Risk & Compliance

Rating Agencies in Sights of New SEC?

In an otherwise routine vetting, three nominees to the short-handed Securities and Exchange Commission agreed with their Senate questioner that fix...
Tim ReasonJune 3, 2008

The Securities and Exchange Commission, on the verge of being down to just two commissioners, may soon be back up to full strength — and using that muscle against credit rating agencies.

When it came to questions about credit rating agencies, Democratic nominees Luis Aguilar and Elisse Walter, and Republican nominee Troy Paredes presented a unified front today before the U.S. Senate Committee on Housing, Banking and Urban Affairs.

Asked by Senator Christopher Dodd (D-Conn) whether recent missteps by credit rating agencies were sufficient reason for the Commission to “engage in some serious rule-making,” all three nominees replied “Absolutely.”

Walter, who currently serves as senior vice president of regulatory policy and programs at the Financial Industry Regulatory Authority, said the issue of credit rating agencies was “a terribly important issue. It is one that is not a new one.” In addition to rules now in the works at the SEC, she applauded efforts by the SEC to consider which of its existing rules force companies and broker-dealers to rely on credit ratings.

Paredes, a professor at the Washington University School of Law in St. Louis, said further attention need to be paid to conflicts of interest within credit rating agencies. He also said disclosing the previous performance of credit rating agencies and the accuracy of their past ratings is “worth giving serious consideration.”

Walter and Aguilar were originally recommended to President Bush by Senate Majority Leader Harry Reid last year, but nomination of the two Democrat nominees has been held up by political wrangling between the President and Congress over more than 200 political posts.

Since January, the SEC has had only three Republican commissioners, one of whom, Paul Atkins, steps down this month. The SEC, normally made up of five commissioners, may have no more than three members from the president’s party.

In February, Bush complained that the Senate had stalled on several of his nominations for such agencies as the Council of Economic Advisers and the Federal Reserve’s Board of Governors. “The Senate is not fulfilling its duty,” he said in February. “The confirmation process has turned into a never-ending political game where everyone loses.”

In his opening remarks today, Senator Christopher Dodd (D-Conn.) alluded to the wrangling, noting that several of the 10 nominations before the committee had been previously “blocked for reasons unrelated to the qualifications of the nominees.”

There were few other surprises in the questions or answers during the session, in which the three nominees were also asked for their opinions on issues including proxy access for shareholders, due diligence by originators of structured financial instruments, the appropriate amount of disclosure to investors, and the SEC’s own processes for changing rules.

Both Walter and Aguilar said they enthusiastically welcomed reopening the debate over giving shareholders proxy access. “I think it is one [issue] the commission should approach as soon as possible,” responded Walter. Paredes responded more cautiously. “To be sure, if this issue comes before us, I would consider it with an open mind,” he said.