SEC Finalizes Tougher Rating Agency Rules
The SEC on Wednesday adopted new rules for credit rating agencies that address problems which allegedly contributed to the failure of corporate credit unions.
The new rules, which will enhance governance, protect against conflicts of interest and increase transparency to investors, aim to prevent allegations that form the basis of the NCUA’s lawsuit against Standard & Poors. That suit alleges S&P purposely misled corporates when rating mortgage backed securities and collateralized debt obligations for credit risk.
“This expansive package of reforms will strengthen the overall quality of credit ratings, enhance the transparency of credit rating agencies and increase their accountability,” SEC Chair Mary Jo White said in a release. “Today’s reforms will help protect investors and markets against a repeat of the conduct and practices that were central to the financial crisis.”
The new requirements for nationally recognized statistical rating organizations address internal controls, conflicts of interest, disclosure of credit rating performance statistics, procedures to protect the integrity and transparency of rating methodologies, disclosures to promote the transparency of credit ratings, and standards for training, experience, and competence of credit analysts. The requirements provide for an annual certification by the CEO as to the effectiveness of internal controls and additional certifications to accompany credit ratings attesting that the rating was not influenced by other business activities, the release said.
The Commission also adopted requirements for issuers, underwriters and third-party due diligence services to promote the transparency of the findings and conclusions of third-party due diligence regarding asset-backed securities.
Certain amendments will become effective 60 days after publication in the Federal Register. The amendments with respect to the annual report on internal controls and the production and disclosure of performance statistics will be effective on Jan. 1, 2015, which means that the first internal controls report to be submitted by an NRSRO would cover the fiscal year that ends on or after Jan. 1, 2015, and the first annual certification on Form NRSRO relating to performance statistics is required for the annual certifications filed after the end of the 2015 calendar year.
The SEC also said the following provisions are effective nine months after publication in the Federal Register: Prohibiting the sales and marketing conflict; addressing look-back reviews to determine whether the credit analyst’s prospects of future employment influenced a credit rating; requiring the disclosure of rating histories; addressing rating methodologies; requiring the form and certification to accompany credit ratings; addressing issuer and underwriter disclosure of third-party due diligence findings; addressing the certification of a third-party due diligence provider; addressing NRSRO standards of training, experience, and competence; and addressing universal rating symbols.
This period is intended to provide time for NRSROs, issuers, underwriters, and providers of third-party due diligence services to prepare for the changes resulting from the new requirements.
Americans for Financial Reform, a Washington-based coalition of more than 200 civil rights, consumer and other groups, said in a release the rule on investor disclosures with regard to asset-backed securities will improve the availability, quality, and accessibility of loan-level data to investors in registered securities.
“However, much remains to be done to address the problems and abuses revealed in the securities markets during the financial crisis,” the AFR said in the release. “The fundamental business incentives of credit rating agencies continue to encourage ratings inflation. This means that the broad requirements in this new rule must be strictly enforced to be effective, and the SEC must be vigilant for evidence of continuing ratings inflation. In addition, the new credit rating rules still fall short in requirements for meaningful transparency and consistency of ratings across asset classes. The new requirements for asset-backed securities also have significant loopholes, particularly since they do not appear to cover privately issued structured finance products and certain significant asset classes. We hope the SEC will take additional action to address disclosures in areas not covered by this rule.”