The Securities Industry and Financial Markets Association has launched an industry-wide, investor-led task force to examine the credit rating agencies and make recommendations on ratings, the rating process, and the regulatory issues that surround the agencies.
The SIFMA task force will also address calls from several state issuers and other market participants for the "harmonization" of rating agencies' municipal ratings with corporate, or so-called global, scales. In a letter Monday, SIFMA endorsed a plan by Moody's Investors Service to provide a global rating to municipal issuers, but said it should be free of charge.
The task force, which SIFMA announced late Tuesday and which includes about two dozen firms, came the same day of a Senate Banking Committee hearing in which Securities and Exchange Commission chairman Christopher Cox defended the SEC's relatively new oversight over the credit agencies that it registers as nationally recognized statistical rating organizations whose ratings can be used to comply with commission rules. The SEC, which began to register rating agencies only last year, is working on drafting new rules that it plans to propose this summer to improve the transparency, accountability and competitiveness of registered rating agencies.
The SIFMA task force will not only examine some of the same rating agency issues that the SEC plans to address in its proposed rules, but will also consider these agencies from "a very global perspective," consulting with the European securities regulators as well as the SEC, said Randy Snook, SIFMA's senior managing director and executive vice president.
The task force will be led by Boyce Greer, president of the fixed-income and asset allocation division at Fidelity Investments, and Deborah Cunningham, chief investment officer at Federated Investors Inc.
In addition to discussing regulatory issues, Snook said the task force also may consider business models and conflicts of interests that exist with the ratings and the ratings process, as well as disclosure and transparency issues. He stressed the task force is just being developed and will begin meeting next month.
Meanwhile, at Tuesday's Senate Banking Committee hearing, several senators noted the inherent conflicts that arise from the "issuer pays" model, in which issuers pay the agencies for their ratings. Of late, lawmakers have heaped scorn on the major rating agencies - Standard & Poor's, Moody's Investors Service, and Fitch Ratings - placing much of the blame for the subprime mortgage crisis on them.
But Cox, who spoke at this week's hearing, seemed to defend the rating agencies when he said that "it is entirely possible to have private sector entities that are commercial in nature [but] nonetheless independent from the securities they rate and who do a good job of it."
"There is a conflict of interest in virtually any commercial relationship in the sense that you if go to the dentist, and it is the dentist's interest to charge as much money as possible and you didn't know much about dentistry - well, the dentist could tell you that you needed all your teeth replaced," he said.
"But I can sue that guy for medical malpractice, I can't sue" the rating agencies, said committee chairman Christopher Dodd, D-Conn.
"Well, I think that that's what's changing," Cox responded. Citing the 2006 law that gave the SEC oversight over registered rating agencies, he said: "The result of the legislation that you passed and the regulatory authority that you have given us, the ability that we now have to define what's necessary to manage, mitigate or end entirely those conflicts of interest, makes this all very different."
Some critics of the rating agencies are urging the SEC to consider a number of reforms, including the forfeiture or suspension of an agency's registration if it consistently issues misleading ratings.
John Coffee, a professor at Columbia University Law School, who also addressed the committee, recommended a slew of proposals to enhance rating agency transparency and competition, including an SEC-sponsored Web site that would display the ratings for each security on which multiple ratings were issued.
"The net result would be to inform consumers of the multiplicity of ratings and the possible divergences in view," Coffee said.