The SEC has released the study on credit ratings required by Section 939F of the Dodd-Frank Act.  Section 939F provides that, after submission of the report to Congress containing the

findings of the study, the SEC shall, by rule, as the SEC determines is necessary or appropriate in the public interest or for the protection of investors, establish a system for the assignment of NRSROs to determine the initial credit ratings of structured finance products, in a manner that prevents the issuer, sponsor, or underwriter of the structured finance product from selecting the NRSRO that will determine the initial credit ratings and monitor such credit ratings.  In issuing any rule pursuant to section 939F, the SEC is directed to give thorough consideration to the provisions of section 15E(w) of the Exchange Act, as that provision would have been added by section 939D of H.R. 4173 (111th Congress), as passed by the Senate on May 20, 2010 (the “Section 15E(w) Provisions”), and shall implement the system described in section 939D of H.R. 4173 (the “Section 15E(w) System”) unless the SEC determines that an alternative system would better serve the public interest and the protection of investors.

The study cites several concerns with a Section 15E(w) System including:

  • It may not substantially mitigate the issuer-pay conflict because issuers couldcontinue to engage in “rating shopping” as they would be permitted to hire NRSROs to provide credit ratings to supplement the initial credit rating published by the assigned Qualified NRSRO.
  • The risk that some NRSROs may choose not to apply to become Qualified NRSROs and thereby not participate in the Section 15E(w) System.
  • Even if most NRSROs were to participate in the Section 15E(w) System, there is a risk that it would not change the current dynamics of the market for rating structured finance products.