On July 21, the Treasury Department delivered proposed legislation to Capitol Hill amending Section 15E of the Securities Exchange Act of 1934 which would increase transparency, tighten oversight and reduce reliance on credit rating agencies, as well as reduce conflicts of interest at credit rating agencies and strengthen the authority of the Securities and Exchange Commission over and supervision of credit rating agencies. The proposed legislation would make the following changes:  

Conflicts of Interest  

  • Bar rating agencies from consulting issuers that they also rate
  • Strengthen disclosure and management of conflicts of interest which would affect how a credit rating agency is paid, its relationships with businesses and various affiliations  
  • Require disclosure of fees paid by the issuer for a particular rating as well as the fees paid by the issuer to the credit rating agency for the prior two years  
  • If a rating agency employee is hired by an issuer, require a review of an issuer’s ratings for the prior year to confirm no conflicts of interests influenced the ratings agency employee involved with the issuer’s rating  
  • Designate a compliance officer who reports directly to the senior officer or the board of directors of the rating agency  

Transparency and Disclosure  

  • Require disclosure of preliminary ratings to reduce “ratings shopping” where an issuer may solicit ratings from several agencies and only pay for and disclose the highest rating it receives
  • Require different symbols to be used to differentiate the risks of structured products such as asset-backed securities from corporate securities to highlight disparate risks  
  • Require qualitative and quantitative disclosure of the risks measured in a rating, including a report which provides assessment in a manner which allows investors to compare data across different securities and institutions  

Strengthen SEC Supervision of Credit Rating Agencies  

  • Establish a dedicated office within the SEC for supervision of rating agencies
  • Institute mandatory registration for all credit rating agencies  
  • Require SEC examination of internal controls and methodologies of credit rating agencies  

Reduce Reliance on Credit Rating Agencies  

  • Institute a President’s Working Group review of the current regulatory use of ratings to identify potential to eliminate rating requirement  
  • Implement the SEC’s proposal to remove references to ratings in money market mutual fund regulations  
  • Require the U.S. Government Accountability Office (GAO) to report on reducing reliance  

Support SEC Proposals on Credit Rating Agencies  

  • Require issuers of structured products to provide same issuer information for all rating agencies
  • Require rating agency disclosure of full ratings history for all issuer-paid credit ratings  
  • Strengthen the regulation and oversight of credit rating agencies by the SEC

In her July 22 testimony before the House Committee on Financial Services related to rating agency regulation, SEC Chairman Mary Schapiro highlighted the necessity of requiring mandatory registration by credit rating agencies. She has also directed the Commission to explore new possibilities to limit the potential for ratings shopping. Further, Chairman Schapiro noted that the Commission proposed an amendment to its rules in February 2009 which would require disclosure of ratings history for 100% of all issuer-paid credit ratings, which is included in the Obama Administration’s proposed legislation. For more information on the SEC’s adopted and proposed rules with respect to credit rating agencies, please see the February 6, 2009, edition of Corporate and Financial Weekly Digest.

For the full text of Chairman Schapiro’s testimony, click here.  

For the full text of the Fact Sheet on the Obama Administration’s Regulatory Reform Agenda and the legislation, click here.