Rating Agencies Revolt?
Well, that didn’t take long.
With the ink on President obama’s signature on the dodd-Frank bill still wet, the first reper-
cussions of the landmark legislation are becoming evident in the bond market.
the Wall Street Journal reported that a little-discussed provision in the broad-gauge bill was hav-
ing an immediate impact on financial services firms as the three major rating agencies began
refusing to allow their ratings to be used in documentation for new bond sales. “a.M. Best will
not consent to the use of its ratings in registration statements and related prospectuses,” the
oldwick, n.J.-based company said in a statement.
dodd-Frank rescinded Securities and exchange Commission Rule 436(g), which spared
credit-rating agencies the indignity of being from being treated as “experts” under the U.S. Se-
curities act. Why would rating agencies want to be relegated to amateur status? to stay out of
court. With the safe harbor provisions afforded under Rule 436(g) in place, agencies were able
to give their imprimatur with relative impunity. in its absence, rating agencies fear they can be
hauled in front of a judge by aggrieved investors.
Yet, with the role of triple-a-rated toxic assets in the financial crisis still fresh, many say the
rescission of Rule 436(g) is long overdue. Writing in Bnet.com, the CBS interactive Business
network, financial blogger alain Sherter summed it up. “the raters have exploited this safe
harbor for years,” Sherter wrote. “it allows them to pose as experts, like a doctor prescribing
medicine (take a “aaa” rating and call me in the morning), without accepting full legal respon-
sibility for their services. Critics have long pressed the SeC to drop 436(g), and—kudos to
Congress and the SeC—it’s finally happened.”
in the wake of the bill becoming law, rating agencies issued a flurry of statements explicating
their newfound recalcitrance, noting that in addition to greater legal exposure, the law will
hamper their ability to elicit certain information of a material, non-public nature from issuers.
indeed, considering the centrality of the rating agencies to the debt-issuing process, this impasse
has the potential to significantly alter the availability of bonds, a staple of insurers’ investment
portfolios.
not surprisingly, given their exposures, the agencies are now professing caution.
“a.M. Best is carefully examining its current practices in light of the new requirements in the
act and will explore ways to ensure that it can fully meet the needs of the marketplace while
effectively mitigating its risks under the new law,” the company said. “if necessary, a.M. Best
will take additional steps to mitigate any potential risks associated with the new law.”
insurers now need hope that the agencies’ efforts at risk mitigation don’t undermine their
own.
Bill kenealy
Senior editor
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Email: firstname.lastname@sourcemedia.com ll www.insurancenetworking.com
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