Speech by SEC Commissioner:
Comments on Proposed Rules Regarding Oversight of Credit Rating Agencies as Nationally Recognized Statistical Rating Agencies
Commissioner Paul S. Atkins
U.S. Securities and Exchange Commission
January 31, 2007
Thank you, Mr. Chairman. I am very happy that we are considering today rules that, if promulgated, will provide a fully transparent regime for the designation and oversight of NRSROs. I would like to thank Erik Sirri, once again, for guiding his Staff through a congressionally-mandated rulemaking process. Erik- I bet you never guessed that things would be so well laid out for you when you started a few months ago! I would also like to thank the Staff for their efforts in completing the proposed rules within the timelines set by Congress.
Since I came to the Commission in 2002, I have been a vocal proponent of increased transparency in the NRSRO designation process. The rules we propose today will, if implemented, pull back the curtains and expose to the sunlight what has become an all too mysterious internal process that has disadvantaged many and rewarded only a select few.
I have seen this process from both inside and outside the Commission, and I for one am glad that Congress mandated that we formalize the system. My main regret is that the definition of NRSRO still uses the word "recognized" instead of "registered"—in my view we are in the registration, not recognition business. The government should facilitate market-based decisions, not obstruct them.
It probably would have been hard to imagine in 1975 that the NRSRO designation — a designation designed to assist broker-dealers in calculating their net capital — would develop into a means by which we in effect limit competition and information flowing to investors. But that is exactly what happened. Given the problems broker-dealers have had over the years interpreting and complying with the Net Capital rule, I guess we could say that the NRSRO quagmire is simply the fruit of a poisonous tree. Again, this is why I believe that the SEC's Consolidated Supervised Entity program, which embraces value at risk methodologies, is so important — it is a significant departure from the primitive nature of the net capital rule.
As Congress observed when crafting the Credit Rating Agency Reform Act of 2006, there is a genuine concern that the SEC facilitated the creation of — and perpetuated — an oligopoly in the credit rating business. Today, two NRSRO-designated firms collect over 80 percent of the market's revenues, and enjoy hefty profit margins that would be the envy of almost every industry that I can think of. Maybe Alex Pollock of the American Enterprise Institute had it right when he called it a "government-sponsored cartel!"
With today's proposed rules, it appears that the SEC will finally have a transparent NRSRO program complete with detailed procedural rights for applicants. We must not forget, however, what led Congress to prescribe for us — in painstaking detail — this transparent application process. Over the years we have approved only 9 NRSROs, and as the Chairman noted, today there are only 5 due to consolidation. However, several others have applied and have never gotten a final decision. In the most notable example, one patient applicant has been waiting for a decision on its NRSRO application since its predecessor applied in October, 1990. I often refer back to my first stint on the staff of the SEC. As a young lawyer I applied for a position in Chairman Breeden's office right around the same time as this credit rating agency first applied — luckily for me it took Chairman Breeden and the SEC only a few weeks to process my application and allow me to come aboard. It's hard to believe that this applicant has been stuck in our inscrutable process since then!
We should note that this rulemaking is one of four very public interventions by the last Congress into our internal workings because we failed to respond to a clear call and need to act. I am confident that today we will not fall into the same pitfalls that inspired these very public rebukes.