03 December 2008

SEC strengthens oversight of Credit Rating Agencies

The new rules will touch upon  possible conflicts of interest, ratings methodologies, and the disclosure of ratings track records, SEC Chairman Cox said. However, they will not include a 'special identifier' for complex securities.

The SEC approved a series of measures to increase transparency and accountability at credit rating agencies, and ensure that firms provide more meaningful ratings and greater disclosure to investors. The rules will touch upon the ‘uncovered serious deficiencies’, such as possible conflicts of interest, ratings methodologies, and the disclosure of ratings track records, SEC Chairman Christopher Cox said.

 

These new rules will promote the goals of the Credit Rating Agency Reform Act of 2006 of improving ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating agency industry.

 

However, the rules do not include the proposal to require ratings of complex securities, such as those underpinned by mortgages, student loans or auto loans, to be distinguished by a special identifier from those for more traditional securities like corporate or municipal bonds.

 

The new rules were subject to consultation since June (see here) and include to ban the rating agencies from advising investment banks on how to package securities to secure favourable ratings. Rating agencies will also be banned from making ratings in cases where the agency made recommendations to the company issuing securities or the investment bank underwriting them concerning the corporate structure, assets or activities of the issuing company. In addition, rating agencies will be required to disclose statistics on all their upgrades and downgrades for each asset type. They also will have to disclose how much verification they performed on the quality of complex securities in determining ratings for them.

 

It is the second set of credit rating agency reforms since the SEC received its new regulatory authority from Congress to register and oversee credit rating agencies. The initial rules were implemented by the Commission under the Credit Rating Agency Reform Act in June 2007.

 

The text will be made public in due course on the SEC website. Deadline for comment is within 45 days after their publication in the Federal Register.

 

Press release

Speech Cox

Fact sheet

 

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