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Regulation and Compliance > Federal Regulation > SEC

SEC Not Sure What To Do About Rating Agencies

By Allison Bell

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Federal regulators want Congress to help them decide whether and how to oversee the “nationally recognized statistical rating organizations.”[@@]

Annette Nazareth, director of the market regulation division at the U.S. Securities and Exchange Commission, recommended Tuesday that Congress hold a series of hearings on “NRSRO” issues.

“A well-thought out regulatory regime could provide significant benefits in such cases as record-keeping and addressing conflicts of interest in the industry,” Nazareth said at a credit rating agency hearing organized by a U.S. House Financial Services Committee subcommittee, according to a written version of her testimony. “

The SEC gave birth to the current NRSRO system in 1975, when it began to relying on rating agencies to distinguish between various grades of securities, then issued a series of “no-action letters” that helped give extra weight to the ratings of 5 agencies: A.M. Best Company Inc., Oldwick, N.J.; Dominion Bond Rating Service Ltd., Toronto; Fitch Inc., Chicago; Moody’s Investors Service Inc., New York; and Standard & Poor’s, New York.

The rating agencies argue that their “rating activities are journalistic and are afforded a high level of protection under the First Amendment,” Nazareth said.

The rating agencies also argue that the SEC has no explicit regulatory authority over their work, and 6 months of efforts to set up a voluntary oversight system “have not resulted in an agreed-upon voluntary oversight framework,” Nazareth said.

But the SEC is asking for public comments about whether it ought to look at issues such as setting minimum standards for the experience, training and workloads of a rating agency’s rating analysts, Nazareth said.

SEC also is asking whether it should require rating agencies to show that they are insulating analysts from potential conflicts of interest, including potential conflicts resulting from the activities of the agencies’ sister companies and economic pressure from the companies being rated.

The House Financial Services Committee has posted the written version of Nazareth’s testimony at //financialservices.house.gov/media/pdf/041205an.pdf

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