SEC Boosts Oversight of Credit Rating Agencies

The U.S. Securities and Exchange Commission has voted unanimously to increase disclosure rules for Nationally Recognized Statistical Rating Organizations -- the organizations that rate companies on their creditworthiness.

At a Sept. 17 meeting, the federal agency adopted rules demanding more information about ratings histories and requiring competing companies be given access to data on structured products, enabling them to offer unsolicited ratings. The federal regulators will require annual compliance reports and increased disclosure of potential revenue-related conflicts. References to the companies' ratings also will be removed from some SEC rules and forms. And the new rules include disclosure provisions that call for rated institutions or financial products to report whether other ratings had been sought -- a counter to the potential for "ratings shopping" for the most positive rating.

SEC Chairwoman Mary Shapiro said the new rules will "promote greater accountability" and "foster competition" among the ratings organizations in the wake of the economic crisis. "These proposals are needed because investors often consider ratings when evaluating whether to purchase or sell securities," she said. "Their 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 to give investors the appropriate context for evaluating whether ratings deserve their trust."

The SEC was given authority by Congress in 2006 to establish registration, record-keeping and reporting rules for the NRSROs. A.M. Best Co. is designated an NRSRO -- one of 10 currently registered.

Shapiro contended that the new disclosures will allow investors a better sense of the ratings agencies' performance and will "decrease the level of undue reliance" on the ratings by investors.

The SEC also has decided to collect public comments on whether the credit rating agencies should be held more liable under securities law for their ratings being used in connection with a registered offering.