August 12, 2011
In a nutshell, if information is not material enough to be required to be included in a prospectus or other offering document (which should be the source of information which is relevant to an investor's ability to make an informed investment decision), then a comparison of such same "non-material" information against comparable "non-material information" that appears in transactions of "similar securities" also would not be relevant to an investor's ability to make an informed investment decision. The following comments propose that the NRSROs should be able to limit their 17g7 representation, warranty and enforcement mechanism comparison reports ("17g7 R/W/EM comparison report") to a comparison of material representation, warranty and enforcement mechanism information, i.e. to the disclosures of the representations, warranties and enforcement mechanism that appear in the prospectus or other offering document for such security.
A prospectus should be the source of material information about an offering so that an investor can make an informed decision.
Due to the lack of regulatory guidance given with respect to the scope of current 17g7 (and proposed 17g7(a)(1)(ii)(N)), the 17g7 R/W/EM comparison report required to be prepared by NRSROs will contain more specificity and detail with respect to representations, warranties and enforcement mechanisms that are contained in a transaction being rated than the disclosure of the same that appears in a prospectus or other offering document for such transaction.
It seems counter-intuitive that the Commission intended that an NRSRO report would be a better source of information for investors with respect to representations, warranties and enforcement mechanisms of a transaction than the prospectus or other offering document for such transaction.
The value of the NRSROs experience (and the 17g7 R/W/EM comparison report) is "the comparison," not the disclosure specific to the transaction being rated. The NRSRO, in its preparation of the 17g7 R/W/EM comparison report, should not be required to provide more specificity and detail about the transaction being rated than is provided in the prospectus or other offering document.
If disclosure of a representation, warranty or enforcement mechanism (or portion thereof) does not appear in a prospectus or offering document, then arguably such information is not material to an investor's ability to make an informed investment decision. And if that is the case, then a comparison of such non-material representation, warranty or enforcement mechanism (or portion thereof) would not be material to an investor's ability to make an informed investment decision. Why would the Commission require NRSROs to prepare a comparison of such information, as well as incur the time and cost in order to do so, if such information was not material to an investor's ability to make an informed investment decision.
The 17g7 R/W/EM comparison required of an NRSRO should be limited to a comparison of material information, i.e. the information contained in the prospectus or other offering document for the transaction being rated.
Such a limitation would also limit the time and cost to the NRSRO for preparing a 17g7 report. Limiting such time and cost to the NRSRO would benefit all participants of a transaction who want to limit transaction costs and reduce the transaction time line. Current 17g7 (and 17g7(a)(1)(ii)(N)), which currently lacks guidance as to the scope of such reports, grossly underestimates the cost and time it will take an NRSRO to comply with such requirements, which will ultimately lengthen the transaction time line.
Limiting the 17g7 R/W/EM comparison required of the NRSRO to the information contain in the prospectus or other offering document would reduce time and cost to NRSROs (and the transaction as a whole), since the NRSRO would only be required to prepare the 17g7 R/W/EM comparison report from information contained in the prospectus or other offering document (which information would be summarized, as opposed to being in the legalese that appears in operative documents, and limited by the materiality granted to the preparers thereof), rather than the NRSRO having to scour all operative documents in search of the relevant information and extract the same (which information would be in legalese and without the benefit of materiality of the prospectus). Note also that the prospectus or offering document is generally prepared by an outside law firm of the underwriter or other transaction participant, and contains information in a more readable form than the legalese that would appear in operative documents. Thus the transaction as a whole has already incurred significant costs to locate and extract such information and present it in a form appropriate for a prospectus.
By permitting an NRSRO to limit its comparison to information contained in a prospectus or other offering document, the NRSRO would be able to benefit from the work product of the outside law firm that prepared such document, rather incur additional time and cost (either internally or of an outside law firm) to extract the same information and present it in a more friendly form and as a result, reduce preparation time (and ultimately the transaction time line) as well as eliminate the need to incur duplicate costs (and thus reduce the overall costs to the transaction).