Corporate Governance

SEC v. Credit Rating Agencies

By Tamar Weinrib

The Securities and Exchange Commission ("SEC") proposed a rule today which would remove credit ratings as one of the conditions for companies seeking to use short-form registration when registering securities for public sale.  ?Over-reliance on credit ratings has been one of the factors cited as contributing to the financial crisis,? said SEC Chairman Mary L. Schapiro. ?I look forward to hearing from companies that are currently eligible for short-form registration as to whether there are alternative criteria that would preserve their eligibility.?  Instead of ratings, the new short-form test for shelf-offering eligibility of companies would be tied to the amount of debt and other non-convertible securities they have sold in the past three years. 

The SEC proposed this rule pursuant to its authority under Dodd-Frank, which targeted the rating agencies for their contribution to the ongoing economic turbulence.  The credit rating agencies, like Moody's and Standard & Poor's, granted superior ratings to securities backed by risky subprime mortgages, which subsequently lost most or all of their value.  Those ratings were heavily relied upon by the market.  Many commentators, government officials, and lawsuits, have asserted that the credit rating agencies compromised their integrity when granting these ratings in order to maximize their own profit generation.  The SEC is accepting public comments on the proposal until March 28, 2011.

Full post as published by PomTalk on February 09, 2011 (boomark / email).