SEC Mulls Rule to Slow Credit-Rating 'Shopping'

Securities and Exchange Commission Chairman Mary Schapiro testified on Tuesday the SEC is looking to enforce rules to curb debt underwriters from shopping around for firms willing to assign the highest letter grade. Speaking spoke before the House Financial Services subcommittee, Schapiro told members that the SEC staff has been instructed to research regulations to stop "rating shopping" by firms. (Link to Schapiro's testimony:)

Schapiro said one way the SEC may do this is to require issuers to release preliminary ratings from firms such as Standard & Poor's and Moody's Investors Service before a firm is hired to give a final ranking.

"We are committed to working with Congress to ensure a strong and robust regulatory framework" for raters, she said. Making firms more liable to claims if they incorrectly assess creditworthiness "could have a very important effect."

Lawmakers had pointed to S&P, Moody's and Fitch Ratings for assigning mortgage bonds the highest rankings and maintaining the assessments even after home-mortgage defaults began growing in 2007. SEC's move to stop this type of action by ratings companies, as Calpers, the biggest U.S. public pension fund, filed a lawsuit against the three credit rating agencies. Calpers - the California Public Employees' Retirement System - is suing the three agencies for giving perfect grades to securities that later suffered huge subprime mortgage losses. Calpers, in a suit filed last week in California Superior Court in San Francisco - contends it may lose more than $1 billion from structured investment vehicles that got top marks from the three credit rating agencies.

Schapiro said the SEC recently established a unit of examiners to oversee the rating firms. The agency is mulling the idea that it could also require disclosure of data used to create rankings, a step that could encourage unsolicited ratings by letting companies grade bonds even if they weren't paid by debt underwriters. "Then you would have competition and diversity of perspective about the quality" of new instruments, Schapiro said.

The SEC in December approved rules prohibiting credit-rating analysts who assess debt from discussing fees with underwriters. The agency also limits gifts from securities firms to rating-company employees and restricted analysts from offering advice on structuring securities to win top grades. Other measures now require firms to publish statistics on how well their ratings predicted the risk of default and show how frequently grades are re-evaluated.

About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.

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