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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Opening Statement at SEC Open Meeting


Chairman Mary Schapiro

U.S. Securities and Exchange Commission

Washington, D.C.
May 18, 2011

Good morning. This is an Open Meeting of the Securities and Exchange Commission on May 18, 2011. Today, we will consider proposing rules that are intended to strengthen the integrity and improve the transparency of credit ratings.

These proposals arise from provisions of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act – which substantially augmented the Commission’s oversight of credit rating agencies that are registered as Nationally Recognized Statistical Rating Organizations (NRSROs).

The rules would establish new requirements for credit rating agencies, providers of third-party due diligence services with respect to asset-backed securities (ABS), and issuers and underwriters of asset-backed securities.

Proposals to Bolster the Integrity of Ratings

In passing the Dodd-Frank Act, Congress noted the systemic importance of credit ratings. It also noted that ratings that were applied to structured financial products proved inaccurate – and contributed significantly to the mismanagement of risks by financial institutions and investors.

Several of the proposals we are considering today seek to address that point by attempting to improve the quality of ratings. For example:

  • We are considering a proposal to require an NRSRO to file an annual report assessing the effectiveness of its internal control structure which governs the way it determines credit ratings.
  • We also are considering a proposal to address the conflict of interest that arises when credit analysts participate in the sales and marketing of an NRSRO’s products.
  • And we are considering a proposal to require NRSROs to establish standards of training, experience, and competence of credit analysts.

The proposals under consideration also would – among other things – require NRSROs to have policies and procedures that are designed to:

  • Strengthen the methodologies they use to determine credit ratings.
  • Establish a process to review and potentially revise a credit rating when an employee subsequently is hired by the entity being rated or by the issuer, underwriter, or sponsor of the security being rated.

Finally, to further strengthen the integrity of credit ratings, we also are considering a proposal to require a provider of third party due diligence services for an asset-backed security to provide a certification to an NRSRO that produces a credit rating for that ABS. The certification would describe the work performed by, and the findings and conclusions of, the third-party due diligence provider.

Proposals to Improve the Transparency of Credit Ratings

In addition to issues of integrity, we also are considering several proposals designed to improve the transparency of credit rating activities. These rules are intended to help investors and other users of credit ratings better understand and assess the ratings.

For example, we are considering a proposal to require an NRSRO to disclose performance statistics in a way that allows investors to better compare the performance of credit ratings across the industry.

We are considering rules that would require an NRSRO to publish more information about the history of its credit ratings, as well as more information about the methodologies used in determining each rating.

And, we are considering a proposal to require issuers and underwriters of asset-backed securities and NRSROs to disclose the findings and conclusions of any provider of third-party due diligence services with respect to an ABS.

Other Actions

Today’s proposals are part of a concerted effort by the SEC to enhance the credit rating industry in light of the financial crisis. In recent months, we have taken steps to reduce reliance on credit ratings by proposing to remove references to such ratings in the SEC’s rules. And prior to the passage of the Dodd-Frank Act, we adopted rules that would similarly reduce the potential for conflicts of interest and mandate the disclosure of ratings performances by NRSROs.

As with all rulemaking undertaken by the Commission under the Dodd-Frank Act, we have sought to carefully draft these proposals to fulfill Congress’s direction and intent. I strongly encourage public comment on the proposals to assist the Commission in formulating sound rules and regulations. I look forward to reviewing public comments.

Before I turn to Robert Cook and Randall Roy, I would like to thank them and other Commission staff for their hard work on these proposals, including John Ramsay, Mike Macchiaroli, Tom McGowan, Raymond Lombardo, Tim Fox, Joe Levinson, Rose Wells, Alan Dunetz, Scott Davey, Kristin Devitto, and Diane Audino from the Division of Trading and Markets, and Paula Dubberly, Katherine Hsu, Rolaine Bancroft, and Eduardo Aleman from the Division of Corporation Finance.

I also appreciate the contributions from Jennifer Marietta-Westberg, Ayla Kayhan, Tiago Requiejo and Kristi Kaepplein from the Division of Risk, Strategy, and Financial Innovation; David Blass, Steve Jung, and Lynn Taylor from the Office of General Counsel; and Yuri Zelinsky, Alex Koch, and David Frohlich from the Division of Enforcement.

I’d also like to thank my fellow Commissioners and their staff for their work on this proposal. Now I will ask Robert and Randall to provide us with additional details about the Division’s recommendations.



Modified: 05/18/2011