The Securities and Exchange Commission has commenced publishing comments received regarding the possible recission of Rule 436(g).
Naturally, all Assiduous Readers will know what this rule is; those who are not sufficiently assiduous may wish to refer to the PrefBlog post reporting the concept release, with additional commentary on October 7. Basically, the proposed rule change will
- force credit rating agencies to take on more legal liability for their ratings, and
- allow pseudo-managers to slough off their responsibility for checking credit themselves
Those who are familiar with my view will know that I advocate that Portfolio Managers should be paramount in the investment management process; PMs must assume all authority and all responsibility for managing their investments.
Thus, to take a specific example, I consider the Council for Institutional Investors views on the subject to be a disgrace to the profession:
The accountability of NRSROs has deteriorated so much that institutional investors now are vulnerable if they rely on credit ratings in making investment decisions. To the extent rating agencies are not subject to liability, an institutional investor’s defense of reliance on ratings is weakened, because constituents can argue that ratings are less reliable when rating agencies are not accountable for fraudulent or reckless ratings.
Well, bucko: you should be vulnerable. You should be more than vulnerable. You should be fired if you blindly rely on credit ratings in making investment decisions. Your clients are paying you a pretty good buck to manage their investments; manage them and accept your responsibilities.
The CII did not make a point of its disdain for responsibility in their comments on the rule, nor did they make any comparison between the size of the fees charged by their members for managing a fixed-income portfolio and the pro-rata share of ratings fees paid by the issuers.
Update: As a very (very!) rough guide to what sort of breakdown might be expected should anybody wish to do the look, let’s take a quick peek at the ALB.PR.A Annual Report for 2009:
| Administrative fees (note 7) | 352,906 | 566,811 |
| Directors’ and independent review committee fees | 39,300 | 31,800 |
| Insurance premiums | 36,653 | 40,308 |
| Audit fees | 30,200 | 29,700 |
| Listing fees | 28,000 | 30,000 |
| Printing and mailing charges | 19,500 | 34,950 |
| Transfer agent fees | 10,400 | 9,800 |
| Rating fees | 7,875 | 13,250 |
| Custodial fees | 4,500 | 8,300 |
| Legal fees | 3,000 | 5,000 |
| Capital tax | — | (2,330) |
| Other (note 6) | 21,666 | 19,411 |
Other companies that make a practice of breaking out their ratings fees are BAM Split and 5Banc Split (this is by no means an exhaustive list … it’s just taken from some rough notes I made a long time ago).
Now, many split share corporations (not these particular ones) pay a service fee to stockbrokers whose clients own the capital units. And if I, for instance, hold these preferreds in Malachite Aggressive Preferred Fund, I’m going to charge you 1% (basically) on assets for worrying about what goies in the fund.
Now: having looked at how much a split share fund – as an easy example with which I’m reasonably familiar – pays for ratings fees, hands up who thinks investment advisors should be able to shrug off their responsibility for credit quality due diligence onto the agencies.
If anybody has authoritative figures for rating fees on sub-prime mortgage CDOs and so on … please link in the comments!