The Dude is enthusiastic about his chain of bowling alleys and convinced his IPO will succeed famously. (Section 11 devotees might recall another famous, or infamous, bowling alley company, B & C Bowling Alley Builders, better known as BarChris Construction Corp., see Escott v. BarChris Construction Corp., 283 F. Supp. 643 (S.D.N.Y. 1968)). But the Dude is concerned about credit ratings and, in particular, whether he has to disclose them in the prospectus. What do you tell him?
Dodd-Frank, Section 7, Section 11 and Rule 436(g)
Let’s start with some history. As noted previously, Section 7(a) of the Securities Act lays out the consent requirements and when they apply, while Rule 436 of the Securities Act provides more detail and some exceptions to the consent requirement. One of those exceptions formerly appeared in Rule 436(g), which, until 2010, provided that ratings assigned to securities in a registration statement or prospectus by a rating agency such as S&P, Moody’s or Fitch (technically, a “nationally recognized statistical rating organization” or NRSRO; note that not all credit rating agencies are NRSROs) would not be deemed part of the registration statement or prospectus. This allowed issuers to include credit ratings in registration statements without subjecting the rating agency to Section 11 liability or requiring a written consent from the rating agency.
On July 21, 2010 the Dodd-Frank Act became law. Buried somewhere toward the end, Section 939G repealed Rule 436(g) of the Securities Act. As a result, credit ratings no longer get a pass from Sections 7 and 11, which would suggest that an issuer would need a rating agency’s consent to be named as an expert in any registration statement that includes information about the issuer’s credit ratings. This complicates things: the likelihood that a rating agency would consent to be named as an expert and take on Section 11 liability reminds us of the title of a certain Eagles album.
Is there any credit ratings information that an issuer can include in a registration statement after Dodd-Frank without filing a hellaciously impossible-to‑obtain written consent?
Yes. Shortly after Dodd-Frank was enacted, Latham, together with nine other law firms, put out guidance about the use of credit ratings in the post-Rule 436(g) world, and the SEC Staff followed with C&DI 233.04. The C&DI and the guidance take the position that no consent is required for ratings included to satisfy disclosure obligations. After all, it would seem strange that you could violate the Securities Act by complying with the Exchange Act. This category of ratings – sometimes called “issuer disclosure-related ratings information” – includes disclosure about changes to a credit rating, the liquidity of the company, the cost of funds for a company or the terms of agreements, such as credit agreements or indentures, that refer to credit ratings. It would also include references to ratings in the context of a risk factor discussion (such as the failure to maintain a certain credit rating and its potential impact on the company), as well as discussions of credit ratings in MD&A.What about ratings included in FWPs–is a consent required?
No. An FWP is not part of the registration statement unless the FWP is filed as such. FWPs may therefore include ratings information without the need for consent. See C&DI 233.06. Similarly, ratings could be included in a Rule 134 press release, which is exempted from the definition of “prospectus.”
I’m doing a takedown from an existing shelf that went effective before July 21, 2010 (when Dodd-Frank became law). The base registration statement contains (or incorporates by reference) standalone ratings information that is not tied to any of the categories of disclosure contemplated for disclosure-related ratings. Do I need a consent for unadorned (or “non-disclosure”) ratings information?
No. A company can continue to use a pre-Dodd-Frank registration statement without regard to any information about ratings included or incorporated by reference until the next post-effective amendment. However, that relief would not apply if a new prospectus supplement filed under Rule 424(b) contains non-disclosure based ratings information. In addition, bear in mind that the filing of a company’s Form 10-K is deemed to be a post-effective amendment for purposes of updating the prospectus under Securities Act Section 10(a)(3), so most companies were able to continue to use their pre-Dodd-Frank registration statements until they filed their next 10-K. If that 10-K includes ratings information (other than disclosure based ratings information), then the 10-K must be accompanied or preceded by the filing of the appropriate consents. Remember, though, a rating agency will not consent to be named as an expert, so in practical terms, the 10-K cannot include any ratings information unless it is disclosure-related.
What about a new shelf?
Since consents from rating agencies are not likely to be forthcoming, the ratings information included (or incorporated by reference) in a new shelf will have to be disclosure-related.
For a discussion of auditor consents and shelf takedowns, see this WoW.