EBSA proposes to amend PT class exemptions to remove references to “credit ratings”

The Employee Benefits Security Administration has issued proposed amendments to various Prohibited Transaction Class Exemptions that would remove any references to or requirements of reliance on “credit ratings.” The proposed amendment reflects provisions enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Dodd-Frank Act

Section 939A of the Dodd-Frank Act requires federal agencies, including the Labor Department, to review any regulation “that requires the use of an assessment of the credit-worthiness of a security or money market instrument and any references to or requirements in such regulations regarding credit ratings.” Once the Department has completed that review, the statute provides that the Department “remove any reference to or requirement of reliance on credit ratings, and to substitute in such regulations such standard of credit-worthiness” as the Department determines to be appropriate. The DOL has determined that Class Exemptions are “regulations” for purposes of this provision.

PTEs referencing credit ratings

Accordingly, the Department has conducted a review of its Class Exemptions and has identified certain Class Exemptions as those including references to, or requiring reliance on, credit ratings.

In this regard, PTE 75-1 and PTE 80-83 require credit ratings in one of the four highest rating categories for non-convertible debt securities. PTE 2006-16 requires a credit rating of “investment grade” or better for certain issuers of irrevocable letters of credit and a credit rating in one of the two highest rating categories for collateral which consists of foreign sovereign debt securities. PTE 81-8 utilizes a credit rating in one of the three highest rating categories for commercial paper. PTEs 95-60 and 97-41 do not require specific credit ratings, but instead refer generally to the credit ratings of certain financial instruments. Pursuant to Dodd-Frank, EBSA is proposing to amend these Class Exemptions to remove the references to credit ratings, and where applicable, substitute in their place alternative methods for determining credit quality.

Alternatives considered

In proposing these amendments to the Class Exemptions, EBSA has considered alternatives to credit ratings set forth in three recent SEC releases. The first is a recent proposal released by the SEC that relates to the use of credit ratings in rules and forms under the Investment Company Act of 1940. The second is the adoption of a new rule under Dodd-Frank that relates to the use of credit ratings in rules under the Investment Company Act. The third is the adoption of regulatory amendments released by the SEC in 2009 regarding references to credit ratings of nationally recognized statistical rating organizations in certain rules under Securities Exchange Act of 1934 and the Investment Company Act.

Source: Application No. D-11681, June 21, 2013, (78 FR 37572).

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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