On September 29, 2010, the SEC amended Regulation FD to remove the express exemption for disclosures of material non-public information to credit rating agencies (former Rule 100(b)(2)(iii) of Regulation FD), as required under Section 939B of the Dodd-Frank Act. This amendment became effective upon its publication in the Federal Register on October 4, 2010.
As discussed below, because credit rating agencies are not among the classes of covered persons under Regulation FD, we believe that this amendment to Regulation FD does not require issuers to change the way in which they interact with credit rating agencies that are registered with the SEC as nationally recognized statistical rating organizations ("NRSROs").
Regulation FD was adopted to prevent selective disclosure to those who would reasonably be expected to trade securities on the basis of the information or provide others with advice about securities trading. Under Rule 100(b)(1) of Regulation FD, material non-public information must be publicly disclosed whenever that information is disclosed to any of the following specified persons (collectively, "covered persons"):
- broker-dealers and their associated persons,
- investment advisers, certain institutional investment managers and their associated persons,
- investment companies, hedge funds and their affiliated persons, or
- any security holder or person for whom it is reasonably foreseeable that such person would buy or sell securities on the basis of the information disclosed.
When Regulation FD was first adopted, there was uncertainty as to whether credit rating agencies were investment advisers. At that time, the leading credit rating agencies in the U.S. were voluntarily registered with the SEC as investment advisers and thus would have been covered persons under Regulation FD if not for the express exemption for credit rating agencies in Regulation FD. Gibson Dunn advised Moody's in commenting to the SEC on providing the credit rating agency exemption when it adopted Regulation FD, and continues to advise Moody's on SEC matters.
In 2006, Congress passed the Credit Rating Agency Reform Act of 2006, which created a separate regulatory regime for NRSROs under the Securities Exchange Act of 1934. The Credit Rating Agency Reform Act also amended Section 2(a)(11)(F) of the Investment Advisers Act of 1940 so that NRSROs are specifically excluded from the definition of "investment adviser" (unless they engage in issuing recommendations as to purchasing, selling, or holding securities or in managing assets, consisting in whole or in part of securities, on behalf of others). As a result, none of the NRSROs are registered as investment advisers.
In addition to not being within the specifically enumerated categories of "covered persons" described above, we do not believe it is reasonably foreseeable that NRSROs or their employees would buy or sell securities on the basis of information disclosed to them in the credit rating process. This view is supported by Section 15E(g) and Rule 17g-4 of the Exchange Act, under which NRSROs are required to implement and maintain policies designed to prevent their employees from inappropriately disseminating information obtained in connection with the performance of credit rating services or from engaging in transactions in securities (including derivatives) when they are aware of material, non-public information that affects such securities.
As such, while Regulation FD no longer contains an express exemption for credit rating agencies, it is important to note that:
- Regulation FD requires public disclosure of material nonpublic information only when that information is disclosed to a covered person as described above; and
- NRSROs are not investment advisers and are subject to regulatory standards that prevent them from otherwise being a "covered person".
Note that the foregoing may not apply to interactions with all businesses that provide credit ratings. If an issuer is providing information to a credit rating agency that is not an NRSRO or if an NRSRO ever engaged in business that caused it to register as an investment adviser, it would be advisable to ensure the availability of one of the exemptions from Regulation FD for communications with such a credit rating agency. In those cases, companies could either seek assurances that communications would be subject to a duty of trust and confidence, as a result of which the exemption under Regulation FD for disclosures made in this context (contained in Rule 100(b)(2)(i)) would be available, or could enter into a confidentiality agreement with the credit rating agency to take advantage of the exemption for disclosures to persons who expressly agrees to maintain the disclosed information in confidence (Rule 100(b)(2)(ii)). Absent these types of unusual circumstances, it should not be necessary to enter into a separate confidentiality agreement with a credit rating agency that is an NRSRO despite the recent amendment to Regulation FD.