SEC tightens regulations for credit rating agencies

The Securities and Exchange Commission has announced a series of measures to increase transparency and accountability of credit rating agencies, and ensure that firms provide more meaningful ratings and greater disclosure to investors.

Under the revised guidelines, the rating agencies and applicants for rating would have to enhance disclosures. They would have to provide transition statistics for each asset class of credit ratings for which it is registered or is seeking registration, broken out over 1, 3, and 10 year periods.

The amended instructions require that all ratings transitions (ie, upgrades as well as downgrades) must be included in these statistics as well as that default statistics must show defaults relative to the initial rating and incorporate defaults that occur after a credit rating is withdrawn.

Rating agencies should provide enhanced disclosure in three areas: (1) whether and, if so, how much verification performed on assets underlying or referenced by the structured finance transaction is relied on in determining credit ratings; (2) whether and, if so, how assessments of the quality of originators of structured finance transactions play a part in the determination of the credit ratings; and (3) more detailed information on the surveillance process, including whether different models or criteria are used for ratings surveillance than for determining initial ratings.

Each rating agency would have to make publicly available on its corporate website a random sample of 10 per cent of its issuer-paid credit ratings and their histories documented for each class of issuer-paid credit rating for which it is registered and has issued 500 or more ratings. This information has to be made available (in XBRL format) no later than six months after the rating is made.

Under the new record keeping requirements, a rating agency should make and retain records of all rating actions related to a current rating from the initial rating to the current rating. If a quantitative model is a substantial component of the credit rating process for a structured finance product, a rating agency must keep a record of the rationale for any material difference between the credit rating implied by the model and the final credit rating issued. The agency should retain records of any complaints regarding the performance of a credit analyst in determining, maintaining, monitoring, changing, or withdrawing a credit rating.