Bethesda, MD -- April 15, 2009 -- Today, at a Securities and Exchange Commission (SEC) roundtable on the reform of credit rating agencies, Association for Financial Professionals' President and CEO Jim Kaitz put forth two proposals for credit rating agency reform.
1) a stand-alone model, where the only business of the credit rating agency would be to produce credible and reliable ratings; and
2) new government requirements to support alternative rating organizations, encouraging competition and breaking the government's own addiction to Standard & Poor's and Moody's.
The Association for Financial Professionals (AFP) serves over 16,000 members who manage and safeguard the financial assets of more than 5,000 U.S. organizations. Many of its members are responsible for issuing short- and long-term debt and managing corporate cash and pension assets for their organizations. As such, they are significant users of credit rating agencies.
According to Kaitz, "The current rating agency processes and business model are broken. The big two rating agencies were a catalyst for the sub-prime debacle and resulting financial meltdown. The time has come for a fundamental overhaul of the system to restore investor confidence and reestablish efficient global capital markets."
AFP is proposing two reforms to the system:
1) Implement a model that is similar in nature to a utility, in which Nationally Recognized Statistical Rating Organizations (NRSROs) have a single line of business focused exclusively on providing credible and reliable ratings. These agencies would be able to interact with and advise organizations being rated, but could not charge fees for providing advice. The new NRSROs would be financed by a transaction fee.
2) The U.S. government would require that any federal programs requiring credit ratings, as well as any business that has had a capital infusion from the government, utilize alternative NRSROs as additional credit analysis providers.
This action would foster a more competitive environment and give credibility to alternative rating agencies now overshadowed by Moody's and S&P.
AFP member surveys have revealed that: 1) the information provided by credit rating agencies is neither timely nor accurate, 2) the rating agencies are primarily serving the interest of parties other than investors, and 3) the SEC should increase its oversight of rating agencies and take steps to foster greater competition in the market for credit rating information.
"We must not continue to reward failure," said Kaitz. "Global capital markets need credible ratings; we need significant rating agency reform now."
For additional information about AFP's two reform proposals, please see Jim Kaitz's testimony on the AFP website at:
The Association for Financial Professionals (AFP) serves a network of more than 16,000 treasury and finance professionals. Headquartered in Bethesda, MD, AFP provides members with breaking news, economic research and data on the evolving world of treasury and finance, as well as world-class treasury certification programs, networking events, financial analytical tools, training, and public policy representation to legislators and regulators. AFP is the daily resource for treasury and finance professionals.
AFP's global reach extends to over 150,000 treasury and financial professionals worldwide, including AFP of Canada; AFP's gtnews, an on-line resource for the treasury and finance community; and the London-based bobsguide, a financial IT solutions network.