In my essay Credit Ratings: Investors in a Bind I argued that the NRSRO exemption to Regulation FD be repealed.
This exemption may be summarized as
Regulation FD requires that an issuer, or any person acting on its behalf, publicly disclose material nonpublic information if the information is disclosed to certain specified persons. Currently, one exception to this requirement is disclosure of information to an entity whose primary business is the issuance of credit ratings, so long as the information is disclosed solely for the purpose of developing a rating and the entity’s ratings are publicly available.
The fact that credit rating agencies have access to material non-public information that you or I would go to jail for possessing can lead to considerable second-guessing when evaluating the credit quality of any given issue or issuer; encouraging an over-reliance by investors on credit rating agencies and increasing the degree of financial instability inherent in the system (by encouraging cliff-risk through market reaction to downgrades and other difficulties caused by exposure to single-point failure).
The author of the above summary, Charles A. Sweet of Bingham McCutchen LLP goes on to advise, in his post In an Effort to Encourage Unsolicited Ratings, SEC Requires Disclosure of All Information Provided to NRSROs Hired to Provide Credit Ratings; Also Adopts and Proposes Various New Disclosure Requirements for NRSROs:
The SEC has adopted, substantially as proposed, an expansion of this provision to permit the disclosure of material nonpublic information to NRSROs even if their ratings are not public. According to the SEC, this change will accommodate both subscriber-based NRSROs that do not make their ratings publicly available for free, as well as NRSROs that access information under the new disclosure rules but which do not ultimately issue a rating.
… which is great news, but not as good as the information passed on by Jim Hamilton of Jim Hamilton’s World of Securities Regulation in his post House Passes Historic Financial Overhaul Legislation:
The House of Representatives passed historic legislation today overhauling the US financial regulatory system.
…
The SEC is directed to revise Regulation FD to remove from FD the exemption for entities whose primary business is the issuance of credit ratings (Section 6007).
Let’s just hope that this part of the legislation, anyway, becomes law … next stop, National Policy 51-201!