May 23, 2011
Securities Law Alert
Author(s): John C. Partigan
This Securities Law Alert provides practical tips for meetings with credit rating agencies after Dodd-Frank.
Do you need to have a confidentiality agreement in place prior to meeting with a rating agency?
The practical answer, for business reasons and to avoid potential compliance issues under Regulation FD, is that such an agreement is advisable. Moody’s and S&P will take the position that a confidentiality agreement is technically not needed because the rating agency, like the news media, is not included on the list of enumerated persons covered by Regulation FD (i.e., broker-dealers and their associated persons, investment advisers, certain institutional investment managers and their associated persons, investment companies, hedge funds and their affiliated persons, and any security holder or person for whom it is reasonably foreseeable that such person would buy or sell company securities on the basis of the information disclosed). On the other hand, since the SEC amended Regulation FD on September 29, 2010, to remove the express exemption for credit rating agencies as required by Section 939B of the Dodd-Frank Act, it would not be unreasonable for counsel to assume that Congress (if not the SEC) intended this change to have some purpose. By entering into a confidentiality agreement, the disclosure by the company to the rating agency of material nonpublic information would be covered by a separate exemption for disclosures to persons who agree to maintain confidentiality. Also, having a confidentiality agreement in place avoids the need for the company to seek assurances from the rating agency that it is not a covered person.
Do the rating agencies have an appropriate form of confidentiality agreement?
Both Moody’s and S&P have included confidentiality obligations in their standard terms and conditions that are designed to address the issuer’s policies with respect to Regulation FD. The confidentiality obligations can either be included in an addendum to an existing rating application or a new rating application (including these terms and other updates). The full set of new and existing terms and conditions should be reviewed and compared before deciding whether to sign an addendum or a new rating application.
How is “Confidential Information” defined by the rating agencies?
Moody’s and S&P define “Confidential Information” to include both written and verbal information regarding the company or its securities that is furnished to the rating agency by the company or its authorized agents or advisors in connection with the provision of ratings services. Moody’s currently requires that it has “received written notice specifically indicating the proprietary and confidential nature of the information.” S&P currently requires the company to, “in a specific and particularized manner, have marked or otherwise indicated in writing (either prior to or promptly following such disclosure) that such information is ‘Confidential.’” These written notice and marking requirements create some practical difficulties that need to be addressed in preparing for a meeting with these rating agencies.
What steps should be taken before, during, and after the meeting to maintain confidentiality?
Projections and other documents containing material nonpublic information should be marked in writing as Confidential. In addition, the Moody’s form would appear to require a written notice specifying the proprietary and confidential nature of the information. It may be possible to protect verbal statements (such as answers to questions raised by the rating agency’s staff at the meeting) in a number of ways, including (i) obtaining questions in advance, and identifying in writing that management’s answers to these questions (or certain of them) will contain confidential information; (ii) scripting management’s presentation for the meeting, identifying in writing the script as confidential, and sticking to the script; and (iii) carefully monitoring management’s statements made at the meeting, and providing prompt written notice following the meeting of any material nonpublic information that is disclosed in response to questions.
Although others have commented that the removal from Regulation FD of the exemption for entities whose primary business is the issuance of credit ratings should not have a significant impact on how companies deal with credit rating agencies, the level of advance preparation required, and the compliance burden of monitoring what is disclosed at the meeting and deciding what additional notices may be required after the meeting is completed, is certainly higher for many companies than it was before the amendment became effective on October 4, 2010. These additional compliance burdens, which are largely the result of the written notice and marking requirements currently proposed by the rating agencies, have the potential to impede the exchange of information at company meetings with credit rating agencies.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.