SEC Removes Credit Rating Agency Exemption From Regulation FD

On September 29, 2010, the U.S. Securities and Exchange Commission (the “Commission”) published a final rule amendment removing the specific exemption provided under Regulation FD for disclosures made by issuers to nationally recognized statistical rating organizations (“NRSROs”) and other credit rating agencies for purposes of determining or monitoring a credit rating.¹ The Dodd-Frank Wall Street Reform and Consumer Protection Act directed the Commission to modify the rule to remove this specific exemption within 90 days of Dodd-Frank’s enactment, and the Commission did so without publishing a notice of proposed rulemaking, noting that because of the legislative mandate the action “does not involve the exercise of Commission discretion or policy judgments.” The amendment will become effective immediately upon its publication in the Federal Register.

Regulation FD by its terms prohibits disclosure of material nonpublic information only to specified classes of persons:

• a broker or dealer, or a person associated with a broker or dealer;
• an investment adviser² or person associated with one;
• an institutional investment manager or person associated with one;
• an investment company or private investment company or affiliate of either; or
• a holder of the issuer’s securities and the circumstances of the disclosure are such that it is reasonably foreseeable that the person will purchase or sell the issuer’s securities on the basis of the non-public information.

There is a legitimate question whether an NRSRO or other credit rating agency falls within any of these specified categories. If not, disclosure to it will be outside the ambit of Regulation FD’s prohibition without regard to the specific exemption eliminated by today’s Commission action. Whether any given NRSRO or other credit rating agency falls within one of the specified categories could be quite fact-specific.

In addition, the accompanying release notes that Dodd-Frank does not affect the other specific exemptions in Regulation FD, which include an exemption for disclosures to “a person who expressly agrees to maintain the disclosed information in confidence.” An issuer providing material non-public information to a rating agency in the future would be well advised to rely on this exemption for confidential disclosures, unless it can conclusively determine that the rating agency does not fall within one of the specified categories. The exemption for disclosures made to persons under a confidentiality obligation does not require that obligation to be in writing. However, we believe it would be prudent for issuers relying on this exemption to obtain written confidentiality agreements wherever practicable.

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Please feel free to contact any of your regular contacts at the firm or any of the partners and counsel listed under Structured Finance or Capital Markets if you have any questions.


1. SEC Release Nos. 33-9146; 34-63003; IC-29448.
2. NRSROs are specifically excluded from the definition of “investment adviser” in Section 202(a)(11) of the Investment Advisers Act “unless such organization engages in issuing recommendations as to purchasing, selling, or holding securities or in managing assets, consisting in whole or in part of securities, on behalf of others.”