On July 9, the DOL issued an amendment to DOL Prohibited Transaction Exemption (PTE) 2007-5 (a.k.a. the underwriters exemptions) that replaces the current definition of "rating agency" with a definition referencing generic rating agency requirements. This legal analysis from the Practical Law Company provides a good explanation.
Under ERISA, fiduciaries of employee benefit plans investing in mortgage-backed securities and asset-backed securities (collectively, ABS) transactions are responsible for confirming that any rating given for a certificate acquired pursuant to the underwriters exemption was issued by a rating agency that satisfies these criteria.
Some background: On Dec. 28, 2012, the DOL published a proposed amendment to the underwriter exemptions which replaced the current definition of "rating agency" with a definition referencing generic rating agency requirements. The DOL's July 9 amendment to PTE 2007-5 finalizes the proposed amendment with certain changes. Under the amended PTE, a rating agency is a credit rating agency that:
• is currently recognized by the SEC as a nationally recognized statistical ratings organization (NRSRO)
• has indicated on its most recently filed SEC Form NRSRO that it rates "issuers of asset-backed securities"
• Has had, within a period not exceeding 12 months before the initial issuance of the securities, at least three "qualified ratings engagements" — defined as one:
— requested by an issuer or underwriter of securities in connection with the initial offering of the securities;
— for which the credit rating agency is compensated for providing ratings;
which is made public to investors generally; and
— which involves the offering of securities of the type that are granted relief by the underwriter exemptions.
