Kroll Bond Rating Agency, Inc.
Headnote
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Confidentiality -- Application by a designated rating organization (DRO) for a decision that sections of Form 25-101F1 Designated Rating Organization Application and Annual Filing be held in confidence for an indefinite period by the Commission, to the extent permitted by law -- Subject information discloses intimate financial, personal or other information and that the desirability of avoiding disclosure thereof in the interests of any person or company affected outweighs the desirability of adhering to the principle that material filed with the Commission be available to the public for inspection -- Relief granted subject to conditions.
Application by a DRO for exemptive relief from section 11 of National Instrument 25-101 Designated Rating Organizations -- Filer's code of conduct does not specify that the DRO must not waive provisions of its code of conduct -- Filer's code of conduct specifies that a waiver may be granted under limited circumstances and subject to certain conditions -- Relief granted subject to conditions.
Applicable Legislative Provisions
Securities Act (Ontario), R.S.O. 1990, c. S.5, as am., s. 140(2).
National Instrument 25-101 Designated Rating Organizations, ss. 11, 14, 15.
June 21, 2018
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF KROLL BOND RATING AGENCY, INC. (the Filer)
DECISION
Background
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:
(a) pursuant to the confidentiality provisions of the Legislation (being subsection 140(2) of the Securities Act (Ontario)),
(i) the information referred to in Item 13 of Form 25-101F1 Designated Rating Organization Application and Annual Filing (Form 25-101F1), which may be calculated at a global level for the Filer as a whole, be held in confidence (and therefore not available to the public for inspection) for an indefinite period, to the extent permitted by law,
(ii) the information referred to in Item 14 of Form 25-101F1, which may be calculated at a global level for the Filer as a whole, be held in confidence (and therefore not available to the public for inspection) for an indefinite period, to the extent permitted by law, and
(iii) the information referred to in Item 15 of Form 25-101F1 be held in confidence (and therefore not available to the public for inspection) for an indefinite period, to the extent permitted by law,
(collectively, the Confidentiality Relief); and
(b) pursuant to section 15 of National Instrument 25-101 Designated Rating Organizations (NI 25-101), the Filer be exempted from the requirement in section 11 of NI 25-101, provided that the Filer complies with the procedures set out in the Code (as defined below) and described at paragraph 26 of this decision document (the Code of Conduct Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the Principal Regulator) is the principal regulator for this application; and
(b) the Filer has provided notice that subsection 4.7(1) 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).
Interpretation
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.
Representations
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation governed by the Delaware General Corporation Law with its principal offices located in New York, New York, USA. The Filer has offices in New York, NY, Dresher, PA, and Frederick, MD.
2. The Filer is a credit rating agency which provides credit rating opinions to a broad range of financial institutions, insurance companies, corporate entities, government bodies and various structured finance product groups in North America and through its affiliate, Kroll Bond Rating Agency Europe Limited (KBRA Europe), in Europe. The Filer has not yet commenced rating securities issued by issuers in Canada.
3. The Filer is a wholly-owned subsidiary of KBRA Holdings, Inc., a corporation governed by the Delaware General Corporation Law. The Filer has no subsidiaries.
4. The Filer is a nationally recognized statistical rating organization (NRSRO) regulated by the SEC, is registered as a certified credit rating agency pursuant to Regulation (EC) No 1060/2009 of the European Parliament and of the Council, of 16 September 2009, on credit rating agencies (the EU 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).
5. 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.
6. In a concurrent decision, the Principal Regulator designated the Filer as a designated rating organization (DRO) under the Legislation.
The Confidentiality Relief
7. Subsection 6(1) of NI 25-101 requires a credit rating organization that applies to be a DRO to file a completed Form 25-101F1. Despite subsection 6(1), a credit rating organization that is an NRSRO may file its most recent Form NRSRO.
8. In addition, for subsequent years, subsection 14(1) of NI 25-101 requires a DRO to file a completed Form 25-101F1 no later than 90 days after the end of its most recently completed financial year.
9. Item 13 of Form 25-101F1 requires a DRO to disclose information, as applicable, regarding the applicant's aggregate revenue for the most recently completed financial year including: revenue from determining and maintaining credit ratings, revenue from subscribers, revenue from granting licenses or rights to publish credit ratings, and revenue from all other services and products offered by the DRO. Item 13 of Form 25-101F1 also provides that the financial information on the revenue of the DRO be divided into fees from credit rating and non-credit rating activities (the Item 13 Information).
10. In the United States, Exhibit 12 to Form NRSRO requires NRSROs to provide "[i]nformation regarding revenues for the fiscal or calendar year ending immediately before the date of the initial application." Such information is provided for subsequent years pursuant to SEC Rule 17g-3(a)(3) under the Securities Exchange Act of 1934 (1934 Act). However, NRSROs are permitted to provide this information confidentially. Likewise, the EU Regulation provides that revenue information must be provided quarterly and annually to ESMA but need not be disclosed publicly.
11. Item 14 of Form 25-101F1 requires a DRO to disclose "a list of the largest users of credit rating services of the applicant by the amount of net revenue earned by the applicant attributable to the user during the most recently completed financial year". It also requires the DRO to disclose "a list of users of credit rating services whose contribution to the growth rate in the generation of revenue of the applicant in the previous fiscal year exceeded the growth rate in the applicant's total revenue in that year by a factor of more than 1.5 times" (the Item 14 Information).
12. In the United States, Exhibit 10 to Form NRSRO requires NRSROs to provide "[a] list of the largest users of credit rating services by the amount of net revenue earned from the user during the fiscal year ending immediately before the date of the initial application". Such information is provided for subsequent years pursuant to SEC Rule 17g-3(a)(5) under the 1934 Act. However, NRSROs are permitted to provide this information confidentially. Likewise, the EU Regulation provides that such information must be provided annually to ESMA but need not be disclosed publicly.
13. Public disclosure of the Item 13 Information and the Item 14 Information would make that information available to the Filer's analysts. The Filer believes that confidential treatment of the Item 13 Information and the Item 14 Information helps to shield this information from the Filer's analysts, thereby bolstering independence in the rating process by insulating the Filer's analysts from commercial influences. In addition, some of the Item 13 Information and the Item 14 Information is competitively sensitive information of the Filer.
14. Item 15 of Form 25-101F1 requires a DRO to attach a copy of the audited financial statements of the applicant, which must include a statement of financial position, a statement of comprehensive income, and a statement of changes in equity, for each of the three most recently completed financial years (the Item 15 Information and, collectively with the Item 13 Information and the Item 14 Information, the Sensitive Information).
15. In the United States, Exhibit 11 to Form NRSRO requires NRSROs to provide "[a]udited financial statements for each of the three fiscal calendar years ending immediately before the date of the initial application." Such information is provided for subsequent years pursuant to SEC Rule 17g-3(a)(1) under the 1934 Act. However, NRSROs are permitted to provide this information confidentially. The EU Regulation does not have a similar requirement to provide such information on a yearly basis.
16. The Filer and its affiliates are privately held companies that do not publicly issue audited financial statements. Some of the Item 15 Information is competitively sensitive information of the Filer.
17. Consistent with the requirements applicable to NRSROs under the 1934 Act and credit rating agencies pursuant to the EU Regulation, the Filer proposes to file the Sensitive Information on a confidential basis with the Principal Regulator.
18. Section (4) of the Instructions to Form 25-101F1 provides that an applicant may apply to the securities regulatory authority to hold in confidence portions of Form 25-101F1 which disclose intimate financial, personal or other information.
19. The Sensitive Information constitutes intimate financial, personal or other information related to the credit rating activities of the Filer that is not otherwise publicly available.
20. The Filer believes that none of the Sensitive Information, either individually or in the aggregate, is necessary to understand the remaining information provided in Form 25-101F1.
21. The Filer believes that: (i) the negative implications to the Filer, issuers or an investor relying on a credit rating were the Sensitive Information to be made public outweigh the desirability of adhering to the principle that material filed with the Principal Regulator be available to the public for inspection, and (ii) the disclosure of the Sensitive Information is not necessary in the public interest.
22. The Filer believes that the Sensitive Information is not material to an analyst, an issuer or an investor relying on a credit rating and, therefore, there is no prejudice or harm to the public as a result of the Sensitive Information remaining private.
The Code of Conduct Relief
23. The Filer has adopted and implemented the Kroll Bond Rating Agency Code of Conduct (the Code), which is designed to be substantially aligned with the International Organization of Securities Commissions Code of Conduct Fundamentals for Credit Rating Agencies and includes provisions adopted to satisfy the requirements of NI 25-101.
24. The Filer has also appointed a chief compliance officer (the Chief Compliance Officer or CCO) who is supported by compliance staff to fulfill the functions of the "designated compliance officer" set forth in NI 25-101, including monitoring and assessing compliance by the Filer and its DRO employees with the Code and the Legislation.
25. Section 11 of NI 25-101 provides that a DRO's code of conduct must specify that a DRO must not waive provisions of its code of conduct.
26. The Code does not include the provision relating to section 11 of NI 25-101. Section 5.5 of the Code provides as follows:
"Any request for exceptions to the KBRA Code of Conduct must be submitted to the KBRA Compliance Department in writing, and must identify the relevant facts supporting the requested exceptions. Any exceptions may be approved in writing by the Chief Executive Officer of KBRA, but only when granting the exception does not otherwise violate a law, rule, or regulation, and any such written approval must specify reasons that support the exceptions."
27. The Code, as well as the policies, procedures and internal controls that the Filer has implemented to ensure the objectivity and integrity of its ratings and the transparency of its operations, is consistent in all material respects with the objectives of NI 25-101 and enables the Filer to:
(a) accommodate the global nature of the Filer's operations;
(b) implement high level principles that govern the conduct of the Filer's credit rating activities and underlying regulatory requirements in the jurisdictions where the Filer conducts credit rating activities; and
(c) meet specific jurisdictional requirements, in addition to those which are reflected in the Code.
28. The CCO annually reviews and assesses the efficacy of the implementation and enforcement of the Code.
29. The reporting line of the CCO and other compliance staff is independent of the Filer's credit rating activities. The CCO, while serving in such capacity, may not participate in any of the following:
(a) the development of credit ratings, methodologies or models;
(b) the establishment of compensation levels, other than for DRO employees reporting directly to the CCO.
30. Within 90 days of its most recently completed financial year end, the Filer will deliver on a confidential basis to the Principal Regulator a report outlining any written waiver granted under section 5.5 of the Code during the Filer's most recently completed financial year, including a description of the nature of the request and the relevant facts supporting the request.
Decision
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 Confidentiality Relief is granted provided that the Sensitive Information, which may be calculated at a global level for the Filer as a whole, is provided to the Principal Regulator on a confidential basis concurrently with the filing of Form 25-101F1 by the Filer; and
(b) the Code of Conduct Relief is granted provided that:
(i) the Filer complies with the procedures regarding waivers set out in the Code and described at paragraph 26 of this decision document, and
(ii) the Filer complies with paragraph 30 of this decision document.
With respect to the Confidentiality Relief:
With respect to the Code of Conduct Relief:
"Michael Balter"Manager, Corporate FinanceOntario Securities Commission