SEC Tightens Belt on Rating Agencies

After an “extensive examination” found “significant weaknesses in rating practices,” the Securities and Exchange Commission approved Wednesday new measures to expand oversight of credit rating agencies — who have long been criticized for their alleged role in contributing to the financial crisis.

“Conflicts of interests were amplified as credit rating agencies sought to gain market-share in an industry that is vital to capital formation,” said SEC Chairman Christopher Cox, according to a Market Watch report. “These rules create a more transparent industry.”

The new measures will outlaw anyone who participates in determining or monitoring a credit rating from negotiating the fee that a corporation pays for it, and from receiving gifts or entertainment in excess of $25 from the corporation or its affiliated parties.

The SEC will also require that Nationally Recognized Statistical Rating Organizations provide the SEC and the public with more transparency on ratings through enhanced record keeping and mandatory annual reports. Rating agencies, for example, will be required to publish the data behind 10 percent of their ratings online. And no longer will credit rating firms be able to issue a rating on a security if it also advises, underwrites or sponsors the structuring of the security.

The new regulations are meant to ensure that agencies conduct their activities with “integrity and impartiality,” according to an SEC open meeting fact sheet,

This is the second set of credit rating agency reforms since the SEC received its new regulatory authority from Congress to register and oversee credit rating agencies in 2007.  In recent years, the SEC had no statute empowering them to regulate agencies, although they pushed them to voluntarily register with the SEC, the venture was in sum, unsuccessful, according to a Market Watch report.

With the recent subprime market turmoil, the SEC has been particularly interested in the rating agencies’ policies and practices in rating mortgage-backed securities and the impartiality of their ratings, according to the SEC examination report.

The SEC’s examination into Moody’s Investors Services Inc. (MCO: 22.80 -0.78%), Standard & Poor’s Ratings Services and Fitch Ratings Ltd., found that rating agencies struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities and collateralized debt obligations deals since 2002.  In fact, none of the rating agencies examined had specific written comprehensive procedures for rating RMBS and CDOs, according to the SEC report.

The new regulations touch every aspect of the credit rating process, Cox explained, from conflicts of interest, to publication of ratings methodologies, to disclosure of ratings track records, so that investors and markets will have better information to guide investment decisions.

Write to Kelly Curran at kelly.curran@housingwire.com.