Home / News / Government / SEC Adopts New Rules for Credit Rating Agencies
Print This Post Print This Post

SEC Adopts New Rules for Credit Rating Agencies

Last week, the ""Securities and Exchange Commission"":http://www.sec.gov (SEC) approved its final rules for credit rating agency reform. The commission is calling for changes to the practices of credit ratings agencies because it says agencies' ratings of securities that were backed by subprime mortgage loans ""contributed to the recent turmoil in the credit markets.""
Testifying at a congressional oversight hearing back in October, Raymond McDaniel, CEO of ""Moody's Investors Service"":http://www.moodys.com, said the three major ratings agencies - Moody's, ""Standard & Poor's"":http://www.standardandpoors.com, and ""Fitch Ratings"":http://www.fitchratings.com - got caught up in a race to the bottom, forced to lower their standards in an attempt to maintain their market share, just to survive.
Deven Sharma, president of Standard & Poor's, also acknowledged the negative impact agencies' failure to correctly identify risk may have had on the current economical crisis. ""Let me state upfront that we recognize that many of the forecasts we used in our ratings analysis of certain structured finance securities have not been borne out,"" Sharma told lawmakers. ""We have reflected on the significance of these events and are committed to doing our part to enhance transparency and confidence in the markets.""
Only recently did credit rating agencies become subject to SEC oversight. For years, the SEC had sought unsuccessfully to have credit rating agencies voluntarily register with the federal supervisory body. In 2007, Congress passed a statute empowering the SEC to adopt rules regulating credit rating agencies, similar to the way it oversees institutional investors.
An SEC report released in July found ""serious shortcomings"" in the practices at the three major ratings agencies. Among the problems cited by the SEC report were a lack of disclosure on conflicts of interest and a lack of oversight for such conflicts.
Moody's, S&P, and Fitch, which rate financial securities on the risk that they won't be paid off, prospered while they helped lead the country into a spiraling economical downturn, according to ""U.S. Representative Henry Waxman (D-California)"":http://www.house.gov/waxman, chairman of the House Oversight and Government Reform Committee. Waxman noted that the three primary agencies saw their revenues double between 2002 and 2007 to $6 billion. Widely criticized for their role in the subprime mortgage debacle of the time, credit ratings firms now face significant changes aimed at stemming conflicts of interest within the industry.
The new SEC rules, which would require compliance by the agencies within 60 days from publication in the Federal Register, are intended to improve disclosure and stop the practice of corporations ""buying"" favorable ratings. One significant reform includes prohibiting credit raters or affiliates from rating their own work - meaning a security on which the ratings agency also advises, underwrites, or sponsors.
The reforms would also require ratings agencies to provide the SEC with an annual report of credit actions, such as downgrades or upgrades. The SEC has proposed requiring the agencies to disclose the histories for all current credit ratings. If that measure is adopted, it would apply only to ratings paid for by issuers such as banks. The SEC also revived a proposal that would prohibit agencies from issuing a rating for a structured finance product unless the information is also available to the other rating firms.
However, the SEC decided to delay a vote on a stipulation that would differentiate structured finance products, omitting a component within the proposed rules that would have imposed different ratings symbols for structured finance versus other investment products, such as corporate bonds. The COO of the ""Mortgage Bankers Association"":http://www.mbaa.org (MBA), John A. Courson, said the move was an important step to promote stability and stimulate recovery within the crippled credit markets.
""MBA has worked extensively with legislators and the SEC to help them understand why different ratings systems for structured finance products and ratings for other asset classes, such as corporate and municipal bonds would only increase confusion and fuel the continued disruption to secondary market transactions,"" Courson said.
""Structured finance transactions remain and will continue to serve as a vital segment of the capital markets and the success or failure of a securitization is attributable to the quality of its underlying assets, not its structure. We are grateful to the SEC for recognizing that the perceived benefits associated with a unique structured securities identifier would be more than offset by the resultant market uncertainty and implementation costs such a proposal would have invoked,"" added Courson.
In additional SEC news, rather than suspending the controversial mark-to-market accounting rule, which requires writedowns of performing loans based on the last sale of similar assets within the marketplace, the SEC is planning to refine the rule's application, according to a recent report by %{=font-style: italic}The Wall Street Journal%. Congress has ordered the SEC to complete a study on the rule, but the %{=font-style: italic}Journal% said that new guidance on applying the rule likely won't be included in the study. Lobbyists for the banking industry have been urging the SEC to allow greater flexibility in applying the rule, which many say has also been a strong contributor to the financial meltdown.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

Check Also

Are Negative Interest Rates Possible in the U.S.?

Commentary from The Wall Street Journal questions whether interest rates in the U.S. could fall ...


Featuring daily updates on foreclosure, REO, and the secondary market, DS News has the timely and relevant content you need to stay at the top of your game. Get each day’s most important default servicing news and market information delivered directly to your inbox, complimentary, when you subscribe.