Recent events in the structured finance market have highlighted limitations on the performance of the current Nationally Recognized Statistical Ratings Organizations (NRSROs).

We would like to highlight one area that has not been actively addressed. This is the topic of issuer communication with the NRSROs.

Currently there are two classes of NRSROs.

One class of NRSROs is paid by the issuer to rate its securities and as part of that compensated relationship has access to material non-public information about the issuer.

The other class of NRSRO is paid by subscribers and/or other market participants and generally must rely on publicly available information to conduct its credit analysis. These NRSROs generally have no access to the material non-public information of the issuer.

The existence of two classes of NRSROs, with substantively different forms of information, has limited the transparency of information available to credit market participants. It has also limited competition between the NRSROs in their race to conduct the most accurate and timely credit analysis. As we have seen recently this has significant consequences for the financial markets.

Given the enormous size of the credit markets and their importance to the US and global economy it is crucial that all NRSROs have available as much information as possible. All NRSROs should receive equal access to information necessary to conduct their credit analysis.

This echoes a similar problem in the equity markets during the "internet bubble". This was the issue of preferential access to material non-public information from equity issuers to favored stock analysts. This inequality of access restricted issuer information from flowing into the market and created information asymmetry. This inequality was corrected with the adoption of Regulation Fair Disclosure (Reg FD).

This proposal borrows from the application of broadened disclosure embodied in Reg FD.

We want to thank Professor John Coffee of Columbia Law School for his endorsement for the adoption of “Equivalent Disclosure”. Within his testimony of September 26, 2007 to the Senate Banking Committee he makes the following statement, “Although I doubt that subscription-funded agencies will displace the traditional rating agencies, subscription-funded rating agencies are less conflicted, and they could play an important watchdog role. But such new entrants face barriers, as issuers may not wish to deal with them or disclose sensitive information. Indeed, the issuer may withhold access to non-public information for precisely the same reason that public companies use to withhold data from securities analysts who were skeptical of them: to punish them. Thus, some have sensibly proposed that an equivalent of Regulation Fair Disclosure (“Reg FD”) should be adopted to require “equivalent disclosure” to all NRSROs of any information that is given by an issuer to any NRSRO. “

Equivalent Disclosure
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We propose the adoption of "equivalent disclosure" rules for issuer communications with NRSROs.

Equivalent disclosure would require an issuer, or person acting on its behalf, to disclose material nonpublic information to all NRSROs if it discloses that information to one NRSRO.

The institution of equivalent disclosure would strengthen financial markets by ensuring that all NRSROs have adequate and equivalent information from issuers upon which to base their credit analysis.

We are not proposing that issuers be required to share material non-public information with all market participants as is embodied in Reg FD. We are proposing a more narrow application to the credit markets. Issuer disclosure would be required to all NRSROs that rate securities in the specific asset category (as outlined in the Credit Rating Agency Reform Act of 2006 and the SEC Final Rule) for which the issuer has securities outstanding.

This broadened disclosure will increase the volume of information available to NRSROs and help unbind a market that has relied on the opinions of creditworthiness from a very small group of credit rating agencies.

This proposal does not alter the ability of NRSROs to have any form of business model that they choose. Issuers can continue to pay NRSROs to rate their securities. Issuers may likely continue this practice because of the bundle of services offered by the NRSROs to market participants.

Fitch, Moody's and Standard & Poor's have satisfactory track records in predicting defaults but current events in the credit markets suggest that a broader array of opinions from more NRSROs would be useful for the integrity of the markets. We are currently expecting too much from a small handful of firms to provide timely, aggressive, and consistent credit analysis for the entire universe of fixed income securities.

The Credit Rating Agency Reform Act of 2006 creates a new framework for rating agencies to become NRSROs but the important problem of information asymmetry from issuers to the NRSROs persists. The adoption of equivalent disclosure will go a long way to improve the current shortcomings in the credit markets.

It would beneficial for investors to have a wide variety of NRSROs providing credit analysis. We believe a wealth of credit rating firms will only come about when there is a wealth of information from issuers.

Cate Long

Cate >>> at <<< multiple-markets.com
888-752-0900 - Land
646-242-3751 – Cell

November 15, 2007