The Securities and Exchange Commission is considering rules that would curb issuers from shopping around for the best ratings for their securities, but it's not clear if the provisions would apply across all types of asset classes, including municipal securities.
In testimony before the House Financial Services Committee's capital markets panel yesterday on the current state and agenda of the SEC, Schapiro suggested that rating-shopping restrictions might apply only to structured finance products.
The rules would be geared to keep issuers from shopping around their planned debt issuances to a number of nationally recognized statistical rating organizations, or NRSROs, and only hiring the agency that rates the debt the highest.
Specifically, Schapiro said the SEC is considering requiring issuers of the securities to disclose all of their "pre-ratings," so that if some were not triple-A, investors would know.
Another way the SEC may seek to curb rating shopping is by requiring issuers to confidentially disclose information about their securities' underlying loans to rating agencies that have not been hired to rate the debt. The other agencies would then be able to provide unsolicited ratings and make them publicly available.
Asked to clarify whether the provisions would apply to all asset classes and not just structured products, an SEC spokesman said after the hearing that the commission is looking at all options.
Schapiro also told the committee that exposing rating agencies to liability if their ratings turn out to be flawed could improve the quality of the ratings, but she stressed that Congress would have to be careful in crafting any bill that would expose the agencies to additional lawsuits.
"It may make a big difference," she said. "You would want to be careful in crafting it. You want rating agencies to work."
Her remarks follow the introduction of legislation in May by Sen. Jack Reed, D-R.I., chairman of the Senate Banking Committee's securities subcommittee, that would make it easier for investors to sue rating agencies if they fail to review certain key information in developing ratings.
Meanwhile, Schapiro also told the House panel that she has created a new branch of examiners dedicated specifically to conducting routine, special, and targeted examinations of the NRSROs.
In December, the SEC adopted new rules to restrict conflicts of interest and provide more transparency to the rating industry, but Schapiro has said that the commission must do more. At a six-hour April roundtable, commissioners heard from a variety of market participants but did not appear to reach any obvious agreement on how to move forward with additional NRSRO rules.
During yesterday's hearing, Schapiro did not talk about specific draft amendments to Rule 15c2-12 on disclosure that the SEC is expected to consider at a meeting today. But sources have said the draft amendments would eliminate exemptions for some forms of short-term debt from disclosure requirements, update the list of material events that issuers must disclose as part of their continuing disclosure agreements, and improve the timeliness of issuers' disclosures.
Some market participants expect the SEC will impose a limit on the amount of time issuers must file annual financial information following the close of their fiscal years.
Also at the hearing, panel chairman Rep. Paul Kanjorski, D-Pa., said Congress must seriously consider the SEC's request to boost its $1.2 billion budget for fiscal 2011 by an additional 20%. The House is currently considering the SEC's proposed $1.03 billion budget for the fiscal year starting in October, an 8% increase over the current year.