As noted, the SEC has removed the rating agency exemption from Regulation FD as required by Section 939B of the Dodd-Frank Act. Regulation FD provides that when an issuer, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the issuer’s securities who may trade on the basis of the information), it must make public disclosure of that information. The question remains what strategies a public company should employ when providing rating agencies information in the future.
Most commentators believe there will be little practical impact. One reason is issuers have entered into, or will enter into, confidentiality agreements with rating agencies and as a result disclosure of information is then permitted under Regulation FD. The CEO of Fitch Ratings has validated this strategy, stating “[i]n the event that issuers feel it necessary to have in place with Fitch a confidentiality agreement pursuant to that provision of Regulation FD (Rule 100(b)(2)(ii)), which permits selective disclosure to a person who expressly agrees to maintain the disclosed information in confidence, Fitch has received confirmation from [its outside counsel] that its standard form confidentiality agreement would suffice for this purpose.”
Another reason many think the change to Regulation FD will have little practical impact is Regulation FD only operates with respect to disclosures to certain persons such as investment advisers, brokers or dealers or associated persons, institutional investment managers, certain investment companies (and those who would be an investment company but for Section 3(c)(1) or 3(c)(7) of the Investment Company Act) and to certain holders of the issuer’s securities. Rating agencies are often outside this category of enumerated entities. Major rating agencies have been registered as investment advisers in the past but are not believed to be currently registered as investment advisers.
Rule 17g-4 under the Securities Exchange Act also provides some comfort. It provides, among other things “[t]he written policies and procedures a nationally recognized statistical rating organization establishes, maintains, and enforces to prevent the misuse of material, nonpublic information pursuant to section 15E(g)(1) of the Act (15 U.S.C. 78o–7(g)(1)) must include policies and procedures reasonably designed to prevent . . .[t]he inappropriate dissemination within and outside the nationally recognized statistical rating organization of material nonpublic information obtained in connection with the performance of credit rating services [and] [a] person within the nationally recognized statistical rating organization from purchasing, selling, or otherwise benefiting from any transaction in securities or money market instruments when the person is aware of material nonpublic information obtained in connection with the performance of credit rating services that affects the securities or money market instruments”. An example of the implementation of Rule 17g-4 can be found in Moody’s Code of Professional Conduct.
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