The Securities and Exchange Commission voted unanimously yesterday to propose a new rule to foster more transparency and competition in the credit-rating industry, but some commissioners expressed frustration that they lack the authority to oversee the powerful business without congressional action.
The SEC agreed to float what would be the first definition of a nationally recognized credit-rating company 30 years after the federal agency created the designation, "Nationally Recognized Statistical Rating Organization," or NRSRO. Investors have come to view the designation as the U.S. government's stamp of approval, and it is used by institutional investors to decide which bonds to buy and sell.
Under the SEC's proposed rule, a nationally recognized credit rater would be required to issue publicly available credit ratings that are generally accepted in the marketplace and are considered credible, reliable and up to date. The designation may also apply to credit raters that have a limited scope, assessing bonds in a particular geographical area or industry, such as insurance. And credit raters would be required to manage conflicts of interest, prevent the misuse of confidential information and have the financial resources to handle such issues.
The SEC staff yesterday also bestowed the national status on A.M. Best Co., a major rater of insurance companies. Four others have the designation: Moody's Investors Service, Standard & Poor's, Fitch Ratings and Dominion Bond Rating Service Ltd.
Annette L. Nazareth, the SEC's director of market regulation, said the proposal does not give the SEC authority to oversee the credit raters; its legal counsel said the regulator lacked such explicit statutory power.
Critics of the credit-rating companies, including the Association for Financial Professionals, called for congressional intervention. Moody's spokeswoman Frances G. Laserson said her firm hasn't seen the proposal but welcomed "healthy competition in the marketplace," including A.M. Best's national designation.
Commissioner Cynthia A. Glassman called it a "very modest proposal" that "does little to change the status quo." She also was concerned that the SEC staff did not address unsolicited ratings issued by credit raters, which some borrowers say are used to pressure them to pay fees to the ratings company. Nazareth said the SEC staff also was concerned about unsolicited ratings but considered that area beyond its authority.
After airing the proposed rule for public comment, the SEC is expected to take a final vote in the coming months. Meanwhile, SEC Chairman William H. Donaldson, who was noncommittal during the hearing, is set to testify about credit raters and the state of the securities industry at a Senate Banking Committee hearing Wednesday.