Credit Rating Agencies
Background: In 2006, Congress passed the Credit Rating Agency Reform Act. This law required the SEC to establish clear guidelines for determining which credit rating agencies qualify as Nationally Recognized Statistical Rating Organizations (NRSROs). It also gave the SEC the power to regulate NRSRO internal processes regarding record-keeping and how they guard against conflicts of interest, and specifically makes the NRSRO determination subject to a Commission vote. The law specifically prohibits the SEC from regulating an NRSRO's rating methodologies.
The Dodd-Frank Wall Street Reform and Consumer Protection Act enhances the SEC’s enforcement mechanisms, and adds a number of requirements on NRSROs that are immediately effective (i.e., do not depend on SEC rulemaking). The Dodd-Frank Act also requires the Commission to adopt a number of new rules concerning:
- Annual reports on internal controls
- Conflicts of interest with respect to sales and marketing practices
- “Look-backs” when credit analysts leave the NRSRO
- Fines and penalties
- Disclosure of performance statistics
- Application and disclosure of credit rating methodologies
- Form disclosure of data and assumptions underlying credit ratings, among other things
- Disclosure about third party due diligence
- Analyst training and testing
- Consistent application of rating symbols and definitions
- Specific and additional disclosure for ratings related to ABS products
In addition, the Dodd-Frank Act requires every federal agency to review existing regulations that require the use of an assessment of the credit-worthiness of the security or money market instrument and any references to credit ratings in such regulations; to modify such regulations identified in the review to remove any reference to, or requirement of reliance on credit ratings; and substitute with a standard of credit worthiness as the agency shall determine as appropriate for such regulations.
- On January 20, 2011, the Commission adopted a rule addressing one of the new requirements for NRSROs.
- On May 18, 2011, it proposed rules addressing the remaining requirements.
- In July 2011, it issued a report on reliance on credit ratings.
- In September 2011, it published an annual report summarizing NRSRO inspections, findings, and responses.
- In September 2012, it issued a report on credit-rating standardization.
- In November 2012, it published the second annual report summarizing NRSRO inspections, findings, and responses.
- It published a Report to Congress on Assigned Credit Ratings in December 2012.
- It issued a study on credit-rating agency independence in November 2013.
- In December 2013, it published the third annual report summarizing NRSRO inspections, findings, and responses.
- In August 2014, it adopted rules regarding NRSRO reports of internal controls over the ratings process, transparency of NRSRO ratings performance, steps be followed when adopting or revising credit ratings procedures and methodologies, and a requirement for third parties retained for the purpose of conducting due diligence related to asset-backed securities to provide a certification containing specified information to the NRSRO that is producing a rating for the ABS. It also adopted standards for NRSRO analysts, rules regarding ratings symbols. and technical amendments to NRSRO Rules to conform text, terms and definitions in the rules to amendments to text, terms, and definitions in the Securities Exchange Act of 1934.
The Commission also has issued a series of proposals and final rules regarding the removal of references to credit ratings in its regulations: