NP 11-205 Process for Designation of Credit Rating Organizations in Multiple Jurisdictions -- Application by a credit rating organization (the Filer) to be designated as a designated rating organization (DRO). On June 12, 2018, amendments to National Instrument 44-101 Short Form Prospectus Distributions (NI 44-101) and National Instrument 44-102 Shelf Distributions (NI 44-102) came into force which recognized credit ratings of the Filer, but only for the purposes of the alternative eligibility criteria in section 2.6 of NI 44-101 and section 2.6 of NI 44-102 for issuers of asset-backed securities (ABS) to file a short form prospectus or shelf prospectus, respectively (the ABS Short Form Eligibility Criteria). However, those provisions are only available for use by market participants if the Filer is designated as a DRO. Filer designated as a DRO under securities legislation, but only for the purposes of the ABS Short Form Eligibility Criteria.
Applicable Legislative Provisions
Securities Act (Ontario), R.S.O. 1990, c. S.5. as amended, s. 22.
National Instrument 25-101 Designated Rating Organizations, s. 6.
National Instrument 44-101 Short Form Prospectus Distributions, s. 2.6.
National Instrument 44-102 Shelf Distributions, s. 2.6.
June 21, 2018
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR DESIGNATION OF CREDIT RATING ORGANIZATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF KROLL BOND RATING AGENCY, INC. (the Filer or KBRA)
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that the Filer be designated as a designated rating organization (DRO), as contemplated by National Instrument 25-101 Designated Rating Organizations (NI 25-101).
Under the Process for Designation of Credit Rating Organizations in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the Commission) is the principal regulator (the Principal Regulator) for this application; and
(b) the Filer has provided notice that section 4B.6 of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, Nova Scotia, New Brunswick, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Yukon and Nunavut (the Passport Jurisdictions).
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 25-101 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a Delaware corporation with its registered office in Wilmington, Delaware, USA, and its principal office at 845 Third Avenue, New York New York, USA and is a wholly-owned subsidiary of KBRA Holdings, Inc.
2. The Filer and its corporate predecessor, LACE Financial Corporation (acquired by the Filer in August 2010), have provided subscription-based rating services with respect to financial institutions, corporations and governmental entities for over twenty-five years and began to issue credit ratings on structured finance and other asset classes in 2011 on an issuer-paid basis. Today, KBRA is a full service credit rating agency, with revenues increasingly derived from a diversified group of issuers. As of June 8, 2018, KBRA employed 188 credit rating analysts as well as approximately 112 business and support staff in offices located in New York, New York, Dresher, Pennsylvania, and Frederick, Maryland. In addition to subscription-based ratings services, KBRA's issuer-paid ratings business encompasses municipal finance, financial institutions, insurance, residential mortgage-backed securities (RMBS), non-RMBS asset backed securities, commercial mortgage-backed securities and other corporate and project finance related securities.
3. The Filer is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO), is registered as a certified credit rating agency under the European Union regulation on credit rating agencies (the EU CRA Regulation) with the European Securities and Markets Authority (ESMA) and is designated as an external credit assessment institution (ECAI) with the European Banking Authority (EBA). The Filer is in compliance in all material respects with U.S. federal securities law applicable to NRSROs and their credit rating affiliates.
4. Kroll Bond Rating Agency Europe Limited (KBRA Europe) is a private company limited by shares established in Ireland and an affiliate of the Filer. KBRA Europe is registered as a credit rating agency under the EU CRA Regulation with ESMA and is designated as an ECAI with the EBA. KBRA Europe is in compliance in all material respects with the EU CRA Regulation.
5. Section 15E of the U.S. Securities Exchange Act of 1934 (the 1934 Act) establishes the regulatory framework for NRSROs. Subsection 15E(t) of the 1934 Act imposes a number of corporate governance requirements on NRSROs, including requirements that the NRSRO have a board of directors, that at least half (but not fewer than two) board members are independent of the NRSRO and meet prescribed independence criteria, that compensation for independent members is not linked to the NRSRO's business performance, that independent members be appointed for pre-agreed fixed and non-renewable terms not exceeding five years, and that the board fulfill certain prescribed responsibilities.
6. The Filer has a board of directors comprised of five members. Three members are independent of the Filer and meet the independence criteria set out in subsection 15E(t)(2)(B) of the 1934 Act.
Compliance with NI 25-101
7. The Filer has filed all documentation required under Part 2 of NI 25-101.
8. The Filer has established, maintains and complies with a code of conduct (the Code) that substantially incorporates each of the provisions of Appendix A to NI 25-101. In particular, the Code has been revised to satisfy the requirements of NI 25-101. The Code reflects adherence to the International Organization of Securities Commission's Code of Conduct Fundamentals for Credit Rating Agencies (the IOSCO Code). The Code is available on the Filer's website.
9. The Filer has also adopted and implemented a range of policies, procedures and internal controls (the Policies) that are designed to achieve the objectives set out in the IOSCO Code. In particular, the Policies have been revised to satisfy the requirements of NI 25-101.
10. As required by subsection 8(2) of NI 25-101, three members of the Filer's board of directors are independent of KBRA and KBRA Europe as determined in accordance with NI 25-101. At least two members of the Filer's board of directors (including one independent member) have in-depth knowledge and experience at a senior level regarding the market for structured finance products. The Filer's board of directors complies with the composition requirements in section 8 of NI 25-101 and section 2.22 of Appendix A to NI 25-101. Upon being designated as a DRO, the Filer's board of directors will assume the responsibility for performing the prescribed functions of the board of directors of a DRO. In particular, the Filer's board of directors has responsibility for performing the functions prescribed by Part 3 of NI 25-101 and sections 2.22 through 2.25 of Appendix A to NI 25-101.
11. The Filer has appointed a compliance officer that monitors and assesses compliance by the Filer and its DRO employees with the Code and with applicable laws and regulations. Upon being designated as a DRO, the compliance officer of the Filer will fulfill the designated compliance officer functions prescribed by Part 5 of NI 25-101. The designated compliance officer has a direct reporting relationship to the Filer's board of directors.
12. The Code and the Policies are consistent in all material respects with the objectives of NI 25-101 and enable the Filer to maintain the objectivity and integrity of its credit ratings and the transparency of its operations.
13. The Filer keeps books and records and other documents as are necessary to account for the conduct of its credit rating activities, its business transactions and financial affairs and, upon designation as a DRO, will keep such additional other books, records and documents as may otherwise be required under the Legislation and the securities legislation in each of the Passport Jurisdictions.
14. The Filer is in compliance in all material respects with NI 25-101 and securities legislation applicable to credit rating organizations in each jurisdiction of Canada and in any other jurisdiction in which the Filer or KBRA Europe operates.
15. Upon being designated as a DRO, the Filer will be subject to the requirements set out in the Legislation and the securities legislation in each of the Passport Jurisdictions.
16. On June 12, 2018, amendments to National Instrument 44-101 Short Form Prospectus Distributions (NI 44-101) and National Instrument 44-102 Shelf Distributions (NI 44-102) came into force which recognized credit ratings of KBRA, but only for the purposes of the alternative eligibility criteria in section 2.6 of NI 44-101 and section 2.6 of NI 44-102 for issuers of asset-backed securities (ABS) to file a short form prospectus or shelf prospectus, respectively (the ABS Short Form Eligibility Criteria). However, those provisions are only available for use by market participants if KBRA is designated as a DRO.
17. Upon being designated as a DRO, the Filer will rely on the "endorsement regime" under the EU CRA Regulation in respect of any Canadian rating that it issues as a DRO and not the "equivalence/certification" regime under the EU CRA Regulation. For this purpose, KBRA Europe will be the endorsing credit rating agency under the EU CRA Regulation for any Canadian rating.
The Principal Regulator is satisfied that this decision meets the test set out in the Legislation for the Principal Regulator to make this decision.
The decision of the Principal Regulator under the Legislation is that:
(a) the Filer is designated as a DRO under the Legislation, but only for the purposes of the ABS Short Form Eligibility Criteria; and
(b) KBRA Europe is designated as a DRO affiliate of the Filer, as contemplated by NI 25-101.