Wednesday, September 1, 2010 By Lynn Hume

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WASHINGTON — Bowing to growing concerns from municipal issuers, Moody’s Investors Service announced Wednesday that it will stop trying to get state and local issuers to agree to indemnify and hold it and its officers harmless for any mistakes they might make as a precondition to assigning ratings to municipal bond transactions.

Moody’s has been including the indemnification language in ratings applications and had recently urged issuers to fill out and sign them before the agency would provide them with ratings.

But several issuers and their lawyers questioned whether state and local governments could legally enter into those agreements and complained that Moody’s was “overreaching” by trying to hold issuers liable for legal costs or liabilities stemming from ratings of their bonds, except in situations involving “fraud or willful misconduct” on the part of a rating agency.

A Moody’s spokesman issued this statement: “As Moody’s began introducing rating applications to the municipal market earlier this year, we heard from issuers in isolated instances that our standard indemnification language raised concerns unique to their market. While we’ve worked directly with issuers to address their concerns, we’ve recently heard similar concerns from the broader municipal market. Therefore, although this type of language is common other business services agreements, we have decided to suspend our use of this indemnification language in this sector.”