WASHINGTON — The Securities and Exchange Commission should consider seven alternative methods of compensating rating agencies, including one patterned after the Municipal Securities Rulemaking Board, the Government Accountability Office said in a report sent Wednesday to key members of Congress.
Under the MSRB model, the rating agencies would be compensated from fees paid into a fund by issuers and investors.
The congressional watchdog reached its conclusion in a report, entitled Credit Rating Agencies: Alternative Compensation Models for Nationally Recognized Statistical Rating Organizations, that was required by the Dodd-Frank Act. The GAO sent the report to Sen. Tim Johnson, D-S.D., chairman of the Senate Banking Committee, and Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, as well as the ranking members of both panels, Sen. Richard Shelby, R-Ala., and Rep. Barney Frank, D-Mass.
Dodd-Frank required GAO to study different means of compensating rating agencies, which have been criticized for operating under a conflict of interest, particularly in the municipal securities market, where issuers must pay for the ratings generated by the agencies.
GAO identified seven alternate payment approaches, designed to address the conflicts and bolster the agencies’ incentives to produce “reliable and high-quality ratings.”
Under the model patterned after the MSRB’s approach, payments for ratings would come from fees on issuers of new debt and on investors in secondary market transactions, the GAO said.
The fees would be deposited into a dedicated fund, called the U.S. Ratings Fund, and would be determined and reset periodically. A governing board comprised of issuers, investors, rating agencies, intermediaries and independent directors would oversee the fund.
The GAO told the SEC, which oversees the rating agencies, to consult with the individuals who developed the models and obtain “all available information,” about them as it considers various alteratives and any recommendations for statutory changes.
Some of the organizations that use or proposed such alternative models told the GAO that the SEC had not reached out to them as part of the commission’s ongoing study of the issue, also required by Dodd-Frank.
The SEC agreed with the GAO’s findings, according to the report.
In a letter to the accounting office, dated Jan. 11, Robert Cook, director of the SEC’s division of trading and markets, said the commission has been analyzing alternative compensation models for rating agencies for “several years,” and hosted an April 2009 roundtable regarding its oversight of the agencies.
The SEC will seek to consult further with the proponents of the alternate models “to better ensure that the commission has all available information,” Cook wrote.
SEC spokesman John Nester, declined to comment on the GAO’s report, citing Cook’s comments.
An MSRB spokesperson did not respond to a request for comment.