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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Statement at Open Meeting on Credit Rating Agency Reforms


Chairman Christopher Cox

U.S. Securities and Exchange Commission

Washington, D.C.
December 3, 2008

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission under the Government in the Sunshine Act on December 3, 2008.

The current credit market crisis, which has taken such a toll both here in America and in economies and markets around the world, began with deterioration in mortgage lending practices, in particular in the subprime arena. The near-complete collapse of underwriting standards was typified by the notorious no-down payment loans, and "no-doc" loans in which borrowers not only didn't have to disclose income or assets, but even employment wasn't verified. It is now abundantly clear, as the SEC's former Chief Accountant testified at a recent Congressional hearing on the failure of AIG, that "if honest lending practices had been followed, much of this crisis quite simply would not have occurred."

Securitization of these bad loans was advertised as a way to diversify and thus reduce the risk. But in reality the negative impacts of these bad policies and practices were spread more broadly throughout the markets by financial instruments that packaged the risky loans into products that carried top credit ratings issued by the world's leading credit rating agencies.

Earlier this year the SEC publicly released our findings from an extensive 10-month examination of the three major credit rating agencies that uncovered significant weaknesses in their ratings practices for mortgage-backed securities and that called into question the impartiality of their ratings. The SEC last summer proposed comprehensive reforms to regulate the conflicts of interests, disclosures, internal policies, and business practices of credit rating agencies. The proposed rules addressed conflicts of interest and required new disclosures designed to increase the transparency and accountability of credit rating agencies.

Today, after taking into account the many comments the agency has received, and revising the proposals to address practical concerns that were brought to our attention through this public notice and comment procedure, we are prepared to issue final rules. These new rules will promote the goals of the Credit Rating Agency Reform Act of 2006 of improving ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating agency industry.

These new rules, which address specific concerns about the integrity of the ratings process, have also benefited from consultation with other regulators and supervisors of financial markets both here and abroad. In particular, our work with international organizations such as the Financial Stability Forum and the International Organization of Securities Commissions has been especially valuable in the development of these rules.

One of the significant weaknesses in the credit rating process has been that while the credit rating agencies often relied on others to verify the quality of assets underlying structured products — and thus their ratings were vulnerable to reliance on incorrect information — there was frequently inadequate explanation of the limitations on the ratings of these products. Just as significantly, conflicts of interest ingrained into the business models of credit rating agencies were amplified as structured products were specifically designed to achieve high ratings for certain tranches and as credit rating agencies sought to gain business and market share by assisting in this process.

The rules the Commission is considering today are aimed at strengthening the protections for investors in an industry that is vital to the capital formation process. An important purpose of these rules is to create a more competitive, transparent environment in which many firms can serve the needs of investors and issuers. Indeed, since passage of the Credit Rating Agency Reform Act, there is more competition than ever before. Ten credit rating agencies have registered with the Commission since the law was passed, representing a 43% increase in the number of nationally recognized statistical rating organizations in the industry. This competition, as we know, promotes high-quality ratings and provides a check on slack and inferior practices. The rules are intended to promote increased transparency of the ratings methodologies and bolster the disclosure of ratings performance. These rules also prohibit credit ratings agencies from engaging in specific practices that create conflicts of interest. They also enhance credit rating agency recordkeeping and reporting obligations, which assists the Commission in performing its regulatory and oversight functions as called for by the Credit Rating Agency Reform Act.

In addition to the rules the Commission is considering adopting today, the Commission is also considering proposing amendments to Rules 17g-2 and 17g-5. The amendments to Rule 17g-2 being considered for adoption today require NRSROs that use issuer-paid credit ratings to make a statistically valid sample of their ratings and subsequent rating actions publicly available.

In addition to the disclosure requirement being adopted today, the Commission is considering proposing an additional amendment to Rule 17g-2 that would require NRSROs that use issuer-paid credit ratings to disclose ratings history information for 100% of their current credit ratings that were initially issued on or after June 25, 2007. The Commission hopes to elicit further comments on the subject of ratings histories disclosure in order to gain a better understanding of the costs and potential impacts of the new proposal, in particular the costs and potential impacts of the proposal on NRSROs that issue subscriber-paid credit ratings.

The Commission is also today considering re-proposing additional amendments to Rule 17g-5. The goal of the original proposal in June was to increase competition among NRSROs for rating structured finance products by providing new entrants access to the information that's necessary to determine credit ratings for these products. Under the re-proposal, based on comments received, arrangers that hire NRSROs to rate their products would need to provide information given to the hired NRSRO to other NRSROs. This would give the other NRSROs a chance to rate the product. Under the original proposal in June, this information would have been made available to the public generally.

Finally, the Commission is also considering whether to propose a technical amendment to Regulation FD to permit the disclosure of material non-public information to NRSROs irrespective of whether they make their ratings publicly available.

The Commission's ability to consider adoption of these rules and proposed rules is due to the exceptional effort on the part of many men and women from Offices and Divisions across the SEC who have been working around the clock to protect investors in these difficult and trying times. I would like to express my thanks to the staff of the Division of Trading and Markets for their commendable work on these amendments. Thanks especially to Director Erik Sirri, Deputy Directors Bob Colby and Dan Gallagher, Mike Macchiaroli, Tom McGowan, Randall Roy, Joseph Levinson, Carrie O'Brien, Sheila Swartz, and Rose Russo Wells.

I also would like to thank the leaders and professional staff in the Division of Corporation Finance and the offices of the General Counsel, the Office of Economic Analysis, the Office of International Affairs, the Division of Investment Management, the Office of Compliance Inspections and Examinations, and the Office of Investor Education and Advocacy for their contributions and collaborative efforts.

Finally, I would like to thank the other Commissioners and all of our counsels for their work and comments on this rulemaking effort. I'll now turn the floor over to Erik Sirri for a more detailed discussion of these proposals.


Modified: 12/03/2008