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SEC Amends Regulation FD to Remove Exemption for Disclosures to Rating Agencies

Effective October 4, 2010, the Securities and Exchange Commission issued a final rule amending Regulation FD to remove the specific "safe harbor" exemption for disclosures of material, non-public information to nationally recognized statistical rating organizations and credit rating agencies for the purpose of determining or monitoring credit ratings. This amendment implements Section 939B of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"). Prior to the amendment, Regulation FD included an exemption available for material, non-public disclosures made to nationally recognized statistical rating organizations or credit rating agencies solely for the purpose of "determining and monitoring" credit ratings.  

The ultimate impact of this amendment is unclear. Credit rating agencies are not among the enumerated categories of persons covered by Regulation FD. They would be covered only if they also were engaged in activities in one of the covered categories such as providing investment advice to persons trading in securities or managing securities on behalf of others. In addition, even if credit agencies were to engage in activities which would bring them within a covered category, the existence of a confidentiality agreement between a company and these agencies would exempt such communications from Regulation FD under the separate confidentiality agreement exemption. However, it has been reported that companies' attempts to secure stand-alone confidentiality agreements and thus be certain that Regulation FD does not apply have been resisted by these agencies which argue that the stand-alone confidentiality agreements are unnecessary because of the agencies' internal confidentiality policies. 

The elimination from Regulation FD of the exemption for credit rating agencies is the latest in a series of regulatory changes that have impacted credit ratings agencies. Prior to the amendment of Regulation FD, one such regulatory change was the Dodd-Frank Act's repeal of Rule 436(g), which had exempted nationally recognized statistical rating organizations, such as Standard & Poor's Rating Services and Moody's Investors Services, from being considered "experts" if an agency's ratings of a company's securities were disclosed in, or incorporated by reference into, such company's prospectus or registration statement. With the Rule 436(g) exemption eliminated, the securities laws generally require companies to file an agency's consent before such ratings may be included in, or incorporated by reference into, such filings, except in certain limited circumstances. Because consenting "experts" are subject to heightened liability, credit agencies have thus far refused to consent to the use of their ratings.  

Update — SEC Stays Proxy Access Rules

On Monday October 4, 2010, the Securities and Exchange Commission announced that it would postpone the implementation of the new proxy access rules. This delay in the implementation of the new rules follows a legal challenge filed September 29 by the U.S. Chamber of Commerce and the Business Roundtable against the SEC. The petition argues that the proxy access rules were created without a proper assessment of the rules' impact on "efficiency, competition and capital formation," and that the SEC erred in appraising the costs that the rules would impose. The legal action also alleges that, in creating the proxy access rules, the SEC arbitrarily and capriciously estimated how often proxy access will be used, which in turn resulted in an inaccurate cost-benefit analysis. Finally, the petition states that the proxy access rules interfere with state law, particularly that of Delaware. The petition notes that even though a majority of public companies in the United States are incorporated in Delaware, the new proxy access rules would supersede Delaware law that specifically addresses shareholder access to the proxy for director nominations. For questions or more information, contact one of the members of the firm's Securities/SEC Practice Group including:

Lewis U. Davis, Jr. — 412 562 8953;
Jeremiah G. Garvey — 412 562 8811;
Jennifer R. Minter — 412 562 8444;
Brian S. North — 215 665 3828;
Brian S. Novosel — 412 562 5266;