The credit-rating agencies (CRAs) could soon feel a new level of scrutiny, at least if the Association for Financial Professionals (AFP) has its way. The Bethesda, Md.-based industry group has proposed a “Code of Standard Practices” for Moody’s Investors Service, Standard & Poor’s, Fitch, and upstart Dominion Bond Rating Service, as well as for debt issuers.
Among the AFP’s recommendations are that CRAs publish their ratings methodologies, document their firewalls whenever potential conflicts of interest arise, and reveal their nondisclosure policies about confidential data. The draft also asks the Securities and Exchange Commission to clarify guidelines on how other CRAs can achieve the official recognition that the SEC currently bestows on only the four best-known agencies.
The SEC has been delinquent in reining in the CRAs, says Jim Kaitz, CEO of the AFP. “They’ve been unresponsive for nearly a year.”
The Sarbanes-Oxley Act of 2002 requires the SEC to study the CRAs, and the commission issued a preliminary report in January 2003. But it didn’t keep its promise to follow up in two months’ time with proposed regulations. The agency finally issued a “request for comments” on the appropriate level of regulation for CRAs in June 2003, but it has said nothing since. Spokesman John Nester explains that the commission is still evaluating the comments. “There’s nothing unusual about a one-year waiting period,” he says.
What is unusual is the idea that AFP members should enforce the new code in their contracts with the rating agencies. After all, the agencies are supposed to evaluate AFP members, not the other way around.
Congress and the SEC have been wrestling with why the agencies didn’t move faster to protect investors from Enron and WorldCom, but finance executives are worried about just the opposite: that ratings have become too volatile as agencies try to erase the shame of missing those meltdowns. Kaitz stresses that the AFP’s objective is not to challenge the integrity of the CRAs but to codify an as-yet-ungoverned province of the business landscape.
The CRAs are taking heed. Moody’s president Raymond McDaniel wrote a letter to Kaitz expressing a desire for dialogue and consensus development. The other three agencies share those sentiments: each is writing a formal response to the AFP’s proposal.