AFP's Kaitz Urges Congress to Hold SEC Accountable on Credit Rating Agency Reform through Immediate and Aggressive Action

Bethesda, MD--February 8, 2005--At a hearing today on “Examining the Role of Credit Rating Agencies in the Capital Markets,” AFP President Jim Kaitz called on Congress “To hold the SEC accountable by demanding immediate action on the issues,” including questions about the credibility and reliability of credit ratings and conflicts of interest and abusive practices in the rating process. Kaitz testified before the Senate Committee on Banking, Housing and Urban Affairs.

Kaitz pointed out that the credit rating agencies and investor confidence in the ratings they issue are vital to the operation of global capital markets. But, as evidenced by AFP’s research, confidence in rating agencies and their ratings has diminished over the past few years.

The Securities and Exchange Commission (SEC) in more than 10 years since it first began examining the role and regulation of credit rating agencies, and despite increasing reliance on credit ratings, has not taken any meaningful action to address the concerns of issuers and investors. Kaitz stated “These issues are far too important for the SEC to remain silent while the world waits for it to act.”

Kaitz outlined five concerns to Chairman Shelby and members of the Senate Committee:

• The SEC has created an artificial barrier to competition in the credit ratings market by not enumerating the criteria for recognition and only the Commission can remove the artificial barrier to competition it has created;

• The SEC has failed to exercise any meaningful oversight of the recognized credit rating agencies to ensure that they continue to merit recognition;

• The credit rating agencies have access to non-public information and are exempt from Regulation Fair Disclosure (FD), but SEC has done nothing to ensure that the agencies do not use the non-public information inappropriately;

• Unsolicited ratings, which are issued without the benefit of access to company management or non-public information and are often not an accurate reflection of an organization’s financial condition, creating the potential for abuse and some organizations may feel compelled to pay for ratings they did not request; and

• Companies may feel pressured to purchase ancillary services, such as ratings evaluations and corporate governance reviews, in order to secure a fair rating. Further, the revenues derived from these services has the potential to taint the objectivity of the ratings.

Kaitz also emphasized the central and increasing role that credit ratings play in the investment markets. Institutional and individual investors have long relied on credit ratings when purchasing individual corporate and municipal bonds. Further, nearly every mutual fund manager to whom investors have entrusted over $8 trillion relies to some degree on the ratings of nationally recognized agencies.

Debt issuers rely on the credit rating agencies to understand the company’s finances, strategic plans, competitive environment and any other relevant information about the company in order to issue ratings that accurately reflect the company’s creditworthiness. These ratings determine the conditions under which a company can raise capital to maintain and grow their business.

Further, while credit rating agencies have long played a significant role in the operation of capital markets, the Administration’s recent single-employer pension reform proposal would tie pension funding and Pension Benefit Guaranty Corporation (PBGC) premiums to a plan sponsor’s financial condition as determined by existing credit ratings. In some cases, plan sponsors would be prohibited from increasing benefits or making lump sum payments based on their credit rating and funded status.

In his conclusion, Kaitz reiterated, “If the SEC does not act immediately to aggressively address concerns that have been raised at this hearing, we urge members of this Committee to act to restore investor confidence in the credit ratings process.

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The Association for Financial Professionals (AFP) in Bethesda, Maryland, supports more than 14,000 individual members from a wide range of industries throughout all stages of their careers in various aspects of treasury and financial management. AFP is the preferred resource for financial professionals for continuing education, financial tools and publications, career development, certifications, research, representation to legislators and regulators, and the development of industry standards. For more information about AFP visit www.AFPonline.org