SEC approves measures to strengthen oversight of rating agencies

By Jennifer Chiou

New York, Dec. 3 - The Securities and Exchange Commission announced that it is moving forward with a series of measures to increase transparency and accountability at credit rating agencies.

The SEC said it is looking to ensure that firms provide more meaningful ratings and greater disclosure to investors.

According to a news release, the new measures impose additional requirements on the agencies, whose ratings of residential mortgage-backed securities backed by subprime mortgage loans and of collateralized debt obligations linked to subprime loans contributed to the recent turmoil in the credit markets.

The SEC added that it also proposed additional measures related to transparency and competition concerning credit rating agencies. Its actions were informed by the agency's extensive 10-month examination of three major credit rating agencies that found significant weaknesses in ratings practices.

"These comprehensive rules touch every aspect of the credit rating process - from conflicts of interest, to publication of ratings methodologies, to disclosure of ratings track records," SEC chairman Christopher Cox said in the release.

"The SEC's examinations of credit rating agencies uncovered serious deficiencies that these rules will address, so that investors and markets will have better information to guide investment decisions."

This is the second set of credit rating agency reforms since the SEC received its new regulatory authority from Congress to register and oversee credit rating agencies, the release noted.

Among the changes:

• Rating agencies will have to provide statistics on all rating changes for each asset class for one-, three- and 10-year periods. They will also have to compare default rates relative to initial ratings.

• The agencies will be required to describe their verification of the underlying or reference assets in structured finance transactions and the ongoing surveillance.

• A random sample of 10% of credit ratings and their histories will have to be made public.

• Improved record keeping will be mandated covering all actions, differences between models and ratings issued for structured finance products, and complaints about ratings.

• Agencies will be barred from issuing ratings where they have made recommendations to the issuer, underwriter or sponsor about the corporate or legal structure, assets, liabilities, or activities of the obligor or issuer of the security.

• Analysts involved in issuing ratings will be prohibited from discussions about fees. They will also be banned from receiving gifts, including entertainment, other than items provided in the context of normal business activities that have an aggregate value of no more than $25.

The SEC is also proposing additional changes. If adopted, these would:

• Requiring agencies to disclose ratings history for all their issuer-paid credit ratings in an XBRL format. Information would not need to be disclosed until 12 months after the action.

• Prohibit rating agencies from issuing a rating for a structured finance product paid for by the product's issuer, sponsor, or underwriter unless the information about the product provided to the agency to determine the rating and, thereafter, monitor the rating is made available to other rating agencies.

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