CREDIT RATING AGENCIES TO UNDERGO GREATER SCRUTINY

On September 17, 2009, the SEC voted unanimously to adopt or propose several measures aimed at improving the overall quality of credit ratings. The proposals are intended to provide a more robust regulatory framework for Nationally Recognized Statistical Rating Organizations (“NRSROs”) by (1) requiring greater disclosure; (2) fostering competition; (3) helping to address conflicts of interest; (4) shedding light on rating shopping; and (5) promoting accountability.

In particular, the SEC has agreed to consider six proposals related to NRSROs:

• A recommendation to adopt rules to provide greater information concerning ratings histories — and to enable competing credit rating agencies to offer unsolicited ratings for structured finance products, by granting them access to the necessary underlying data for structured products.

• A recommendation to propose amendments that would seek to strengthen compliance programs through requiring annual compliance reports and enhance disclosure of potential sources of revenue-related conflicts.

• A recommendation to adopt amendments to the Commission's rules and forms to remove certain references to credit ratings by nationally recognized statistical rating organizations.

• A recommendation to reopen the comment period to allow further comment on Commission proposals to eliminate references to NRSRO credit ratings from certain other rules and forms.

• A recommendation to require disclosure of information including what a credit rating covers and any material limitations on the scope of the rating and whether any "preliminary ratings" were obtained from other rating agencies — in other words, whether there was "ratings shopping"

• A recommendation to seek comment on whether we should amend Commission rules to subject NRSROs to liability when a rating is used in connection with a registered offering by eliminating a current provision that exempts NRSROs from being treated as experts when their ratings are used that way.

SEC Chairman Mary S. Schapiro stated that the proposed measures “are needed because investors often consider ratings when evaluating whether to purchase or sell a particular security.” In 2006, with the passage of the Credit Rating Agency Reform Act, the SEC was given exclusive authority over rating agency registration and qualifications.

A copy of Ms. Schapiro’s opening statement before the SEC Open Meeting can be found here.