SEC Cracks Down on Ratings Agencies

The SEC voted yesterday to formally propose comprehensive rating-agency reforms intended to prevent a future credit crisis, provide greater transparency, and perhaps even promote competition among the seven firms.

SEC Chairman Christopher Cox believes that lapses in the current system of regulation for ratings agencies underscore the need for new reforms globally.

The markets watchdog released its proposals a week after the big three credit rating agencies--Standard & Poor's, Moody's Investors Service and Fitch--agreed to reform their practices with New York state attorney general Andrew Cuomo.

“The events of recent months have had a profound effect on our economy and our markets, and they have galvanized regulators and policymakers not only in this country but around the world to re-examine every aspect of the regulatory framework governing credit-rating agencies,” Cox said yesterday during an open meeting of the SEC to begin discussions on two of the three proposals.

The new rules would apply to the seven credit rating agencies, called Nationally Recognized Statistical Rating Organizations (NRSROs), which include Fitch, Moody's, and Standard & Poor's. Interested parties now have 30 days to comment on the reforms before SEC commissioners take a final vote.

Under the new rules, the NRSROs would be prohibited from issuing ratings on a structured product unless information on assets underlying the product are available. NRSROs would not be able to structure the same products that they rate. Other rules:

• Agencies would have to make public their ratings. The data would be used to compare each credit rating agency’s performance.

• Prohibiting anyone who participates in determining a credit rating from negotiating the fee that the issuer pays for it.

• Prohibit gifts of more than $25 from being accepted by those receiving ratings and those rating them.

• Require statistics to be published every one, three, and ten years.

• Require disclosure of how frequently credit ratings are reviewed; and determine what models are being used.

• Require annual reports from ratings agencies.

• Require public disclosure of information on a credit rating agency to determine a rating on a structured product, including underlying assets.
  

• Require documentation of the rational for any significant out-of-model adjustments.

The second part of the Commission’s proposal would require credit agencies to differentiate ratings on structured products to those they issue on bonds. Symbols or identifiers would be required, to disclose any differences.

The third part of the proposal is to be considered during an open meeting now scheduled for Wednesday.