National Policy 11-205 Process for Designation of Credit Rating Organizations in Multiple Jurisdictions -- Application by a designated rating organization to amended and restate its designation order.
Applicable Legislative Provisions
Securities Act (Ontario), R.S.O. 1990, c. S.5, as am., s. 22.
National Instrument 25-101 Designated Rating Organizations, s. 6, Part 3 and ss. 2.22 to 2.25 of Appendix A.
November 2, 2015
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR DESIGNATION OF CREDIT RATING ORGANIZATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF MOODY'S CANADA INC. (the Filer)
AMENDED AND RESTATED DESIGNATION ORDER
IT IS ORDERED THAT effective as of November 2, 2015, the order issued by the Ontario Securities Commission (the principal regulator in the Jurisdiction) on October 31, 2012 which designated the Filer as a designated rating organization as contemplated by National Instrument 25-101 Designated Rating Organizations, subject to the conditions provided for in that order, be amended and restated as follows:
On October 31, 2012, the Ontario Securities Commission (the Commission) issued an order (the Original Designation Order) which designated the Filer as a designated rating organization (DRO) as contemplated by National Instrument 25-101 Designated Rating Organizations (NI 25-101), subject to the conditions provided for in that order. One of these conditions is that either (i) the MIS Committee (as defined in the Original Designation Order) assumes responsibility for performing the functions that section 2.25 of Appendix A to NI 25-101 allocates to the board of directors of a DRO (the Governance Functions) and the composition of such committee is as described in paragraph 14 of the Original Designation Order (the MIS Governance Option), or (ii) the board of directors of the Filer complies with Part 3 of NI 25-101 (including sections 2.22 to 2.24 of Appendix A to NI 25-101) and performs the Governance Functions.
The Commission has received an application from the Filer (also referred to as MIS Canada) for a decision under the securities legislation of the Jurisdiction (the Legislation) to amend and restate the Original Designation Order to, among other things, allow the MIS Governance Option to be satisfied by the board of directors (the MIS Board) of Moody's Investors Service, Inc. (MIS Inc.), a wholly owned subsidiary of Moody's Corporation (MCO), rather than the MIS Committee.
Under the Process for Designation of Credit Rating Organizations in Multiple Jurisdictions (for a passport application):
(a) the Commission is the principal regulator (the Principal Regulator) for this application; and
(b) the Filer has provided notice that section 4B.6 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).
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 25-101 have the same meanings in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation governed by the federal laws of Canada with its registered and head office located in Toronto, Ontario.
2. The Filer provides credit rating opinions, research and risk analysis regarding a broad range of financial institutions, corporate entities, government bodies and various structured finance product groups in Canada, which may from time to time be used outside of Canada.
3. The Filer is a wholly owned subsidiary of Moody's Overseas Holdings, Inc. (MOH), which itself is a wholly-owned subsidiary of MCO. MCO, the parent company, is a publicly held Delaware corporation whose board of directors is subject to the full corporate governance regime imposed by Delaware law, rules made under the Securities Exchange Act of 1934 and the New York Stock Exchange.
4. The Filer has filed all documentation required under Part 2 of NI 25-101.
5. The Filer is: (i) a "credit rating affiliate" of MIS Inc., which is a Nationally Recognized Statistical Rating Organization (NRSRO) in the United States (US); (ii) listed on MIS Inc.'s Form NRSRO as a credit rating affiliate; and (iii) in compliance in all material respects with US federal securities law applicable to NRSROs and their credit rating affiliates.
6. In general terms, MCO and its direct and indirect subsidiaries (collectively, Moody's) are organized as follows. Moody's has two principal businesses. Moody's Investors Service (MIS) is the credit rating agency. The term MIS refers to MIS Inc. and the wholly owned subsidiaries of MCO that engage in rating services. The term Moody's Analytics (MA) refers to the companies that carry out all other, non-rating commercial activities.
7. The Filer's credit ratings are determined collectively by rating committees by a majority vote, and not by any individual analyst. Rating committees, which are constituted individually for each issuer and obligation, have members who may be based in different MIS offices around the world. Rating committees that determine credit ratings assigned by the Filer consist of analysts who have the appropriate knowledge and experience to address the analytical perspectives relevant to the issuer and obligation. Rating committees for Canadian-based issuers often, but do not necessarily, include one or more analysts based in Canada and employed by MIS Canada. Factors considered in determining the make-up of a rating committee may include the size of the issue, the complexity of the credit and the introduction of a new instrument. This approach to the composition of rating committees helps MIS provide high quality credit ratings that are comparable across sectors, regions and countries. Therefore, for purposes of this Amended and Restated Designation Order, any credit ratings of MIS that are required under the Legislation to be issued by a DRO shall be deemed to be credit ratings of MIS Canada.
8. MIS has a Credit Policy Group, separate from the rating groups that are principally responsible for rating issuers and obligations. The Credit Policy Group is charged with promoting consistency, quality and transparency in MIS' rating practices globally and across diverse sectors and regions. The Moody's Investor's Services Code of Professional Conduct (the MIS Code) and the MIS Canada Code (as defined below) allocate to the Credit Policy Group responsibility for:
(1) conducting research on ratings performance;
(2) reviewing and approving methodologies and models; and
(3) overseeing credit policy committees that formulate high-level rating policies and practices for each of the rating groups.
9. Moody's maintains independent Internal Audit and Compliance functions with global remits that extend to MIS, its activities and those of its employees.
10. Certain activities or functions that are required to be undertaken by a DRO pursuant to NI 25-101 are centralized within MIS or Moody's, as the case may be, and are performed by other employees of other Moody's entities. For example, the Compliance and Internal Audit functions are shared services across MIS, MA and MCO. The Credit Policy function is centralized within MIS, and the Credit Policy staff may be employed by MIS entities other than MIS Canada. Also, many of the disclosures that MIS is required to disseminate under various laws are effected through moodys.com, which is managed centrally within MCO. The centralization of these and other functions promotes global consistency in the performance of these functions. The Filer also sometimes employs third parties to perform certain services that are referred to in NI 25-101.
11. The Filer has appointed a compliance officer of MIS as its "designated compliance officer" (DCO) to fulfill the functions prescribed by Part 5 of NI 25-101.
12. Pursuant to a unanimous shareholder declaration, the powers of the directors of the Filer to manage, or supervise the management of, the business and affairs of the Filer have been given to MOH, the sole shareholder of the Filer.
13. As a result of recent changes to United States laws, specifically Rule 17g-8(a)(1) of the Securities Exchange Act of 1934, the MIS Committee can no longer perform the governance and oversight functions required by section 2.25 of Appendix A of NI 25-101 and Section 15E(t)(3) of the Securities Exchange Act of 1934. Consequently, such functions will be fulfilled by the MIS Board effective as of the date of the Amended and Restated Designation Order.
14. Upon the coming into effect of this Amended and Restated Designation Order, at least half, and no fewer than two of the directors of the MIS Board will be independent for the purposes of NI 25-101, a majority of its board of directors, including its independent directors, will have, what a reasonable person would consider, sufficient expertise in financial services to fully understand and properly oversee the business activities of the Filer, and at least one independent member and one other member of the MIS Board will have what a reasonable person would consider to be, in-depth knowledge and experience at a senior level, regarding structured finance products.
15. In addition to the independence requirements in Part 3 of NI 25-101, a director of the MIS Board will not be considered "independent" for the purposes of Part 3 of NI 25-101 if:
(a) the director previously served on the MIS Committee for more than five years in total; or
(b) the director's cumulative service on the MIS Committee and the MIS Board is more than five years in total.
16. It is contemplated that the MIS Board will act in a capacity similar to a board of directors for the Filer in respect of the requirements and functions prescribed by NI 25-101 for the board of directors of a DRO, including Part 3 of NI 25-101, subsection 12(1) and 12(2) of NI 25-101, section 2.11 and sections 2.22 to 2.25 of Appendix A to NI 25-101. The MIS Board will comply with those requirements as if MIS Inc. was a DRO affiliate that is a parent of the Filer.
The Filer's Compliance with NI 25-101
17. MIS Inc. has adopted the MIS Code, which is designed to be substantially aligned with the International Organization of Securities Commissions Code of Conduct Fundamentals for Credit Rating Agencies (the IOSCO Code). The Filer has adopted and implemented the Moody's Canada Inc. Code of Professional Conduct (the MIS Canada Code), which is similarly designed to be substantially aligned with the IOSCO Code and includes provisions adopted to satisfy the requirements of NI 25-101.
18. MCO and MIS Inc. have also implemented a range of globally applicable policies, procedures and guidance (the Global Policies) that are designed to achieve the objectives set out in the IOSCO Code and satisfy regulatory requirements that MIS implements globally. The Filer has adopted and implemented Canada-specific policies, procedures, guidance and internal controls as necessary (the Canada Policies) in order to comply with NI 25-101.
19. On October 31, 2012:
(a) the Commission issued the Original Designation Order which designated the Filer as a DRO pursuant to NI 25-101, subject to the conditions provided for in that order. The Original Designation Order requires that either (i) the MIS Committee assumes responsibility for performing the Governance Functions, or (ii) the board of directors of the Filer complies with Part 3 of NI 25-101 (including sections 2.22 to 2.24 of Appendix A to NI 25-101) and performs the Governance Functions. The Original Designation Order also prohibits the Filer from making amendments to the MIS Canada Code unless the amendments do not derogate in any material respect therefrom or are necessary or desirable for MIS to comply with applicable law or achieve the objectives of the IOSCO Code as it might be amended from time to time; and
(b) the Filer was granted exemptive relief from certain aspects of NI 25-101 pursuant to an order granted by the Principal Regulator on October 31, 2012 (the Exemption Order).
20. Upon the coming into effect of this Amended and Restated Designation Order, the MIS Board will assume responsibility for performing the Governance Functions for the Filer.
21. The Filer believes that the MIS Canada Code, the Global Policies and the Canada Policies are consistent in all material respects with the objectives of NI 25-101 and will enable the Filer to:
(a) accommodate the global nature of MIS's operations;
(b) provide independent and globally consistent credit ratings; and
(c) maintain and enforce globally consistent policies and procedures designed to achieve regulatory objectives.
22. The Filer is in compliance in all material respects with the Original Designation Order, the Exemption Order, NI 25-101 and the securities legislation applicable to credit rating organizations in each jurisdiction in Canada and in any other jurisdiction in which the Filer operates.
23. The Filer is subject to the requirements set out in the Legislation and the securities legislation in each of the Passport Jurisdictions.
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 the Filer is designated as a designated rating organization under the Legislation provided that:
(a) the MIS Board assumes responsibility for performing the functions prescribed by NI 25-101 for the board of directors of a DRO and the MIS Board complies with (i) the independence requirements described in paragraph 15 of this Amended and Restated Designation Order, (ii) Part 3 of NI 25-101 and (iii) sections 2.22 to 2.25 of Appendix A to NI 25-101; in each case, as if MIS Inc. was a DRO affiliate that is a parent of the Filer, or
(b) the board of directors of the Filer performs the functions prescribed by NI 25-101 for the board of directors of a DRO and complies with Part 3 of NI 25-101 and sections 2.22 to 2.25 of Appendix A to NI 25-101, and
2. the Filer continues to designate a compliance officer of an affiliate as its DCO to fulfill the functions prescribed by Part 5 of NI 25-101 and the DCO has a direct reporting relationship to either the MIS Board or the board of directors of the Filer, in accordance with paragraph 1 above.