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The Resource for the Global Finance Profession

Members of Congress Urge SEC to Act on Rating Agency Reform

  • By Jeanine H. Arnett, Director, Government Relations & Policy
  • Published: 2013-05-16

On May 14, the U. S. Securities and Exchange Commission (SEC) held a roundtable in Washington, DC to discuss the findings of a staff study to address how the commission might respond to conflicts of interest, compensation models and other problems in the ratings of structured finance products. The dialogue included a discussion of a new system wherein an independent board would randomly assign initial ratings to nationally recognized statistical rating organizations (NRSROs). The study was mandated by Section 939F of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Section 939F also required the SEC to give "thorough consideration" to an approach suggested by Sens. Al Franken (D-MN) and Roger Wicker (R-MS) to address the inherent conflicts of interest in the current model, under which issuers and investment banks seek out and pay agencies to rate their structured products. The "Franken-Wicker Amendment," which ultimately was not included in Dodd-Frank, would create an independent board to assign ratings jobs to NRSROs based on their capacity, expertise and, later on, their track records. The provision further stated that the SEC "shall" implement the lawmakers' proposal unless it "determines that an alternative system would better serve the public interest and the protection of investors."

Both senators attended the May 14 roundtable and offered comments. During his remarks, Sen. Franken said he and Sen. Wicker sponsored their amendment because credit rating agencies were not doing their jobs to issue "accurate, objective ratings." While American citizens lost trillions of dollars in the 2008 financial crisis, Wall Street banks were bailed out, and the credit rating agencies kept millions of dollars in fees, Sen. Franken said. He also noted that most of the objections to his approach were raised by parties who benefited most directly from the conflicts embedded in the issuer-pay model. He added that the Franken-Wicker model can co-exist with amendments to Rule 17g-5. In fact, he said, "they perfectly complement each other."

Conversely, House Financial Services Capital Markets Subcommittee Chairman Scott Garrett (R-NJ) expressed trepidation with implementing a system as described in Franken-Wicker. Speaking at the roundtable, Rep. Garrett said that moving to an independent board assignment system could "move us backwards in reform."

Several panelists, including Standard & Poor's Ratings Services President Douglas Peterson, also expressed concerns about implementing this type of structural change, arguing that it could create conflicts of interest and may cause market uncertainty. Others on the panel disagreed; assigning ratings jobs "would promote competition, encourage accuracy and complement other Dodd-Frank reforms" said Better Markets Inc. Securities Specialist Stephen Hall.  

Panelist Jules Kroll, chairman and CEO at Kroll Bond Rating Agency Inc., spoke up for a system in which raters are chosen through a "simplified rotation system" rather than creating a new "bureaucracy." Rotation would be the only way to allow for more competition in the credit ratings industry, currently dominated by Standard & Poor's, Moody's Investors Services and Fitch Ratings, he said.


AFP Position

Consistent with our message of years past, AFP will continue to be a proponent of policies that encourage competition in the credit ratings market, increase transparency and eliminate potential conflicts of interest in the ratings process. We firmly believe that fundamental changes to the current business models of credit rating agencies must be enacted in order to correct the systemic problems plaguing the system.

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