WASHINGTON - The Securities and Exchange Commission should expand to municipal bonds and other securities the rules it proposed last year to enhance the transparency and limit conflicts of interest for structured products' ratings, securities industry and mutual fund trade groups told the SEC.
They made their remarks in comment letters sent to the SEC as the two largest rating agencies - Standard & Poor's and Moody's Investors Service - urged the commission to reconsider a separate proposal that would require the rating agencies to publish the histories of all of their issuer-paid ratings after a 12-month lag.
The provision is designed to allow market participants to better monitor rating agency performance, but the rating agencies warned that such disclosures would violate their intellectual property rights and curtail their revenues, among other things.
Under the provision, the disclosures would be required in XBRL format and would only apply to ratings issued on or after June 26, 2007 - the effective date of the Credit Rating Agency Reform Act of 2006, which gave the SEC the authority to establish guidelines for determining which rating agencies qualify as nationally recognized statistical rating organizations, or NRSROs. The act gave the SEC the right to regulate rating agencies, but barred it from dictating their ratings methodologies.
The comment letters come after several rounds of proposed and reproposed SEC rules last year, which were initiated in response to record losses reported by Wall Street firms with investments in tainted subprime mortgage securities. The structured products were rated triple-A despite their poor credit quality.
SEC chairman Mary Schapiro has scheduled an April 15 roundtable on how to improve federal oversight and regulation of the credit rating agencies.
In one set of rules proposed last June, the SEC sought to require NRSROs to publicly report all of their issuer-paid ratings within six months of assigning them. But as a compromise to predominantly negative feedback, the commission in December implemented a rule change requiring the agencies only to make a 10% sample of their issuer-paid ratings available after six months. At the same time, though, the SEC proposed requiring 100% of the ratings history be disclosed within 12 months.
The conflicts of interest proposal stems from rules the SEC originally proposed last year, as well. Specifically, the rule changes seek to boost transparency and competition by requiring NRSROs hired to rate structured transactions to disclose to other NRSROs the deals they are working. In addition, the "arrangers" of those transactions would be required to share the information they provide with the NRSROs that they have hired with other NRSROs.
Commenting on the conflicts of interest proposal, the Securities Industry and Financial Markets Association and its affiliate, the American Securitization Forum, argued that the SEC should expand the proposal to include other types of securities, including munis.
"We continue to be concerned about any proposed requirements that would apply only to structured finance products, or that place an undue burden on structure finance products as compared to other types of rated securities," wrote ASF executive director George Miller and SIFMA managing director Sean Davy. "We note that in ratings for other types of securities, such as corporate and municipal securities, NRSROs use non-public information and may be compensated by the issuer, thus raising the same conflict of interest issues that the reproposed rule seeks to address."
The Investment Company Institute, which represents mutual funds, echoed that argument. "We believe that more ... must be done to increase disclosure and transparency with respect to other debt securities, particularly municipal securities," ICI general counsel Karrie McMillan wrote in a footnote to the group's letter.
ICI also warned that the 12-month delay on the disclosure of ratings histories is too long, particularly in the current market, and urged a lag closer to three months. Separately, ICI said the SEC should impose a due diligence requirement for NRSROs when rating structure products.
Standard & Poor's and Moody's argued that the ratings history proposal would not achieve Congress' goal of fostering greater accountability, transparency and competition among NRSROs under the 2006 act.
Writing on behalf of Moody's, Michel Madelain, the rating agency's chief operating officer, said the disclosure proposal would only allow comparison between NRSROs that assign issuer-paid ratings, and argued that it should apply to all NRSROs, particularly those with subscriber-paid models.
"The absence of uniformity in regulatory approach and the corresponding lack of transparency regarding the performance of non-issuer-paid ratings is likely to impede, rather than promote, the reform act's purpose of improving rating quality for all NRSROs," he wrote.
Meanwhile, Standard & Poor's executive vice president Vickie Tillman said it would be unduly burdensome to require NRSROs to provide both a 10% sample of their issuer-paid ratings history after six months followed by a full history of such ratings after 12 months.
Fitch Ratings was the only one of the three major rating agencies to strongly support the disclosure proposal.
"We believe that the six-month and 12-month delays ... are sufficient to protect the commercialization of ratings of any type," wrote Fitch general counsel Charles Brown.
