Industry groups speak out on SEC rating agency rules

The SEC published the proposed rules in March, aimed at codifying the criteria for a ratings agency to be given NRSRO status for regulatory purposes. NRSRO ratings are treated as the benchmark by a number of US and foreign regulations, such as net capital rules, as well as private financial contracts. However, there is no legal definition of the term.

The SEC's proposed rules have been broadly welcomed by the industry - for example, that NRSROs should make ratings (although not rating methodology) publicly acceptable, that they should rate securities rather than only companies and that they should be “generally accepted in the financial markets”, according to the SEC.

However, an issue regarding ‘no-action letters’ has attracted some concern. The SEC's proposal suggests that the status of NRSRO could be reached automatically by any agency that met a list of criteria. This would represent a change from the situation at present, where agencies must seek and receive a letter of assurance that the SEC will not take civil or criminal action against them.

The SEC suggests that, in light of the length of time it takes to process a request for a no-action letter, this requirement could be removed, thus lowering the barriers to entry for new rating agencies. But the Investment Company Institute (ICI) said this could remove important SEC oversight from the ratings business, arguing instead that the process of receiving the letters should be speeded up.

The Bond Market Association and Securities Industry Association also raised the issue of ratings agencies, such as Moody's KMV, which rely entirely on quantitative methods rather than contacts with senior management for their assessments. "We do not believe that a rating agency that uses solely quantitative models and does not request that an issuer’s senior management participate in the rating process free of charge should be designated an NRSRO", the associations commented in a joint letter to the SEC this month.

SEC commissioner Cynthia Glassman, however, disagrees with these sentiments. "I question the assumption that ratings based on qualitative factors, specifically, access to senior management, are necessarily more credible and reliable than ratings based on quantitative models. I am not aware of a substantive basis for this distinction, and I agree with commentators who view this requirement as another barrier to entry," she said in March.

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