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After several discussions, roundtables, debates and proposals, the U.S. Securities and Exchange Commission (SEC) recently voted unanimously to issue several rules aimed at more harshly regulating U.S. credit rating agencies. Specifically, the proposals will bolster oversight of Nationally Recognized Statistical Rating Organizations (NRSROs) by enhancing disclosure and improving the quality of issued credit ratings.

Among the many blamed for the subprime mortgage crisis and financial meltdown of the last year or so, none have been more ripe for increased regulation than NRSROs, whose failure to properly identify risks and propensity to create harmful conflicts of interest led to inflated ratings of financial products that eventually had to be downgraded, causing hundreds of billions of losses at banks and investment firms. In its quest to ensure that such misdeeds never occur in the future, the SEC's rules and proposals require greater disclosure among NRSROs, aim to increase competition in the industry, which is dominated by only three different firms, and help to address conflicts of interest by illuminating the practice of rating shopping, whereby a firm will seek ratings from multiple agencies in order to get the highest grade.

"These proposals are needed because investors often consider ratings when evaluating whether to purchase or sell a particular security," said SEC Chairman Mary Schapiro. "That reliance did not serve them well over the last several years and it is incumbent upon us to do all that we can to improve the reliability and integrity of the ratings process and give investors the appropriate context for evaluating whether ratings deserve their trust."

Certain items were approved by the SEC while several others were simultaneously proposed and made available for public comment. Among the adopted elements were rules that will provide greater information on ratings histories and grant competing agencies access to the underlying data necessary to provide unsolicited ratings on structured finance products, as well as an amendment to the SEC's rules and forms that will remove certain references to credit ratings by NRSROs. Among the proposed elements were amendments to strengthen compliance programs by requiring annual compliance reports and enhancing disclosure of potential revenue-related conflicts of interest and new rules that would require firms to disclose the practice of rating shopping.

While 10 credit rating agencies are listed with the SEC as NRSROs, the three dominant raters are Moody's Investor Service, Standard & Poor's and Fitch Ratings, whose business is expected to be largely affected by the new proposals. Parties interested in commenting on the new rules or proposals can visit the SEC's website (www.sec.gov) for more details.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.

 

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