As a consequence of Dodd-Frank, rating agencies worried about expert liability. But should their concerns go further?
Dodd-Frank contains a provision that spells bad news for rating agencies and issuers that are required to include credit ratings in official registration statements. The financial reform bill, which was signed into law today, removes the exemption rating agencies have enjoyed from Securities Act rules that deem those parties who prepare or certify a registration statement as being subject to expert liability.
Rating agencies fought hard to maintain the exemption, holding the position that ratings are an opinion subject to free speech protections, rather than an expert certification subject to liability. Indeed, they thought they had won on this point, but the exemption was apparently revoked in the final conference version. This fact was indicated in several bill summaries, including that of law firm Davis Polk.
Barring any changes, the Dodd-Frank provision would require issuers to obtain rating agencies’ consent to have their ratings used in registration statements and related official documentation. Since such consent would expose rating agencies to expert liability, they would rather not. So what will issuers do?
No consent, pending clarification
As the Wall Street Journal reported today, Moody’s, S&P and Fitch are not consenting at the moment as they sort out how they expect to deal with expert liability going forward. This is upsetting certain portions of the bond market–particularly ABS issues, where registration statements are required by law to include ratings, effectively shutting these markets down.
Rating agency lawyers are no doubt working out how to advise issuers on communicating ratings, outside of registration statements, to satisfy legal provisions for a rating without subjecting rating agencies to expert liability claims.
We don’t need your stinkin’ rating
Meanwhile, issuers can turn to private offerings, which tend to be more costly. However, issuers should expect the “consent” of rating agencies in whatever form to cost them too, and place another hurdle in front of properly timing the market. Of course, another response to the price of consent might well be: “we don’t need your stinkin’ rating.” The question is which risk do rating agencies fear more?
Looking to reduce reliance on ratings has been a constant topic of discussion for treasurers over the last few years, including removing references to ratings from their own investment policies. This latest regulatory snafu should provide another catalyst to consider accelerating such change.
Update (July 23, 2010):
The SEC is offering issuers a “no action” letter exempting them from requirements to have a rating in registration statements for six months. This will give rating agencies time to sort out their consent problem. Ford was among the first to benefit.