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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Removal of Credit Rating References From Exchange Act Rules


Commissioner Kathleen L. Casey

U.S. Securities and Exchange Commission

SEC Open Meeting
Washington, D.C.
April 27, 2011

Thank you, Chairman Schapiro. I want to first thank the staff for their excellent work on this release. Today’s release amending six Exchange Act rules and one Exchange Act form continues our effort to meet the requirements of Section 939A of Dodd-Frank, which directs the Commission to review references to and requirements of reliance on credit ratings in our rules and remove and substitute them with appropriate standards of creditworthiness.

I am interested in hearing from commenters whether the standards we are proposing for creditworthiness are workable and make sense and whether they, as closely as possible, act as a substitute for the ratings use.

Finding appropriate substitutes for ratings across the myriad rules, where they have been embedded over the years, can be challenging, particularly where they have led to excessive market reliance, and have diminished independent credit analysis discipline and risk management capabilities. While the process for transitioning away from legal reliance on credit ratings will undoubtedly entail costs and adjustments for market participants, investors and regulators alike--and therefore will require deliberate and considered thought in doing so--it remains a critical objective.

Indeed, understanding and correcting the broad, negative and damaging consequences (such as herding behavior, cliff effects and undue market reliance) of hardwiring ratings in our rules is one of the most important lessons from the crisis. Investor protection is ill-served by mandatory ratings requirements that have the deleterious effect of weakening and undermining internal credit assessment processes and credit risk analysis. Ratings of course will continue to play an important role in our markets--and can continue to inform such processes and be an important benchmark for such analysis--but they should not serve as a substitute for appropriate creditworthiness assessment and due diligence obligations by market participants and investors.

As we go forward and think about additional ratings agency reforms contemplated under Dodd-Frank, I believe we must continue to focus on this broader objective and avoid insidious “reforms” that would counteract these efforts by actually furthering the imprimatur of government approval, breeding further dependence on ratings and offering false confidence of ratings quality, accuracy and performance.

Again, I thank the staff for their hard work on this release, and I have no questions.



Modified: 04/27/2011