Credit Rating Agencies to Face Tighter Oversight under Obama Proposal

Credit rating agencies will face enhanced oversight of their activities under the Obama Administration's plan for financial regulatory reform. The plan noted that the rating agencies’ performance, especially related to mortgage-backed securities, "contributed significantly to the financial crisis." The Administration recommends that the oversight of rating agencies be consistent with the International Organization of Securities Commissions’ (IOSCO) December, 2004, Code of Conduct Fundamentals for Credit Rating Agencies and the Group of 20’s (G-20) April, 2009, Declaration on Strengthening the Financial System. Both of these include many of the recommendations included in AFP's Code of Standard Practices for Participants in the Credit Rating Process, which was developed jointly with other international treasury associations and released in April 2004.

While the United States' regulation of credit rating agencies is already consistent with IOSCO’s Code of Conduct, the G-20 Declaration states that national authorities will enforce full compliance with the Code of Conduct and that any credit rating agency that is relied upon for regulatory purposes should be subject to registration and oversight. The G-20 Finance Ministers also agreed that regulators must take steps to ensure that credit rating agencies are managing conflicts of interest, a step that AFP has recommended on numerous occasions since 2003.

The G-20 also agreed to take steps to improve the quality and transparency of the rating process. AFP surveys over the past seven years have found that both issuers and investors believe that credit ratings are neither timely nor accurate. The G-20 Declaration recommends that rating agencies fully disclose their methodologies, performance of their ratings and "the information and assumptions that underpin the ratings process," recommendations that AFP supported in a comment letter to the Securities and Exchange Commission (SEC).

The G-20 Declaration that is supported by the Administration does, however, include a component that AFP has previously opposed in comments to the SEC. The G-20 Finance Ministers recommend that rating agencies differentiate their ratings for structured finance products from those of other products. AFP has stated that mandating different symbols for different asset classes encroaches on the independence of each rating agency's methodologies. The Credit Rating Agency Reform Act of 2006 states that "neither the Commission nor any State (or political subdivision thereof) may regulate the substance of credit ratings or the procedures and methodologies by which any nationally recognized statistical rating organization determines credit ratings." AFP has argued that if the methodology and procedures submitted for each asset class for which a rating agency is registered are sufficiently detailed to inform market participants, and include an explanation of any symbol or quantitative measure used in assigning ratings for each asset class, a prudent investor will be in a position to make an informed decision about whether to rely upon a rating.