Moves to reduce reliance on credit ratings and improve the rating process make sense, but going cold turkey may not, according to a state pension fund executive.
Gregory Smith, chief operating officer of the Colorado Public Employees’ Retirement Association, Denver, talked about the current effort to root references to credit ratings out of federal financial services regulations today at a hearing organized by the oversight subcommittee of the House Financial Services Committee.
Smith, a board member of the Council of Institutional Investors, Washington, appeared at the hearing a day after members of the U.S. Securities and Exchange Commission (SEC) voted unanimously to adopt new rules to remove credit ratings as eligibility criteria for companies seeking to use the simpler “short form” registration when registering securities for public sale.
The SEC developed the regulations to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that call for federal agencies to shift away from use of credit ratings.
Traditionally, issuers of debt securities have paid the big “nationally recognized statistical rating organizations” (NRSROs) to rate the securities. Lawmakers added the NRSRO provisions to the Dodd-Frank Act in response to arguments that faulty ratings assigned by rating agencies with conflicts of interest contributed to the severity of the credit market crisis that started in 2007.
Smith noted that Colorado PERA has never relied solely on NRSROs when making investment decisions.
“Credit ratings are used as a part of the mosaic of information we consider during the investment process,” Smith testified, according to a written version of his remarks provided by the House Financial Services Committee.
Colorado PERA is looking for alternative measures of risk to further reduce reliance on ratings, Smith added.