(Bloomberg News) Credit-rating companies would have to release more information on how they assess debt securities, ensure the quality of ratings and prevent conflicts of interest under rules proposed by the U.S. Securities and Exchange Commission.
SEC commissioners voted 5-0 to publish a 517-page set of regulations, part of the Dodd-Frank Act's attempt to reshape the role of the credit raters after they were blamed by lawmakers for fueling the housing bubble by handing out top grades on bonds tied to risky mortgages.
"Today's proposals are part of a concerted effort by the SEC to enhance the credit-rating industry in light of the financial crisis," SEC Chairman Mary Schapiro said in prepared remarks before commissioners voted in Washington.
Dodd-Frank, the regulatory overhaul enacted in July, sought to force changes in the credit-rating industry after lawmakers blamed inflated grades from firms such as Moody's Corp. and McGraw-Hill Cos.' Standard & Poor's unit for fueling the housing bubble before the collapse of the U.S. subprime mortgage market.
The vote approves release of the agency's proposal for a 60-day comment period.
Conflicts Of Interest
The rules, which would apply to the 10 firms registered with the SEC as "nationally recognized statistical rating organizations," target potential conflicts of interest by barring employees involved in sales and marketing from ratings work. The proposal would give the SEC authority to de-register firms found to have violated the conflict-of-interest rule.
Ratings companies would also be required to review the activities of employees who leave to join firms whose products they have rated, and to notify the SEC when such moves occur.
Third-party due diligence providers hired by ratings firms to assess asset-backed securities would have to provide information on their examinations and conclusions, making those reports public for the first time.
SEC Commissioner Kathleen Casey, one of two Republicans on the five-member panel, said some aspects of the proposal "threaten to cross the line into regulating the substance of credit ratings."
Schapiro said the proposal is meant to implement Dodd-Frank provisions requiring the agency to enhance existing rules governing ratings and ratings firms. Lawmakers included the provisions after losing bets on asset-backed securities that got top grades from credit-raters helped topple Lehman Brothers Holdings Inc. and forced the government to bail out firms including American International Group Inc.