Rating Agency Oversight

For over three years, AFP has called for reform of the credit ratings market. During that time, AFP has provided testimony to the Senate Banking Committee, and the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. In its June 2005 testimony before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, AFP expressed its support of the Credit Rating Agency Duopoly Relief Act of 2005 (H.R. 2990). AFP has also provided extensive comments to the Securities and Exchange Commission as the Commission studied the issue.

STATUS - On June 14, 2006, the House Financial Services Committee approved the Credit Rating Agency Duopoly Relief Act. (HR 2990).

On March 7, 2006, the Senate Banking Committee held its third hearing to assess the current oversight and operation of credit rating agencies (CRA).

On November 29, 2005, the House Financial Services Committee held a hearing in Philadelphia to receive additional testimony on the Credit Rating Agency Duopoly Relief Act (H.R. 2990).

In June 2005, The House Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee held its fourth hearing on this issue, the first, on H.R. 2990, "The Credit Rating Agency Duopoly Relief Act." AFP President and CEO Jim Kaitz testified in support of the legislation, which is intended to enhance competition, transparency and accountability in the credit ratings market.

H.R. 2990, introduced by Representative Fitzpatrick (R-PA) would eliminate Nationally Recognized Statistical Rating Organizations, which the Securities and Exchange Commission (SEC) has relied upon for determining regulatory capital for more than thirty years. In their place, the Act would require the SEC to rely upon Nationally Registered Statistical Rating Organizations. This change would eliminate the ambiguous process of recognizing rating agencies through SEC staff no-action letters, which AFP believes has created a significant artificial barrier to entry into the credit ratings market. For more detailed information on this proposal, visit the AFP Rating Agency Resource Page.

In March 2005, the SEC issued a proposed rule formally defining the term Nationally Recognized Statistical Rating Organization (NRSRO). The SEC claimed, however, that it lacks the requisite authority to conduct ongoing oversight of credit rating agencies. In June 2005, AFP submitted a comment letter to the SEC on the proposed rule. The SEC has not taken any additional action on the proposed rule.

BACKGROUND – Responding to the corporate scandals of 2001, Congress, in the Sarbanes-Oxley Act, required the Securities and Exchange Commission (SEC) to conduct a study on credit rating agencies examining the role of rating agencies in evaluating debt issuers, the importance of that role to investors and any impediments to accurate appraisal by credit rating agencies. Sarbanes-Oxley also required the study to determine whether there are any barriers to entry into the credit rating market and whether there are conflicts of interest that hinder the performance of the rating agencies.

In January 2003, the SEC completed and released its study, which identified five major issues the SEC will examine further: information flow, potential conflicts of interest, alleged anti-competitive or unfair practices, reducing potential barriers to entry and ongoing oversight.

On June 4, 2003, the SEC issued a concept release seeking comments on the issues raised in the above mentioned study. AFP submitted extensive comments on the concept release to the SEC.

On October 7, 2004, the International Organization of Securities Commissions (IOSCO) issued its own Code of Conduct for credit rating agencies for public consultation. AFP jointly submitted comments with the United Kingdom’s Association of Corporate Treasurers (ACT) and France’s Association Française des Trésoriers d'Entreprise (AFTE) in November 2005.

AFP ACTION – AFP’s President and CEO, Jim Kaitz, has presented testimony at three House Financial Services Committee hearings, most recently before the House Capital Markets Subcommittee in June 2005 (see above). Kaitz also presented testimony to the Senate Banking Committee in February 2005.

AFP has surveyed it members twice on this important issue. Both surveys found that:

The SEC should increase its oversight of rating agencies and take steps to foster greater competition in the market for credit rating information.
The information provided by credit rating agencies is neither timely nor accurate.
Rating agencies are primarily serving the interests of parties other than investors.

In April 2004, AFP released an Exposure Draft of a Code of Standard Practices for Participants in the Credit Rating Process. The Exposure Draft was developed with the United Kingdom’s Association of Corporate Treasurers (ACT) and France’s Association Française des Trésoriers d'Entreprise (AFTE). The Code of Standard Practices is designed to restore confidence among issuers, credit rating agencies, investors and the regulators who oversee the credit rating process by creating enhanced transparency, protecting non-public information, guarding against conflicts of interest, and improving communications with market participants.

Responding to the Securities and Exchange Commission’s (SEC) request for comment on its concept release, Rating Agencies and the Use of Credit Ratings Under the Federal Securities Laws, AFP submitted its views to the SEC on July 28, 2003.