Home >Newsroom >U.S. Securities and Exchange Commission Proposes Rules to Improve Transparency & Integrity of Credit Ratings
U.S. Securities and Exchange Commission Proposes Rules to Improve Transparency & Integrity of Credit Ratings
Date Published
5/23/2011
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On May 19, 2011, the
Securities and Exchange Commission voted unanimously to propose
new rules and amendments intended to increase transparency and improve the
integrity of credit ratings.
The
proposed rules would implement certain provisions of the Dodd-Frank Wall Street
Reform and Consumer Protection Act and enhance the SEC’s existing rules
governing credit ratings and Nationally Recognized Statistical Rating
Organizations (NRSROs).
The
Proposed Rules
The
SEC proposed rules related to NRSROs and third-party due diligence providers as
well as issuers and underwriters, of asset-backed securities, including:
1. Reporting on Internal Controls:
Under
the proposed rule amendment, the NRSRO would be required to file a report with
the SEC containing a description of management’s responsibility in establishing
the internal control structure and an assessment of the effectiveness of those
internal controls.
2. Preventing Conflicts of Interest Relating to Sales and
Marketing:
Under
the proposed rule amendments, an NRSRO would be prohibited from issuing or maintaining
a credit rating where an employee of the NRSRO – who participates in the sales
or marketing of a product or service of the NRSRO or of a person associated
with the NRSRO – also participates in determining or monitoring a credit rating
or developing or approving procedures used for determining a credit rating.
Additionally,
the proposal would establish a mechanism:
By which small
NRSROs could seek an exemption from this provision.
To suspend or
revoke the registration of an NRSRO or impose other penalties if the SEC
finds that the NRSRO has committed a violation of a conflict of interest
rule that affected a rating.
3. Enhancing the “Look-Back” Review:
Section
932 of the Dodd-Frank Act requires NRSROs to establish policies regarding
former employees:
Who participated
in determining a credit rating, and …
Who were
subsequently employed – within one year – by an entity subject to that
credit rating – or by the issuer, underwriter, or sponsor of a product
subject to that credit rating.
In
such cases, the NRSRO must conduct a “look-back” review to:
Determine
whether any conflicts of interest influenced the credit rating.
Take action to
revise the rating, if appropriate.
Under
the proposed rule, if the NRSRO “look-back” review determined that a conflict influenced
a rating, the NRSRO would be required to, at a minimum:
Immediately
place the credit rating on a credit watch and include, among other things,
an explanation that the reason for the action is that the rating was
influenced by a conflict of interest.
Promptly
determine whether the credit rating must be revised so it no longer is
influenced by a conflict of interest.
Promptly publish
a revised credit rating or an affirmation of the credit rating, if
appropriate.
4. Standardizing Disclosure of Information About the
Performance of Credit Ratings:
The
SEC proposals would, among other things:
Standardize the
way an NRSRO calculates and presents aggregate information about how its
ratings change over time (the transition rate) and how often a rated
entity or product subsequently defaulted.
Require the
NRSRO to publicly display this information on an “easily accessible”
portion of its website
Enhance the
so-called “100% Rule.” This previously-existing rule requires an NRSRO to
publish information concerning its rating actions for credit ratings that
the NRSRO initially determined on or after June 26, 2007. The
disclosure must be made within 12 months after determination for ratings
that are issuer-paid and within 24 months after determination for ratings
that are not issuer paid.
5. Strengthening Credit Rating Methodologies:
Under
the proposed rule, policies and procedures governing the way the NRSRO
determined credit rating would have to be reasonably designed to ensure, among
other things, that:
The board of
directors approves them.
Material changes
are applied consistently and changes to surveillance procedures are
applied within a reasonable period of time.
The NRSRO
promptly publishes notice of material changes to rating methodologies and
of the discovery of significant errors in rating methodologies.
The NRSRO
discloses the version of the methodologies used with respect to a
particular credit rating.
6. Leveraging Third-Party Due Diligence for Asset-Backed
Securities:
SEC’s
proposed rules would require that due diligence providers for asset-backed
securities must provide a written certification to any NRSRO that rates the
securities (Form ABS due Diligience-15E).
7. Enhancing the Disclosure of Information About Credit
Ratings:
Under
the proposed rule, the NRSRO would be required to publish a form with each
credit rating:
Include in the
form information about the credit rating, such as information relating to
the assumptions underlying the methodology used to determine the credit
rating.
Include any
certification of due diligence providers described above.
The
form and certifications would have to be published in the same medium and made
available to the same persons who can receive or access the credit rating.
The NRSRO would need to disclose in the form substantial qualitative and
quantitative information about the credit rating and methodologies used to
determine the credit rating.
8. Upgrading Standards of Training, Experience, and
Competence:
The
proposed rule would require NRSROs to establish standards of training,
experience and competence for credit analysts and to:
Consider certain
factors when establishing the standards, for example the complexity of the
securities that will be rated by the analyst.
Periodically
test its credit analysts on the credit rating procedures and methodologies
it uses.
Require that at
least one individual with three or more years of experience in performing
credit analysis participates in determining a credit rating.
9. Addressing Rating Symbols:
The
rule proposal would require an NRSRO to have policies and procedures that are
reasonably designed to:
Assess the
probability that an issuer of a security or money market instrument will
default.
Clearly define
each symbol in the NRSRO’s rating scale.
Apply any such
symbol in a consistent manner.
10. Mandating Electronic
Filings of Form NRSRO and the Annual Reports:
Under
the proposed rule amendments, an NRSRO would be required to use the SEC’s EDGAR
system to electronically submit Form NRSR:
To update an
NRSRO registration.
Submit the
annual certification.
Withdraw from
registration.
The
proposal also would require NRSROs to use EDGAR to file their annual reports.
11.Filing NRSRO
Compliance Officer Reports:
Section
932 of the Dodd-Frank Act requires the designated compliance officer of an
NRSRO to submit to the NRSRO an annual report on the rating agency’s compliance
with the securities laws and its policies and procedures that must be filed
together with the report that NRSROs must submit to the SEC annually.