The Securities and Exchange Commission voted unanimously to adopt rules that will increase oversight of credit rating agencies and improve transparency. The rules will require greater disclosure, address conflicts of interest and promote competition for an industry that is dominated by three firms.
Credit ratings agencies generally provide a given financial product or company with a creditworthiness tag that investors’ factor into their investment decision process. Those ratings have been provided by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.
All three agencies came under fire following the subprime mortgage fallout, as they tagged many mortgage backed financial products with investment grade ratings.
Many investors who relied on credit ratings to place funds in triple A rated products suffered significant losses when loan defaults began to skyrocket, leading the credit rating agencies to aggressive downgrade those products.
“That reliance did not serve them well over the last several years, and it is incumbent upon us to do all that we can to improve the reliability and integrity of the ratings process and give investors the appropriate context for evaluating whether ratings deserve their trust,” said Shapiro.
Many regulators have accused the ratings agencies of failing to identify risks in the products that were backed by subprime mortgages.
The SEC formally implemented a rule on Thursday that requires ratings agencies to disclose the history of their ratings, which generally provide detail for giving that rating.
In the past little transparency existed into why a rating was given, which also cleared the way for conflicts of interest to go unnoticed since many companies pay the ratings agency to determine the creditworthiness of its more complex investments.
According to the new rules, a credit rating agency must notify other agencies when it has been paid to determine a rating for company’s financial product.
An additional rule that has been proposed would require that rating agencies to publicly disclose every company or agency that paid for a credit rating.
The SEC has opened the above proposed rule and others to public comment for a 60 day period.
