SEC Rule 17g-5 is Stifling Deal Discussions

August 20, 2011 by · Leave a Comment
Filed under: Bond Regulation, General 

The Securities and Exchange Commission’s Rule 17g-5 was intended to introduce greater transparency and discourage credit ratings shopping. In practice it has made raters and issuers nervous to speak openly.

The rule requires that credit rating agencies share confidential loan-level arranger-provided information with other rating agencies on a password-protected website. Likewise, any verbal conversations, including phone calls and texts, must be recorded and documented on the website.

Rui Pereira, head of U.S. residential mortgage-backed securities at Fitch is quoted by Reuters as saying, “People are so concerned about litigation and risks that the operational review and ratings process has become a lot more complicated…Any questions about a deal must be e-mailed, and sent ahead of time.”

Another senior analyst from a different rating agency told Reuters , “Communication is ridiculous…I call an issuer with a question and he says, ‘I can’t answer that. E-mail that question to me and I’ll get back to you.’ It was so easy in the past. You just get on the phone to discuss it. With 17g-5, you eventually get the information you want, but it takes the longest way to get there.”

Although the rule’s purpose was to promote an equitable flow of information and motivate unsolicited ratings, it hasn’t worked. Since the rule went into effect, no rating agencies have issued an unsolicited rating.

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