On May 18, 2011, the SEC proposed rules that would implement certain provisions of the Dodd-Frank Act and enhance existing SEC rules governing nationally recognized statistical rating organizations (“NRSROs”) and third-party due diligence services provided in connection with the issuance of asset-backed securities. Following the recent financial crisis, many believed that credit rating agencies were improperly influenced by conflicts of interest and lacked transparency. According to SEC Chairman Mary L. Schapiro, the proposed rules are designed to “strengthen the integrity and improve the transparency of credit ratings.”

The SEC’s proposed rules and rule amendments applicable to NRSROs would, among other things:

  • prevent sales and marketing activities of an NRSRO from influencing ratings issued by the NRSRO and require an NRSRO to take certain actions, including public disclosures, if the NRSRO determines that a rating was influenced by a conflict of interest;
  • enhance public disclosure of information on the initial credit ratings determined by the NRSRO for each type of obligor, security, and money market instrument, and any subsequent changes, to better enable users of ratings information to evaluate the accuracy of the NRSRO’s ratings and compare the performance of ratings issued by different NRSROs;
  • require public disclosure of certain information in the event the NRSRO changes the methodology used by the NRSRO to determine credit ratings; and
  • require the NRSRO to publish a form in connection with the publication of a credit rating and a certification from any provider of third-party due diligence services that relates to the credit rating.

The SEC also proposed a new rule and form that would apply to providers of third-party due diligence services for asset-backed securities, and rule amendments and a new rule that would require issuers and underwriters of asset-backed securities to make the findings and conclusions of such third-party due diligence providers publicly available.

The SEC seeks comment on a number of matters relating to the proposals set forth in the proposing release. The text of the proposed rules can be found here.