11 June 2008

SEC proposes new rules on CRAs

The approved package regulates the conflicts of interests, disclosures, internal policies, and business practices of CRAs and requires them to differentiate the ratings they issue on structured products from those they issue on bonds.

The SEC voted to formally propose a comprehensive series of credit rating agency reforms to bring increased transparency to the ratings process and curb practices that contributed to recent turmoil in the credit markets.

 

The approved package sets out rules that would regulate the conflicts of interests, disclosures, internal policies, and business practices of credit rating agencies. It also requires credit rating agencies to differentiate the ratings they issue on structured products from those they issue on bonds.

 

The proposed rules intend to prohibit a credit rating agency from issuing a rating on a structured product unless information on assets underlying the product were available. They would also prohibit credit rating agencies from structuring the same products that they rate, and requires CRAs to make all of their ratings and subsequent rating actions publicly available.

 

Further issues intended by the package:

• The proposed rules prohibit anyone who participates in determining a credit rating from negotiating the fee that the issuer pays for it.
• They would prohibit gifts from those who receive ratings to those who rate them, in any amount over $25.
• They would require credit rating agencies to publish performance statistics for 1, 3, and 10 years within each rating category, in a way that facilitates comparison with their competitors in the industry.
• They would require disclosure by the rating agencies of the way they rely on the due diligence of others to verify the assets underlying a structured product.
• They would require disclosure of how frequently credit ratings are reviewed; whether different models are used for ratings surveillance than for initial ratings; and whether changes made to models are applied retroactively to existing ratings.
• The new rules would require credit rating agencies to make an annual report of the number of ratings actions they took in each ratings class, and they would require the maintenance of an XBRL database of all rating actions on the rating agency's web site. That would permit easy analysis of both initial ratings and ratings change data.
• The rules would require the public disclosure of the information a credit rating agency uses to determine a rating on a structured product, including information on the underlying assets. That would permit broad market scrutiny, as well as competitive analysis by other rating agencies that are not paid by the issuer to rate the product.
• And they would require documentation of the rationale for any significant out-of-model adjustments.

 

A third part of the recommended rules package will be considered on 25 June and will consider whether to reform the SEC's rules that make explicit reference to credit ratings, so as to provide a more thorough description of the basis for the SEC's use of ratings as a surrogate for compliance with various regulatory conditions and requirements.

 

Press release

Statement Cox

Webcast of the meeting

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