Revoking Registration
One rule requires the firms to re-examine ratings done by analysts who leave to join a company after grading its products. Raters that violate the ban on mixing sales and ratings could have their registrations suspended or revoked. Seven smaller credit raters, including Morningstar Inc. and Kroll Bond Rating Agency Inc., are permitted by the rules to apply for exemptions to the conflict-of-interest provision.
The rules also require that the firms establish internal controls for ensuring they follow their own criteria for rating bonds. SEC examinations in recent years found rating firms didn’t follow their methodologies while others failed to separate analytical work from sales pressure.
The changes are a “constructive step” toward reforming practices that contributed to the 2008 meltdown, said Jeffrey Manns, a law professor at George Washington University. Suspension is “the nuclear weapon that the SEC could use,” Manns said in an interview.
Dennis Kelleher, president of Better Markets, a nonprofit promoting tighter regulation of the markets, said the SEC’s action is an improvement but not a solution.
‘Lofty Goal’
“Until the conflict of interest inherent in the ‘issuer- pay’ model is eliminated or at least significantly limited, truly objective and reliable credit ratings will remain a lofty goal, not a reality,” Kelleher said.
Among the few voices saying the rules were too onerous was SEC Commissioner Daniel M. Gallagher, one of the Republicans who voted no. He said yesterday that the ban on mixing sales and ratings is so broad that regulators could trap analysts who have “a stray thought related to sales and marketing.”
“A majority of the commission has taken the novel approach of establishing what amounts to a thought-crime,” Gallagher said at yesterday’s meeting.
Rating companies, which in 2010 faced the possibility that Congress would impose more radical changes, greeted the SEC’s action with some relief, saying the regulations provide clarity.