threshold, or that did not have a public float, with an
alternate means of becoming eligible to register offerings on Form S-
3.\31\ In adopting this requirement, the Commission specifically noted
that commenters believed that the component relating to investment
grade ratings was appropriate because nonconvertible debt securities
are generally purchased on the basis of interest rates and security
ratings.\32\ Consistent with Form S-3, the Commission adopted a
provision in Form F-3 providing for the eligibility of a primary
offering of investment grade non-convertible debt securities by
eligible foreign private issuers.\33\
---------------------------------------------------------------------------

    \29\ 17 CFR 239.13 and the Integrated Disclosure Release.
    \30\ See General Instruction I.B.2 of Form S-3. A non-
convertible security is an ``investment grade security'' for
purposes of form eligibility if at the time of sale, at least one
NRSRO has rated the security in one of its generic rating categories
which signifies investment grade, typically one of the four highest
rating categories. See id.
    \31\ Pursuant to the recently adopted revisions to Form S-3 and
Form F-3, issuers also may conduct primary securities offerings on
these forms without regard to the size of their public float or the
rating of debt securities being offered, so long as they satisfy the
other eligibility conditions of the respective forms, have a class
of common equity securities listed and registered on a national
securities exchange, and the issuers do not sell more than the
equivalent of one-third of their public float in primary offerings
over any period of 12 calendar months. See Revisions to Eligibility
Requirements for Primary Offerings on Forms S-3 and F-3, Release No.
33-8878 (Dec. 19, 2007) [72 FR 73534].
    \32\ See Section III.A.1 of the Integrated Disclosure Release.
Later, in 1992, the Commission expanded the eligibility requirement
to delete references to debt or preferred securities and provide
Form S-3 eligibility for other investment grade securities (such as
foreign currency or other cash settled derivative securities). See
Simplification of Registration Procedures for Primary Securities
Offerings, Release No. 33-6964 (Oct. 22, 1992) [57 FR 48970].
    \33\ General Instruction I.B.2 of Form F-3. See Adoption of
Foreign Issuer Integrated Disclosure System, Release No. 33-6437
(Nov. 19, 1982) [47 FR 54764]. In 1994, the Commission expanded the
eligibility requirement to delete references to debt or preferred
securities and provide Form F-3 eligibility for other investment
grade securities (such as foreign currency or other cash settled
derivative securities). See Simplification of Registration of
Reporting Requirements for Foreign Companies, Release No. 33-7053A
(May 12, 1994) [59 FR 25810].
---------------------------------------------------------------------------

    Since the adoption of those rules relating to security ratings and
Form S-3 and Form F-3, other Commission forms and rules have included
requirements that likewise rely on the ratings issued to a
security.\34\ Among them are Form F-9,\35\ Forms S-4 and F-4,\36\ and
Exchange Act Schedule 14A.\37\ Shelf registration requirements for
asset-backed securities also depend on a security ratings
component.\38\ In 1983, the Commission adopted Securities Act Rule 415
which permits certain mortgage related securities, among others, to be
offered on a delayed basis.\39\ A mortgage related security is defined
in section 3(a)(41) of the Exchange Act,\40\ as, among other things,
``a security that is rated in one of the two highest rating categories
by at least one nationally recognized statistical

rating organization.'' \41\ In 1992, the Commission expanded the Form
S-3 eligibility provisions to provide for the registration of
investment grade asset-backed securities offerings, regardless of the
issuer's reporting history or public float.\42\ In addition, if they
are related to investment grade rated securities, certain registration
statements and other requirements afford foreign private issuers with
an option to comply with less extensive U.S. GAAP reconciliation
requirements.\43\
---------------------------------------------------------------------------

    \34\ This release addresses rules and forms filed by issuers
under the Securities Act and Exchange Act. In separate releases, the
Commission is proposing to address other rules and forms that rely
on an investment grade ratings component.
    \35\ See General Instruction I. of Form F-9.
    \36\ See General Instruction B.1 of Form S-4 and General
Instruction B.1(a) of Form F-4.
    \37\ See Note E and Item 13 of Schedule 14A.
    \38\ General Instruction I.B.5 of Form S-3.
    \39\ 17 CFR 230.415(a)(1)(vii). See Shelf Registration, Release
No. 33-6499 (Nov. 17, 1983) [48 FR 5289].
    \40\ 15 U.S.C. 78c(a)(41).
    \41\ See discussion of mortgage related securities in Section
II.A.2. below.
    \42\ See Simplification of Registration Procedures for Primary
Securities Offerings, Release No. 33-6964 (Oct. 22, 1992) [57 FR
32461].
    \43\ See Exchange Act Forms 20-F (17 CFR 249.220f) and 40-F (17
CFR 249.240f), Securities Act Forms F-1 (17 CFR 239.31), F-3 (17 CFR
239.33), and F-4 (17 CFR 239.34), and Form F-9 (17 CFR 239.39) and
Rule 502(b)(2)(i)(C) of Regulation D (17 CFR 230.502(b)(2)(i)(C)).
---------------------------------------------------------------------------

    At various times since the adoption of these form requirements and
rules, however, the Commission has reviewed and reconsidered its
permissive views toward the disclosure of ratings in filings and the
reliance on ratings in the Commission's form requirements. For example,
in 1994, the Commission published a proposing release that would have
mandated disclosure in Securities Act prospectuses of a rating given by
an NRSRO whenever a rating with respect to the securities being offered
is ``obtained by or on behalf of an issuer.'' \44\ The proposals would
have required disclosure of specified information with respect to
security ratings, whether or not disclosed voluntarily or mandated by
the proposed new rules. In addition, the 1994 Ratings Release sought
comment on various areas relating to the disclosure of security
ratings.
---------------------------------------------------------------------------

    \44\ See Disclosure of Security Ratings, Release No. 33-7086
(Aug. 31, 1994) [59 FR 46304] (the ``1994 Ratings Release''). A
concept release on this subject was published in Disclosure of
Security Ratings, Release No. 33-5882 (Nov. 3, 1977) [42 FR 58414].
---------------------------------------------------------------------------

    The 1994 Ratings Release also proposed to require the disclosure on
a Form 8-K current report of any material change in the security rating
assigned to the registrant's securities by an NRSRO.\45\ Later, in
2002, the Commission again proposed to require an issuer to file a Form
8-K current report when it received a notice or other communication
from any rating agency regarding, for example, a change or withdrawal
of a particular rating.\46\ The Commission did not adopt this proposal,
noting that it would continue to consider the appropriate regulatory
approach for rating agencies.\47\
---------------------------------------------------------------------------

    \45\ See the 1994 Ratings Release.
    \46\ See Additional Form 8-K Disclosure Requirements and
Acceleration of Filing Date, Release No. 33-8106 (Jun. 17, 2002) [67
FR 42914].
    \47\ See Additional Form 8-K Filing Requirements and
Acceleration of Filing Date, Release No. 33-8400 (Mar. 16, 2004) [69
FR 15594], amended by Release No. 33-8400A (Aug. 4, 2004) [69 FR
48370].
---------------------------------------------------------------------------

    In 2003, the Commission issued a concept release requesting comment
on whether it should cease using the NRSRO designation and, as an
alternative to the ratings criteria, provide for Form S-3 eligibility
where investor sophistication or large size denomination criteria are
met.\48\ The Commission also requested comment on alternatives to Form
S-3 ratings reliance with regard to offerings of asset-backed
securities. In the 2004 adopting release for Regulation AB,\49\ while
retaining the eligibility provision for investment grade rated asset-
backed securities, the Commission noted that it was engaged in a broad
review of the role of credit rating agencies in the securities markets,
including whether security ratings should continue to be used for
regulatory purposes under the securities laws.\50\ The release made
note of the 2003 concept release and the comments received on possible
alternatives to using the investment grade requirement for determining
Form S-3 eligibility for asset-backed securities.
---------------------------------------------------------------------------

    \48\ See Rating Agencies and the Use of Credit Ratings under the
Federal Securities Laws, Release No. 33-8236 (Jun. 4, 2003) [68 FR
35258]. Comments on the concept release are available at: http://
www.sec.gov/rules/concept/s71203.shtml. As discussed above, recent
events have highlighted the need to revisit our reliance on NRSRO
ratings in the context of these developments. See also the extensive
discussion of market developments in Release No. 34-57967.
    \49\ 17 CFR 229.1100 through 1123.
    \50\ See Section III.A.3.c of Asset-Backed Securities, Release
No. 33-8518 (Dec. 22, 2004) [70 FR 1506, 1524].
---------------------------------------------------------------------------

    In 2005, the Commission adopted rules and form amendments to modify
the framework for the registration, communications, and offerings
processes, relaxing restrictions and requirements on the largest
issuers.\51\ These large issuers, defined as well-known seasoned
issuers, include issuers that have issued for cash more than an
aggregate of $1 billion in non-convertible securities, other than
common equity, through registered primary offerings over the prior
three years.\52\ In adopting this definition, the Commission did not
rely on investment grade ratings, noting in the adopting release that
the securities included in the calculation for determining whether the
$1 billion threshold has been met need not be investment grade
securities.\53\
---------------------------------------------------------------------------

    \51\ See Securities Offering Reform, Release No. 33-8591 (July
19, 2005) [70 FR 44722].
    \52\ See definition of well-known seasoned issuer in Rule 405.
17 CFR 230.405.
    \53\ See Section II.A.1.b of Release No. 33-8591.
---------------------------------------------------------------------------

II. Proposed Amendments

A. Shelf Registration for Issuers of Asset-Backed Securities

1. Form S-3 Eligibility for Offerings of Asset-Backed Securities
    Under the existing requirements, an offering of asset-backed
securities, or ABS, as defined in Item 1101 of Regulation AB,\54\ may
be eligible for registration on Form S-3 and may therefore be offered
on a delayed or continuous basis \55\ if they are rated investment
grade by an NRSRO and meet certain other conditions.\56\ The Commission
now proposes to amend this requirement in Form S-3 for ABS to replace
the component that relies on investment grade ratings with an alternate
provision.
---------------------------------------------------------------------------

    \54\ 17 CFR 229.1101.
    \55\ General Instruction I.B.5 of Form S-3. The Commission
expanded the use of Form S-3 to all types of asset-backed securities
in 1992. See Simplification of Registration Procedures for Primary
Securities Offerings, Release No. 33-6964 (Oct. 22, 1992) [57 FR
48970].
    \56\ As discussed below, two additional conditions also apply in
order for ABS offered for cash to be Form S-3 eligible: (1)
delinquent assets do not constitute 20% or more, as measured by
dollar volume, of the asset pool as of the measurement date; and (2)
with respect to securities that are backed by leases other than
motor vehicle leases, the portion of the securitized pool balance
attributable to the residual value of the physical property
underlying the leases, as determined in accordance with the
transaction agreements for the securities, does not constitute 20%
or more, as measured by dollar volume, of the securitized pool
balance as of the measurement date. General Instruction I.B.5(a) of
Form S-3.
---------------------------------------------------------------------------

    In the 2004 proposing release for Regulation AB, the Commission
requested comment on whether the investment grade reliance component of
the Form S-3 eligibility requirements for ABS offerings was appropriate
and whether alternative criteria such as investor sophistication,
minimum denomination, or experience criteria were more appropriate.\57\
The Commission received four comment letters in response that provided
suggestions on possible alternatives to the investment grade
requirement for Form S-3 eligibility purposes for ABS offerings.\58\
One commenter

recommended that the Commission replace the investment grade ratings
requirement with a sponsor \59\ experience requirement (e.g., Exchange
Act reporting).\60\ Another commenter suggested that the Commission
either (1) eliminate the use of the ratings as a bright line test for
the Form S-3 eligibility criteria, thereby eliminating the incentive to
shop for ratings simply to satisfy a regulatory requirement; or (2)
reflective of developing market practice, require an investment grade
rating which is the lower of two ratings.\61\
---------------------------------------------------------------------------

    \57\ See Section III.A.3.c of Asset-Backed Securities, Release
No. 33-8419 (May 3, 2004) [69 FR 16650]. In the 2003 concept release
where the Commission requested comment on alternatives to the
ratings reliance requirement in Form S-3 for corporate debt, the
Commission requested comment on alternatives to ratings reliance
with respect to ABS offerings. No comment letters submitted in
response to the concept release provided specific suggestions on
alternatives for ABS offerings. See Release No. 33-8236.
    \58\ See letters commenting on Release No. 33-8419 from the
American Bar Association (ABA), Kutak Rock, LLP (Kutak), State
Street Global Advisors (State Street), and Moody's Investor Service
(Moody's). The public comments received are available for inspection
in our Public Reference Room at 100 F Street, NE., Washington, DC
20549 in File No. S7-21-04, or may be viewed at http://www.sec.gov/
rules/proposed/s72104.shtml.
    \59\ While ``sponsor'' is a commonly used term for the entity
that initiates the asset-backed securities transaction, the terms
``seller'' or ``originator'' also are often used in the market. In
some instances the sponsor is not the originator of the financial
assets but has purchased them in the secondary market. See footnote
46 of Release No. 33-8518.
    \60\ See letter from State Street.
    \61\ See letter from Moody's.
---------------------------------------------------------------------------

    Two commenters recommended that the Commission adopt a minimum
denomination requirement (e.g., $100,000 or $250,000) that would
determine form eligibility, limiting investment in the offering to
investors who had such capital.\62\ One of these commenters recommended
that the Commission make short-form registration available to otherwise
eligible non-investment grade rated or unrated classes of asset-backed
securities provided that sales are made in minimum denominations and
initial sales of classes of securities are made only to qualified
institutional buyers (as defined in Securities Act Rule 144A(a)(1))
\63\ and institutional accredited investors (as defined in Rule 501
\64\ of Regulation D).\65\ The commenter reasoned that such
restrictions should ensure that securities are sold and subsequently
resold only to investors who are capable of undertaking their own
analysis of the merits and risks of their investment.\66\
---------------------------------------------------------------------------

    \62\ See letters from ABA and Kutak.
    \63\ 17 CFR 230.144A(a)(1).
    \64\ 17 CFR 230.501.
    \65\ See letter from ABA.
    \66\ Id.
---------------------------------------------------------------------------

    In light of our effort to reduce regulatory reliance on security
ratings, the Commission has revisited the comments in 2004 and now
proposes to replace the investment grade component in the Form S-3
eligibility requirement for ABS offerings with a minimum denomination
requirement for initial and subsequent sales and a requirement that
initial sales of classes of securities be made only to qualified
institutional buyers. The eligibility requirement, as proposed to be
revised, would retain the other provisions relating to delinquency
concentration and residual value percentages for offerings of
securities backed by leases other than motor vehicle leases.\67\ Thus,
as proposed, asset-backed securities offered for cash may be Form S-3
eligible provided:
---------------------------------------------------------------------------

    \67\ See proposed General Instruction I.B.5(a)(iii) and (iv) of
Form S-3.
---------------------------------------------------------------------------

     Initial and subsequent resales are made in minimum
denominations of $250,000;
     Initial sales are made only to qualified institutional
buyers (as defined in Rule 144A(a)(1));
     Delinquent assets do not constitute 20% or more, as
measured by dollar volume, of the asset pool as of the measurement
date; and
     With respect to securities that are backed by leases other
than motor vehicle leases, the portion of the securitized pool balance
attributable to the residual value of the physical property underlying
the leases, as determined in accordance with the transaction agreements
for the securities, does not constitute 20% or more, as measured by
dollar volume, of the securitized pool balance as of the measurement
date.\68\
---------------------------------------------------------------------------

    \68\ See proposed General Instruction I.B.5(a) of Form S-3.
---------------------------------------------------------------------------

    This proposed amendment would limit use of a short-form shelf
registration statement for asset-backed securities to offerings to
large sophisticated and experienced investors without, we believe,
causing undue detriment to the liquidity of the asset-backed securities
market.\69\ In keeping with that purpose and given the unique nature
and structure of asset-backed securities, we are proposing at this time
only to include qualified institutional buyers rather than also
including institutional accredited investors as suggested by the
commenter in 2004.
---------------------------------------------------------------------------

    \69\ We are aware of two types of asset-backed offerings that
may not meet these new criteria, unit repackaging and securitization
of insurance funding agreements but believe that they can be
effectively registered using Form S-1 instead of Form S-3.
---------------------------------------------------------------------------

2. Mortgage Related Securities and Securities Act Rule 415
    In addition to being shelf eligible by meeting the requirements of
Form S-3, a particular subset of ABS may also be shelf eligible by
meeting the requirements in Securities Act Rule 415,\70\ which
enumerates the securities which are permitted to be offered on a
continuous or delayed basis. Among those securities are ``mortgage
related securities, including such securities as mortgage-backed debt
and mortgage participation or pass through certificates.'' \71\ By
specifically referring to mortgage related securities, Rule 415 has
permitted such securities to be offered on a delayed basis, even if the
offering cannot be registered on the Form S-3 short form registration
statement because it does not meet the eligibility requirements of Form
S-3.
---------------------------------------------------------------------------

    \70\ 17 CFR 230.415.
    \71\ 17 CFR 230.415(a)(vii).
---------------------------------------------------------------------------

    Currently, the term ``mortgage related securities'' is defined by
Section 3(a)(41) of the Exchange Act \72\ as, among other things, ``a
security that is rated in one of the two highest rating categories by
at least one nationally recognized statistical rating organization.''
Given that the term mortgage related securities also depends on a
ratings component, it would be a logical extension of our amendments
here to amend the Rule 415 reference to a mortgage related security to
add that the sale of such security must be in compliance with the
additional requirements that initial sales are made to qualified
institutional buyers and initial and subsequent sales are made in
certain minimum denominations. Given that reliance on security ratings
could just as easily impact an investor's investment decision in
mortgage-backed securities as it could for other asset-backed
securities,\73\ we believe it is appropriate that mortgage-backed
securities be treated the same as all asset-backed securities.\74\
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 78c(a)(41). Section 3(a)(41) was added by the
Secondary Mortgage Market Enhancement Act of 1984 (SMMEA) (Pub. L.
98-440-98 Stat. 1690). In 1984, contemporaneous with the enactment
of SMMEA, the Commission amended Rule 415, which is known as the
shelf rule, to allow SMMEA-eligible mortgage related securities to
use the shelf offering process. See Shelf Registration, Release No.
33-6499 (Nov. 17, 1983) [48 FR 5289].
    \73\ The President's Working Group has noted that one of the
principal underlying causes of the current global market turmoil
relating to the mortgage-backed securities industry was the credit
rating agencies' assessments of subprime residential mortgage-backed
securities and other complex structured credit products that held
residential mortgage-backed and other asset-backed securities. See
Section I of the Policy Statement on Financial Market Developments.
See n. 24 above.
    \74\ Indeed, mortgage-backed securities are merely a type of, or
subset of, asset-backed securities. We believe that there have not
been any recent offerings that have relied on Rule 415(a)(vii) for
shelf eligibility rather than through meeting the requirements of
Form S-3.
---------------------------------------------------------------------------

    Therefore, under the proposed revision to Rule 415, mortgage-backed
securities, having the same characteristics as mortgage related
securities under the Section 3(a)(41) definition, regardless of the
security

rating, could be offered on a delayed basis provided that:
     Initial sales and any resales of the securities are made
in minimum denominations of $250,000; \75\ and
---------------------------------------------------------------------------

    \75\ Denominations of any amounts above $250,000 would meet this
requirement.
---------------------------------------------------------------------------

     initial sales of the securities are made only to qualified
institutional buyers (as defined in Rule 144A(a)(1)).
Request for Comment
     Is the proposed amendment to the Form S-3 eligibility
requirement for asset-backed securities appropriate? Is there a better
alternative to the investment grade ratings component? If so, what is
that alternative and why is it better?
     Is the proposed amendment requiring that initial and
subsequent sales be made in a minimum denomination appropriate? Should
the denomination level be higher or lower (e.g., $400,000 or $100,000)?
     We understand that non-convertible securities may
typically be held in book entry form with a depository. Are there any
system issues or processes at the depository that may affect the
ability to limit transferability based on a minimum denomination? If
yes, what are those issues or processes and how should the rule
provisions be revised to prohibit subsequent transfers below the
minimum denominations?
     Should there be any restriction on permitting purchasers
from allocating securities in denominations lower than $250,000 if the
purchasers are acquiring the nonconvertible securities for more than
one account? For example, if an investment advisor acquires the
securities for more than one qualified institutional buyer, should it
be allowed to allocate securities to the accounts of the qualified
institutional buyers in denominations lower than $250,000?
     Should Form S-3 limit initial sales of eligible asset-
backed securities to qualified institutional buyers? Should the
requirement include sales to an additional group of investors (e.g.,
institutional accredited investors)? If so, why? Should subsequent
sales be limited as well? Would it be appropriate to eliminate the
minimum denomination requirements after some period of time, such as
after six months or one year from the date of issuance? Are there
particular kinds of ABS offerings that are sold to investors other than
qualified institutional buyers?
     What would be the impact on liquidity in the ABS secondary
market if Form S-3 registration required that initial sales be limited
to qualified institutional buyers, institutional accredited investors,
or other groups of sophisticated investors? What would be the impact on
liquidity in the secondary market if resales of securities that were
originally offered and sold off of the Form S-3 were so limited? What
would be the impact on the cost of capital for ABS sponsors if Form S-3
registration required that initial sales or resales were limited to
qualified institutional buyers or other groups of sophisticated
investors?
     Would a better standard than qualified institutional buyer
be any purchaser that owns and invests on a discretionary basis not
less than $25,000,000? Would a threshold like this that does not limit
the purchasers to institutions be appropriate, particularly in light of
recent market events? Should there be other thresholds for particular
investors, such as owning and investing on a discretionary basis not
less than $50,000,000 for government or political subdivisions,
agencies or instrumentalities of a government? Should we use Qualified
Investor as defined in Exchange Act Section 3(a)(54) \76\ rather than
qualified institutional buyer?
---------------------------------------------------------------------------

    \76\ 15 U.S.C. 78c(a)(54).
---------------------------------------------------------------------------

     We note that there are two types of ABS offerings that may
not meet this new criteria, unit repackagings, and securitizations of
insurance funding agreements. Can the offer and sale of these
securities be effectively registered on Form S-1? We note that these
securities are typically listed on a national securities exchange.
Should we instead add an alternative eligibility requirement that would
provide eligibility to use Form S-3 for securities listed on a national
securities exchange?
     Should we instead assess Form S-3 and shelf eligibility in
a manner similar to what we are proposing for corporate debt that is
discussed in the next section? If so, what would be the appropriate
amount of required issuance? Should the issuance amount be measured
only for the same sponsor, same asset class, and same structure? Should
it matter if the assets are purchased by the sponsor rather than
originated by the sponsor or an affiliate?
     Is the proposed revision to Securities Act Rule 415
appropriate? Is there any reason why mortgage related securities should
be treated differently from other asset-backed securities for purposes
of delayed offerings?
     Are there SMMEA eligible loans that could not be
securitized in circumstances meeting the proposed threshold for S-3
eligibility?
     Should Rule 415 be amended as proposed? In the
alternative, should the reference to mortgage related securities in
Rule 415 be deleted (i.e., so that mortgage-backed securities could
only be offered on a delayed basis if eligible for registration on Form
S-3)? Are there securities that are currently offered pursuant to Rule
415(a)(1)(vii) that do not meet the current requirements of Form S-3
and would not meet the requirements of the proposal?

B. Primary Offerings of Non-convertible Securities

1. Form S-3 and Form F-3
    Forms S-3 and F-3 are the ``short forms'' used by eligible issuers
to register securities offerings under the Securities Act. These forms
allow eligible issuers to rely on reports they have filed under the
Exchange Act to satisfy many of the disclosure requirements under the
Securities Act. Form S-3 eligibility for primary offerings also enables
form eligible issuers to conduct primary offerings ``off the shelf''
under Securities Act Rule 415. Rule 415 provides considerable
flexibility in accessing the public securities markets in response to
changes in the market and other factors. Issuers that are eligible to
register these primary ``shelf'' offerings under Rule 415 are permitted
to register securities offerings prior to planning any specific
offering and, once the registration statement is effective, offer
securities in one or more tranches without waiting for further
Commission action. To be eligible to use Form S-3 or F-3, an issuer
must meet the form's eligibility requirements as to registrants, which
generally pertain to reporting history under the Exchange Act,\77\ and
at least one of the form's transaction requirements.\78\ One such
transaction requirement permits registrants to register primary
offerings of non-convertible securities if they are rated investment
grade by at least one NRSRO.\79\ Instruction I.B.2 provides that a
security is ``investment grade'' if, at the time of sale, at least one
NRSRO has rated the security in one of its generic rating categories,
typically the four highest, which signifies investment grade.
---------------------------------------------------------------------------

    \77\ See General Instruction I.A to Forms S-3 and F-3.
    \78\ See General Instruction I.B to Forms S-3 and F-3.
    \79\ See General Instruction I.B.2 to Forms S-3 and F-3.
---------------------------------------------------------------------------

    The Form S-3 investment grade requirement was originally proposed
by

the Commission in a 1982 release.\80\ Prior to adopting Form S-3, the
Commission had previously provided a short form registration statement
on Form S-9, which permitted the registration of issuances of certain
high quality debt securities.\81\ The criteria for use of Form S-9
related primarily to the quality of the issuer.\82\ While these
eligibility criteria delineated the type of issuer of high quality debt
for which Form S-9 was intended, the Commission believed that certain
of its requirements may have overly restricted the availability of the
form.\83\ The Commission believed that security ratings were a more
appropriate standard on which to base Form S-3 eligibility than
specified quality of the issuer criteria, citing letters from
commenters indicating that short form prospectuses are appropriate for
investment grade debt because such securities are generally purchased
on the basis of interest rates and security ratings.\84\
---------------------------------------------------------------------------

    \80\ See Reproposal of Comprehensive Revision to System for
Registration of Securities Offerings, Release No. 33-6331 (Aug. 6,
1981) [46 FR 41902] (``the S-3 Proposing Release'').
    \81\ Form S-9 was rescinded on December 20, 1976, because it was
being used by only a very small number of registrants. The
Commission believed the lack of usage was due in part to interest
rate increases which made it difficult for many registrants to meet
the minimum fixed charges coverage standards required by the form.
Adoption of Amendments to Registration Forms and Guide and
Rescission of Registration Form, Release No. 33-5791 (Dec. 20, 1976)
[41 FR 56301].
    \82\ The criteria included net income during each of the
registrant's last five fiscal years, no defaults in the payment of
principal, interest, or sinking funds on debt or of rental payments
for leases, and various fixed charge coverages. The use of fixed
charges coverage ratios, typically 1.5, was common in state statutes
defining suitable debt investments for banks and other fiduciaries.
    \83\ See the S-3 Proposing Release.
    \84\ See the Integrated Disclosure Release.
---------------------------------------------------------------------------

    Today we are proposing to revise the transaction eligibility
criteria for registering primary offerings of non-convertible
securities on Forms S-3 and F-3. As proposed, the instructions to these
forms would no longer refer to security ratings by an NRSRO as a
transaction requirement to permit issuers to register primary offerings
of non-convertible securities for cash. Instead, these forms would be
available to register primary offerings of non-convertible securities
if the issuer has issued (as of a date within 60 days prior to the
filing of the registration statement) for cash more than $1 billion in
non-convertible securities, other than common equity, through
registered primary offerings over the prior three years.\85\
---------------------------------------------------------------------------

    \85\ See proposed General Instruction I.B.2 of Forms S-3 and F-
3. We are also proposing to delete Instruction 3 to the signature
block of Forms S-3 and F-3.
---------------------------------------------------------------------------

    We are proposing to revise the form criteria using the same method
and threshold by which the Commission defined an issuer of non-
convertible securities, other than common equity, that does not meet
the public equity float test as a ``well-known seasoned issuer.'' \86\
Similar to our approach with well-known seasoned issuers, we believe
that having issued $1 billion of registered non-convertible securities
over the prior three years would lead to a wide following in the
marketplace. These issuers generally have their Exchange Act filings
broadly followed and scrutinized by investors and the markets.\87\ The
Commission intends for the number of issuers eligible under the
proposed criteria to register primary offerings of non-convertible
securities on Forms S-3 and F-3 to not be significantly reduced, or to
differ significantly from, the number of those eligible under the
current form requirements.\88\ Using the $1 billion threshold, we
preliminarily believe that for issuances that have occurred thus far
this year, the proposed change would result in approximately six
issuers filing on Form S-1 instead of on a short-form registration
statement. This approach is designed to provide assurance that eligible
issuers are followed by the markets such that it is appropriate to
allow forward incorporation by reference and delayed offering. We
realize that it is now possible that some offerings of non-investment
grade securities, such as high-yield bonds (also known as ``junk
bonds'') may be registered for sale on Form S-3.
---------------------------------------------------------------------------

    \86\ See Securities Offering Reform, Release No. 33-8591 (Jul.
19, 2005) [70 FR 44722]. Rule 405 under the Securities Act defines a
``well-known seasoned issuer'' as an issuer that meets the
registrant requirements of Form S-3 or F-3, and either has a
worldwide market value of its outstanding voting and non-voting
common equity held by non-affiliates of $700 million or more, or has
issued in the last three years, in registered offerings, at least $1
billion aggregate principal amount of non-convertible securities in
primary offerings for cash. 17 CFR 230.405.
    \87\ See Securities Offering Reform, Release No. 33-8501 (Nov.
3, 2004) [69 FR 67392].
    \88\ We preliminarily anticipate that under the proposed
threshold some additional high yield debt issuers would be eligible
to use the Forms.
---------------------------------------------------------------------------

    These issuers also would have to satisfy the other conditions of
the form eligibility requirement. In determining compliance with this
threshold:
     Issuers may aggregate the amount of non-convertible
securities, other than common equity, issued in registered primary
offerings during the prior three years;
     issuers may include only such non-convertible securities
that were issued in registered primary offerings for cash--they may not
include registered exchange offers; \89\ and
---------------------------------------------------------------------------

    \89\ Issuers may not include the principal amount of securities
that were offered in registered exchange offers by the issuer when
determining compliance with the $1 billion non-convertible
securities threshold. A substantial portion of these offerings
involve registered exchange offers of substantially identical
securities for securities that were sold in private offerings. In
those cases, the original sale to investors in the private offering,
relying upon, for example, the exemptions of Securities Act Section
4(2) and Rule 144A, is not registered and is not carried out under
the Securities Act's disclosure or liability standards. Moreover, in
the subsequent registered exchange offers purchasers may not be
able, in certain cases, to avail themselves effectively of the
remedies otherwise available to purchasers in registered offerings
for cash.
---------------------------------------------------------------------------

     parent company issuers only may include in their
calculation the principal amount of their full and unconditional
guarantees, within the meaning of Rule 3-10 of Regulation S-X,\90\ of
non-convertible securities, other than common equity, of their
majority-owned subsidiaries issued in registered primary offerings for
cash during the three-year period.
---------------------------------------------------------------------------

    \90\ 17 CFR 210.3-10.
---------------------------------------------------------------------------

The aggregate principal amount of non-convertible securities that may
be counted toward the $1 billion issuance threshold may have been
issued in any registered primary offering for cash, on any form (other
than Form S-4 or Form F-4). Non-convertible securities need not be
investment grade securities to be included in the calculation. In
calculating the $1 billion amount, issuers generally may include the
principal amount of any debt and the greater of liquidation preference
or par value of any non-convertible preferred stock that were issued in
primary registered offerings for cash.\91\
---------------------------------------------------------------------------

    \91\ In determining the dollar amount of securities that have
been registered during the preceding three years, issuers should use
the same calculation that they use to determine the dollar amount of
securities they are registering for purposes of determining fees
under Rule 457. 17 CFR 230.457.
---------------------------------------------------------------------------

Request for Comment
     The recent turmoil in the credit markets, particularly in
the structured finance market, strongly suggests that there has been
undue reliance on security ratings and that the ratings for many
issuers did not reflect the risks of the investment. We are proposing
thresholds on the amount of issuance in order to move away from
reliance on security ratings in the Commission's rules. Does the
proposed eligibility based on the amount of prior registered non-
convertible securities issued serve as an adequate replacement for the
investment grade eligibility condition? Would the cumulative offering
amount

for the most recent three-year period reflect market following? Since
most of the problems in the market have occurred with respect to asset-
backed securities, should we retain the current eligibility requirement
for investment grade non-convertible securities?
     Would the specific issuers eligible under the investment
grade condition be different from the issuers eligible under the
proposal? Would certain investors, such as pension funds, be impacted
if investment grade securities could not be offered on Form S-3?
     If the Commission adopts a Form S-3 eligibility
requirement designed to reflect the market following of a debt issuer,
should the condition be sensitive to the number of debt holders? Is it
reasonable to expect that analysts would be more likely to follow
issuers with a larger number of debt holders insofar as such holders
are potential customers of the analysts' products? If so, how should we
determine the number of holders?
     Should there be an eligibility requirement based on a
minimum number of holders of record of non-convertible securities
offered for cash? If so, should this number be 300 or 500, by analogy
to our registration and deregistration rules relating to equity
securities? Would linking the eligibility requirement to the number of
holders of record help to assure market following?
     Is the cumulative offering amount for the most recent
three-year period the appropriate threshold at which to differentiate
issuers? Should the threshold be higher (e.g., $1.25 billion) or lower
(e.g., $800 million), and, if so, at what level should it be set? Are
there any transactions that currently meet the requirements of current
General Instruction I.B.2. that would not be eligible to use the form
under the proposed revision? Are there any transactions that do not
meet the current Form S-3 or Form F-3 eligibility requirements for
investment grade securities but now would be eligible under the
proposed revision that should not be eligible? If practicable, provide
information on the frequency such offerings are made.
     Would the proposed threshold increase or decrease the
number of issuers eligible to use Forms S-3 and F-3 under the current
investment grade criteria? Is there a reason that this Form S-3
eligibility requirement should not mirror the debt only well-known
seasoned issuer definition?
     Should the measurement time period for $1 billion of
issuance be longer than three years (e.g., four or five years)? If so,
why? Would it be more appropriate for the threshold to include non-
convertible securities, other than common equity, outstanding rather
than issued over the prior three years?
     Is there a better alternative by which Form S-3
eligibility for non-convertible securities could be required? By what
metrics could one measure the market following for debt issuers? Is
there an alternative definition of ``investment grade debt securities''
that does not rely on NRSRO ratings and adequately meets the objective
of relating short-form registration to the existence of widespread
following in the marketplace?
     Should there be a different standard for foreign private
issuers eligible to use Form F-3? If so, explain why and what would be
a more appropriate criteria.
     Does the $1 billion threshold of offering in the prior
three years present any issues that are unique to foreign private
issuers, especially those that may undertake U.S. registered public
offerings as only a portion of their overall plan of financing, and how
might these problems be addressed? Would it be appropriate to provide a
longer time period for measurement, or to include public offerings of
securities for cash outside the United States?
2. U.S. GAAP Reconciliation Requirements
    The Commission's rules relating to U.S. GAAP reconciliation
requirements for foreign filers also rely on ratings. Forms F-1, F-3,
and F-4 under the Securities Act permit foreign private issuers
registering offerings of investment grade securities to provide
financial information in accordance with Item 17 of Exchange Act Form
20-F. Item 17 requires foreign private issuers to reconcile their
financial statements and schedules to U.S. GAAP if they are prepared in
accordance with a basis of accounting other than U.S. GAAP or
International Financial Reporting Standards as issued by the
International Accounting Standards Board. This reconciliation need only
include a narrative discussion of reconciling differences, a
reconciliation of net income for each year and any interim periods
presented, a reconciliation of major balance sheet captions for each
year and any interim periods, and a reconciliation of cash flows for
each year and any interim periods. Item 18 of Form 20-F, by contrast,
requires that a foreign private issuer provide all of the information
required by U.S. GAAP and Regulation S-X, in addition to the
reconciling information for the line items specified in Item 17.\92\
Foreign private issuers of investment grade rated securities are
permitted to provide the less-extensive U.S. GAAP reconciliation
disclosure pursuant to Item 17 in registration statements and annual
reports.
---------------------------------------------------------------------------

    \92\ See also Foreign Issuer Reporting Enhancements, Release No.
33-8900 (Feb. 29, 2008) [73 FR 13404] at Section III.A.
---------------------------------------------------------------------------

    The definition of ``investment grade'' is the same as in the Form
S-3 eligibility requirements. A security is ``investment grade'' if, at
the time of sale, at least one NRSRO has rated it in one of its generic
rating categories that signifies investment grade. Also, a foreign
private issuer conducting a private placement of investment grade
securities under Regulation D can provide Item 17 information to the
extent the issuer is able to do so in a registration statement.\93\
---------------------------------------------------------------------------

    \93\ Rule 502 requires a foreign private issuer to provide the
same kind of information the issuer would be required to include in
a registration statement on a form the issuer would be eligible to
use if any sales are made to investors who are not accredited
investors. See 17 CFR 230.502(b)(2)(i)(C).
---------------------------------------------------------------------------

    The Commission recently proposed to require foreign private issuers
offering investment grade securities, among others, to file financial
statements that comply with the more complete Item 18 level of
reconciliation, thus eliminating the option of providing Item 17
financial disclosure.\94\ The Commission reasoned that ``a
reconciliation that includes footnote disclosures required by U.S. GAAP
and Regulation S-X \95\ can provide important additional information.''
\96\ The Commission specifically requested comment, however, on whether
foreign private issuers should continue to be permitted to provide Item
17 financial disclosure for offerings of, and periodic reporting
relating to, investment grade securities.\97\ We now also propose to
remove from these requirements the components relying on investment
grade ratings and instead permit foreign private issuers to comply with
the less extensive U.S. GAAP reconciliation requirements under Item 17
in a registration statement or private offering document if the issuer
would meet the proposed Form F-3 eligibility requirements (i.e., if the
issuer has issued (as of a date within 60 days prior to the filing of
the registration statement) for cash more than $1 billion in non-
convertible securities, other than common equity, through registered

primary offerings over the prior three years).
---------------------------------------------------------------------------

    \94\ See Release No. 33-8900.
    \95\ 17 CFR 210.1-01 et seq.
    \96\ Release No. 33-8900 at Section III.A.
    \97\ See Request for Comment No. 23 of Release No. 33-8900.
---------------------------------------------------------------------------

Request for Comment
     If the Commission does not adopt the proposal in Release
No. 33-8900 that would eliminate the ability of a foreign private
issuer to comply with the less extensive U.S. GAAP reconciliation
requirements under Item 17 for filings with respect to investment grade
securities, should the Commission revise the requirements as proposed
to permit a foreign private issuer to comply with the less extensive
U.S. GAAP reconciliation requirements under Item 17 if the issuer has
met the proposed Form F-3 eligibility criteria for debt issuers? Are
there different criteria that should be used?
3. Form F-9
    Form F-9 allows certain Canadian issuers to register investment
grade debt or investment grade preferred securities that are offered
for cash or in connection with an exchange offer, and which are either
non-convertible or not convertible for a period of at least one year
from the date of issuance.\98\ Under the Form's requirements, a
security is rated ``investment grade'' if it has been rated investment
grade by at least one NRSRO, or at least one Approved Rating
Organization (as defined in National Policy Statement No. 45 of the
Canadian Securities Administrator).\99\ This eligibility requirement
was adopted as part of a 1993 revision to the multijurisdictional
disclosure system originally adopted by the Commission in 1991 in
coordination with the Canadian Securities Administrators.\100\
Consistent with the Commission's proposal to reduce reliance on
security ratings in its rules and regulations the Commission is
proposing to eliminate the eligibility requirement of Form F-9 that
allows Canadian issuers to register certain debt and preferred
securities if they are rated investment grade by at least one NRSRO. As
with our proposals regarding Forms S-3 and F-3, this requirement would
be replaced by a requirement that the issuer has issued in the three
years immediately preceding the filing of the Form F-9 registration
statement at least $1 billion of aggregate principal amount of debt or
preferred securities for cash in primary offerings registered under the
Securities Act.
---------------------------------------------------------------------------

    \98\ Securities convertible after a period of at least one year
may only be convertible into a security of another class of the
issuer.
    \99\ See General Instruction I.A to Form F-9.
    \100\ See Amendments to the Multijurisdictional Disclosure
System for Canadian Issuers, Release No. 33-7025 (Nov. 3, 1993) [58
FR 62028]. See also Multijurisdictional Disclosure and Modifications
to the Current Registration and Reporting System for Canadian
Issuers, Securities Act Release No. 33-6902 (Jun. 21, 1991) [56 FR
30036].
---------------------------------------------------------------------------

    The proposed revision would not change a Canadian issuer's ability
to use Form F-9 to register debt or preferred securities meeting the
requirements of current General Instruction I.A if the securities are
rated ``investment grade'' by at least one Approved Rating Organization
(as defined in National Policy Statement No. 45 of the Canadian
Securities Administrators). While the proposal would still permit
Canadian issuers to register certain securities rated investment grade
by an Approved Rating Organization, the Commission believes this
approach is appropriate and consistent with the Commission's intent in
adopting the multijurisdictional disclosure system to look to form
eligibility requirements under Canadian rules.\101\ To the extent that
the Canadian securities regulators revise similar requirements to
remove references to investment grade ratings, we may revise Form F-9
to mirror those revisions.
---------------------------------------------------------------------------

    \101\ See Release No. 33-6902, section II.
---------------------------------------------------------------------------

Request for Comment
     The Commission requests comment on whether the proposed
threshold for issuances of debt or preferred securities in the three
years immediately preceding the filing of the registration statement is
appropriate. Should the Form F-9 eligibility requirements continue to
permit the use of ratings by Approved Rating Organizations? Is a
different threshold or measurement period more appropriate for Form F-
9?
4. NRSRO Ratings Reliance in Other Forms and Rules
a. Forms S-4 and F-4 and Schedule 14A
    Issuing investment grade securities confers benefits that extend to
other forms and rules as well. Forms S-4 and F-4 allow registrants that
meet the registrant eligibility requirements of Form S-3 or F-3 and are
offering investment grade securities to incorporate by reference
certain information.\102\ Similarly, Schedule 14A permits a registrant
to incorporate by reference if the Form S-3 registrant requirements are
met and the registrant is offering investment grade securities.\103\
Because the Commission proposes to change the eligibility requirements
in Forms S-3 and F-3 to remove references to ratings by an NRSRO, the
Commission believes the same standard should apply to the disclosure
options in Forms S-4 and F-4 based on Form S-3 or F-3 eligibility. That
is, a registrant will be eligible to use Forms S-4 and F-4 to register
non-convertible debt or preferred securities if the issuer has issued
(as of a date within 60 days prior to the filing of the registration
statement) for cash more than $1 billion in non-convertible securities,
other than common equity, through registered primary offerings over the
prior three years. Similarly, we propose to amend Schedule 14A to refer
simply to the requirements of General Instruction I.B.2. of Form S-3,
rather than to ``investment grade securities.''
---------------------------------------------------------------------------

    \102\ See General Instruction B.1 of Forms S-4 and Form F-4.
    \103\ See Note E and Item 13 of Schedule 14A.
---------------------------------------------------------------------------

b. Securities Act Rules 138, 139 and 168
    The reliance on security ratings is also evident in other
Securities Act rules. Rules 138, 139, and 168 under the Securities Act
provide that certain communications are deemed not to be an offer for
sale or offer to sell a security within the meaning of Sections
2(a)(10) \104\ and 5(c) \105\ of the Securities Act when the
communications relate to an offering of non-convertible investment
grade securities. These communications include the following:
---------------------------------------------------------------------------

    \104\ 15 U.S.C. 77b(a)10.
    \105\ 15 U.S.C. 77e(c).
---------------------------------------------------------------------------

     Under Securities Act Rule 138, a broker's or dealer's
publication about securities of a foreign private issuer that meets F-3
eligibility requirements (other than the reporting history
requirements) and is issuing non-convertible investment grade
securities;
     Under Securities Act Rule 139, a broker's or dealer's
publication or distribution of a research report about an issuer or its
securities where the issuer meets Form S-3 or F-3 registrant
requirements and is or will be offering investment grade securities
pursuant to General Instruction I.B.2 of Form S-3 or F-3, or where the
issuer meets Form F-3 eligibility requirements (other than the
reporting history requirements) and is issuing non-convertible
investment grade securities; and
     Under Securities Act Rule 168, the regular release and
dissemination by or on behalf of an issuer of communications containing
factual business information or forward-looking information where the
issuer meets Form F-3 eligibility requirements (other than the
reporting history requirements) and is issuing non-convertible
investment grade securities.
    The Commission proposes to revise Rules 138, 139, and 168 to be
consistent with the proposed revisions to the eligibility requirements
in Forms S-3 and F-3 since in order to rely on these rules the issuer
must either satisfy the public float threshold of Form S-3 or F-

3, or issue non-convertible investment grade securities as defined in
the instructions to Form S-3 or F-3 as proposed to be revised.
Request for Comment
     Should the Commission revise Rules 138, 139, and 168 as
proposed?
c. Item 1100 of Regulation AB
    Under the existing Item 1100(c) of Regulation AB,\106\ if a
significant obligor \107\ meets the registrant requirements for Form S-
3 or Form F-3 and the pool assets relating to the obligor are non-
convertible investment grade rated securities, then an ABS issuer's
filings may include a reference to the financial information of the
obligor rather than presenting the full financial information of the
obligor. The Commission now proposes to amend this provision of Item
1100(c) to remove the ratings reference and permit incorporation by
reference of third party financial statements if the third party meets
the registrant requirements of Form S-3 and the pool assets relating to
such third party are non-convertible securities, other than common
equity, that were issued in a primary offering for cash that was
registered under the Securities Act. The Commission believes that, for
the most part, non-convertible securities that were issued in a
registered offering constitute higher quality securities than
securities issued under an exemption under, for example, Securities Act
Rule 144A, and then subsequently exchanged for registered securities
because such securities are subject to the Securities Act.
---------------------------------------------------------------------------

    \106\ 17 CFR 229.1100(c).
    \107\ The term ``significant obligor'' is defined in Item
1101(k) of Regulation AB [17 CFR 229.1101(k)].
---------------------------------------------------------------------------

Request for Comment
     Should the Commission revise Item 1100 of Regulation AB as
proposed? If not, explain why?
d. Items 1112 and 1114 of Regulation AB
    Items 1112 and 1114 of Regulation AB require the disclosure of
certain financial information regarding significant obligors of an
asset pool and significant credit enhancement providers relating to a
class of asset-backed securities. An instruction to Item 1112(b)\108\
provides that no financial information on a significant obligor,
however, is required if the obligations of the significant obligor as
they relate to the pool assets are backed by the full faith and credit
of a foreign government and the pool assets are investment grade
securities. Item 1114 of Regulation AB contains a similar instruction
that relieves an issuer from providing financial information when the
obligations of the credit enhancement provider are backed by a foreign
government and the enhancement provider has an investment grade rating.
Under both Items 1112 and 1114, to the extent that pool assets are not
investment grade securities, information required by paragraph (5) of
Schedule B of the Securities Act may be provided in lieu of the
required financial information.\109\
---------------------------------------------------------------------------

    \108\ Instruction 2 to 17 CFR 229.1112(b).
    \109\ Paragraph 5 of Schedule B requires disclosure of three
years of the issuer's receipts and expenditures classified by
purpose in such detail and form as the Commission prescribes.
---------------------------------------------------------------------------

    We are now proposing to revise these instructions so that these
exceptions based on investment grade ratings to the requirements of
Items 1112 and 1114 of Regulation AB would no longer apply and
information required by paragraph (5) of Schedule B would be required
in all situations when the obligations of a significant obligor are
backed by the full faith and credit of a foreign government. We are not
aware of any benchmark comparable to an investment grade rating here
and the requirement would not impose substantial costs or burdens to an
ABS issuer, as such information should be readily available.
Request for Comment
     Should the Commission revise the instructions that rely on
investment grade ratings in Items 1112 and 1114, as proposed? In the
alternative, should the Commission instead permit issuers to omit all
information relating to the obligors and credit enhancement providers
when the obligations are backed by the full faith and credit of the
foreign government? Are there any risks in doing so? Should the
Commission allow incorporation by reference of the information required
by paragraph (5) of Schedule B of the Securities Act in lieu of
providing the information to the extent such information is contained
in a filing with the Commission?
     Are there any other provisions in Regulation AB or other
rules applicable to asset-backed securities that should be revised?

C. The Commission's Policy on Security Ratings

    As noted above, in 1981 the Commission issued its policy on
disclosure of security ratings, articulated in Item 10(c) of Regulation
S-K,\110\ that permits, but does not require, issuers to disclose in
Commission filings security ratings assigned by credit rating agencies
to classes of debt securities, convertible debt securities, and
preferred stock.\111\ In 1994, the Commission proposed to change from
permissible to mandated disclosure of security ratings.\112\ While the
Commission did not adopt mandatory disclosure at that time, it signaled
concerns relating to adequate disclosure to the markets regarding new
financial products and security ratings. In the proposal we noted the
dramatic proliferation in the types of securities offered in the
marketplace with the development of the market for mortgage- and asset-
backed securities and other highly structured or derivative financial
obligations. In response to the growth of this market, we adopted new
and amended rules and forms to address comprehensively the
registration, disclosure, and reporting requirements for asset-backed
securities.\113\ The adoption of Regulation AB in 2004 codified
disclosure requirements and assisted in providing more disclosure with
greater comparability for investors in the asset-backed securities
markets. While the adoption of Regulation AB has enhanced the
disclosure about asset-backed securities, it did not significantly
address securities ratings disclosure.
---------------------------------------------------------------------------

    \110\ 17 CFR 229.10(c).
    \111\ See the Integrated Disclosure Release. See also Release
No. 33-6336. The release indicated that a debt rating was simply
``an evaluation of the likelihood that an issuer will be able to
make timely interest payments and will be able to repay principal.''
    \112\ See the 1994 Ratings Release.
    \113\ Release No. 33-8518.
---------------------------------------------------------------------------

    Because mandating disclosure of, and about, securities ratings
might unduly emphasize or over rely on ratings, the Commission is at
this time retaining the current Item 10(c) policy on security ratings,
with minor changes to accommodate our proposed changes to Rule
436(g),\114\ which asks registrants to consider, but does not require,
certain additional disclosure if a registration statement includes
disclosure of a rating. While the Commission has not determined to
propose mandatory disclosure, we are again requesting comment as to
whether we should require disclosure by issuers regarding ratings in
their Securities Act registration statements and their Exchange Act
periodic reports. The goal of such disclosure requirements would be to
enhance security rating disclosure so that investors are better able to
understand the terms of a security rating and the limitations on the
rating.
---------------------------------------------------------------------------

    \114\ 17 CFR 230.436(g).
---------------------------------------------------------------------------

    We are proposing to amend Rule 436(g) so that applicability would
no longer be limited to just NRSROs.

Securities Act Rule 436(g)\115\ provides that a security rating
assigned to a class of debt securities, a class of convertible debt
securities, or a class of preferred stock is not a part of a
registration statement prepared or certified by a person or a report or
valuation prepared or certified by a person within the meaning of
sections 7 and 11 of the Securities Act. We propose to amend the
reference to ``nationally recognized statistical rating organization''
in Rule 436(g) to expand the relief to any ``credit rating agency'' as
defined in 15 U.S.C. 78c(a)(61). By proposing to permit issuers to
disclose security ratings provided by any credit rating agency without
requiring consents, the Commission believes this relief may foster
competition between credit rating agencies.\116\
---------------------------------------------------------------------------

    \115\ 17 CFR 230.436(g).
    \116\ See also Section II.B.1 of the 1994 Ratings Release where
the Commission requested comment on eliminating the consent
requirement for credit rating agencies that are not NRSROs.
---------------------------------------------------------------------------

Request for Comment
     Prior to 1981 the Commission precluded disclosure
regarding security ratings in registration statements under the
Securities Act. Should we revise our disclosure policy to prohibit
disclosure of security ratings in an issuer's Securities Act
registration statements or Exchange Act periodic reports? Should we
simply delete Item 10(c) and provide no established disclosure policy
regarding credit ratings?
     In 1994, the Commission noted ``the extensive use of, and
reliance on, ratings, and the wide disparity in the meaning and
significance of the rating'' as important factors in its decision to
propose mandated disclosure.\117\ In light of the recent turmoil in the
credit markets, some of the factors for the proposed disclosure may be
no less of concern today than they were in 1994. Should the Commission
require disclosure like the disclosure we currently recommend in Item
10(c) of Regulation S-K in order to enhance issuers' security rating
disclosure so that investors are better able to understand the terms of
a security rating and the limitations on that rating? Would requiring
disclosure of a security rating place the Commission's ``official seal
of approval'' on security ratings such that it could adversely affect
the quality of due diligence and investment analysis?
---------------------------------------------------------------------------

    \117\ See Section II.A of the 1994 Proposing Release.
---------------------------------------------------------------------------

     Item 10(c) of Regulation S-K currently refers to
``security ratings'' while the 2006 Credit Rating Agency Reform Act
added the definition of ``credit rating'' to the Exchange Act, which
means an assessment of the creditworthiness of an obligor as an entity
or with respect to specific securities or money market instruments.
Should we revise the reference to ``security rating'' in Item 10(c) to
refer to ``credit rating'' instead? Would such a revision increase or
decrease the scope of ratings covered by 10(c)? Would such a change
limit the types of ratings that could be disclosed in a registration
statement? In particular, are there any types of ratings that are
issued that would not be covered by the term ``credit rating,''
particularly for ABS or structured products that should be covered by
Item 10(c)? Are there any other changes we should make to Item 10(c) to
align it with the Credit Rating Agency Reform Act or otherwise
modernize it? For instance, should we specifically delineate structured
products and asset-backed securities in the list of securities covered
by the item since it currently only lists debt securities, convertible
debt securities and preferred stock?
     While Item 10(c) currently only recommends disclosure,
commenters on the 1994 Ratings Release expressed that most issuers
provide this disclosure in their Securities Act filings. Do issuers
generally provide this disclosure today? Is disclosure about an
issuer's securities rating appropriate disclosure for their Securities
Act filings? Is it appropriate disclosure for their periodic Exchange
Act filings? Is there any reason that this disclosure should only be
recommended rather than required?
     In addition to the information Item 10(c) currently
recommends disclosure regarding security ratings would it be valuable
for investors to have additional disclosure of all material scope
limitations of the rating and any related designation (or other
published evaluation) of non-credit payment risks assigned by the
rating agency with respect to the security assist investors in better
understanding the credit rating and assessing the risks of an
investment in the securities? What additional disclosure would be
helpful to investors in making these assessments?
     If we were to mandate security rating disclosure, should
disclosure be required for any published designation that reflects the
results of any evaluation, other than a credit risk evaluation, done by
a credit rating agency? Should disclosure be required for any
evaluation by a credit rating agency that is communicated to the
issuer, regardless of whether it is published?
     If the Commission were to require security rating
disclosure, when should an issuer be required to provide that
disclosure? In 1994, we proposed to require disclosure: if a registrant
has obtained a security rating from an NRSRO with respect to a class of
securities being registered under the Securities Act; if the rating is
used in the offer or sale of the securities by any participant in an
offering; or if the registrant voluntarily discloses a security rating.
Should disclosure about the security rating be required under those
circumstances? If not, under what circumstances, if any, should
disclosure be required?
     Should we require disclosure of unsolicited ratings? It
has been suggested that such ratings may not reflect the level of
information on the security that is reflected in a solicited rating, at
least in part because of a lack of access to the issuer by the
unsolicited credit rating agency.\118\ Is there a difference between
solicited and unsolicited ratings such that they should be treated
disparately? Should it matter if the issuer uses the unsolicited rating
in the offer and sale of the securities being rated? If we were to
require disclosure of unsolicited ratings, should there be limitations
on how many ratings or which credit rating agencies ratings should be
required to be disclosed? At what point would this create too great a
burden on the issuer?
---------------------------------------------------------------------------

    \118\ However, in the corollary release amending rules for
NRSROs, the Commission proposed various changes to Exchange Act Rule
17g-5 [17 CFR 240.17g-5] that would provide the opportunity for
other credit rating agencies to use the information to develop
``unsolicited ratings'' for certain rated asset-backed securities.
See proposed amendments to Rule 17g-5 in Release No. 34-57967 (Jun.
16, 2008).
---------------------------------------------------------------------------

     In Release 34-57967, we expressed our concerns about
ratings shopping by issuers and the potential for credit rating
agencies to use less conservative rating methodologies in order to gain
business, presumably lessening the value of the ratings. If an issuer
would be required to provide ratings disclosure where the issuer has
obtained either a preliminary security rating or a final security
rating from a rating agency, would such disclosure enhance investors'
understanding of, and therefore the value of, the ratings? Would it
help to address our concerns with ratings shopping? If you do not
believe such disclosure would be helpful, how would you suggest that we
address these concerns? Should we include a disclosure requirement for
indications of a rating prior to a preliminary rating? Would disclosure
of indication from a credit rating agency of a likely or possible
rating be appropriate?

     If we were to interpret that a security rating is
``obtained'' if: it is solicited by or on behalf of an issuer from a
credit rating agency; or the issuer pays a credit rating agency for
services related to a rating issued by that credit rating agency, would
the standard capture sufficient disclosure about an issuer's security
ratings and the credit rating agencies that have issued them? Could
that lead to non-substantive or procedural modifications to the
practice of assigning ratings so that issuers could avoid the
disclosure requirement? Would that lead to disclosure of security
ratings that would not be useful to investors? What standard would
provide the most useful information for investors? Could this threshold
lead to ratings being obtained in connection with an offering but not
being disclosed?
     In the 1994 Ratings Release, we proposed to require
issuers to disclose any material differences between the terms of the
security as assumed in rating the security and (1) the terms of the
security as specified in the governing instruments, and (2) the terms
of the security as marketed to investors. The terms of the securities
are required to be disclosed in the prospectus, a prospectus
supplement, or a post-effective amendment, as applicable. Would this
disclosure assist investors? Would requiring this disclosure in
periodic filings assist investors in the secondary market in making
their investment decisions?
     Having previously proposed requiring material changes in
security ratings be reported on Form 8-K under the Exchange Act,\119\
we recognize that such security rating changes can be important
information to an investor in making investment and voting decisions.
We note, however, that issuer-paid rating agencies make their rating
designations public. The current failures of security ratings,
particularly in the asset-backed securities markets, have led us to re-
evaluate the required level of disclosure regarding security ratings.
Would requiring detailed current and/or periodic reporting of an
issuer's security ratings provide investors and the markets sufficient,
timely information about an issuer's security ratings to assist them in
making their investment decisions? Would a Form 8-K provide investors
with material and timely information about an issuer's security ratings
and changes in those ratings? Would periodic reports on Form 10-K, Form
20-F, Form 10-Q and Form 10-D provide investors with material and
timely information about an issuer's security ratings and changes in
those ratings? Is the information that would be provided regarding a
material change in a rating in a Form 8-K already provided by the
credit rating agency? Would a Form 8-K be unduly burdensome? Should a
Form 8-K requirement be limited to solicited ratings? If a credit
rating agency does not publicly disclose the security rating of an
issuer's securities, should we require disclosure of the rating in a
Form 8-K or in the issuer's periodic reports? How would the existence
of subscriber paid credit rating agencies affect your response?
---------------------------------------------------------------------------

    \119\ See the 1994 Ratings Release and Release No. 33-8106.
---------------------------------------------------------------------------

     We are only proposing to amend Item 10(c) to remove
references to consents in conjunction with our proposed amendments to
Rule 436(g) to no longer requiring consents from any credit rating
agencies for inclusion of their ratings in an issuer's registration
statement. Should there be a written consent requirement? Would a
written consent requirement create any issues if the Commission were to
require disclosure regarding those ratings? Would issuers find it
problematic or costly to obtain consents?
     Should we require the consent of a credit rating agency
for the use of its security rating by an issuer? What would be the
additional costs of such a requirement? Would a consent requirement
result in fewer ratings being obtained?
     Should we continue to limit the consent requirement to
non-NRSROs as our rules currently do? Does our proposed regulatory
oversight and additional disclosure regarding the ratings process and
results of ratings justify allowing the use of NRSROs ratings without
requiring consents? Would such a provision provide a ``seal of
approval'' for NRSROs? Would there be any competitive effect on non-
NRSRO credit rating agencies?
     Are there any issues with periodic disclosure regarding
security ratings that are particular to ABS issuers? For instance, how
would the responsibility to monitor changes or development in security
ratings impact ABS offerings?

D. Other Rules Referencing Security Ratings

    Other rules under the Securities Act also reference security
ratings assigned by NRSROs. Rule 134(a)(17)\120\ permits the disclosure
of security ratings in certain communications deemed not to be a
prospectus or free writing prospectus. We are not proposing to
eliminate this reference to security ratings in our rules. However, we
are proposing to revise the rule to allow for disclosure of ratings
assigned by any credit rating agency, not just NRSROs. In addition,
disclosure must also note that the credit rating agency is not an
NRSRO, if that is the case.
---------------------------------------------------------------------------

    \120\ 17 CFR 230.134(a)(17).
---------------------------------------------------------------------------

    Under Rule 100(b)(2) of Regulation FD, disclosures to an entity
whose primary business is the issuance of security ratings are excluded
from coverage provided the information is disclosed solely for the
purpose of developing a credit rating and the entity's ratings are
publicly available. We believe this exception for disclosures to credit
rating agencies is appropriate given the purpose of Regulation FD and
are therefore not proposing to revise that provision.
Request for Comment
     Should we continue to allow disclosure of security ratings
in ``tombstones'' to be deemed not to be a prospectus or free writing
prospectus? Is it appropriate to allow such disclosure of a security
rating by any credit rating agency and not limit the allowance to
NRSROs? If the credit rating agency is not an NRSRO, is it appropriate
to require additional disclosure to that effect?
     Should we revise Rule 100(b)(2) of Regulation FD to
eliminate the requirement that the entity's ratings be publicly
available or to require public disclosure of information submitted to
credit rating agencies by issuers? If so, please explain the basis for
recommending the change and discuss how to implement such changes.
     How would requiring disclosure under Regulation FD affect
security ratings?

III. General Request for Comments

    We request and encourage any interested person to submit comments
regarding:
     The proposed amendments that are the subject of this
release;
     Additional or different changes; or
     Other matters that may have an effect on the proposals
contained in this release.
    We request comment from the point of view of companies, investors,
and other market participants. With regard to any comments, we note
that such comments are of great assistance to our rulemaking initiative
if accompanied by supporting data and analysis of the issues addressed
in those comments.
    In addition, we request comment on the following:
     Should the Commission include a phase-in for issuers
beyond the effective date to accommodate pending offerings?

If so, should a phase-in apply only to particular rules, such as Form
S-3 eligibility? As proposed, compliance with the new standards would
begin on the effective date of the new rules. Will a significant number
of issuers have their offerings limited by the proposed rules? If a
phase-in is appropriate, should it be for a certain period of time or
only for the term of a pending registration statement?
     What impact on competition should the Commission expect
were it to adopt the proposed non-convertible debt eligibility
requirements? Would any issuers that currently take advantage, or are
eligible to take advantage of the investment grade condition and are
planning to do so, be adversely affected? Is the ability to offer debt
off the shelf a significant competitive advantage that the Commission
should be concerned about limiting to only large debt issuers?

IV. Paperwork Reduction Act

A. Background

    Certain provisions of the proposed rule amendments contain a
``collection of information'' within the meaning of the Paperwork
Reduction Act of 1995 (PRA).\121\ The Commission is submitting these
proposed amendments and proposed rules to the Office of Management and
Budget (OMB) for review in accordance with the PRA. An agency may not
conduct or sponsor, and a person is not required to comply with, a
collection of information unless it displays a currently valid control
number. The titles for the collections of information are: \122\
---------------------------------------------------------------------------

    \121\ 44 U.S.C. 3501 et seq. ; 5 CFR 1320.11.
    \122\ The paperwork burden from Regulation S-K and S-B is
imposed through the forms that are subject to the requirements in
those regulations and is reflected in the analysis of those forms.
To avoid a Paperwork Reduction Act inventory reflecting duplicative
burdens and for administrative convenience, we assign a one-hour
burden to Regulation S-K.
---------------------------------------------------------------------------

    ``Regulation S-K'' (OMB Control No. 3235-0071);
    ``Regulation C'' (OMB Control No. 3235-0074);
    ``Form S-1'' (OMB Control No. 3235-0065) ;
    ``Form S-3'' (OMB Control No. 3235-0073);
    ``Form S-4'' (OMB Control No. 3235-0324);
    ``Form F-1'' (OMB Control No. 3235-0258);
    ``Form F-3'' (OMB Control No. 3235-0256); and
    ``Form F-4'' (OMB Control No. 3235-0325).
    We adopted all of the existing regulations and forms pursuant to
the Securities Act or the Exchange Act. These regulations and forms set
forth the disclosure requirements for periodic reports and registration
statements that are prepared by issuers to provide investors with
information to make investment decisions in registered offerings and in
secondary market transactions. Our proposed amendments to existing
forms and regulations are intended to replace rule and form
requirements of the Securities Act and the Exchange Act that rely on
security ratings with alternative requirements.
    The hours and costs associated with preparing disclosure, filing
forms, and retaining records constitute reporting and cost burdens
imposed by the collection of information. There is no mandatory
retention period for the information disclosed, and the information
disclosed would be made publicly available on the EDGAR filing system.

B. Summary of Collection of Information Requirements

    The threshold we are proposing for issuers of non-convertible
securities who are otherwise ineligible to use Form S-3 or Form F-3 to
conduct primary offerings because they do not meet the aggregate market
value requirement is designed to capture those issuers with an active
market following. The Commission expects that under the proposed
threshold, approximately the same number of issuers who are currently
eligible will be eligible to register on Form S-3 or Form F-3 for
primary offerings of non-convertible securities for cash. In addition,
because these proposed amendments relate to those forms' eligibility
requirements, rather than the disclosure requirements, the Commission
does not expect that the proposed revisions will impose any new
material recordkeeping or information collection requirements. Issuers
may be required to ascertain the aggregate principal amount of non-
convertible securities issued in registered primary offerings for cash,
but the Commission believes that this information should be readily
available and easily calculable.
    Our proposed amendments to Form S-3 and Rule 415 for ABS offerings
is intended to limit the investors purchasing asset-backed securities
in a delayed offering and off a short-form registration statement to
sophisticated and experienced investors without creating an undue
detriment to the liquidity of the asset-backed securities market. The
Commission expects preliminarily that the proposed amendments for ABS
offerings would not substantially change the number of ABS issuers
registering their offerings on Form S-3.\123\
---------------------------------------------------------------------------

    \123\ As noted above, we have identified two areas of exception:
unit repackagings and securitizations of insurance funding
agreements. We do not believe that changes in these areas would
substantially change the number of issuers that would be eligible
under the proposed Form S-3 eligibility requirement for ABS
offerings.
---------------------------------------------------------------------------

C. Paperwork Reduction Act Burden Estimates

    For purposes of the Paperwork Reduction Act, we estimate that there
will be no annual incremental increase in the paperwork burden for
issuers to comply with our proposed collection of information
requirements.

D. Solicitation of Comments

    We request comments in order to evaluate: (1) Whether the proposed
collection of information is necessary for the proper performance of
the functions of the agency, including whether the information would
have practical utility; (2) the accuracy of our estimate of the burden
of the proposed collection of information; (3) whether there are ways
to enhance the quality, utility, and clarity of the information to be
collected; and (4) whether there are ways to minimize the burden of the
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.\124\
---------------------------------------------------------------------------

    \124\ We request comment pursuant to 44 U.S.C. 3506(c)(2)(B).
---------------------------------------------------------------------------

    Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct the comments to the Office of
Management and Budget, Attention: Desk Officer for the Securities and
Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and should send a copy to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090,
with reference to File No. S7-18-08. Requests for materials submitted
to OMB by the Commission with regard to these collections of
information should be in writing, refer to File No. S7-18-08, and be
submitted to the Securities and Exchange Commission, Records
Management, Office of Filings and Information Services, 100 F Street,
NE., Washington, DC 20549. OMB is required to make a decision
concerning the collection of information between 30 and 60 days after
publication of this

release. Consequently, a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days of publication.

V. Cost-Benefit Analysis

A. Proposed Amendments

    The Commission is sensitive to the costs and benefits imposed by
its rules. We have identified certain costs and benefits of the
proposed amendments and request comment on all aspects of this cost-
benefit analysis, including identification and assessment of any costs
and benefits not discussed in this analysis. We seek comment and data
on the value of the benefits identified. We also welcome comments on
the accuracy of the cost estimates in each section of this analysis,
and request that commenters provide data that may be relevant to these
cost estimates. In addition, we seek estimates and views regarding
these costs and benefits for particular covered institutions, including
small institutions, as well as any other costs or benefits that may
result from the adoption of these proposed amendments.
    As discussed above, the proposed rule amendments are designed to
address the risk that the reference to and use of NRSRO ratings in our
rules is interpreted by investors as an endorsement of the quality of
the credit ratings issued by NRSROs, and may encourage investors to
place undue reliance on the NRSRO ratings. Today's proposals seek to
replace rule and form requirements of the Securities Act and the
Exchange Act that rely on security ratings by NRSROs with alternative
requirements that do not rely on ratings.
    The Commission is proposing to revise the transaction eligibility
requirements of Forms S-3, F-3, and F-9. Currently, these forms allow
issuers who do not meet the forms' other transaction eligibility
requirements to register primary offerings of non-convertible
securities for cash if such securities are rated investment grade by an
NRSRO.\125\ The proposed rules would replace the current eligibility
requirement with a requirement that for primary offerings of non-
convertible securities for cash, an issuer must have issued in the
three years (as of a date within 60 days prior to the filing of the
registration statement) at least $1 billion aggregate principal amount
of non-convertible securities, other than common equity, in registered
primary offerings for cash. In addition, the Commission proposes to
replace the Form S-3 eligibility requirement for ABS offerings to
require that initial sales of eligible offerings be made only to
qualified institutional buyers and that initial and subsequent resales
of the securities in the eligible offerings be made only in
denominations of at least $250,000. In conjunction with this proposal,
the Commission proposes to amend Rule 415 to provide for delayed
offerings of mortgage related securities, regardless of the security
ratings, only if they meet the same criteria as proposed for ABS
offerings on Form S-3.
---------------------------------------------------------------------------

    \125\ The proposed revisions to Form F-9 would eliminate a
Canadian issuer's ability to rely on security ratings by NRSROs, but
would continue to rely on ratings issued by Approved Rating
Organizations, as defined in National Policy Statement No. 45 of the
Canadian Securities Administrator.
---------------------------------------------------------------------------

    Currently, issuers are required to obtain consent from a rating
agency that is not an NRSRO for disclosure of a security rating issued
by that rating agency in a registration statement or report. The
Commission is also proposing to amend Securities Act Rule 436(g) and
related rules to expand the relief from the consent requirements for
security ratings currently provided to NRSROs to other credit rating
agencies that are not NRSROs. In addition, the proposed revision to
Rule 134 of the Securities Act would permit an issuer to disclose the
security rating of any credit rating agency, but would require an
issuer to provide, if it elects to include a security rating in a
communication under Rule 134, a statement as to whether the entity
issuing the rating is an NRSRO.

B. Benefits

    The Commission anticipates that one of the primary benefits of the
proposed amendments, if adopted, would be the benefit to investors of
reducing their possible undue reliance on NRSRO ratings that could be
caused by references to NRSROs in our rules. An over-reliance on
ratings can inhibit independent analysis and could possibly lead to
investment decisions that are based on incomplete information. The
purpose of the proposed rule amendments is to encourage investors to
examine more than a single source of information in making an
investment decision. Eliminating reliance on ratings in the
Commission's rules could also result in greater investor due diligence
and investment analysis. In addition, the Commission believes that
eliminating the reliance on ratings in its rules would remove any
appearance that the Commission has placed its imprimatur on certain
ratings.
    The Commission believes that the proposed amendments to the Form S-
3 eligibility requirements for ABS offerings and eligibility to rely on
Rule 415(a)(vii) for mortgage-backed securities are designed to make
shelf eligibility and short-form registration available to
sophisticated and experienced investors. The proposed requirement to
permit initial sales only to qualified institutional buyers is intended
to limit the market to investors who understand the risks involved with
an ABS offering. The proposed requirement that initial sales and
subsequent resales of the securities are in minimum denominations of
$250,000 is designed to limit offerings to investors with such capital,
increasing the probability that these investors have the resources to
analyze and comprehend the risks involved with an investment decision
in the ABS offering. As with the other amendments to our rules and form
requirements relying on investment grade ratings, the Commission
believes that these proposals would reduce or eliminate undue reliance
on ratings.
    The proposed revision to Rule 134 of the Securities Act would
require an issuer to provide, if it elects to include a security rating
in a communication under Rule 134, a statement as to whether the entity
issuing the rating is an NRSRO. The Commission believes that disclosure
of this information would be beneficial to investors in evaluating the
value of the rating.
    Under our proposed amendment to Rule 436(g), an issuer would not be
required to obtain consent from the rating agency even with respect to
a rating disclosed in a registration statement or report that is issued
by a credit rating agency that is not an NRSRO. We believe that our
proposed change would foster competition between credit rating
agencies.\126\
---------------------------------------------------------------------------

    \126\ This would be consistent with our proposed amendments to
the rules governing NRSROs in Release No. 34-57967. As discussed in
that release, such competition could promote ease of comparability
between ratings.
---------------------------------------------------------------------------

C. Costs

    We are proposing to revise the transaction eligibility criteria for
registering primary offerings of non-convertible securities on short-
form registration statements. Forms S-3 and F-3 would be available to
register primary offerings of non-convertible securities if the issuer
has issued (as of a date within 60 days prior to the filing of the
registration statement) for cash more than $1 billion in non-
convertible securities, other than common equity, through registered
primary offerings over the prior three years. The proposed eligibility
thresholds may be more difficult to ascertain for some issuers than an
NRSRO rating and impose some

burden on issuers to ascertain the information. In addition, while we
do not anticipate that fewer issuers will be eligible, to the extent
that the proposal results in fewer issuers eligible to use Forms S-3
and F-3 to register primary offerings of non-convertible securities,
this could result in increased costs of preparing and filing
registration statements.\127\ Issuers who do not meet the proposed
threshold and are not otherwise eligible to use Forms S-3 and F-3,
would have to register offerings on Forms S-1 or F-1. This could result
in additional time spent in the offering process, and issuers may incur
costs associated with preparing and filing post-effective amendments to
the registration statement.
---------------------------------------------------------------------------

    \127\ The ability to conduct primary offerings on short form
registration statements confers significant advantages on eligible
companies in terms of cost savings and capital formation. The time
required to prepare Form S-3 or F-3 is significantly lower than that
required for Forms S-1 and F-1 primarily because registration
statements on Forms S-3 and F-3 can be automatically updated. Forms
S-3 and F-3 permit registrants to forward incorporate required
information by reference to disclosure in their Exchange Act
filings.
---------------------------------------------------------------------------

    The Commission does not expect the proposed changes to Forms F-1,
F-3 and F-4 to impact substantially the number of registrants able to
provide information required by Item 17 of Form 20-F in lieu of Item 18
information. However, because the Commission is proposing changes to
the provisions of the forms that provide the eligibility requirements
for registrants to provide Item 17 information instead of Item 18,
registrants who do not meet the proposed criteria could incur more
costs as a result of being required to provide Item 18 information
instead.
    For the most part, the Commission believes that there would be
minimal costs involved with the adoption of the proposed ABS offering
Form S-3 eligibility requirements and eligibility to rely on Rule
415(a)(vii) for mortgage-backed securities.\128\ Some costs may be
incurred on the part of issuers to ensure that sales of the securities
in an offering on Form S-3 are made only to qualified institutional
buyers and in the prescribed denominations; however, the Commission
believes these costs are not significant. To the extent that some
issuers would no longer be able to use Form S-3 to register their
offerings, those issuers may face some additional costs, such as those
arising from no longer being able to utilize certain rules permitting
the use of offering materials.
---------------------------------------------------------------------------

    \128\ ABS issuers generally provide the same disclosure in Form
S-1 and Form S-3 registration statements. As such, there may not be
the same cost concerns for ABS issuers that no longer qualify for
registration on Form S-3 as for other issuers.
---------------------------------------------------------------------------

    The proposed revision to Rule 134 could impose a disclosure burden
of ascertaining whether the entity is an NRSRO, but the Commission
believes this burden is slight given the limited number of NRSROs, the
availability of this information from public filings, and the issuer's
relationship with the credit rating agency.

D. Request for Comments

    We seek comments and empirical data on all aspects of this Cost-
Benefit Analysis. Specifically, we ask the following:
     Are there any costs involved with tracking whether the
initial purchaser is a qualified institutional buyer? Are most ABS
offerings on Form S-3 sold to such purchasers? What kind of asset-
backed securities are sold to retail investors?
     Are there any costs entailed with tracking the
denominations of the sale for the purposes of meeting the proposed ABS
offering Form S-3 eligibility requirements?
     Would there be any significant transition costs imposed on
issuers as a result of the proposals, if adopted? Please be detailed
and provide quantitative data or support, as practicable.

VI. Consideration of Burden on Competition and Promotion of Efficiency,
Competition, and Capital Formation

    Section 23(a) of the Exchange Act \129\ requires the Commission,
when making rules and regulations under the Exchange Act, to consider
the impact a new rule would have on competition. Section 23(a)(2)
prohibits the Commission from adopting any rule which would impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act. Section 2(b) of the Securities Act
\130\ and Section 3(f) of the Exchange Act \131\ require the
Commission, when engaging in rulemaking, to consider whether an action
is necessary or appropriate in the public interest, and in addition, to
consider the protection of investors and whether the action would
promote efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \129\ 15 U.S.C. 78w(a).
    \130\ 15 U.S.C. 77b(b).
    \131\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The proposed amendments would eliminate reliance on ratings by an
NRSRO in various rules and forms under the Securities Act and the
Exchange Act. If adopted, the Commission believes that these amendments
would reduce the potential for over-reliance on ratings, and thereby
promote investor protection. The Commission anticipates that these
proposed amendments would improve investors' ability to make informed
investment decisions, which will therefore lead to increased efficiency
and competitiveness of the U.S. capital markets. The Commission expects
that this increased market efficiency and investor confidence also may
encourage more efficient capital formation. Specifically, the proposed
amendments would:
     Seek to limit the investors purchasing asset-backed
securities off a short-form registration statement to sophisticated and
experienced investors without creating an undue detriment to the
liquidity of the asset-backed securities market; and
     Seek to limit the issuers eligible to register primary
offerings of non-convertible securities on Forms S-3 and F-3 and
incorporate by reference to issuers that are actively followed by the
markets; and
     Enhance the ability of credit rating agencies to offer
security ratings to issuers.
The Commission solicits comment on whether the proposed amendments
would change the Forms S-3 and F-3 eligibility requirements for
registering primary offerings of non-convertible securities, if
adopted, would promote or burden efficiency, competition, and capital
formation. The Commission also requests comment on whether the proposed
amendments would have harmful effects on investors or on issuers who
could use Form S-3 and Form F-3 for primary offerings of non-
convertible securities, and what options would best minimize those
effects. The Commission requests comment on whether the proposed
changes to the eligibility requirement on Form S-3 for offerings of
asset-backed securities would promote or burden efficiency,
competition, and capital formation. The Commission requests comment on
whether the proposed eligibility criterion is less efficient than using
the current NRSRO criterion? Additionally, the Commission solicits
comment on whether the proposed expansion of the ability of credit
rating agencies to proffer their security ratings without being
required to provide a consent for an issuer to disclose those ratings
would promote or burden efficiency, competition, and capital formation.
Finally, the Commission requests comment on the anticipated effect of
disclosure requirements on competition in the market for credit rating
agencies.

The Commission requests commenters to provide empirical data and other
factual support for their views, if possible.

VII. Regulatory Flexibility Act Certification

    The Commission hereby certifies, pursuant to 5 U.S.C. 605(b), that
the amendments contained in this release, if adopted, would not have a
significant economic impact on a substantial number of small entities.
The proposed amendments would:
     Amend the Securities Act Form S-3 eligibility requirements
for offerings of asset-backed securities by replacing the investment
grade component with a minimum denomination requirement for initial and
subsequent sales and require that initial sales of classes of
securities only be made to qualified institutional buyers;
     Amend Rule 415 of the Securities Act that references
mortgaged related securities by adding the requirement that an initial
and subsequent sale of such a security must meet certain minimum
denominations, and initial sales must be made to qualified
institutional buyers;
     Amend the Securities Act Form S-3 and Form F-3 eligibility
requirements for primary offerings of non-convertible securities if the
issuer has issued (as of a date within 60 days prior to the filing of
the registration statement) for cash more than $1 billion in non-
convertible securities, other than common stock, through registered
primary offerings, within the prior three years;
     Amend Form F-9 which requires securities to be rated
investment grade to instead require that the issuer have issued in the
prior three years at least $1 billion of aggregate principle amount of
debt or preferred securities for cash in registered primary offerings;
     Amend Forms S-4 and F-4 and Schedule 14A to conform with
the proposed Form S-3/F-3 eligibility requirements;
     Amend Securities Act Rules 138, 139, and Rules 168 to be
consistent with the proposed Form S-3/F-3 eligibility requirements;
     Amend Item 10(c) to conform to our proposed Rule 436(g)
changes;
     Amend Rule 134(a)(17) to allow for disclosure of ratings
assigned by any Credit Rating Agency--not just NRSROs; and
     Amend Rule 436(g) to replace the current reference to
``nationally recognized statistical rating organization'' with a
reference to ``credit rating agency.''

We are not aware of any issuers that currently rely on the rules that
we propose to change or any issuers that would be eligible to register
under the affected rules that is a small entity. In this regard, we
note that credit rating agencies rarely, if ever, rate the securities
of small entities. We further note most security ratings that will be
disclosed are expected to be ratings obtained and used by the issuer.
Issuers are required to pay for these security ratings and the cost of
these ratings relative to the size of a debt or preferred securities
offering by a small entity would generally be prohibitive. Finally,
based on an analysis of the language and legislative history of the
Regulatory Flexibility Act, we note that Congress did not intend that
the Act apply to foreign issuers. Accordingly, some of the entities
directly affected by the proposed rule and form amendments will fall
outside the scope of the Act.
    For these reasons, the proposed amendments would not have a
significant economic impact on a substantial number of small entities.

VIII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\132\ a rule is ``major'' if it has resulted, or is likely
to result in:
---------------------------------------------------------------------------

    \132\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the U.S. economy of $100 million or
more;
     A major increase in costs or prices for consumers or
individual industries; or
     Significant adverse effects on competition, investment, or
innovation. We request comment on whether our proposal would be a
``major rule'' for purposes of the Small Business Regulatory
Enforcement Fairness Act. We solicit comment and empirical data on:
     The potential effect on the U.S. economy on an annual
basis;
     Any potential increase in costs or prices for consumers or
individual industries; and
     Any potential effect on competition, investment, or
innovation.

IX. Statutory Authority and Text of Proposed Rule and Form Amendments

    We are proposing the amendments contained in this document under
the authority set forth in Sections 6, 7, 10, 19(a) of the Securities
Act and Sections 12, 13, 14, 15(d) and 23(a) of the Exchange Act.

List of Subjects in 17 CFR Parts 229, 230, 239, and 240

    Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is proposed to be amended as follows:

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K

    1. The authority citation for part 229 continues to read in part as
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll,
78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-
38(a), 80a-39, 80b-11, and 7201 et seq.; 18 U.S.C. 1350, unless
otherwise noted.
* * * * *
    2. Amend Sec.  229.10, paragraph (c)(1)(i) by:
    a. Removing the second sentence;
    b. Revising ``NRSRO'' in the third sentence to read, ``credit
rating agency (as defined in 15 U.S.C. 78c(a)(61))''; and
    c. Revising the phrase ``Instruction to paragraph (a)(2)'' in the
fourth sentence to read, ``paragraph A.2.(B)''.
    3. Amend Sec.  229.1100 by revising paragraph (c)(2)(ii)(B) to read
as follows:

Sec.  229.1100 (Item 1100)  General.

* * * * *
    (c) * * *
    (2) * * *
    (ii) * * *
    (B) The third party meets the requirements of General Instruction
I.A. of Form S-3 or General Instructions 1.A.1, 2, 3, 4, and 6 of Form
F-3 and the pool assets relating to such third party are non-
convertible securities, other than common equity, that were issued in a
primary offering for cash that was registered under the Securities Act.
* * * * *
    4. Amend Sec.  229.1112 by:
    a. In paragraph (b) remove Instruction 2 to Item 1112(b);
    b. Redesignating Instructions 3 and 4 to Items 1112(b) as
Instructions 2 and 3 to Item 1112(b).
    5. Amend Sec.  229.1114 by:
    a. In paragraph (b) revise the heading for ``Instructions to Item
1114:'' to read ``Instructions to Item 1114(b):''.
    b. Removing Instruction 3 to Item 1114.
    c. Redesignating Instructions 4 and 5 to Item 1114 as Instructions
3 and 4 to Item 1114.

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    6. The authority citation for part 230 continues to read in part as
follows:

    Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r,
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w,
78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37,
unless otherwise noted.
* * * * *
    7. Amend Sec.  230.134 by:
    a. Revising paragraph (a)(17)(i);
    b. Redesignating paragraph (a)(17)(ii) as paragraph (a)(17)(iii);
and
    c. Adding new paragraph (a)(17)(ii).
    The revision and addition read as follows:

Sec.  230.134  Communications not deemed a prospectus.

* * * * *
    (a) * * *
    (17) * * *
    (i) Any security rating assigned, or reasonably expected to be
assigned, by a credit rating agency, as that term is defined in 15
U.S.C. 78c(a)(61), and the name or names of the credit rating agencies
that assigned or is or are reasonably expected to assign the rating(s);
    (ii) If the credit rating agency or agencies that assigned or is or
are reasonably expected to assign the rating(s) is not a nationally
recognized security rating organization, as that term is defined in 15
U.S.C. 78c(a)(62), include a statement to that effect; and
* * * * *
    8. Amend Sec.  230.138 by revising paragraph (a)(2)(ii)(B)(2) to
read as follows:

Sec.  230.138  Publications or distributions of research reports by
brokers or dealers about securities other than those they are
distributing.

    (a) * * *
    (2) * * *
    (ii) * * *
    (B) * * *
    (2) Is issuing non-convertible securities and the registrant meets
the provisions of General Instruction I.B.2 of Form F-3; and
* * * * *
    9. Amend Sec.  230.139 by revising paragraphs (a)(1)(i)(A)(1)(ii)
and (a)(1)(i)(B)(2)(ii) to read as follows:

Sec.  230.139  Publications or distributions of research reports by
brokers or dealers distributing securities.

    (a) * * *
    (1) * * *
    (i) * * *
    (A)(1) * * *
    (ii) At the date of reliance on this section, is, or if a
registration statement has not been filed, will be, offering non-
convertible securities and meets the requirements for the General
Instruction I.B.2 of Form S-3 or Form F-3; or
* * * * *
    (B) * * *
    (2) * * *
    (ii) Is issuing non-convertible securities and meets the provisions
of General Instruction I.B.2. of Form F-3; and
* * * * *
    10. Amend Sec.  230.168 by revising paragraph (a)(2)(ii)(B) to read
as follows:

Sec.  230.168  Exemption from sections 2(a)(10) and 5(c) of the Act for
certain communications of regularly released factual business
information and forward-looking information.

* * * * *
    (a) * * *
    (2) * * *
    (ii) * * *
    (B) Is issuing non-convertible securities and meets the provisions
of General Instruction I.B.2 of Form F-3; and
* * * * *
    11. Amend Sec.  230.415 by revising paragraph (a)(1)(vii) to read
as follows:

Sec.  230.415  Delayed or continuous offering and sale of securities.

    (a) * * *
    (1) * * *
    (vii) Mortgage backed securities, including such securities as
mortgage backed debt and mortgage participation or pass through
certificates, provided that:
    (A) Initial sale and any resales of the securities are made in
minimum denominations of $250,000; and
    (B) Initial sales of the securities are made only to qualified
institutional buyers (as defined in Sec.  230.144A(a)(1)); and
    (C) Either of the following is true:
    (1) Represents ownership of one or more promissory notes or
certificates of interest or participation in such notes (including any
rights designed to assure servicing of, or the receipt or timeliness of
receipt by the holders of such notes, certificates, or participations
of amounts payable under, such notes, certificates, or participations),
which notes:
    (i) Are directly secured by a first lien on a single parcel of real
estate, including stock allocated to a dwelling unit in a residential
cooperative housing corporation, upon which is located a dwelling or
mixed residential and commercial structure, on a residential
manufactured home as defined in section 603(6) of the National
Manufactured Housing Construction and Safety Standards Act of 1974,
whether such manufactured home is considered real or personal property
under the laws of the State in which it is to be located, or on one or
more parcels of real estate upon which is located one or more
commercial structures; and
    (ii) Were originated by a savings and loan association, savings
bank, commercial bank, credit union, insurance company, or similar
institution which is supervised and examined by a Federal or State
authority, or by a mortgage approved by the Secretary of Housing and
Urban Development pursuant to sections 203 and 211 of the National
Housing Act, or, where such notes involve a lien on the manufactured
home, by any such institution or by any financial institution approved
for insurance by the Secretary of Housing and Urban Development
pursuant to section 2 of the National Housing Act; or
    (2) Is secured by one or more promissory notes or certificates of
interest or participations in such notes (with or without recourse to
the issuer thereof) and, by its terms, provides for payments of
principal in relation to payments, or reasonable projections of
payments, on notes meeting the requirements of paragraphs
(a)(1)(vii)(C)(1) (i) and (ii) of this section or certificates of
interest or participations in promissory notes meeting such
requirements.

    Note to paragraph (a)(1)(vii): For purposes of paragraph
(a)(1)(vii) of the section, the term ``promissory note,'' when used
in connection with a manufactured home, shall also include a loan,
advance, or credit sale as evidence by a retail installment sales
contract or other instrument.

* * * * *
    12. Amend Sec.  230.436 by revising paragraph (g) and removing the
authority citations following the section to read as follows: