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S&P questions proposed SEC rules on ratings errors

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Standard & Poor's is pushing back against a proposed Securities and Exchange Commission rule that would outline the process ratings firms have to go through when reporting "significant ratings errors." In its proposal, which was released for public comment in May, the SEC asked commentators to submit their input on how the commission should define the term "significant error" when drafting a final rule that would force ratings agencies to publicly recognize significant ratings mistakes. The differences of opinion on how to shape rules that effect ratings agencies are arriving at a time when S&P's decision to downgrade the U.S. sovereign credit rating from AAA to AA+ has prompted White House officials and economists to snipe back at the ratings giant and its methodologies. U.S. Representative Maxine Waters (D-Calif.) asked the SEC this week to investigate a possible leak of the Standard & Poor's downgrade last week. Some of the criticism coming from government officials revolves around the Treasury's contention that it found a $2 trillion error in the numbers submitted to the Treasury after S&P informed the government that a downgrade in the sovereign debt was coming. The downgrade was delayed until later in the day, but irked policymakers who believe the downgrade was made abruptly and potentially with error. S&P's President Deven Sharma is now challenging the SEC's proposal to shape how mistakes at ratings agencies are identified and reported. In a letter to the SEC, Sharma warned that a government attempt to create a one-size-fits-all approach to defining how ratings methodologies should be employed and how significant errors should be identified and reported could intrude upon the independent roles maintained by the agencies. "For example, if the commission were to define the term significant error, as it suggests in Section II.F (the rule in question), we believe it would effectively be substituting its judgment for that of the NRSRO, thereby regulating the substance of credit ratings," Sharma said. "Because credit ratings reflect the subjective opinions of committees of rating analysts and incorporate both quantitative and qualitative factors, we believe it would be difficult, if not impossible, for the commission to establish a principled definition of what might constitute a significant error." Michel Madelain, COO and president of Moody's Investors Service, also sent a letter saying, "We do not object in principle to most of the proposed new rules and amendments to existing rules and forms." However, he added, "We believe, however, that a few of them require substantial modification because they are inconsistent with the objectives of the governing legislation, regulate the substance of credit ratings or the rating process, or present a risk of unintended, adverse consequences for the market." At Fitch, General Counsel Charles Brown sent in a response, saying in the agency generally supports the SEC's attempt to create more transparency and remove conflicts of interest. But he added, "We believe that requiring NRSROs to disclose their entire credit ratings history as of June 26, 2007, even on a time-delayed basis, will be harmful to NRSROs, and ultimately to investors." Write to: Kerri Panchuk.

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