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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Opening Statement at SEC Open Meeting: Item 2 — Ratings Removals


Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

Washington, D.C.
April 27, 2011

Next we turn to a proposal to remove references to credit ratings from various rules under the Securities Exchange Act of 1934. These proposals represent the next step in a series of actions we have taken to remove references to credit ratings within our rules and, where appropriate, replace them with alternative criteria.

Under the Dodd-Frank Act, federal agencies must review how their existing regulations rely on credit ratings as an assessment of creditworthiness. At the conclusion of this review, each agency is required to report to Congress on how the agency modified these references to replace them with alternative standards that the agency determined to be appropriate.

The focus of these efforts is to eliminate over-reliance on credit ratings by both regulators and investors – and to encourage independent assessments of creditworthiness rather than uncorroborated reliance on credit ratings.

A very significant group of proposed changes concern the financial responsibility rules that govern how broker-dealers calculate their regulatory capital and the rules that govern protection of customer funds and securities. Although these rules are rather technical, we must not lose sight of the fact that they form a critical part of the Commission’s customer protection regime.

The most significant proposed change in this area would preclude firms from looking solely to ratings when calculating capital charges for commercial paper, nonconvertible debt, and preferred stock under the Commission’s net capital rule. Instead, each firm with proprietary positions in these instruments would need to look at a variety of factors, and they would need to have and document procedures for doing so.

It is important that we ensure the integrity of the capital rules while meeting the statutory mandate to remove references to credit ratings. In this regard, additional suggestions and alternative ideas for determining capital charges without relying on credit ratings will be very helpful.

Dodd-Frank has given us a mandate to change our rules so that we no longer rely on ratings as a proxy for credit standing. In all the Commission’s proposals to carry out this mandate, we are seeking not the simplest alternative but instead are trying to provide tailored responses that reflect the underlying purpose of each rule, and we are conscious of potential costs to market participants. In many cases, this is a challenging assignment, and I look forward to what I hope will be a wide range of public comment on today’s proposals. I am particularly interested in whether the alternatives to credit ratings that we propose are meaningful, effective and workable.

Before I turn to Robert Cook, I would like to thank him and other Commission staff, including John Ramsay, Jamie Brigagliano, Nathaniel Stankard, Mike Macchiaroli, Tom McGowan, Randall Roy, Mark Attar, Carrie O’Brien, Leigh Bothe, Marshall Levinson, Josephine Tao, Elizabeth Sandoe, David Bloom, Bradley Gude, Joe Furey, and Ignacio Sandoval from the Division of Trading and Markets for the long hours and hard work they have devoted to preparing the recommendations before us.

I also appreciate the contributions from Meredith Mitchell, David Blass, Stephen Jung, and Cynthia Ginsberg from the Office of the General Counsel; Jennifer Marietta-Westberg, Tiago Requeijo, Ayla Kayhan, Kristin Kaepplein, and Bruce Kraus from the Division of Risk, Strategy, and Financial Innovation; Zerubbabel Johnson, Juanita Hamlett, Robert Sollazzo, and Everardo DeArmas from the Office of Compliance Inspections and Examinations; Penelope Saltzman and Anu Dubey from the Division of Investment Management; and Paula Dubberly from the Division of Corporation Finance.

Now I will ask Robert and John to provide us with additional details about the Division’s recommendations.



Modified: 04/27/2011