Truck and Barter: More Credit Rating Agency Issues

June 07, 2004

More Credit Rating Agency Issues

By Bob

Last week, I posted an article from International Economy. Appearantly, the mood to examine the credit ratings agencies have spread to this side of the Atlantic, but unlike in Germany the impetus has been ratings users(oops, forgot the link, here it is):

Credit rating agencies might be required to submit to new record-keeping and reporting requirements when the US Securities and Exchange Commission, the US financial regulator, concludes its long-running review of the industry.

The move would be the most significant reform of the ratings business in decades and would give the SEC greater authority to examine how the agencies assess companies' creditworthiness, according to people close to the regulator.

However, it is unlikely to be welcomed by some credit rating agencies, which regard tighter controls of their lightly regulated sector as unnecessary.

But in an apparent concession, the SEC is not expected to make significant changes to its system of officially recognising certain agencies.

The designations of "nationally recognised statistical ratings organisations" is held by only four agencies: Moody's Investors Service, Standard & Poor's, Fitch Ratings and the Dominion Bond Rating Service. However, eligibility guidelines for entry to this elite could be clarified. Formal action by the SEC is expected by the end of the year.

Scrutiny of the ratings industry increased following the collapse of energy trader Enron in late 2001. Congress convened special hearings and demanded to know how the agencies could have rated Enron as a creditworthy risk days before it imploded.
A year ago the SEC issued a report outlining a range of possible reforms, including introducing "more pervasive" regulations.

Under the current system, the SEC holds informal meetings with the agencies only every few years and does not evaluate how they reach decisions.

Investors, however, have been telling the SEC they want more transparent information about how the agencies assess creditworthiness. The Investment Company Institute, an association of m utual funds, has recommended the regulator require agencies to maintain records of their decision-making.

Fidelity Investments, a mutual fund, has suggested the agencies disclose the date and location of their most recent meeting with the management of debt issuers.

The ratings agencies declined to comment on SEC's review. Moody's said: "We're engaged in conversations with the SEC and are co-operating fully."

But some have indicated they would be unhappy with any regulations that intrude too deeply into their business operations.

S&P said: "We would consider record-keeping requirements in light of our current practices, the fact that ratings are not investment advice and our First Amendment protections."

The SEC declined to comment.

Posted at June 7, 2004 02:47 PM

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