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
- 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.