Yesterday the SEC approved and re-proposed a new set of rules regulating credit rating agencies. In addition, the SEC proposed an amendment to Regulation FD relating to information provided to credit rating agencies. SEC Chairman Cox, in announcing the approval by the Commission of the new rules, stated that they would “touch every aspect of the credit rating process – from conflicts of interest, to publication of ratings methodologies, to disclosure of ratings track records.” The SEC was granted the authority to register and regulate credit rating agencies in the Credit Rating Agency Reform Act of 2006. This most recent effort follows previous regulatory actions in June 2007. These actions are also part of a larger global effort regarding credit rating agencies, including recent congressional scrutiny of their role in the credit crisis, the G-20 leaders' declaration favoring enhanced regulation of credit rating agencies, and the European Commission's proposed legislation regarding credit rating agencies.
The rules were adopted largely as proposed with some important changes. As proposed, NRSROs would have been required to make and retain records of all rating actions and make such records publicly available in an Interactive Data format. As adopted, the rule only requires NRSROs to make publicly available on their corporate websites in XBRL format a statistically valid random sample of 10% of their issuer-paid credit ratings and their histories for each class for which the NRSRO has issued 500 or more ratings, with a six month lag before a new ratings action needs to be made public. The SEC simultaneously proposed amending the newly adopted rule to require public disclosure of ratings history information for 100% of NRSROs’ current issuer-paid credit ratings that were initially issued on or after June 25, 2007. In addition, a proposal that would have required public disclosure of all information obtained from issuers, depositors, sponsors or trustees and used in the ratings process was not adopted but was rather re-proposed in modified form to require disclosure only to other NRSROs.
Noticeably absent from the actions taken yesterday was a controversial proposal to require NRSROs to furnish a report when they issue ratings of structured finance products. The proposed report would have required the NRSRO to explain how risk characteristics associated with a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction differed from those of any other type of obligor of debt security. As proposed, NRSROs would have been exempt from this requirement if they used different rating symbols for structured products. It was not clear from the meeting whether or not this proposal is still under consideration.
Yesterday’s actions relate to the first of three related proposals the SEC undertook in June regarding credit rating agencies and follow an extensive review of the rating agencies’ practices and disclosure to investors. The other proposals were intended to remove references to credit ratings in the SEC’s rules and forms. Although the SEC was originally scheduled to address the proposal two weeks ago and officials had stated that they had delayed action in order to address all three proposals together, yesterday’s meeting did not cover the other two proposals. Commissioner Walter stated that they hoped the SEC would address those proposals soon.
The new proposed and final rules will soon be available on the SEC website, and public comments on the new regulations must be received by the SEC within 45 days after their publication in the Federal Register.