26 June 2008

SEC to reduce its over-reliance on ratings

The SEC will reduce its reliance on credit ratings, including proposing to eliminate a requirement that money market funds hold highly-rated securities.

Complementing the decisions already taken on 11 June (see here), the SEC focused its third part of rulemaking on Credit Rating Agencies on the way the Commission's own rules refer to and rely upon credit ratings.

The SEC examined the references to credit ratings in 44 rules and forms. The SEC staff recommended changes to 38 of them. Specifically, they are recommending the complete elimination of any reference to credit ratings in 11 rules and forms. They are recommending the substitution of a standard based on a more clearly stated regulatory purpose or other concept in 27 rules and forms. And they are recommending leaving the reference unchanged in 6 rules and forms.

“Several of our regulations implicitly assume that securities with high credit ratings are liquid and have lower price volatility”, SEC chairman Cox said. “But since structured finance products can be very different from other rated instruments in these respects, there is good reason for us to examine the precise way that credit ratings are used in our rules as a surrogate for measurements of liquidity and volatility.”

The FSF criticised the official recognition of credit ratings for a variety of securities regulatory purposes that may have played a role in encouraging investors' over-reliance on ratings.

The votes were 3-0 at a public meeting to propose and open to public comment for 60 days the rule changes related to the role of credit rating agencies and to U.S. investors trading overseas. The new rules could be formally adopted sometime afterward.

Full statement Cox

Webcast of the meeting

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