WASHINGTON — The Securities and Exchange Commission approved proposed rules Wednesday that would bolster the transparency of credit ratings and beef up oversight of rating agencies.
At an open meeting, the five commissioners voted unanimously to propose requiring credit agencies to disclose certain information about their ratings and the methodologies used to determine them.
The proposal, which weighs in at more than 500 pages, also would require the agencies to boost internal controls, police conflicts of interest and establish professional standards for credit analysts.
It would obligate SEC-registered rating agencies, known as Nationally Recognized Statistical Rating Organizations, or NRSROs, to establish policies and procedures designed to assess the probability that an issuer of a security or money-market instrument will default.
“Today’s proposals are part of a concerted effort by the SEC to enhance the credit rating industry in light of the financial crisis,” SEC chairman Mary Schapiro said in an opening statement.
The commission’s proposal would implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and enhance existing SEC rules governing ratings and rating agencies.
Under the 2006 Credit Rating Agency Reform Act, the SEC has authority to establish a registration and oversight system for the rating organizations. Ten agencies are currently registered as NRSROs with the commission.
As for transparency, the SEC’s proposed rules would require NRSROs to publish a form with each rating that includes information about the assumptions underlying the rating procedures, including “substantial qualitative and quantitative information” about the methodologies used to determine the rating, the commission said in a fact sheet.
Rating agencies would have to publish the form in the same medium as the rating and make it available to the same persons who can receive or access the credit rating.
“These rules are intended to help investors and other users of credit ratings better understand and assess the ratings,” Schapiro said.
The proposed rules would require rating agencies to standardize how they calculate and present aggregate information about rating changes over time, known as the transition rate.
The agencies would have to standardize information about the frequency of a rated entity’s defaults.
In addition, the proposal would impose a series of oversight obligations.
For example, an NRSRO would be barred from issuing a credit rating when an employee who participates in sales or marketing of an NRSRO product also plays a role in determining the rating of it.
Rating agencies would be required to conduct a “look-back” review of former employees, probing whether conflicts of interest influenced a credit rating if an employee takes a job with an issuer, underwriter or sponsor of a rated product within one year of participating in the rating decision.
Rating agencies would also be obligated to establish training, experience and competence standards for credit analysts, including periodic testing of rating procedures and methodologies.
An analyst with more than three years experience would have to participate in ratings decisions.
All three rating agencies welcomed the SEC’s proposal.
Moody’s Investors Service “believes that regulatory change is healthy for the markets,” said spokesman Michael Adler.
Standard & Poor’s also released a statement, through spokesman David Wargin, saying it supports the SEC’s efforts to increase accountability.
Still, commissioner Troy Paredes voiced concerns about the compliance burden of the proposed rules.
“There will be costs,” said Randall Roy, an assistant director in the division of trading and markets, adding that rating agencies will incur expenses related to record keeping, internal controls, and training.
Comment letters on the proposed rules will be due 60 days after publication in the Federal Register.
