Rules governing rating agencies are hampering the flow of information in transactions and hurting rather than helping the cause of transparency.Speaking at the American Securitisation Forum this week, representatives of both banks and the rating agencies noted that their conversations have become more constrained by new reporting requirements implemented last June under the US Securities Exchange Commission’s (SEC) Rule 17g-5.
“It’s changing the flow of information, so it’s changing discussions with the issuers and the bankers,” said Fitch senior managing director Douglas Murray, “because anything you say to them outside the package has to be published.”
Murray said that cautiousness on behalf of the clients is complicating relatively simple things like engagement letters, which now pose potential disclosure problems at the most sensitive stage of a transaction.
Amendments to rule 17g-5 require structured finance issuers to post all communications with the rating agencies on their websites. This was designed to increase the transparency of information used to rate deals, allowing other rating agencies to review the terms.
Morgan Stanley structured solutions and securitisation head, David Moffitt, expressed similar experiences with Rule 17g-5.
“From our discussions with the rating agencies it’s had a chilling effect on the free flow of information, which is an exact opposite of the intended consequences,” Moffitt said.
With the fear of public disclosure at odds with the rating agencies’ need for information, he said the rule could potentially harm their ability to accurately rate products.
Murray added that the disclosure rules affect his industry’s ability to protect trade secrets.
“There are concerns on our side that some of the new entrants into the credit rating agency’s space will have a little roadmap,” he explained, “so we’re not crazy about that part.”