New Rules For Credit Ratings Agencies

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We told you last month about the under-reported role of the credit ratings agencies in helping to cause the financial crisis. The problem, in a nutshell, is that the major ratings agencies — Moody’s, Standard & Poor’s, and Fitch — are paid by the insurers (often investment banks) who are issuing the bonds. That gives the agencies a clear incentive to produce favorable ratings, or risk seeing the banks hire a different ratings agency that’s willing to offer a better rating.

So it’s worth noting that the Securities and Exchange Commission today adopted new rules designed to protect against that conflict of interest.

The Associated Press has the rundown on the new rules:

Among other things, the conflict-of-interest rules ban the rating agencies from advising investment banks on how to package securities to secure favorable ratings. Gifts over $25 from clients also will be prohibited.

Rating agencies will be banned from making ratings in cases where the agency made recommendations to the company issuing securities or the investment bank underwriting them concerning the corporate structure, assets or activities of the issuing company.

In addition, rating agencies will be required to disclose statistics on all their upgrades and downgrades for each asset type. They also will have to disclose how much verification they performed on the quality of complex securities, such as those underpinned by mortgages, student loans or auto loans, in determining ratings for them.

Investors will receive detailed information on the ratings process for complex securities, thereby exposing potential conflicts of interest for the agencies, SEC officials said.

The SEC commissioners also voted to propose and open to public comment other rules that would require rating agencies to disclose in interactive electronic format the ratings history information for all of their assessments that companies issuing the securities pay them to do.

But the AP adds that the rules don’t go far enough for some critics of the agencies, who want “new requirements to govern how the rating agencies are paid and to provide for the suspension of their licenses if they engage in unfair practices.”

The Senate investigations committee has launched a probe of the ratings agencies. And we’re going to be doing our own digging, so you’ll hear more on this…

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