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New Zealand Securities Commission |
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.
(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.
******
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.
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