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must show defaults relative to the initial rating and incorporate defaults that occur after a credit rating is withdrawn.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.

The rating agency should provide the SEC with an annual report of the number of credit rating actions that occurred during the fiscal year for each class of security for which the NRSRO is registered.

The new guidelines also prohibit a rating agency from issuing a credit rating with respect to an obliger or security where the rating agency or an affiliate of the NRSRO made recommendations to the obliger or the issuer, underwriter, or sponsor of the security about the corporate or legal structure, assets, liabilities, or activities of the obliger or issuer of the security.

It also prohibits a person within an NRSRO who has responsibility for participating in determining credit ratings or for developing or approving procedures or methodologies used for determining credit ratings from participating in any fee discussions, negotiations, or arrangements.

It also prohibits a rating agency from allowing a credit analyst who participated in determining or monitoring the credit rating to receive gifts, including entertainment, from the obliger being rated or from the issuer, underwriter, or sponsor of the securities being rated, other than items provided in the context of normal business activities, such as meetings, that have an aggregate value of no more than $25.

Rating agencies would have to disclose ratings history information for 100 per cent of their current issuer-paid credit ratings in an XBRL format. Further, they only would apply to issuer-paid credit ratings determined after 25 June 2007 (the effective date of the Rating Agency Act). In addition, to protect the revenues NRSROs derive from selling downloads and data feeds to their current outstanding issuer-paid credit ratings, a credit rating action would not need to be disclosed until 12 months after the action is taken.

The revised norms prohibit a rating agency from issuing a rating for a structured finance product paid for by the product's issuer, sponsor, or underwriter unless the information about the product provided to the NRSRO to determine the rating and, thereafter, monitor the rating is made available to other NRSROs.

The proposed amendments would require NRSROs that are hired by arrangers to perform credit ratings for structured finance products to disclose to other NRSROs the deals for which they were in the process of determining such credit ratings.

The arrangers would need to provide the NRSROs they hire to rate structured finance products with a representation that they will provide information given to the hired NRSRO to other NRSROs. In addition, NRSROs seeking to access information maintained by the NRSROs and the arrangers would need to furnish the SEC an annual certification that they are accessing the information solely to determine credit ratings and will determine a minimum number of credit ratings using the information.

The SEC is also proposing to amend Regulation FD to permit the disclosure of material non-public information to NRSROs regardless of whether they make their ratings publicly available.
 
The new measures impose additional requirements on credit rating agencies, whose ratings of residential mortgage-backed securities backed by subprime mortgage loans and of collateralised debt obligations linked to subprime loans contributed to the recent turmoil in the credit markets.

The SEC also proposed additional measures related to transparency and competition concerning credit rating agencies.

The measures follow SEC's extensive 10-month examination of three major credit rating agencies that found significant weaknesses in ratings practices, the agency said in a press release.

''These comprehensive rules touch every aspect of the credit rating process – from conflicts of interest, to publication of ratings methodologies, to disclosure of ratings track records,'' said SEC chairman Christopher Cox. ''The SEC's examinations of credit rating agencies uncovered serious deficiencies that these rules will address, so that investors and markets will have better information to guide investment decisions,'' he added.

This is the second set of credit rating agency reforms since the SEC received fresh mandate from the US Congress to register and oversee credit rating agencies. The initial rules were implemented by the commission under the Credit Rating Agency Reform Act in June 2007.

The regulatory programme established through the Credit Rating Agency Reform Act allows the SEC to promulgate rules regarding public disclosure, record keeping and financial reporting, and substantive requirements to ensure that credit rating agencies conduct their activities with integrity and impartiality.

The SEC will receive public comments on the new proposed amendments for the next 45 days after their publication in the Federal Register.

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 would clarify that all ratings transitions (i.e., 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.

The amendments to the instructions would require rating agencies to 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 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 would be required to be made public on its corporate web site 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.

The rating agency should provide the SEC with an annual report of the number of credit rating actions that occurred during the fiscal year for each class of security for which the NRSRO is registered.

The new guidelines also prohibit a rating agency from issuing a credit rating with respect to an obliger or security where the NRSRO or an affiliate of the NRSRO made recommendations to the obliger or the issuer, underwriter, or sponsor of the security about the corporate or legal structure, assets, liabilities, or activities of the obliger or issuer of the security.

It also prohibits a person within an NRSRO who has responsibility for participating in determining credit ratings or for developing or approving procedures or methodologies used for determining credit ratings from participating in any fee discussions, negotiations, or arrangements.

It also prohibits a rating agency from allowing a credit analyst who participated in determining or monitoring the credit rating to receive gifts, including entertainment, from the obliger being rated or from the issuer, underwriter, or sponsor of the securities being rated, other than items provided in the context of normal business activities, such as meetings, that have an aggregate value of no more than $25.

Rating agencies would have to disclose ratings history information for 100 per cent of their current issuer-paid credit ratings in an XBRL format. Further, they only would apply to issuer-paid credit ratings determined after June 25, 2007 (the effective date of the Rating Agency Act). In addition, to protect the revenues NRSROs derive from selling downloads and data feeds to their current outstanding issuer-paid credit ratings, a credit rating action would not need to be disclosed until 12 months after the action is taken.

The revised norms prohibit a rating agency from issuing a rating for a structured finance product paid for by the product's issuer, sponsor, or underwriter unless the information about the product provided to the NRSRO to determine the rating and, thereafter, monitor the rating is made available to other NRSROs.

The proposed amendments would require NRSROs that are hired by arrangers to perform credit ratings for structured finance products to disclose to other NRSROs the deals for which they were in the process of determining such credit ratings.

The arrangers would need to provide the NRSROs they hire to rate structured finance products with a representation that they will provide information given to the hired NRSRO to other NRSROs. In addition, NRSROs seeking to access information maintained by the NRSROs and the arrangers would need to furnish the SEC an annual certification that they are accessing the information solely to determine credit ratings and will determine a minimum number of credit ratings using the information.

The SEC is also proposing to amend Regulation FD to permit the disclosure of material non-public information to NRSROs regardless of whether they make their ratings publicly available.