On Wednesday, as previously announced, the Securities and Exchange Commission held a roundtable discussion on oversight of credit rating agencies. The roundtable consisted of four panels with 26 participants in addition to the SEC’s five Commissioners and was moderated by the Deputy Director of the Commission’s Division of Trading and Markets.
Over the course of six hours, the panels, which included investors, issuers, credit agencies and academics covered a number of topics including the performance of the rating agencies leading up to the current market crisis, the lack of competition in the industry, conflicts of interest and possible regulatory and statutory changes in the business and oversight of the ratings agencies. In her opening remarks, Chairman Schapiro stated that the performance of rating agencies in the area of mortgage-backed securities backed by residential subprime loans, and the collateralized debt obligations linked to these securities has “shaken investor confidence to its core.” Chairman Schapiro went on to question the panel on how best to align the interests of the investor with those of rating agencies, as well as how best to identify the inherent limitations of credit ratings.
Several suggestions were made with regard to the compensation structures associated with credit rating agencies. Specifically, several participants recommended that all credit rating agencies be switched to an investor-paid model, so as to better align their incentives with those of the investor. During her remarks, Chairman Schapiro mentioned the possibility of requiring that credit rating agencies distribute independent research along with their own research to investors. This approach would be similar to that in a settlement the Commission reached with ten investment firms in late 2003.
Another idea was to establish a regulator similar to the Public Accounting Oversight Board (PCAOB) to oversee rating agencies. Former SEC Commissioner Joseph Grundfest suggested creating a new category of credit rating agencies that were owned and operated by the largest and most sophisticated debt market investors. Under his proposal, every rating by an issuer-paid agency would be accompanied by this other investor-owned rating that was also paid for by the bank or issuer.
The panelists offered different views but mostly agreed that many different market participants shared blame for the market crisis and that the current system is broken. Despite the SEC’s continued focus on this area, as evidence by the roundtable, the SEC’s recently adopted and re-proposed new rules, and outstanding proposals for other rules it is not clear what if anything will result from the roundtable. Despite the Credit Rating Agency Reform Act of 2006, the SEC’s statutory oversight of the rating agencies is limited and somewhat hampered by concerns regarding the constitutionality of restricting the issuance of opinions.