Credit Rating Agencies
On the issue of credit rating agency reform, AFP is a proponent of policies that encourage competition, increase transparency and reduce potential conflicts of interest in the ratings process. We believe that in order to correct systemic flaws, fundamental changes to the current business models of credit rating agencies, or NSRSOs, are necessary. In 2010, AFP suggested proposals for credit rating agency reform to the Securities and Exchange Commission (SEC) and members of Congress.
One proposal would limit NRSROs to the sole business purpose of providing credible and reliable ratings, and to consider allowing credit rating providers be compensated by transaction fees paid by all who benefit from the rating. A transaction fee model removes conflict of interest between rating agencies and issuers, which years of deliberation and ineffective regulatory reforms have not addressed.
We believe that the time for disclosure and containment of conflicts of interest is long overdue. Regardless of whether the NRSRO is paid by the investor or the issuer, conflicts of interest are irrefutable. AFP urged Congress and the SEC to move to a business model where, through control of compensation, no party—whether issuers, investors or financial intermediaries—had the ability to exert excessive influence over the ratings process.
AFP also commented on a number of proposals issued by the SEC. Though we support the disclosure of additional information, AFP believes that disclosure requirements should apply to all NRSROs regardless of their business model. Disclosing additional information will add transparency and credibility to the credit rating process, allowing investors to evaluate rating methodologies and the diligence with which each NRSRO scrutinizes existing ratings. As market events have demonstrated, ratings that are not based on an effective methodology lose all credibility. Market participants should have access to information that allows them to make an educated assessment of an NRSRO’s surveillance process, thereafter reducing the possibility that faulty ratings are discovered only after the fact thought adverse events.
AFP generally supports increased regulation and oversight of NRSROs, but does not support interference with their rating methodologies. Disclosure of, and adherence to, those methodologies are sufficient for a prudent investor to make an informed decision.
Since the enactment of Dodd-Frank in July 2010, little progress has been made on the rating agency front. Though the SEC has proposed several rules, they have not met the goals as established by Dodd-Frank, nor have they announced any plans for further action at this point.
AFP will continue to pursue policies that promote real competition, greater credibility and reliability in ratings by way of eliminating conflicts of interest. Moreover, we will oppose efforts by the credit rating agencies to shift potential liability to issuers.
Comment Letters and Content