A roundtable convened yesterday by the Securities and Exchange Commission engendered a debate on the role of credit ratings and future of those agencies whose job it is to rate the debt of the country’s financial firms. Through the numerous voices and opinions heard on the topic of credit ratings, SEC chairman Mary Schapiro made clear that changes are coming in the way credit ratings agencies are regulated.
The six-hour roundtable consisted of four separate panels, with about 25 total participants in addition to Schapiro and the SEC’s other four commissioners. Topics addressed included the failures of ratings agencies in the months leading up to the market crash, competition issues between agencies, and potential revisions to the ratings structure.
“Clearly, the role of credit rating agencies must be an area for our intense review as we think about how to promote investor protection and market integrity, and restore confidence in our financial system,” said Schapiro in her opening remarks.
One key problem identified by some participants was the inherent structure of the current ratings system, by which agencies are paid by the firms whose debt they rate. Some argued that the SEC regulate a return to the pre-1971 system by which investors themselves paid the ratings agencies, thus avoiding a conflict of interest.
Another idea put on the table was that of establishing an individual regulator to control ratings agencies, similar to the Public Company Accounting Oversight Board (PCAOB).
One issue of fervent debate was that of the market dominance held by the “Big Three” ratings agencies—Moody’s, Standard & Poor’s, and Fitch. Sean Egan of Egan-Jones Ratings complained that the larger ratings firms were too swayed by the financial interests of the their clients.
“[Big agencies] have gravitated to the business of being paid by the issuers of securities to facilitate the sale of those securities,” said Egan. “If the SEC is in the business of protecting investors, it has to make sure that its agents are also protecting investors. We don’t have that right now.”