SEC Proposes Rating Agency Rule Changes

The U.S. Securities and Exchange Commission (SEC) has proposed new regulations that could change the way rating agencies do business.

Members today voted 5-0 to expose the 518-page rating agency regulations draft for a 60-day public comment period.

The SEC staff developed the draft to implement the rating agency provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

If adopted as written, the proposed regulations would apply to the major “nationally recognized statistical rating organizations” (NRSROs). The new regulations would require rating agencies to change the methods they use to determine credit ratings, take steps to address potential conflicts of interest, and periodically test credit analysts’ knowledge of credit rating procedures.

A rating agency also would have to:

• Exclude sales people from participating in the rating process.
• Re-rate companies if former employees were hired by the companies that they had helped rate.
• File an annual report assessing the effectiveness of the internal controls governing credit rating determinations.
• Publish more information about the assumptions and methods they use to assign ratings, along with reports showing how ratings had changed over times and whether the securities or companies rated had later defaulted.

Another section of the draft would affect ratings of asset-backed securities. In that section, the SEC asks whether insurance-linked securities should be classified as insurance companies or as issuers of asset-backed securities.