SEC Issues Regs for Credit Raters

New rules stemming from Dodd-Frank require agencies to release more information

Credit-rating companies would have to release more information on how they assess debt securities, ensure the quality of ratings and prevent conflicts of interest under rules proposed by the U.S. Securities and Exchange Commission.

SEC commissioners voted 5-0 to seek comment for 60 days on a 517-page set of regulations, part of the Dodd-Frank Act’s attempt to reshape the role of the credit raters after they were blamed by lawmakers for fueling the housing bubble by handing out top grades on bonds tied to risky mortgages.

“Today’s proposals are part of a concerted effort by the SEC to enhance the credit-rating industry in light of the financial crisis,” SEC Chairman Mary Schapiro said in prepared remarks before commissioners voted in Washington.

Dodd-Frank, the regulatory overhaul enacted in July, sought to force changes in the credit-rating industry after losing bets on debt endorsed by firms such as Moody’s Corp. and McGraw-Hill Cos.’ Standard & Poor’s unit helped topple Lehman Brothers Holdings Inc. and forced the government to bail out firms including American International Group Inc.

The rules, which would apply to the 10 firms registered with the SEC as “nationally recognized statistical rating organizations,” target potential conflicts of interest by barring employees involved in sales and marketing from ratings work. The proposal would give the SEC authority to de-register firms found to have violated the conflict-of-interest rule.


Employee Review
Ratings companies would also be required to review the activities of employees who leave to join firms whose products they have rated, and to notify the SEC when such moves occur.

Outside contractors hired by ratings firms to assess asset-backed securities would have to provide information on their examinations and conclusions, making those reports public for the first time.

SEC Commissioner Kathleen Casey, one of two Republicans on the five-member panel, said some aspects of the proposal “threaten to cross the line into regulating the substance of credit ratings.”

Casey cited as an example a requirement that credit-raters put ratings on review and potentially re-issue them when they find conflicts of interest involving former employees.

The requirement, which would let a firm “apply its own procedures and methodologies to determine whether the credit rating should be revised,” appropriately avoids regulating the substance of ratings, the SEC said in the text of the proposal, which was released after today’s meeting.

SEC commissioners -- under a Dodd-Frank directive to find a more “appropriate” standard to gauge risk -- have proposed stripping references to credit ratings from broker-dealers’ liquidity standards and regulations for money-market funds.

Bloomberg News

 

 

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