From the October 2009 issue of Treasury & Risk magazine

New Rating Agency Rules Fall Short, Critics Charge

The Securities and Exchange Commission (SEC) is taking steps to rein in credit rating agencies after the agencies' assessments of structured securities were cited as one of the factors in last year's financial meltdown. But critics question whether the new rules the SEC approved in September will make much difference in the way credit raters go about their business.

The SEC mandated more transparency from rating agencies, ranging from a requirement that they make the history of their ratings freely accessible to rules that they disclose more about compliance efforts, about limitations on the scope of their ratings, and about "ratings shopping." The rating agencies will also need to disclose more information about possible conflicts of interest.

Brian Kalish, director of the finance practice at the Association for Financial Professionals (AFP) calls the SEC's recent actions "little steps," adding that "we just don't think it's really getting us anywhere. They're talking about disclosing conflicts of interest, we think the focus should be on eliminating conflicts of interest." AFP has called for restructuring the business so the agencies are supported by transaction fees, rather than fees paid by issuers.

After Enron's meltdown exposed the raters to criticism earlier in the decade, the SEC had moved to increase competition by awarding the designation of nationally recognized statistical rating organization (NRSRO) to more companies. There are now 10 NRSROs, but the big three--Moody's, Standard & Poor's and Fitch Ratings--still control the bulk of the business.

Lawrence White, an economics professor at New York University's Stern School, cited another SEC change that aims to further increase competition by requiring that issuers of structured finance products provide any rating agency that requests it with the information necessary to rate the products. "That might make a little bit of a difference," White says. "But for the most part this is sort of nibbling around the edges."

He notes, though, that after the beating the rating agencies took in the press over the last year, they have begun taking action on their own to increase transparency and signal their awareness of conflicts of interest.

Of course, the SEC isn't the only government body that has the rating agencies in its sights. There are bills related to the ratings agencies pending in Congress, but the focus on healthcare suggests that such legislation might sit on the shelf for quite some time.


Pension Funding Continues To Slide

The stock market's revival has not been enough to mend ailing defined-benefit pension plans. While the S&P 500 index posted a 3.4% rise in August, its sixth monthly increase in a row, pension plan funding took another hit.

A survey of 100 of the biggest U.S. pension plans by actuarial firm Milliman found their funding declined in August for the fourth month in a row, as a $26 billion increase in the plans' liabilities overshadowed a $14 billion rise in their assets. The liabilities growth is being driven by declines in interest rates, which boosts the cost of the plans' promises to future retirees.

Milliman estimates the plans' averaged funded status stood at 75% at the end of August, down from 100.3% a year earlier.


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