SEC’s Plan Will Lessen Role of Credit Rating Agencies
Proposed new regulatory changes by the Securities and Exchange Commission (SEC) are likely to come as an unwelcome reality for the nation’s credit rating agencies. The plans, which are expected to be announced June 25, would diminish the importance of credit ratings across various markets, and make ratings serve more as a guide on what investors can and cannot hold.
The SEC’s proposal comes after months of criticism over the workings of the three main credit rating agencies - Moody’s Investor Service, Standard & Poor’s and Fitch Ratings – and, specifically, their handling of the subprime crisis.
For years, critics have questioned the role credit rating agencies play in the nation’s financial markets. Last year, the SEC launched its own investigation into the rating industry when thousands of mortgage-backed securities were downgraded, causing the value of the investments to nosedive and forcing billions of dollars in losses and write-downs at major investment banks and securities firms.
As reported June 23 in the Wall Street Journal, the SEC’s proposed changes would include the $3.4 trillion money-market industry, making it possible for U.S. money-market funds to invest in short-term debt without regard to ratings placed on the securities by credit rating agencies.
Regulators hope the new changes, if approved, will reverse the over-reliance that investors place on ratings, which became evident during the subprime mortgage debacle.
Regulators also rely on ratings. In arranging the sale of Bear Stearns to J.P. Morgan Chase in March, the Federal Reserve reportedly said it would take some illiquid, beaten-down assets from investment banks, but only if the assets were rated highly by the rating firms, according to the Wall Street Journal article.
Meanwhile, in an effort to create more competition in the credit-ratings industry, the SEC recognized a 10th bond-rating firm, Realpoint LLC, on June 22.
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.Â
