SEC Proposes New Rules for Credit Rating Industry
 
June 16, 2008
 

In the wake of Moody’s Investors Service’s revelation that it incorrectly rated $4 billion worth of constant proportion debt obligations, on June 11, 2008, the SEC proposed a comprehensive series of credit rating industry reforms that will require enhanced disclosure and regulate business practices and conflicts of interest.

The Credit Rating Agency Reform Act adopted by Congress in 2007 gave the SEC regulatory authority to oversee nationally recognized statistical rating organizations and ensure that they conduct their activities with integrity and impartiality. The new rules, which can be divided into three parts, supplement the original rules implemented by the SEC in June 2007.

The first set of rules, will, among other things:

• prohibit a credit rating agency from issuing a rating on a structured product unless information on the underlying assets was available
• prohibit credit rating agencies from structuring the same products that they rate
• require credit rating agencies to make public their ratings on a structured product and the information used to determine their ratings
• require credit rating agencies to publish performance statistics for one, three and 10 years within each rating category
• require disclosure by the rating agencies of how they rely on the due diligence of others to verify the assets underlying a structured product
• require disclosure of how frequently credit ratings are reviewed; whether different models are used for ratings surveillance than for initial ratings; and whether changes made to models are applied retroactively to existing
  ratings

The second set of rules will require credit rating agencies to differentiate the ratings they issue on structured products from those they issue on bonds, either by using different symbols or by issuing a report detailing the differences.

In addition, the SEC contemplates adopting, in the future, a third set of rules that will be aimed at ensuring that the objective of the ratings in the rules is consistent with helping investors understand the use and limitations of ratings. According to the SEC’s press release, the full text of the rule proposal will be posted to the SEC Web site as soon as possible. Once the proposed amendments are published in the Federal Register, the SEC will accept public comments on the proposed amendments for a 30 day period.

http://www.sec.gov/news/press/2008/2008-110.htm