The U.S. Securities and Exchange Commission (SEC) is asking for comments about the idea of having a public utility, a private utility or a self-regulatory organization pick the agencies that rate structured finance products.
The SEC has issued the rating agency selector request for comments to implement Section 939F of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires the SEC to look into the current methods of paying for credit ratings.
Today, the large “natiobnally recognized statistical rating organizations” (NRSROs) typically charge issuers for ratings. Some NRSROs charge the users for the ratings.
The Dodd-Frank Act drafters included a variety of provisions designed to reduce SEC reliance on the NRSROs, in response to allegations that the NRSROs had done a poor job of rating the products and companies at the heart of the credit market meltdown that started in 2007.
Section 939F of the Dodd-Frank Act directs the SEC to study the conflicts that could arise in the current “issuer pay” structured product rating environment and in a “subscriber pay” environment.
The SEC uses the term “structured product” to include a variety of instruments that are often found in life insurer investment portfolios, such as residential mortgage-backed securities, commercial mortgage-backed securities, collateralized debt obligations, and asset-backed commercial paper.
The act requires the SEC to study the feasibility of having a utility or self-regulatory organization act as the rating agency selector for structured products, to reduce the likelihood that the identity of the party paying for the rating will affect the rating.
The SEC is supposed to come up with tools for measuring the accuracy of credit ratings for structured