Risk & Compliance

SEC to Clamp Down on Credit-Ratings Agencies

Credit-ratings agencies are bracing for new regulations that will tackle problems with the "issuer pays" model and a lack of disclosures to investors.
Iris DorbianAugust 18, 2014
SEC to Clamp Down on Credit-Ratings Agencies

To prevent a reprise of the 2008 financial crisis, the U.S. Securities and Exchange Commission is set to “finalize” new rules for credit-ratings agencies, says the Wall Street Journal. The effort is in response to criticism leveled against the firms for not being vigilant when assessing “flawed mortgage securities,” a significant factor behind the housing collapse.

clampThe WSJ also reports that the new regulations will be somewhat more stringent than what was proposed more than three years ago. Sources told the newspaper that these new rules “will take additional steps to ensure that the firms’ interest in winning business doesn’t affect ratings analysis.”

Says WSJ, the new rules would also give regulators more power to take “disciplinary action” and require more ratings disclosures for investors and “create a clearer process to impose penalties for violations.”

At least one credit-rating agency is applauding the SEC’s move toward making the ratings business more transparent.

Speaking to WSJ, Daniel Noonan, a spokesman for Fitch Ratings, said, “The markets must have clear and consistent rules for credit-rating agencies, and a proper regulatory framework will ensure investors have confidence in the rating process.”

The credit-rating agencies have said that they would need a timeline of several months to “comply with the SEC rules, whenever they are finalized.”

For their actions leading up to the 2008 financial crisis, credit rating agencies came under heavy fire by critics and lawmakers. The latter group blamed the firms for their role in issuing “widespread and sudden downgrades of mortgage-related bonds” that led to the financial meltdown.

Although credit rating agencies have said they were not blameless, neither were regulators nor other market participants, they’ve countered.

Source: WSJ New Rules Near on Credit-Ratings Firms

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