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Credit ratings for non-bank deposit takers - disclosure guidance. Interim Guidance Note [2010] NZSecCom 1 (28 February 2010)

Last Updated: 16 November 2014

INTERIM GUIDANCE NOTE

CREDIT RATINGS FOR NON-BANK DEPOSIT TAKERS – DISCLOSURE GUIDANCE

26 February 2010

Introduction

1. From 1 March 2010 most non-bank deposit takers (NBDTs) will be required to have a credit rating from an approved rating agency. The Ministry of Economic Development is currently developing regulations for disclosure of credit ratings. This note provides guidance to inform NBDTs that are required to have a credit rating about the Securities Commission’s expectations for disclosure of mandatory credit ratings in the interim period.

2. This note is intended as guidance only, and is not mandatory. It sets out the Securities Commission’s intended approach to disclosure of credit ratings by NBDTs in the context of existing securities law. This guidance applies from 1 March 2010 until the regulations for disclosure of credit ratings take effect.

3. Credit ratings are an important part of the new prudential regulatory regime for NBDTs under the Reserve Bank of New Zealand Act 1989 (Act). Disclosure of credit ratings helps investors to compare the risks of investing in different deposit- takers, and therefore provides important information to assist investors to make informed investment choices.

Summary

Advertising

4. Advertisements must not deceive, mislead, or confuse investors. The Commission encourages NBDTs to display information about their credit rating in all advertisements. Where an advertisement for securities displays promised rates of return the Commission expects the advertisement to also contain prominent information about an NBDT’s credit rating, to ensure that investors are not misled or confused by the apparent risk associated with the rate of return offered.

Registered prospectus and investment statement

5. A registered prospectus must contain all information that is material to an offer of securities. The Commission is of the view that an NBDT’s credit rating is material

information. Every prospectus should include information about an NBDT’s credit rating and the meaning of this rating.

6. An investment statement must contain key information about principal risks, intended to inform non-expert investors. Every investment statement should contain details of the credit rating and the meaning of the rating, disclosed in a concise and plain- English manner, and sufficient to help non-expert investors to understand the credit rating.

7. Pending the introduction of disclosure regulations the Commission’s enforcement approach will focus on whether NBDTs are ensuring that prospective investors have access to clear and easily comparable information about credit ratings. This is best achieved if NBDTs take a consistent approach to disclosure. Our assessment of information in investment statements and prospectuses will take into account supplementary information that is distributed to investors with these documents, even if formal amendments have not been made so long as credit rating information is given sufficient prominence. We will also take account of efforts made by NBDTs to provide information about credit ratings via websites.

8. This note provides guidance as to the information about credit ratings that the Commission considers NBDTs can disclose in order to ensure that advertisements are not misleading or confusing and to ensure that offer documents are not misleading and contain the information required by securities law. This guidance note sets out disclosure that the Commission considers will constitute sufficient compliance with the existing law pending the publication of new regulations.

Background to new credit rating requirements

9. Under the Act it will be mandatory from 1 March 2010 for NBDTs to have a current credit rating.¹ The credit rating must:

(a) be given by a rating agency approved by the Reserve Bank; and

(b) comply with credit rating regulations made under the Act.

10. The current “approved rating agencies”, as approved by the Reserve Bank, are: (a) Fitch Ratings;

(b) Moody’s Investors Service; and

(c) Standard & Poor’s Ratings Services.

11. The Securities Commission has responsibility under the Securities Act 1978 for enforcing disclosure and advertising requirements for NBDTs who offer securities to the public.

¹ Reserve Bank of New Zealand Act 1989, Part 5D, s157I.

12. The Ministry of Economic Development is currently developing new regulations that will introduce mandatory disclosure requirements for disclosure of credit rating information in a NBDT’s registered prospectus, investment statement and advertisements for its securities. This interim guidance is given by the Securities Commission pending the introduction of those new credit rating disclosure regulations.

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13. The Commission cannot give rulings on the interpretation of the law or provide legal advice. Accordingly, this note is provided for interim guidance only and to indicate the view the Commission has on the disclosure of credit ratings pending the introduction of the new credit rating disclosure regulations. The Commission may publish further comments or guidance over time. However, the Commission is not bound by this or any other guidance note.

Commission’s expectations for credit rating disclosure by NBDTs pending new regulations

14. NBDTs must have credit ratings from 1 March 2010. The credit rating disclosure regulations which will mandate disclosure requirements are pending. Some NBDTs may have already reviewed their offer documents and updated and amended their registered prospectus, investment statement and advertising in anticipation of the new requirements. Other NBDTs may be in the process of doing so.

15. Further updating and amendment of offer documents and advertisements may be required when the new credit rating disclosure regulations take effect. NBDTs will need to be ready to transition to the new requirements. NBDTs will need to take into account cost considerations and the practicalities of achieving this.

16. In the interim period before disclosure regulations are made and take effect the Commission’s principal concern is that investors are given clear and balanced information about NBDT credit ratings to help them to make informed decisions about investing. In view of the pending new regulations and the practicalities and compliance costs associated with renewal of offer documents the Commission’s focus will be on ensuring issuers provide investors with clear information in offer documents, and that advertising does not confuse or mislead investors. Our assessment of information about credit ratings in offer documents will take account of information that accompanies offer documents provided to investors, even where formal amendments have not been made.

17. The Commission will consider it sufficient compliance by NBDTs with the disclosure requirements of the Securities Act 1978 for the investment statement and registered prospectus distributed to investors to be accompanied by an attachment or “wrap- around” which contains the statements and information about the credit rating set out in this interim guidance note (if sufficient information is not already included in the investment statement and registered prospectus). Any supplementary document should clearly and prominently draw investors’ attention to the credit rating information. The Commission’s priority is that the mix and balance of information given to investors is not likely to mislead or confuse.

Registered prospectus and investment statement disclosure

18. It is important that any registered prospectus or investment statement contains not only an NBDT’s credit rating but also sufficient information to allow investors to understand the meaning and context of the credit rating. This should include:

(a) a statement that the creditworthiness of the NBDT is rated by a ratings agency approved by the Reserve Bank under section 157J of the Reserve Bank of New Zealand Act 1989;

(b) the current credit rating of the NBDT, any qualifications/modifiers to the rating² and the rating outlook³;

(c) a statement that it is a local currency (New Zealand dollar), long term, issuer rating⁴ and a brief explanation of what a local currency, long term, issuer rating means. (If the NBDT also has a separate issue-specific rating for a particular issue of securities, this should be separately and clearly disclosed to avoid confusion);

(d) the name of the “approved rating agency” that has provided the credit rating; (e) the general meaning of the rating and of any qualifications/modifiers

^{(according to the approved rating agency)5;}

(f) descriptions or explanations of the scale used by the approved rating agency (either the full scale or a simplified version of the scale as currently published by the approved rating agency), indicating where the granted rating sits within this scale;

(g) the date that the rating, the rating outlook and/or any qualifications/modifiers to the rating changed (if it changed in the past two years) and a short summary of the reasons for the change; and

(h) a statement to the effect that ratings are statements of opinion issued by the approved ratings agency – they are not statements of fact, an endorsement of the NBDT, or a recommendation to buy, hold or sell securities.

² Fitch and Standard & Poor’s use “+” and “-” as modifiers to show the relative standing of a credit rating within their main categories of rating. Moody’s applies numeric modifiers 1, 2 or 3. If a modifier applies to a credit rating it should be disclosed with the credit rating.

³ The outlook is usually described by rating agencies as “positive”, “stable” or “negative”.

⁴ This is required by the Deposit Takers (Credit Ratings) Regulations 2009 (SR 2009/420) gazetted on 23

December 2009

⁵ For example, Standard & Poor’s define their “BBB” long-term issuer credit rating to mean “An obligor rated

‘BBB’ has adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments”. See www.standardandpoors.com

19. As a general disclosure matter, information about credit ratings should be disclosed clearly, prominently and in a user friendly manner. The information must not deceive, mislead or confuse investors.

Advertisements for securities

20. Where a NBDT has a credit rating from an approved rating agency the Commission encourages disclosure of the rating in all of the NBDTs advertisements for securities. In the Commission’s view, if a NBDT has a credit rating from an approved rating agency but does not refer to it in advertising this may confuse investors as to the NBDT’s rating. However, reference to a credit rating in advertisements without also including additional information about the meaning of that credit rating is likely to mislead and confuse investors.

21. In the Commission’s experience advertising promised rates of return can confuse investors about the risks of certain investments when compared with others that offer different rates. Advertised returns do not always reflect risk. Credit ratings from approved rating agencies provide a concise and easily comparable picture of risks associated with an NBDT’s creditworthiness, and disclosure of ratings will help to avoid the chance that investors are misled or confused by the apparent risk associated with an advertised rate of returns. For this reason, where an advertisement for securities displays promised rates of return the Commission expects the advertisement to also contain information about an NBDT’s credit rating.

22. The Commission’s interim guidance on disclosure in advertising (as set out below) recognises that print advertisements (such as magazines and newspapers) and audiovisual advertisements (television/radio) provide a more limited medium to convey information than other forms of advertisements, such as a NBDT’s website. A website is likely to be an important source of credit rating information for investors, and a useful medium for the NBDT to disclose information about its credit rating.

23. Where a NBDT has a credit rating from an approved ratings agency, the Commission considers that the following statements and information should be included in advertisements for securities that are offered to the public for subscription:

(a) the current credit rating of the NBDT, any qualifications/modifiers to the rating and the rating outlook;

(b) the name of the “approved rating agency” that has provided the credit rating;

and

(c) a statement referring to the investment statement and the NBDT’s website (if any) for further information about the credit rating.

24. Any website maintained by or on behalf of the NBDT should also display the statements and information set out above under the heading “Registered prospectus and investment statement disclosure”.

25. If the NBDT receives an enquiry about its credit rating in response to an advertisement it should refer the enquirer to the investment statement and registered prospectus (which would be accompanied by the attachment or wrap-around with the information about the credit rating set out above), or to the page on its Internet site (if any) where the credit rating information is located.

No reference to rating other than rating from approved rating agency

26. As the credit rating regime under the Reserve Bank Act provides for approved ratings agencies, use of any other type of rating or ranking by an NBDT runs a very high risk of misleading or confusing investors. The Commission strongly recommends that NBDTs do not disclose in any registered prospectus, investment statement or advertisement relating to an offer of its securities an assessment of its creditworthiness that is in substance a credit rating (whether called a rating, grading, scoring, ranking or by any other name) issued by an agency that is not approved by the Reserve Bank under section 157J of the Reserve Bank of New Zealand Act.

Further information

27. The Reserve Bank of New Zealand is the prudential regulator of NBDTs. Information on the regulation of NBDTs and the Deposit Takers (Credit Ratings) Regulations

2009 is available on the Reserve Bank’s website www.rbnz.govt.nz

28. The Reserve Bank has granted certain exemptions from the requirement for deposit takers to have a mandatory credit rating. A full list of exemptions is available on the Reserve Bank’s website www.rbnz.govt.nz. The following are examples of some of the class exemptions granted by the Reserve Bank:

(a) the Deposit Takers (Credit Ratings Minimum Threshold) Exemption Notice 2009 exempts certain deposit takers from the requirements to have a mandatory credit rating under Part 5D of the Reserve Bank of New Zealand Act where the consolidated liabilities of the borrowing group of the deposit taker are less than $20 million (measured as an average over a 12-month period). Certain conditions apply in order to benefit from this exemption, including specified disclosures to be made in offer documents and advertisements for securities.

(b) the Deposit Takers (Moratorium) Exemption Notice 2009 exempts certain deposit takers that are in moratorium and listed in the schedule of this notice from the requirements to have a mandatory credit rating under Part 5D of the Reserve Bank of New Zealand Act. Certain conditions apply in order to benefit from this exemption, including specified disclosures to be made in offer documents and advertisements for securities.

29. In the absence of an applicable exemption, a credit rating is mandatory from 1 March

2010 for NBDTs.