April 17, 2000
Mr. Jonathan Katz, Secretary
Securities and Exchange Commission
450 Fifth street, N.W. (6-9)
Re: Selective Disclosure and Insider Trading
(SEC Release Nos. 33-7787, 34-42259, IC-24209) File No. S7-31-99
Dear Mr Katz:
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's"), is pleased to submit this response to the above referenced release (the "Release") proposing new rules concerning the selective disclosure by issuers of material nonpublic information. The proposed Regulation FD (Fair Disclosure) ("Regulation FD") requires that whenever an issuer subject to the reporting requirements of the Securities Exchange Act of 1934 ("Exchange Act") intentionally discloses material nonpublic information to outside parties on a non-confidential basis, it must contemporaneously provide such information to the public; in the event of an unintentional disclosure, public disclosure is required promptly. The Commission's stated purpose in proposing Regulation FD is to reduce those situations where selective disclosure gives an unfair advantage to certain investors privy to the information. The purpose of our comments is to ensure that the Commission makes clear, preferably by a specific exception in the Regulation, that the submission of material nonpublic information to a rating agency by an issuer solely for rating purposes is not selective disclosure that triggers public disclosure obligations under the new rules. Such an exception is not inconsistent with the Commission's goals underlying the proposal and will avoid unnecessarily burdening the ability of rating agencies to obtain information necessary for quality ratings. If the Commission does not specifically except communications with rating agencies from the Regulation, the Commission should explicitly provide that issuers may continue to rely on the confidentiality policies of the nationally recognized statistical rating organizations ("NRSROs") and do not have to obtain specific confidentiality agreements from a rating agency.
As proposed, Regulation FD would require an Exchange Act reporting issuer to make contemporaneous public disclosure whenever it, or a person acting in its behalf, provides an outsider material nonpublic information. Recognizing the variety of legitimate business needs of issuers to communicate nonpublic information outside the company, the Commission acknowledges in the Release that "issuers and their officials may properly share material,nonpublic information with outsiders, when those outsiders agree to keep the information confidential." Proposed Rule 100(b) thus specifically excepts from its public disclosure obligation an issuer who provides material nonpublic information to a person "who has expressly agreed to maintain such information in confidence." The Commission notes in the Release that for purposes of this exception, such agreement would have to encompass the recipient's agreement not to trade on the nonpublic information.
As the Commission knows well, issuers constantly provide Standard & Poor's and the other rating agencies material nonpublic information in connection with our initial rating of issuers or their securities as well as our ongoing surveillance of existing ratings. Indeed, Standard & Poor's believes that having unfettered access to management and information about the issuer contributes substantially to the quality and timeliness of ratings. Pursuant to Standard & Poor's Ratings Services' long-standing internal policies, all nonpublic information provided by or on behalf of the issuer to Standard & Poor's Ratings Services is required to be kept strictly confidential by Standard & Poor's Ratings Services. Even after the rating is made public, any rationale or other information that Standard & Poor's Ratings Services publishes about the issuer will not disclose any nonpublic company information. Standard & Poor's Ratings Services' internal policies specifically prohibit the use of nonpublic information received by Standard & Poor's Ratings Services for any other purpose, or by any third party, including Standard & Poor's other business units. In addition, Standard & Poor's Ratings Services' internal policies contain restrictions on the securities ownership and trading of securities by Standard & Poor's Ratings Services' employees which are designed to protect against trading on inside information as well as to avoid even the appearance of a conflict of interest or impropriety.
Standard & Poor's Ratings Services' internal policies form the basis of our public statements on the treatment of nonpublic information. Standard & Poor's publicly discloses its confidentiality policy in a number of its publications, including our Corporate Ratings Criteria and Financial Institutions Criteria books. As an example, we have attached a copy of the introduction to our Corporate Ratings Criteria book, which is also available on Standard & Poor's website. These publications are also provided to any issuer or market participant on request.
The Commission did not address the submission of material nonpublic information to rating agencies in the Release. We understand this silence to be a clear reflection of the Commission's recognition that the provision of material nonpublic information to a rating agency does not raise selective disclosure concerns. Such disclosures should not trigger public disclosure obligations pursuant to proposed Rule 100. However, particularly in view of queries Standard & Poor's already has received from issuers about application of proposed Regulation FD, we believe it would avoid needless legal uncertainty if the Commission explicitly stated, preferably as an exception in the Regulation, that provision of material nonpublic information to a rating agency solely for rating purposes will not trigger a public disclosure obligation under Regulation FD. Excepting the provision of information to a rating agency from the Regulationwill not jeopardize any of the Commission's goals underlying proposed Regulation FD; disclosures to rating agencies, have never been the source of the Commission's selective disclosure concerns. Indeed, the Commission itself has long recognized the value of rating agencies access to management and issuer information to maintaining and enhancing the quality of ratings. Inclusion of communications to rating agencies within the scope of the Regulation serves no investor protection purpose and can introduce new, unnecessary compliance costs and burdens into the rating process.
If, notwithstanding the foregoing, the Commission adopts Regulation FD in the form proposed, we urge the Commission to explicitly permit issuers to rely on the rating agencies' existing confidentiality policies to meet Rule 100(b)'s confidentiality exception. Proposed Rule 100(b) excepts from Regulation FD's mandated public disclosures information given to a person who has "expressly agreed" to maintain the confidentiality of the information. Standard & Poor's believes it consistent with the purpose of the proposed Rule for the Commission to permit issuers to rely on the existing confidentiality policies of Standard & Poor's and the other NRSROs, rather than requiring the NRSROs to have to enter into a specific confidentiality agreement with each issuer who seeks or has an existing rating. In 1999, Standard & Poor's rated more than 900 issuers' securities. The administrative costs and burdens of entering into individual agreements for each Exchange Act reporting issuer would be considerable and would provide no additional protection to that already effectively provided by Standard & Poor's existing confidentiality and insider trading policies.
In conclusion, Standard & Poor's requests that if the Commission adopts Regulation FD, Rule 100 specifically provides that submission of material nonpublic information to a rating agency for rating purposes does not trigger the public disclosure requirements of Rule 100. If the Commission does not exclude disclosures to rating agencies from the ambit of Regulation FD, we request that the adopting release explicitly state that an issuer may rely on an NRSRO's existing confidentiality policies for purposes of Rule 100(b), and does not have to obtain specific confidentiality agreements from an NRSRO for information transmitted to the NRSRO for rating purposes.
We appreciate having the opportunity to express our views on proposed Regulation FD. We would be happy to discuss our comments with the Commission or the Commission's staff. Please feel free to contact the undersigned (212-438-6262) or Rita Bolger (212-438-6602).
Very truly yours,
/s/ Vickie A. Tillman
Vickie A. Tillman
Executive Vice-President and Chief Rating Officer,
Standard & Poor's Ratings Services
Exhibit to Standard & Poor's letter to the SEC
dated April 17, 2000
Confidentiality. A substantial portion of the information set forth in company presentations is highly sensitive and is provided by the issuer to Standard & Poor's solely for the purpose of arriving at ratings. Such information is kept strictly confidential by the ratings group. Even if the assigned rating is subsequently made public, any rationales or other information that Standard & Poor's publishes about the company will only refer to publicly available corporate information. It is not to be used for any other purpose, nor by any third party, including other Standard & Poor's units. Standard & Poor's maintains a "Chinese Wall" between its rating activities and its equity information services.