SEC moves to reduce reliance on credit ratings

US regulator proposes changes to clarify credit ratings for investors

WASHINGTON, DC – The Securities and Exchange Commission (SEC) has proposed rule changes that clarify the limits and purpose of credit ratings for investors. This is the third set of proposals issued by the SEC for public comment concerning rating agency reform, aiming to bring increased transparency to the credit ratings process and curb practices that contributed to recent turmoil in the credit markets.

“This action is designed to ensure that the role we assign to ratings in our rules is consistent with the objective of having investors make an independent judgement of the risks associated with a particular security,” says SEC chairman Christopher Cox. “It should be neither the purpose nor the effect of any SEC rule to discourage investors from paying close attention to what credit ratings actually mean.”

Erik Sirri, director of the SEC's trading and markets division, says: “These proposals complete the rulemaking initiative begun two weeks ago with respect to NRSROs [nationally recognised statistical rating organisations]. I believe the proposed amendments will further promote the Commission's goals of strengthening the ratings process by reducing any undue reliance on NRSRO ratings and by encouraging independent evaluation and analysis of credit risk.”

John White, director of the SEC's corporation finance division, adds: “These proposals are an important step towards clarifying the appropriate role of credit ratings in investors' decisions about the securities in which they invest. Not only do the proposals establish new criteria, independent of ratings, for issuers to access our forms and utilize the shelf registration process, they do so in a manner that protects the interests of investors.”

Consistent with recent recommendations issued by the President's Working Group on Financial Markets, the Financial Stability Forum, and the Technical Committee of the International Organisation of Securities Commissions (Iosco), the SEC has considered whether the inclusion of requirements related to ratings in its rules and forms has, in effect, placed an ‘official seal of approval’ on ratings that could adversely affect the quality of due diligence and investment analysis. The new proposals aim to reduce such undue reliance and result in improvements in the analysis that underlies investment decisions.

The deadline for public comments for the third set of proposed rules is September 5, 2008.