Rating Agencies Revolt?
Insurance Experts' Forum, July 23, 2010
Well, that didn’t take long.
With the ink on President Obama’s signature on the Dodd-Frank bill still wet, the first repercussions of the landmark are becoming evident in the bond market.
Yesterday, the Wall Street Journal reported that a little-discussed provision in the broad-gauge legislation is having a major impact as the three major rating agencies are 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. 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Dodd-Frank rescinded Securities and Exchange Commission Rule 436(g), which spared credit-rating agencies the indignity of being from being treated as “experts” under the U.S. Securities Act. Why would rating agencies want to return their amateur status? To stay out of court. With the safe harbor provisions afforded under 436 (g) in place, agencies were able to give their imprimatur with relative impunity. In its absence, rating agencies fear they can be hauled into court by aggrieved investors.
Yet, with the role of triple-A rated toxic assets in the financial crisis still fresh, many say the rescission of 436(g) is long overdue. Writing in BNET, 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 responsibility 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 is a senior editor with Insurance Networking News.
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