SEC Proposes New Rules For Credit Rating Agencies
In a move that many on Capitol Hill say has been a long time coming, the Securities and Exchange Commission (SEC) is now one step closer to tightening disclosure rules for Wall Street’s credit ratings firms and creating much-needed transparency in the $5 billion-a-year industry.
On June 11, the SEC voted 3-to-0 to tentatively approve new rules relating to disclosure requirements and conflicts of interest issues for the nation’s rating agencies.
Beginning last year, the three major ratings firms - Standard & Poor’s, Moody’s Investors Service and Fitch Ratings - found themselves as one of the untold chapters in the subprime story for their failure in identifying risks related to subprime mortgage investments. When the subprime debacle eventually went into overdrive and a rush of homeowners began to default on their home loans, thousands of securities backed by the mortgages were downgraded by the rating agencies, causing the value of the investments to nosedive.
Shortly thereafter, the downgrades became a major factor leading to hundreds of billions of dollars in losses and write downs at major investment banks and securities firms. It was then that Congress and others began to publicly criticize the credit-rating agencies, calling for more federal oversight regarding their relationships with the debt issuers, which pay the agencies to grade their debt.
The SEC’s new rules are an attempt to curtail these conflicts of interest. Among other things, the rules would ban the rating agencies from giving advice to investment banks on how to package securities to secure favorable ratings. Any “gifts†of more than $25 from companies or others that receive ratings to the credit raters also would be prohibited.
In addition, the proposed rules will require the rating agencies to make their ratings publicly available to allow performance comparisons. They agencies also would have to disclose how much research goes into assigning ratings on structured finance transactions.
The SEC’s efforts to make the credit ratings business more transparent is a step in the right direction for Wall Street. As reported in a June 11 article on CNN Money.com, these agencies have a critical role to play as public financial gatekeepers. Their job of assessing the creditworthiness of companies and securities is often a deciding factor in whether a company is able to raise or borrow capital or may determine at what cost securities are purchased by investment banks, pension funds, mutual funds or local governments.
In short, the agencies’ word - i.e. the quality of their grade analyses - should be above reproach.
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
