The Municipal Securities Rulemaking Board is disputing Standard & Poor’s claims that the board’s plans to display municipal bond ratings on its EMMA website would cause it to lose significant revenue, provide few benefits to retail investors, and erode its intellectual property rights.
In an eight-page comment letter filed with the Securities and Exchange Commission Thursday, the MSRB said Standard & Poor’s concerns essentially are overblown.
“The EMMA ratings initiative would provide substantial benefits to retail investors and would represent a significant increase in the level of investor protection provided by the MSRB’s information systems and marketplace rules,” the board’s general counsel, Ernesto Lanza, wrote.
The MSRB filed the proposal with the SEC on May 20. Standard & Poor’s responded to it in June, saying it would not participate if the SEC approved it. But the Government Finance Officers Association, in its own comment letter, welcomed the initiative. Under the MSRB proposal, the board would display ratings provided to it for free by nationally recognized statistical rating organizations, or NRSROs.
The GFOA said the proposal would eliminate an existing two-tiered system that unfairly allows sophisticated investors to more easily access muni ratings than retail investors. The group said it is often unduly burdensome for issuers to have to report rating changes to the board as is required by the SEC’s Rule 15c2-12 on disclosure, particularly when they may not even be aware of them. If the rating agencies post rating changes on EMMA, transparency is achieved without action from the issuers.
The GFOA also said that while the rating agencies have the right to copyright and protect their written reports and analysis, “they should not be able to withhold the basic conclusion of a rating from open distribution through the EMMA system.”
The MSRB generally agreed with the issuer group, but strongly disputed the claims made by Standard & Poor’s, which argued the proposal’s benefits, “if any,” would outweigh its costs. The agency also said the board failed to “specify the scope of the 'credit rating and related information’ it would like to post,” making it unclear if it would be “sufficiently tailored” to the needs of retail investors.
In its response, the MSRB said it is only proposing to display ratings provided through the same automated data feeds the rating agencies already provide to bulk subscribers of their ratings, though individual ratings generally can be obtained by anyone from the agencies’ websites.
“It is difficult to understand how displaying on the EMMA website information an NRSRO also makes available to other information services, which in turn make them available to their users, would result in such information being insufficiently tailored or otherwise problematic for the needs of retail investors,” Lanza wrote.
Though Standard & Poor’s said the SEC’s existing disclosure requirements for NRSRO ratings are sufficient for providing transparency to the market and to allow investors to compare the quality of different ratings, the MSRB said its rating initiative would serve an entirely different purpose.
“That is, to provide investors with access to material information about municipal securities from NRSROs, not to provide a means by which investors can determine which NRSRO does its job the best,” Lanza wrote.
Turning to Standard & Poor’s claims that it would not be able to monitor and enforce its intellectual property rights against end-users who might abuse the ratings posted to EMMA, the board said it would impose limitations to address those problems, as it previously has done for information vendors.
“The MSRB plans to display credit ratings at the individual security level and not in a fashion that would allow a user to view, copy or print credit ratings on a market-wide basis,” Lanza wrote. “In addition, while the MSRB offers subscriptions to electronic feeds of some of the information displayed on EMMA, the proposal would not provide for inclusion of credit ratings and related information obtained from NRSROs in these subscription products.”
Finally, though Standard & Poor’s maintains it is “unable to provide proprietary information at no cost without unduly impacting our revenues,” the board said that with appropriate intellectual property safeguards, EMMA rating displays “should not have any more appreciable negative impact on the revenues of the NRSROs” than the display of such information on their own respective websites.
Ed Sweeney, a spokesman for Standard & Poor’s, said: “We stand by our letter and have no further comments.”
John Cline, a spokesman for Moody’s Investors Service, said the rating agency has not made a decision on the matter. Fitch Ratings analysts previously said they hope to participate in the MSRB initiative.