Corporate Governance

Including Credit Ratings in Registration Statements

By Harvard Law School Program on Corporate Governance

One of the lesser publicized provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires a registrant to obtain the written consent of a Nationally Recognized Statistical Rating Organization ("NRSRO") in order to disclose in a registration statement or prospectus (or documents incorporated by reference into registration statements or prospectuses) that NRSRO?s credit rating of any class of debt securities, convertible debt securities or preferred stock of the registrant.

Rule 436(a) under the Securities Act of 1933 (the "Securities Act") requires issuers to file consents for portions of reports of expert opinions used in a registration statement or prospectus. Rule 436(g), which was repealed by the Dodd-Frank Act, had provided an exception to Rule 436(a) by providing that credit ratings assigned to a class of debt securities, a class of convertible debt securities or preferred stock by an NRSRO were not considered part of a registration statement prepared or certified by an expert within the meaning of Sections 7 and 11 of the Securities Act. Therefore, prior to the repeal of Rule 436(g), issuers did not need to obtain an NRSRO?s consent in order to provide ratings information in a registration statement or prospectus. In response to the Dodd-Frank Act, certain NRSROs have stated that they will not consent to the use of their ratings in Securities Act registration statements and prospectuses since by doing so it would expose them to potential Section 11 liability for material misstatements or omissions. This position may lead to a decrease in the disclosure of ratings in registered offerings.

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Full post as published by The Harvard Law School Corporate Governance Blog on August 19, 2010 (boomark / email).