A change in the way Fitch Ratings will allow securities issuers’ to use its ratings in offering documents, prompted by the pending regulatory reform bill, will not apply to municipals, an agency official said.
Fitch will no longer allow issuers of registered securities to include its credit ratings in prospectuses and registration statements until the full implications of the bill are clear.
The Frank-Dodd Wall Street Reform and Consumer Protection Act, which passed the Senate last Thursday, is expected to be signed into law by President Obama on Wednesday.
Charles Brown, general counsel at Fitch, said the change only applies to securities registered with the SEC. Municipal securities should not be affected.
“For municipal finance, we believe there will be no change,” Brown said. “No one needs to do anything differently.”
Among its many mandates is one nullifying the Securities and Exchange Commission’s rule 436(g), which exempts nationally recognized rating agencies from being a part of an issuer’s registration statement.
The exemption means the credit rating offered by the agencies is not considered an “expert” opinion.
If rating agencies were considered experts, as the Frank-Dodd Act requires, their compliance burden and liabilities could potentially be much greater — something the agencies would like to avoid.
“Historically, credit rating agencies have never been treated as experts under the Securities Act,” Fitch wrote Monday in a press release. “Appropriately so, since ratings are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified.”
For securities that are affected, an investor might be able to call Fitch directly or use a third-party tool to obtain the rating. However, the issuer wouldn’t be allowed to use that rating in its marketing materials.
“Given the potential consequences, Fitch cannot consent to including Fitch credit ratings in prospectuses and registration statements at this time,” the agency said, noting that it will continue to publish credit ratings and research.
Neither of Fitch’s main competitors has adopted a similar stance.
Moody’s Investors Service on Friday said it anticipates that the new law will “spur various changes in Moody’s processes and operations.”
Standard & Poor’s on Friday said it was “currently examining the proposed legislation” and would expect to provide additional information in the future.
The rule 436(g) exemption was adopted in 1982 “to facilitate voluntary disclosure of credit ratings in registration statements,” according to the SEC. Previously, the agency had discouraged such disclosure.
The Frank-Dodd Act would require, rather than simply allow, that issuers disclose credit ratings and related information in registration statements when selling registered securities.
According to an SEC fact sheet, this would aid investors by detailing the scope and limitations of the rating; helping investors identify conflicts of interest by saying who paid for the rating; and listing any “preliminary ratings” from other agencies, thereby preventing issuers from “shopping” for the highest rating and ignoring others.
Fitch said it “continues to believe” it is not an expert and issuers will need Fitch’s written consent to include its credit rating on any prospectus if the bill is signed into law.
If the nationally recognized rating agencies consented to their ratings being a formal part of the registration documents, they would be considered experts “under Section 11 of the Securities Act for material misstatements or omissions with respect to such included ratings,” according to a summary of the financial bill published by Davis Polk & Wardwell LLP.