Corporate Governance

SEC Considering New Rules and Examiners for Credit Rating Agencies

By Jim Hodgson

SEC Chairwoman Mary Shapiro recently told the U.S. House of Representatives Financial Services Committee that the Commission is hard at work revising its oversight role with respect to credit rating agencies.  Specifically, the Commission is considering implementing new rules for the industry and has established a branch of examiners to oversee the conduct of credit rating agencies.

One of the goals of any new regulatory scheme, Shapiro said, would be to limit a company?s ability to ?rate shop.?  That is, the new rules will prevent a company in the process of issuing new debt securities from secretly approaching multiple credit rating agencies until it finds one willing to assign the new issue an acceptable rating.  Instead, an issuer will be required to disclose every agency that ?pre-rates? its securities ? and the rating that each would have assigned.  Such a regime will prevent an issuer?s ability to play one rating agency off of another ? and should thus serve to make the entire ratings process much more transparent.

Although credit rating agencies have long resisted increased scrutiny of their operations, we feel that the time for requiring more fulsome ratings disclosure has come.  These agencies have been widely criticized as significant contributors to the current economic crisis ? doing little to nothing to signal to the market the risk inherent in mortgage-backed securities, for instance.  New SEC regulations and a branch of the Commission tasked with enforcing them appear to be a major step in the right direction toward getting information on investment risk into the hands of the people who most need it ? investors.

Full post as published by PomTalk on July 16, 2009 (boomark / email).