Shareholding Provisions in European Union and United Kingdom Regulations
European Union (EU) and United Kingdom (UK) credit rating agency regulations contain rules applicable to Moody’s Investors Service (MIS) which prohibit it from providing credit ratings and/or require disclosures to be made in certain circumstances where there are relationships between rated issuers and the significant shareholders of MIS’s parent company, Moody’s Corporation (MCO).
The endorsement of non-EU credit ratings into the EU allows those credit ratings to be used in the EU for regulatory purposes. Similarly, the endorsement of non-UK credit ratings into the UK allows those credit ratings to be used in the UK for regulatory purposes. In order for MIS to be able to endorse non-EU credit ratings into the EU and non-UK credit ratings into the UK, its non-EU and non-UK CRAs have to follow policies and procedures “at least as stringent as” those in the jurisdiction into which MIS is seeking to endorse the rating. Regulatory guidance issued by the EU credit rating agency regulator, the European Securities and Markets Authority, and the UK credit rating agency regulator, the Financial Conduct Authority, explains how these rules should be applied in another jurisdiction in order to be deemed “at least as stringent as” the relevant domestic rules.
The following overview gives a summary of the impact of these regulatory requirements on MIS’s credit ratings.
Impact in relation to credit ratings issued by MIS EU CRAs and MIS UK CRAs (including their branches)
In respect of credit ratings issued by MIS entities (including their branches) where the lead analyst is located in the EU or UK, these provisions may affect:
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MCO controlling shareholders, holders of 10% or more of MCO stock and their 10% or more holdings or board seats in other companies.
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MIS EU CRAs and MIS UK CRAs may not issue new credit ratings in respect of any MCO controlling shareholder or MCO 10% plus shareholder. In relation to existing ratings, MIS EU CRAs and MIS UK CRAs must make a disclosure and consider whether to withdraw or take other action in relation to such ratings; and
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MIS EU CRAs and MIS UK CRAs may not issue new credit ratings in respect of any of the MCO 10% plus shareholder’s holdings of 10% plus, or the controlling shareholder of such holdings, or where the MCO 10% plus shareholder has directors on the board of an entity or any of its controlling shareholders. In relation to existing credit ratings in such situations, MIS EU CRAs and MIS UK CRAs must make a disclosure and consider whether to withdraw or take other action in relation to such credit ratings.
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Holders of 5% or more of MCO stock and their 5% or more holdings or board seats in other companies.
- MIS EU CRAs and MIS UK CRAs may rate holders of 5% plus (but below 10%) of MCO stock without making a disclosure; but
- MIS EU CRAs and MIS UK CRAs must make a disclosure if any of the MCO 5% plus shareholders hold more than 5% of the relevant rated entity or their controlling shareholders, or where the 5% plus shareholder has board members of the rated entity or any of its controlling shareholders.
- MCO 5% plus shareholders are prohibited from providing advisory or consulting services to a rated entity or its related third party. This includes advisory or consulting services in relation to corporate or legal structure, assets, liabilities or activities; and
- MCO 5% plus shareholders are prohibited from being able to hold 5% or more or have board members of another EU-registered or UK-registered CRA.
As mentioned above, these rules only affect credit ratings issued by MIS entities (including their branches) where the lead analyst is located in the EU or UK.
Impact in relation to credit ratings issued by MIS non-EU CRAs and MIS non-UK CRAs (including their branches)
In respect of credit ratings issued by MIS entities (including their branches) where (i) the lead analyst is located in an MIS non-EU CRA and MIS seeks to endorse the credit ratings into the EU and (ii) the lead analyst is located in an MIS non-UK CRA and MIS seeks to endorse the credit ratings into the UK, these provisions may affect:
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MCO controlling shareholders and the holdings of 10% or more or board seats of MCO 20% plus shareholders.
- MIS non-EU CRAs and MIS non-UK CRAs may not issue new credit ratings in respect of any MCO controlling shareholder. In relation to existing ratings, MIS non-EU CRAs and MIS non-UK CRAs must make a disclosure and consider whether to withdraw or take other action in relation to such ratings; and
- MIS non-EU CRAs and MIS non-UK CRAs may not issue new credit ratings in respect of any of the MCO 20% plus shareholder’s holdings of 10% plus, or the controlling shareholder of such holdings, or where the MCO 20% plus shareholder has directors on the board of an entity or any of its controlling shareholders. In relation to existing credit ratings in such situations, MIS non-EU CRAs and MIS non-UK CRAs must make a disclosure and consider whether to withdraw or take other action in relation to such credit ratings.
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Holders of 10% or more of MCO stock and their 10% or more holdings or board seats in other companies.
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MIS non-EU CRAs and MIS non-UK CRAs may rate holders of 10% plus (but below 20%) of MCO stock without making a disclosure; but
- MIS non-EU CRAs and MIS non-UK CRAs must make a disclosure if any of the MCO 10% plus shareholders hold more than 10% of the relevant rated entity or their controlling shareholders, or where the 10% plus shareholder has board members of the rated entity or any of its controlling shareholders.
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Holders of 5% or more of MCO stock.
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MCO 5% plus shareholders are prohibited from providing advisory or consulting services to a rated entity or its related third party. This includes advisory or consulting services in relation to corporate or legal structure, assets, liabilities or activities.
As mentioned above, these rules only affect credit ratings issued by MIS entities (including their branches) where the lead analyst is located outside the EU or UK, and which MIS wishes to endorse into the EU or UK.
IMPORTANT NOTE: The above is only a high-level summary of the relevant provisions to give a brief outline of potentially impacted parties. Moody’s cannot provide legal or regulatory advice or guidance on these issues but wishes to draw attention to these provisions. Those who think that they may be affected should consult the actual legislation and obtain independent legal advice. The relevant legislation can currently be found on official websites: for the EU, www.europa.eu.; and for the UK, www.gov.uk.