Monday, July 28, 2008

S&P to the SEC: The best things in life aren't free, and neither is our data!

(FT Alphaville) The ratings agency is none too pleased with the certain aspects of the SEC’s proposals to overhaul the ratings process, and fired off a 33-page letter contending, among other things, that the regulator is overstepping its mandate:

[In] some respects the proposals would, if adopted, exceed the Commission’s constitutional authority, as well as the express limits on Commission authority established by Congress under the Credit Rating Agency Reform Act of 2006.

S&P particularly objects to a proposals that would require credit rating companies to make freely accessible (and free) historical information for which they currently receive a fee. If the proposals are enacted, S&P and its rivals would have six months to submit their historical ratings action to a public database in XBRL format.

Such a requirement would “severely damage” S&P’s “ability to capitalize on and protect its intellectual property” [translation: this would hurt revenues. We need the money. No one’s issuing CDOs these days. You know how it is.]

Rating action data that is six months old continues to have substantial commercial value, and therefore even with the six-month delay contemplated by rule 17g-2(d), a requirement to post rating actions in XBRL format for unrestricted use free of charge by market participants and competitors would severely damage Ratings Services’ ability to capitalize on and protect its intellectual property.

In addition, third parties may own intellectual property rights in data that would be required to be publicly disseminated by the proposed amendment to rule 17g-2(d), and third parties may also have confidentiality and other contract rights that would prevent an NRSRO from publicly disseminating some of the data.

We do not believe that anything in the Credit Rating Agency Reform Act authorizes the Commission to effect a taking of private property without compensation by requiring an NRSRO to distribute a proprietary database of rating actions free of charge and without usage restrictions on the recipients of the database, or authorizes the Commission to require that an NRSRO publicly disclose data in violation of existing agreements, at least where the Commission’s objectives can be accomplished through more narrowly tailored means as required by Exchange Act § 15E(c)(2).

S&P said complying with the proposal would cost the company at $57m initially, and $16m annually to implement, to say nothing of the effect on revenues.

The ratings agency also objected to a separate proposal that would ban ratings analysts from accepting gifts or entertainment worth more than $25 from their clients. Instead, S&P suggested raising the limit to $250. Failing that:

the rule should exempt the receipt of gifts, including entertainment, in connection with normal business activities that are conducted outside of the United States with obligors, issuers, underwriters or sponsors whose principal place of business is outside of the United States.

The purpose of such an exemption (or higher dollar threshold) would be to permit [ratings agencies] with operations outside the United States to conduct their normal business activities in accordance with local business customs.

We can sympathise with that one. Twenty-five dollars isn’t worth much these days - in London, it’ll just about get you a sandwich at Pret and a bottle of water. Maybe.

And one more thing:

We believe it is the Commission’s intent, and would appreciate clarification in the form of guidance in the adopting release, that proposed rule 17g-5(c)(7) does not impose a lifetime limit of $25 on gifts or entertainment provided by obligors, issuers, underwriters or sponsors of rated securities. In other words, if a rating analyst attends ten business meetings with an underwriter over the course of two years, the rating analyst can accept “gifts, including entertainment” worth up to $25 at each such meeting.

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