Tuesday, July 20, 2010

Expert texperts choking

Rating agencies to debt issuers: don’t cite us [UPDATED]
On Monday, in response to certain aspects of the D0dd-Frank Act, Fitch said it would not allow debt issuers to include its ratings in prospectuses or debt registration statements.

Looks like Moody’s beat Fitch to this one. According to a ’special comment’ issued by the former on Thursday July 15, Moody’s will also be declining to consent to the inclusion of its ratings in prospectuses and registration statements “without further study”.

Standard & Poor’s issued the following to clients and investors on Friday July 16

Here’s why

The Dodd-Frank Act repeals Rule 436(g) under the Securities Act of 1933 (the Securities Act), which relates to U.S. public offerings registered under the Securities Act. Before repeal, Rule 436(g) provided that credit ratings assigned by a Nationally Registered Statistical Rating Organization (NRSRO) are not considered a part of registration statement prepared or certified by an ‘expert’, as described within the meaning of sections 7 and 11 of the Securities Act, and the NRSRO consent would not be required to include credit ratings in Securities Act registration statements and any related prospectuses.

While Fitch continues to believe that it is not an expert under the plain meaning of sections 7 and 11 of the Securities Act, it is Fitch’s understanding that, absent clarification by the U.S. Securities and Exchange Commission (SEC), immediately after the Dodd-Frank Bill is signed into law an issuer will need to obtain Fitch’s written consent to include a Fitch credit rating in a Securities Act registration statement and any related prospectuses. If Fitch provides its consent for ratings to be included into Securities Act registration statements or prospectuses, Fitch will be potentially exposed to ‘expert’ liability under section 11 of the Securities Act, liability to which Fitch is not currently exposed.

The FT Aphaville post mentions other "problems" the ratings agencies have with the new Dodd-Frank bill. And it's about time. Worth a read.

Expert textpert choking smokers,
Don't you thing the joker laughs at you?
See how they smile like pigs in a sty,
See how they snied.
I'm crying.

-- The Beatles, I Am the Walrus

FOLLOW UP: SEC Breaks Impasse With Rating Firms
The Securities and Exchange Commission moved to defuse turmoil in the bond markets caused by ratings firms' refusal to allow their credit ratings to be used in deal documents.

Late Thursday the agency said it would temporarily allow bond sales to go ahead without credit ratings in bond offering documents, a move that would end an effective stalemate between ratings agencies and issuers.

The SEC's waiver will be in place for six months. But the SEC said its action doesn't change or negate the new laws governing ratings agencies that came into effect with the signing of the Dodd-Frank bill this week.

In an April letter to the SEC, the California Public Employees' Retirement System said "making credit rating agencies civilly liable for misstatements or omissions which they cause to be placed in securities offerings" would represent "a large step forward in deterring harmful conduct" by credit raters in the structured-finance area.



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