WASHINGTON - Moody's Investors Service has notified municipal bond issuers about new conflict-of-interest policies the agency has made to implement rules the Securities and Exchange Commission approved in December.
The SEC rules restrict analysts at nationally recognized statistical rating organizations, which must register with the commission, from receiving gifts of more than $25.
But Moody's said in a May 22 letter to one issuer - who did not want to be identified - that gifts regarding entertainment are not permitted regardless of value and that meals must be limited to $25 per person per business interaction.
"When our analysts meet at your offices, they can still accept simple hospitality for morning coffee and pastry or sandwich buffet or box lunch," Edith Behr, vice president and senior credit officer at Moody's, explained in the letter.
The letter also affirms that Moody's has created "walls" between credit analysts and rating agency officials who negotiate fees with the issuers. State analysts must be kept out of discussions about fees with issuers or issuers' agents, Behr said.
A Moody's policy, which has been in place since 2005, "will not have analysts who are directly involved in the rating process initiate, or participate in, discussions regarding fees or payments with an entity they rate," the letter said. All analytical managers and other personnel are also excluded from the fee discussions.
The letter says that for all-day meetings, analysts will have to restrict what they can accept from issuers.
"We are making you aware of this restriction to avoid any awkward situations for you and others in your organization," Behr said.
She could not be reached for comment and it is not clear how many issuers received the letter from Moody's.
The rules approved by the SEC in December bar NRSRO employees that rate a deal or determine the methodology used to rate a security from negotiating fees for the rating. The SEC also prohibited credit rating agencies from rating a security that it or an affiliate helped structure. Other rule changes approved by the commission boosted NRSRO disclosures by requiring firms to provide annual reports that detail the rating upgrades and downgrades broken out over one-, three- and 10-year periods for each asset class that the NRSRO rates.
The other NRSROs have similar policies in place, according to their spokespersons and company documents. Standard & Poor's analysts cannot accept gifts and cannot take items for business activities over $25, according to a statement on the company's Web site dated April 10. An analyst who attends a conference dinner, for example, must pay for the meal if it exceeds $25, a spokesperson said.
Fitch Ratings analysts may accept meeting supplies and "modest food and beverages," so long as the value does not exceed $25 per employee, according to company policy.
In a May 2009 letter to issuers, bankers and investors, the agency detailed its policy on gifts and business events, saying no Fitch employee can accept any type of gift in connection with any rating-related work. Analysts may accept invitations to conferences, outings and dinners, but must pay for their expenses.
The rating agencies have come under fire for ratings they assigned to risky, subprime mortgage securities. Sen. Jack Reed, D-R.I., has introduced legislation that would give the SEC greater authority to oversee credit rating agencies. In the House, Rep. Paul Kanjorski, D-Pa., has called for an office dedicated to rating agencies to be formed in the SEC.
