April 27, 2000
Submitted Via Electronic Mail
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: File No. S7-31-99
Release Nos. 33-7787, 34-42259, IC-24209
Proposed Rule: Selective Disclosure and Insider Trading
MS Word Document (Version 2000)
Ladies and Gentlemen:
This letter is submitted by MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") in response to the request of the Securities and Exchange Commission ("Commission") for comments on proposed Regulation FD, which addresses concerns about selective disclosure of material nonpublic information. Specifically, MOODY'S requests that, if the Commission determines to adopt Regulation FD, it add a specific exemption to Rule 100 or include language in the adopting release recognizing that rating organizations regularly receive and use nonpublic information in the rating process and may continue to do so.
MOODY'S and the Rating Process
Since 1909, MOODY'S has published rating opinions on the creditworthiness of securities issuers. These ratings provide a useful tool to investors in their analysis of investment opportunities. In order to formulate an opinion as to the credit risks applicable to an issuer, MOODY'S looks at factors such as industry characteristics, technology, management policies and performance, profitability, regulatory trends, capital structure, and business fundamentals. In order to obtain this information, MOODY'S reviews public financial information, including registration statements and other periodic reports filed with the Commission. In addition, MOODY'S often receives information directly from issuers, such as earnings forecasts, financing plans, intended shifts in business or product lines, and planned capital expenditures, and frequently meets with representatives of issuers, and their advisors, to consider such information.
Some of the information provided to MOODY'S by issuers may be material and nonpublic. For example, management may discuss detailed plans for future business changes, including proposed divestitures and acquisitions, product modifications, and financing needs. Issuers provide this nonpublic information with the understanding that it will be used solely in order to evaluate and express an opinion on the issuer's creditworthiness. Accordingly, MOODY'S regularly receives and uses nonpublic information in the rating process with the understanding that it will be used only in the process of developing its rating opinion.
MOODY'S has adopted policies that prohibit the misuse of any nonpublic information obtained during the rating process. For example, the policies of The Dun & Bradstreet Corporation, MOODY'S parent, and MOODY'S instruct employees that all nonpublic information received during the course of performing their jobs is confidential and should not be discussed with family or acquaintances or in public places, but rather should only be divulged to other employees who need that information to carry out their business responsibilities. Furthermore, MOODY'S employees may not trade a security while in possession of nonpublic information regarding the issuer and must wait three days following the public disclosure of any nonpublic information before trading that security. These trading restrictions also apply to employees' family members and others living in the household of an employee.
Indeed, the Commission has recognized that, as part of the rating process, rating organizations have "contacts with the management of issuers, including access to senior level management of the issuers." 1 In its proposed rule to define the term nationally recognized statistical rating organization ("NRSRO"), the Commission not only recognizes that NRSROs have extensive contact with issuer management, but also considers such contacts an essential attribute for such organizations. The same proposed rule states that in determining whether to designate a NRSRO the Commission will evaluate the rating agency's "internal procedures to prevent misuse of nonpublic information and compliance with these procedures." This factor is assessed today when the Commission designates a NRSRO through the no-action letter process.2 Thus, the Commission clearly has recognized that rating organizations obtain nonpublic information in connection with the rating opinion process.
MOODY'S also takes steps to assure that its rating opinions on all public and 144A securities are publicly disseminated through a press release. Only the issuer receives information regarding the ratings prior to the press release and then only to review the release for accuracy of the factual statements.
The Impact of Regulation FD on the Rating Process
Proposed Regulation FD does not appear to adequately recognize the role of nonpublic information in the rating process. As drafted, the rule may discourage issuers from sharing nonpublic information with rating organizations, as it requires issuers to publicly disclose any material nonpublic information that is shared with persons outside the issuer. Accordingly, prior to disclosing any nonpublic information to rating organizations, issuers would have to evaluate its materiality. Since determining materiality is a complex, qualitative analysis that requires issuers to evaluate all relevant circumstances,3 the proposed rule would hamper access to nonpublic information by rating organizations.
While Rule 100(2)(b) of proposed Regulation FD contains exceptions to the simultaneous public disclosure requirement for disclosure to "a person who owes a duty of trust or confidence to the issuer" and "a person who has expressly agreed to maintain such information in confidence",4 these exceptions do not accord with rating organization procedures or with the independent role of rating agencies as publishers of creditworthiness opinions. A rating agency, as an independent publisher of opinion, is not in an advisory or fiduciary relationship to issuers. Its independence is critically important to our financial markets. Thus, while Moody's has strong confidentiality protections in place that prohibit it and its employees from using selectively disclosed information to trade or tip, it is not in a duty relationship to issuers. The rating agency's role is analogous to that of a newspaper or magazine publisher, not to the role of a legal or financial advisor.5
Finally, although issuers provide nonpublic information to MOODY'S with the understanding that it will remain confidential and only be used in the rating process, we do not enter into formal confidentiality agreements except in unusual circumstances. As discussed above, MOODY'S has enacted policies that prohibit the misuse of the nonpublic information it obtains during the rating process so formal agreements with each individual issuer are not necessary. In addition, at the end of 1999, MOODY'S had outstanding ratings on approximately 100,000 different corporate obligations and assuring that it signs a confidentiality agreement with each issuer would be incredibly onerous.
Proposed Course of Action
In light of the foregoing, MOODY'S requests that if the Commission decides to adopt Regulation FD, the Commission add a specific exemption to Rule 100 providing that receipt and use of material nonpublic information by rating organizations6 does not violate the rule. MOODY'S and other rating organizations provide a valuable service to the securities markets which would be severely hampered if issuers could not share material nonpublic information in the rating process without fear that it would have to be simultaneously disclosed to the entire market. The Commission has recognized both the value of NRSROs ratings and the importance of access to nonpublic information in the ratings process.
If the Commission determines not to include such an exemption in Regulation FD, the adopting release should include language making it clear that disclosure by an issuer (or a person on its behalf) to MOODY'S and other rating organizations does not give rise to the obligation to make public disclosure under Regulation FD. At a minimum the release should make clear that issuers are not required to enter into confidentiality agreements with a rating agency when they give it nonpublic information in connection with the rating process.
Should you have any questions or need additional information with respect to any of the comments set forth above, please contact the undersigned at (212) 553-1912.
Very truly yours,
John J. Goggins
Vice President and Associate General Counsel
MOODY'S INVESTORS SERVICE, INC.
|cc:||Commissioner Arthur Levitt
Commissioner Norman S. Johnson
Commissioner Isaac C. Hunt, Jr.
Commissioner Paul R. Carey
Commissioner Laura S. Unger
David M. Becker, General Counsel
David B. H. Martin, Jr., Director, Division of Corporation Finance
Richard H. Walker, Director, Division of Enforcement