Corporate Governance

New SEC Rules Promise to Reform the Credit Ratings Process

By Jim Hodgson

Last week, the Securities and Exchange Commission voted to formally propose credit rating agency reforms, which the Commission promises will ?bring increased transparency to the ratings process and curb practices that contributed to recent turmoil in the credit markets.?

Among a host of other things, the proposed rules will prohibit a credit rating agency from issuing ratings on a product unless verifiable information on assets underlying the product is available; will prohibit rating agencies from structuring the same products that they rate; will require the agencies to make all of their ratings and subsequent rating actions publicly available; will curb the practice of buying favorable ratings by prohibiting anyone who participates in determining a credit rating from negotiating the fee that the issuer pays for it; and will require agencies to publish performance statistics for one, three, and ten years within each rating category, in a way that facilitates comparison with their competitors in the industry.  More detail is available by following this link.

These comprehensive rules are being introduced on a rolling basis, with more to follow next week.  As written, the proposal seems to go a long way toward accomplishing SEC Chairman Christopher Cox?s goal of ?increasing transparency, accountability, and competition in the credit rating agency industry for the benefit of investors.?  Time will tell....

Full post as published by PomTalk on June 19, 2008 (boomark / email).