Advocacy

Rule 17g-5 of the Securities Act of 1934
Rule is Not Meeting Its Objectives and is a Cost Burden on the Industry

Last updated: April 9, 2019

Executive Summary

  • During the crisis, policymakers became concerned that Nationally Recognized Statistical Rating Organizations (NRSROs) hired by ABS and CMBS issuers to rate their bonds may face undue pressure to produce positive ratings on transactions. 
  • Effective in 2011, The Securities and Exchange Commission (SEC) promulgated a regulation, 17g-5, which imposed additional disclosure and conflict of interest requirements on NRSROs and, by extension, additional disclosure requirements on issuers, sponsors, and underwriters (collectively, “arrangers”) of structured finance products.  
  • Rule 17g-5 requires CMBS issuers to maintain a password-protected website to which issuers must post all information provided to the rating agencies paid to rate a transaction.  Non-hired NRSROs may access this site and analyze the documentation in order to either monitor or provide an unsolicited rating on a CMBS. 
  • To date, no unsolicited rating has been issued through a 17g-5 website since the inception of the rule in 2011.
  • While the 17g-5 requirements seek to provide more complete information to stakeholders in the securitization industry, in practice, the new requirement is viewed as ultimately reducing the information flow between issuers and the rating agencies—and at material financial cost to the industry. Much, if not most, of the basic information available via 17g-5 websites is available elsewhere. 
  • 17g-5 is an impediment to the ongoing dialogue between issuers and the NRSROs in the initial ratings process and post-issuance dialogue between master and special servicers and the NRSROs. The rule is generally viewed as a limiting factor not only in the initial exchange of loan and asset information but also in the proper servicing of a loan. The limited availability for servicers of current information on both the loan and underlying asset has the potential to lead to ratings volatility.  

17g-5 QUICK FACTS

  • In 2011, the SEC adopted Rule 17g-5 to incentivize non-hired  NRSROs to generate competing ratings on ABS and CMBS transactions.
  • NRSROs must issue ratings for at least 10% of the securities whose sites they have accessed in order to prevent misuse of material non-public information (MNPI).
  • The estimated costs of the rule are as much as $250,000 for reporting and $500,000 for auditing per transaction.
  • Arrangers of structured financial products must maintain password-protected websites with information they furnish to NRSROs for ratings purposes.
  • NRSROs must also maintain separate sites detailing information about each rating that is subject to an “issuer-pay conflict”.
  • Market participants agree that the operational burdens slow publication of new information by an average of several days.

Resources

Rule: SEC 17 CFR Parts 232, 240, 249, and 249b

For further Information, visit CREFC’s Resource Center at: https://www.crefc.org/library

Potential Solutions

  • Recommendation: CREFC members voted to, at a minimum, limit the application of 17g-5 to the issuance phase and to explicitly not apply it to the post-securitization phase.  This would alleviate what most deem to be excessive and unnecessary costs to the trust and would resolve the question of ongoing compliance for several stakeholders. Finally, the change would improve the ability of investors to perform due diligence in the post-securitization phase by speaking in more detail with loan servicers.
  • Support within CREFC’s membership for this recommendation: Based on a survey of all members conducted in May 2017, CREFC members strongly support revisions to the 17g-5 rule. The Policy and Executive Committees of CREFC have adopted the position that the association should seek the repeal of the disclosure requirements in the post- securitization phase.

Additional Background & History

  • The hired NRSRO is required to establish and maintain, for the use of non-hired NRSROs, a website describing each CMBS it has been hired to rate. The website also must direct viewers to a separate website that is maintained by the arranger that collects and discloses all information the arranger has provided to the hired NRSRO as part of the rating process.
  • The hired NRSRO is required to obtain representations from the arranger that the arranger will fulfill its duties to set up and maintain a website as required by the Rule, and that the arranger will provide access to non-hired NRSROs as required (although the hired NRSRO is not responsible for enforcing an arranger’s compliance with the Rule). A non-hired NRSRO seeking to access the websites under this framework is required to submit an annual certification to the SEC (with copies to hired NRSROs and arrangers as appropriate) that the NRSRO seeks access only for purposes of determining or monitoring credit ratings, that it will treat the information it accesses as confidential in accordance with its internal policies on use of material nonpublic information, and that it will undertake to perform credit ratings for a certain percentage of the securities or instruments for which it accesses information if it accesses such information for ten or more issued securities or instruments in the calendar year covered by the certification.

Disclaimer

The information provided herein is general in nature and for educational purposes only. CRE Finance Council makes no representations as to the accuracy, completeness, timeliness, validity, usefulness, or suitability of the information provided. The information should not be relied upon or interpreted as financial, tax, accounting, investment, commercial or other advice, and CRE Finance Council disclaims all liability for any such reliance. © 2018 CRE Finance Council. All rights reserved.
 

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