The Securities Commission Malaysia (‘SC
’) issued the third revision of the Guidelines on Credit Rating Agencies
’) on 10 January 2023. The Revised Guidelines came into effect upon its date of issuance, and replaced the second revision of the Guidelines issued on 16 April 2020 (‘Superseded Guidelines
The Revised Guidelines seek, amongst others, to enhance and strengthen the role, independence and objectivity of credit rating agencies (severally a ‘CRA
’ and collectively ‘CRAs
’) in providing credible credit rating opinion.
The Revised Guidelines apply to (a) an entity seeking registration as a CRA; (b) a CRA registered with the SC; and (c) where applicable, the rating holding company of the proposed or existing CRA.
The key amendments introduced under the Revised Guidelines include the following:
2. Registration of CRA
||The definition of ‘controller’ has been extended to include a third category of persons or entities, namely a person who is entitled to exercise, or control the exercise of, not less than 15% of the votes attached to the voting shares of a CRA.
||The definition of ‘external member’ has been tightened by excluding a person who is related to a CRA, its rating holding company or its shareholders from being an external member of the rating committee; the Superseded Guidelines had excluded a person who is related to a CRA or its rating holding company or its controllers from being an external member;
||The criteria for ‘fit and proper’ has been expanded significantly and is set out in Appendix 1 of the Revised Guidelines which provides detailed and separate criteria for an entity and an individual; whereas paragraph 2.45 of the Superseded Guidelines appear applicable only to an individual.
||The definition of ‘holding company’ has been amended by removing the requirement under the Superseded Guidelines that the core business of such company is in rating services of CRA.
||New definitions of ‘board committees’, ‘senior management’ and ‘sukuk’ have been introduced. The Revised Guidelines also clarify that references to ‘days’ in the guidelines means calendar days unless otherwise stated.
3. Continuous obligations
|The following changes have been introduced under Chapter 4 (Registration of CRA) of the Revised Guidelines:
Fit and proper criteria
The requirement to ensure an appointee or proposed appointee satisfies the fit and proper criteria has been extended to (a) the controller of a CRA; (b) a compliance officer of a CRA; and senior management of a CRA.
The requirement under the Superseded Guidelines to obtain the prior approval of the SC for the appointment by the CRA or its holding company of directors, chief executive and external members of a rating committee of a CRA, has been extended under the Revised Guidelines to include the appointment of the compliance officer of the CRA.
Paragraph 2.45 of the Superseded Guidelines sets out non-exhaustive factors that the SC will consider in determining whether a proposed appointee satisfies the fit and proper criteria. Paragraph 4.06 of the Revised Guidelines shifts the responsibility for considering whether a proposed appointee is fit and proper (including considering the additional factors) to a CRA and its rating holding company. Further, the additional factors to be considered under the Revised Guidelines have been extended to include the skills and qualification and honesty of the proposed appointee, and in the case of the position of chief executive, the capability to lead the CRA.
Composition of board of directors and board committees
Paragraph 4.09 of the Revised Guidelines requires a CRA and its rating holding company to ensure that (a) a majority of its directors and the board committees comprise independent directors; and (b) the chairman of the board of directors and all board committees is an independent director. Paragraph 2.20 of the Superseded Guidelines required the board of directors of a CRA to ensure that one third of its board of directors or at least two individual members of the board (whichever is higher) comprise independent directors who are professionally qualified and who have relevant corporate experience.
Composition of the rating committee
The requirements relating to members of the rating committee set out in paragraph 4.12 of the Revised Guidelines are identical to those in paragraph 2.9 of the Superseded Guidelines except that a CRA is now required to ensure that the rating committee must comprise a majority of external members, whereas the Superseded Guidelines only required one third or two members (whichever is higher) of the rating committee to be external members.
The Revised Guidelines specifically require a CRA to establish the following committees: (a) nomination committee; (b) audit committee; (c) risk management committee; and (d) remuneration committee. The functions and other requirements relating to each of the aforesaid committees are set out in paragraphs 4.14 to 4.18 of the Revised Guidelines. The Revised Guidelines allows a board committee to carry out more than one of the abovementioned functions.
4. Disclosure requirements
|Matters requiring prior approval of the SC
Both the Revised Guidelines and the Superseded Guideline require a CRA and its rating holding company to obtain the SC’s prior approval before effecting any significant change to their shareholding structure, including the creation of a holding company or ultimate holding company of a CRA.
Paragraph 2.3(b) of the Superseded Guidelines also requires a CRA to obtain the SC’s prior approval for any changes in shareholding (including interest in shares) which results in a person controlling 20% or more of the paid-up capital of the CRA, and any subsequent cumulative increase in shareholding of 10% or more of the paid-up capital of the CRA, whether directly or indirectly. This requirement has been replaced by paragraph 5.02(b) of the Revised Guidelines which requires the SC’s prior approval to be obtained for any proposed change in the direct or indirect shareholding which results in a new controller.
An express requirement is introduced in paragraph 5.04 of the Revised Guidelines for a CRA and its rating holding company to undertake the necessary due diligence to ensure that a candidate for the position of director, chief executive, compliance officer of the CRA, external member of rating committee of the CRA and senior management, is fit and proper and suitably qualified to assume the position.
5. Submission and registration procedures
|Notification to the SC
New requirements have been introduced requiring a CRA and its rating holding company to notify the SC of the occurrence of the events set out in paragraph 5.05 (immediate notification), and paragraphs 5.06 and 5.07 (notification within 14 days of occurrence of the event). A CRA should familiarise itself with these new requirements.
Reporting to the SC
The timeframe for compliance with the reporting requirements in sub-paragraphs (c), (d) and (e) of paragraph 5.08 of the Revised Guidelines have been modified or clarified from the corresponding periods set out in sub-paragraphs (c), (d) and (e) of paragraph 4.2 of the Superseded Guidelines.
Dealings with rating holding company or holding company
The responsibility entrusted with the independent directors under the Superseded Guidelines to review and ensure that dealings by a CRA with its rating holding company or holding company are fair and justifiable, on an arm’s length basis and in the best interest of the CRA has been transferred to the board of directors under the Revised Guidelines.
Tenure of office of director and external member
The Superseded Guidelines provide that a CRA and its rating holding company must ensure that none of their directors and external members of the rating committee serve more than two terms of service not exceeding four years per term. To be consistent with the Malaysian Code on Corporate Governance, this requirement has been amended under the Revised Guidelines to require a CRA and its rating holding company to ensure that none of their independent directors and external members of the CRA’s rating committee serve more than a cumulative period of nine years.
Conduct of meetings
The Revised Guidelines introduce a new requirement which stipulates that to constitute a quorum for a meeting of the board of directors and board committees, the majority of directors present must be independent directors, and for a meeting of the rating committee, the majority of members present must be external members.
Direct line of reporting for compliance officer
The Superseded Guidelines require a compliance officer to have a direct line of reporting to the CRA’s independent directors. This has been amended under the Revised Guidelines which instead require the compliance officer’s direct line of reporting to be to the CRA’s board of directors and/or relevant board committees.
Conflict of interest
Paragraph 2.24 of the Superseded Guidelines requires a CRA to have adequate procedures and mechanisms to ensure that its ancillary business (if any) does not lead to conflict of interest with its rating business. Paragraph 5.29 of the Revised Guidelines has extended the responsibility of ensuring compliance with this requirement to the rating holding company of a CRA.
Replacing another CRA
The obligation under the Superseded Guidelines for a CRA to obtain the SC’s approval before displacing or replacing another CRA in rating a corporate bond or sukuk has been replaced by an obligation under the Revised Guidelines for a CRA to notify the SC of its appointment to replace another CRA.
6. Refusal of registration or approval, suspension of registration and deregistration
|The submission and registration procedures in relation to CRAs have been revamped in consequence of the implementation of the SC’s Electronic Application System (EASy). The new provisions are contained in Chapter 6 of the Revised Guidelines.
|The grounds for refusing an application for the registration or approval and for the suspension and deregistration of a CRA are set out in Chapter 7 of the Revised Guidelines.
Most of the operational requirements under the Superseded Guideline have been carried over to the Revised Guidelines. However the Revised Guidelines have introduced measures that enhance board governance and independence, disclosure requirements and extended the fit and proper requirements to the controller, compliance officer and senior management of CRAs and their rating holding companies.
CRAs must adapt their existing practices and procedures to ensure compliance with the Revised Guidelines.
Article by Kok Chee Kheong (Partner) of the Corporate Practice of Skrine.