On August 27, the Securities and Exchange Commission adopted new rules for credit rating agencies to enhance governance, protect against conflicts of interest, and increase transparency to improve the quality of credit ratings and increase credit rating agency accountability. Industry observers hope that the new rules will address problems that have contributed to the failure of some corporate credit unions. In some ways, the rules aim to prevent claims that form the basis of the National Credit Union Administration’s lawsuit against Standard & Poor’s, which alleged that the S&P purposely misled corporations when rating mortgage-backed securities and collateralized debt obligations for credit risk.
The new requirements for nationally recognized statistical rating organizations address internal controls, conflicts of interest, disclosure of credit rating performance statistics, procedures to protect the integrity and transparency of rating methodologies, disclosures to promote the transparency of credit ratings, and standards for training, experience, and competence of credit analysts. They also provide for an annual certification by the CEO as to the effectiveness of internal controls and additional certifications to accompany credit ratings attesting that the rating was not influenced by other business activities.
Furthermore, the SEC adopted requirements for issuers, underwriters, and third-party due diligence services to promote the transparency of the findings and conclusions of third-party due diligence regarding asset-backed securities.
“This expansive package of reforms will strengthen the overall quality of credit ratings, enhance the transparency of credit rating agencies and increase their accountability,” SEC Chair Mary Jo White said in a release. “Today’s reforms will help protect investors and markets against a repeat of the conduct and practices that were central to the financial crisis.”