SEC Adopts New Credit Rating Agency Rules, Proposes Additional Rules

This story appeared in SEC Today

The SEC yesterday unanimously approved six initiatives aimed at strengthening the regulatory framework for nationally recognized statistical rating organizations. The SEC adopted rules to require NRSROs to provide more information about their rating histories and to allow competing credit rating agencies to offer unsolicited ratings for structured finance products by giving them access to the same data. The SEC also adopted amendments to certain rules and forms to remove a number of references to credit ratings.

In opening remarks, SEC Chair Mary Schapiro noted that investors often consider credit ratings in deciding whether to purchase or sell a security. These ratings did not serve them well over the last few years, she said. The SEC's rule adoptions and proposals are intended to improve the reliability and integrity of the ratings process. Schapiro reported that there are currently 10 NRSROs registered with the Commission. Commissioner Kathleen Casey noted that more are "waiting in the wings."

Under one of the new rule amendments, NRSROs will have to disclose actions such as upgrades, downgrades, affirmations and withdrawals of their ratings. The disclosure requirement will apply to any rating that was initially made as of June 26, 2007. The disclosure must be made in less than two years after the action is taken for subscriber-paid ratings and in less than one year for issuer-paid ratings. The disclosures must be made online and in a searchable format.

The amendments will require an NRSRO that is paid by an arranger to rate a structured finance product to disclose to other NRSROs that it is in the process of rating the product. The arranger must agree to provide the same information to other NRSROs that wish to rate the product. The competing NRSRO would have to file an annual certification with the SEC stating that its access to the information is for the purpose of determining a credit rating and that it intends to rate a certain percentage of products.

The SEC also amended Regulation FD so that issuers may allow NRSROs to access information to determine a credit rating even if the NRSROs do not make their credit ratings publicly available at no charge. The commissioners approved the issuance of a release seeking comments on requiring annual compliance reports and increased disclosure about potential sources of revenue-related conflicts. The NRSROs' compliance officers would have to describe the steps taken to ensure that the agencies' policies and procedures are followed. The report would include any material compliance issues that were identified and the steps taken to address those issues.

Another proposal would require the disclosure of information about the coverage of the credit rating and any material limitations on the scope of the rating. This proposal would also require issuers to disclose whether any preliminary ratings were obtained from other rating agencies in order to shop for the best ratings. The proposal includes a requirement that registrants disclose any changes in a credit rating on Form 8-K.

The Commission will reopen the comment period on the elimination of certain references to NRSRO ratings in forms and rules that were not covered in the adopting release.

The Commission will issue a concept release on whether to subject NRSROs to liability when a rating is used in connection with a registered offering. NRSROs currently rely on an exemption from being treated as experts for these ratings. The release will seek comments on whether to rescind 1933 Act Rule 436(g), which may have far-reaching consequences for market participants.

If Rule 436(g) were rescinded, an issuer that includes an NRSRO credit rating in its registration statement would have to file the agency's consent for its use. The agency would then be subject to potential 1933 Act liability. Current rules require the consent of firms that are not NRSROs if their ratings are included in a registration statement.

Casey noted that NRSROs are already subject to the antifraud provisions of the securities laws. She does not believe that additional exposure to private litigation from class action lawyers will protect investors or improve ratings quality. Casey said that competition, not liability, is the solution to improving ratings quality. Higher ratings will come when investors punish NRSROs that do not get the ratings right, in her view.

Commissioner Luis Aguilar expressed concern about seeking comments on the elimination of references to ratings in certain forms and rules for the fourth time. It may create comment fatigue, he said. The process is more complex in execution than it sounds, he added. Commissioner Troy Paredes noted that references serve different purposes in different rules. Some references may still be useful, in his view.

The comment periods on the rule proposals and the concept release will remain open for 60 days.