Business Law Society

Mass. AG Martha Coakley recently wrote to SEC Chairman Schapiro to complain about the SEC staff’s decision not to sue issuers for failing to include disclosure of credit ratings in their prospectuses. The reason for the SEC position is that section 939G of the Dodd-Frank Act effectively requires issuers that rely on outside credit ratings to treat the rating agencies as “experts” for liability purposes. To facilitate such disclosure by asset-back issuers (for whom credit ratings are critical), SEC Rule 436(g) had exempted the agencies from “expert” status, but Dodd-Frank Section 939G vacated that provision. Credit rating agencies, correctly perceiving that being treated as experts would increase their litigation risk, have refused to allow their ratings to be used in issuers’ offering documents. The SEC has agreed not to sue asset-backed issuers that violate the SEC rule. AG Coakley is annoyed. But why? Why doesn’t AG Coakley sue the issuers herself for violating the SEC rule? Do state securities laws allow issuers to violate SEC rules? Does the SEC’s no-enforcement position tie her hands? Can investors still bring private lawsuits on the ground that the issuers’ prospectuses were materially misleading?

Hey, S.E.C., That Escape Hatch Is Still Open (3/5/11)

Mass. AG Coakley letter to SEC Chair Schapiro 3.1.11

Bingham client memo

SEC No-Action Letter

Rule 436

Text of Dodd-Frank Section 939G:

SEC. 939G. EFFECT OF RULE 436(G).

Rule 436(g), promulgated by the Securities and Exchange Commission under the Securities Act of 1933, shall have no force or effect.