Speech by SEC Commissioner:
Statement at Open Meeting to Propose Rules Regarding References to Credit Ratings in Certain Investment Company Act Rules and Forms

by

Commissioner Troy A. Paredes

U.S. Securities and Exchange Commission

Washington, D.C.
March 2, 2011

Thank you, Chairman Schapiro.

Section 939A of the Dodd-Frank Act contemplates the removal of references to credit ratings in rules and forms under the federal securities laws, including the Investment Company Act of 1940. The recommendation before us goes toward giving effect to this provision of Dodd-Frank.

I support the proposal but do have questions about its practical effect, particularly insofar as rule 2a-7 is concerned. I look forward to the comments we will receive, especially those that address the following:

1. The proposing release states, “[B]ecause the proposed amendments are designed to retain the same degree of credit risk limitation and similar standards for monitoring credit events and stress testing as under current rule 2a-7, a money market fund also could use its current policies and procedures to comply with the proposed amendments.” In other words, the proposing release contemplates that a board’s role and obligations would not change appreciably if the proposal were adopted. Do commenters agree? If not, how is the removal of ratings references likely to impact the responsibilities and workload of money market fund boards?
2. How, if at all, is the removal of ratings references likely to impact the decision making of fund boards and their delegates? How might the composition of money market fund portfolios change if ratings references are removed from rule 2a-7? Might some fund boards or their delegates attempt to “reach for yield”? Might other fund boards or their delegates become overly conservative when left to make a subjective determination as to credit quality?
3. What, if any, practical difficulties might a fund’s board or its delegate face in determining whether a security is an “eligible security”? How readily will a fund board or its delegate be able to distinguish a “first tier security” from a “second tier security” under rule 2a-7?
4. Might boards of directors or their delegates come to rely (perhaps too much) on some other objective measure of creditworthiness if ratings references are removed?
5. How, if at all, might the proposed rule change impact the commercial paper market? In what ways, if any, might the proposed removal of ratings references from rule 2a-7, if adopted, affect the ability of companies to raise capital by issuing commercial paper to money market funds?
6. Should an alternative objective standard of creditworthiness replace the reference to credit ratings? If so, what should the new objective standard be?

I join my colleagues in thanking the staff – particularly those from the Division of Investment Management – for your hard work on this rulemaking.

http://www.sec.gov/news/speech/2011/spch030211tap-ratings.htm