Question & AnswerQ&A (SEC MEMORANDUM CIRCULAR NO. 7)
The Circular aims to increase transparency and improve the integrity of credit ratings by amending the relevant provisions of the Securities Regulation Code (SRC) Rule 12 on the accreditation, operations, and reporting of credit rating agencies (CRAs) in the Philippines.
The guidelines apply to Credit Rating Agencies (CRAs) engaged by corporations that offer or issue commercial papers or debt securities to the public, with certain exceptions, such as issuances amounting to not more than 25% of the issuer's net worth or those covered by an irrevocable committed credit line with a bank.
A CRA is defined as any corporation principally and regularly engaged in credit evaluation of corporations, business projects, or debt issues to assess creditworthiness or the issuer's willingness and ability to pay financial obligations, with the assessment translated into credit ratings that are periodically and publicly announced.
Requirements include being a stock corporation, having a paid-up capital of at least P10 million, at least five years' operating experience as a CRA, qualified and independent officers and personnel to conduct rating activities, and no conflict of interest with prospective clients. Several supporting documents and an initial filing fee of P60,000 must also be submitted.
Failure to comply with the requirements and provisions may lead to suspension or revocation of the CRA's accreditation and/or the imposition of monetary fines after due notice and hearing.
No. Under pain of sanctions under the Securities Regulation Code, no person or entity may present itself as an accredited CRA or regulated provider of credit rating services unless it has been accredited by the SEC under these guidelines.
Key operating requirements include signing written contracts with rated entities, not promising or guaranteeing rating outcomes, explaining rating definitions, publishing rating policies, ensuring independence from business influence, conducting periodic surveillance of ratings, maintaining confidentiality, and having formal rating committees.
A missed payment on a debt obligation on the due date or after a pre-specified grace period constitutes default. Filing of bankruptcy before missed payment and involuntary debt rescheduling harmful to investors are also considered defaults.
CRAs must submit credit rating reports to the SEC simultaneously with the rated issuer, an annual report on rating activities, a compliance scorecard, and notify the SEC within five business days of any change in credit rating or denial of information by the issuer.
A CRA must adopt a clear policy defining conflicts of interest, disclose actual or potential conflicts, separate business development from rating analysts, prohibit employees from participating in rating assignments where conflicts exist, and ensure analyst compensation is not linked to revenues from rated entities.