First Rate?

When the SEC sought comments on credit ratings agencies in connection with hearings conducted November 15 and 21 of last year, it got an earful from Weiss Ratings, Inc., which filed a written statement detailing numerous practices within the industry that could generate conflicts. In addition, the Weiss statement included recommendations for eliminating those conflicts, and a proposed a review process to give investors more information about how ratings are determined and who pays for them. According to Martin Weiss, chairman of the Palm Beach Gardens, Florida, ratings firm, “We have been concerned for several years about the conflicts of interests in a variety of industries,” including insurance company ratings and buy, hold, and sell ratings issued by investment advisory firms. Weiss himself testified before Congress in the early 1990s,when the Government Accounting Office conducted an investigation of the insurance ratings industry.

The conflicts are alleged by Weiss Ratings to arise because the nationally recognized statistical rating organizations (NRSROs) issue ratings intended for the use of the investing public. However, “the buyer of those same ratings is the rated company itself.” Further, Weiss Ratings contends, the companies purchasing the ratings pay substantial fees to the NRSROs and have the power to either suppress the publication of a rating or to end their contracts with NRSROs that render unfavorable ratings.