Bond Market Association calls for more transparency, more competition in rating agencies

By Sara Rosenberg

New York, Nov. 20 - The Securities and Exchange Commission should make it process for designating rating agencies more transparent, according to Paul Saltzman, general counsel of the Bond Market Association.

In addition, the SEC should help promote competition in the rating agency sector by considering designating other organizations as nationally recognized statistical rating organizations (NRSRO), Saltzman said in an extract from his prepared testimony to the SEC Thursday.

Greater transparency in the designation of agencies as NRSROs would reflect the important role that these agencies play in capital formation and secondary trading, according to Saltzman.

"The NRSRO designation is critically important to the marketplace and should be more understandable to the investing public, as well other market participants," he said in a Bond Market Association release. "The Commission itself made a proposal to increase transparency in the designation process a few years ago."

In terms of increasing competition, Saltzman points out that there are presently only three agencies designated as NRSRO's. This limited environment may be a result of market-driven factors but it may also be a result of SEC reluctance to allow new organizations into the sector.

"We believe the Commission should consider whether the criteria used to determine the NRSRO designation could be applied in a manner that would make it possible for several additional agencies to qualify in one or more market sectors," commented Saltzman, in the release. "The NRSRO process should not, in and of itself, be a 'barrier to entry.'"

Furthermore, Saltzman will testify that the Bond Market Association does not believe any significant additional regulatory oversight is needed for rating agencies since the current system is operating reasonably well. Additional regulation is being discouraged due to the complex nature of the rating process and so the government does not appear to be "certifying" rating, the release explained. Currently, the rating agencies are regulated through the Investment Advisors Act of 1940, which requires the agencies to register as investment advisors.

"Rating agencies have long played a critical role in the efficient functioning of national and international fixed income markets," said Saltzman, in the release. "The ratings issued by the major rating agencies have proved to be a reliable source of information for investors."

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