No to Standard Ratings Terms: SEC Staff

Report calls for greater transparency on how credit raters determine grades.

U.S. Securities and Exchange Commission staff recommended against creating identical terms and stress tests for credit-ratings, while supporting greater transparency on how grades are determined.

Given the difficulty with implementing such standards, “the staff believes it would be more efficient to focus on the rulemaking initiatives mandated under the Dodd-Frank Act, which, among other things, are designed to promote transparency,” the agency’s staff said in a report posted today on its website.

The Dodd-Frank financial reform act required the agency to consider requiring the use of the same ratings terms across asset classes that would match a range of default probabilities, and mandating companies including Moody’s Investors Service and Standard & Poor’s to use similar economic assumptions in stress tests.

After inflated credit ratings for risky mortgage bonds were blamed for helping cause the worst financial crisis since the Great Depression, policy makers have been searching for a way to ensure the grades are accurate. Dodd-Frank, which became law in 2010, instructed regulators to stop relying on ratings and increased oversight of the companies that issue them.

In 1936, the Office of the Comptroller of the Currency banned banks from holding bonds that were below investment grade. The SEC began using ratings in its rules in 1975, specifying that the only companies whose grades could be used were S&P, Moody’s and Fitch. Those firms were designated nationally recognized statistical rating organizations, or NRSROs. There are now nine.


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