Securities and Exchange Commission staff members are preparing recommendations that would change the agency's 30-year-old system of overseeing the credit-rating industry, potentially opening established firms to more competition but stopping short of imposing tight controls over the business.
At issue is a national designation that the SEC gave in 1975 to the big three credit raters that help investment firms assess the quality of their bonds. The SEC initially gave the national designation only to Moody's Investors Service, Standard & Poor's and Fitch Ratings, but without explicit rules for how other rating companies could apply for the designation and without significant regulatory oversight. Since then, investors have come to view the national designation as the U.S. government's approval, which rivals say has created an oligopoly.
Now, the SEC is preparing a definition of the national designation -- Nationally Recognized Statistical Rating Organization, or NRSRO. Annette L. Nazareth, the SEC's director of market regulation, called it a first step toward bringing greater transparency to the application process and bestowing the designation on other credit-rating firms. At a March 3 meeting, the commission is expected to vote on the rule. Nazareth said there appears to be commission support for it, and the major credit raters have repeatedly said they would not oppose it.
Nazareth declined to describe the new rule in detail, in part because she said the language may change before the meeting. But she said the SEC staff is not only clarifying the national designation but also broadening the definition. Rivals that have sought the national designation have complained that they are caught in a Catch-22: To get the national designation, the SEC has required that the credit rater have a national reach, but to have a national reach, the raters say they need the national designation.
Under the proposed rule, Nazareth said the SEC would grant the national designation to credit raters that specialize in a specific industry sectors, like insurance, or have a dominant position in a geographical area in other parts of the world.
In 2003, the SEC gave the national designation to Dominion Bond Rating Service Ltd., a small Canadian firm. Nazareth said the SEC may give the designation to A.M. Best Co., a leader in the insurance-rating industry, this year.
Nazareth, however, said the SEC may not be able to do more unless Congress enacts legislation that specifically grants authority to the federal agency to oversee the credit-rating industry. "I think everybody is sort of frustrated we can't do more," she said. For now, the major credit raters are working on a voluntary initiative that would protect against conflicts of interest and address other problems.