The Securities and Exchange Commission last week released final rule changes designed to impose additional disclosure and conflict of interest requirements on rating agencies registered as nationally recognized statistical rating organizations. At the same time, it issued proposed new rules that would impose additional reporting requirements on the NRSROs.
The voluminous regulatory documents — which comprise nearly 300 pages and include final rules requiring rating agencies to disclose a complete history of their ratings — come after the five-member commission voted unanimously for them in September.
But the release of the actual language of the final and proposed rules did not take place until last week because staff and the commission needed several weeks to sign off on it, sources said.
The final rules become effective 60 days after publication in the Federal Register, but NRSROs are not required to comply with them until a full six months after publication. Meanwhile, the proposed rules will be subject to a 60-day public comment period after publication in the Federal Register.
SEC officials said the final and proposed rules could be published this week.
The agency also is collecting public comments through Dec. 14 on a concept release proposed at the September meeting that asks whether it should rescind a rule that currently shields rating agencies from investor lawsuits. If the SEC eventually approves such a change, NRSROs could be sued as “experts” for misstatements in prospectuses of registered securities, though the SEC stressed it is only seeking comments on the idea and is not ready to move forward with it.
Among the several rule changes that the commission adopted last week, one would require NRSROs to disclose the full history of their rating actions — upgrades, downgrades, affirmations, and withdrawals — going back to June 26, 2007, the date the SEC first passed rules pertaining to NRSROs.
The historical disclosures would need to be made on their Web sites and in a searchable format, though the disclosures could lag by two years for subscriber-paid ratings and by one year for issuer-paid ratings. Currently, over 98% of ratings are issuer-paid, according to the SEC.
The disclosures are meant to augment an existing rule that requires NRSROs with 500 or more paid issuer ratings to disclose a random 10% sample of their rating histories, subject to a six-month lag. The “100% requirement” was proposed in February.
Meanwhile, the proposed rule changes released last week include provisions that would require NRSROs to provide annual reports describing actions taken by compliance officers and requirements that the rating agencies disclose more information about their primary sources of revenue in registration forms filed with the SEC. The latter change is designed to allow NRSRO customers to better assess conflicts of interest.
Under a revised Form NRSRO, existing NRSROs as well as firms applying to become a NRSRO would have to provide the percentage of their net revenue attributable to the 20 largest users of their rating services. They also would have to report the percentage of revenue attributable to services and products other than ratings.
To provide additional transparency on NRSRO conflicts of interest, the SEC proposed a new rule that would require rating agencies to make publicly available on their Web sites consolidated reports on the revenue they and their affiliates earn for products and services attributable to “persons” that paid for the issuance or maintenance of ratings.
The new rule proposal replaces a June 2008 proposal the SEC deferred for consideration that would have required NRSROs to attach a special report to structured products ratings or use symbols to allow investors to better differentiate them from other types of ratings products.