End Of Credit Rating Agencies? SEC Wants To Wean Market Off
WASHINGTON: Securities regulators on Wednesday will move to scale back markets' reliance on credit rating agencies, after the financial crisis laid bare the industry's shortcomings.
The Securities and Exchange Commission is expected to propose that one of its key documents for securities offerings no longer include ratings references designed to give investors confidence in the company behind the securities offering.
The SEC's effort to extract rating references predates the financial crisis, but it lost steam when global financial markets started going into panic mode.
In 2009 the agency stripped some rating references from regulations, saying it was concerned about undue reliance on the ratings, but the removal of everything was not mandatory.
The Dodd-Frank financial law, however, changes that by requiring government agencies to go through their regulations and remove rating references.
On Wednesday, the SEC will resuscitate a similar plan it proposed in 2008, in its first move to remove ratings from its regulations since the Dodd-Frank law was enacted in July.
Credit-raters have often been blamed for helping fuel the crisis by giving overly positive ratings to loans backed by toxic subprime mortgages.
Dodd-Frank mandates some credit-rating reforms, such as mitigating conflicts of interest, holding credit-raters accountable for their ratings and reducing investor reliance on them.
But credit-raters such as Moody's Corp, McGraw-Hill Cos' Standard & Poor's, and Fimalac SA's Fitch Ratings are not facing the same sweeping overhaul as banks and mortgage lenders, largely because lawmakers could not come up with a good alternative to what they offer.
The lack of a good alternative has even caused some financial regulators to worry that Dodd-Frank goes too far, especially bank regulators who rely on ratings providers to assess the risk associated with a bank's capital.
MORE THORNY ISSUES AWAIT
The SEC's proposal on Wednesday specifically would strip rating references from a form known as an S-3, a simplified registration form designed to expedite the process for a primary offering of public securities.
A company can qualify to file an S-3 if it meets criteria that make the SEC comfortable with it's getting greater access to the public securities market.
Companies offering nonconvertible debt securities, for instance, can qualify for an S-3 filing as long as the debt is given an investment grade rating.
The SEC plans to propose stripping out that rating requirement and replacing it with an alternative.
Instead of relying on a high-investment grade rating, companies could file primary offerings using the S-3 form if they have issued more than $1 billion in nonconvertible debt securities over a three year period, according to people familiar with the matter.
Plans to remove other rating references could prove more contentious than Wednesday's action, namely what the SEC will do with the ratings of securities underlying money market mutual funds.
Under current rules, money market mutual funds must invest in high-grade securities. Advisers delegated by the board of directors also are required to make sure the quality of securities are of a high quality.
Industry advocates favor this approach, and say it bolsters investor confidence.
The SEC did not remove the rating reference in the past because the industry widely opposed the removal. Dodd-Frank, however, leaves the SEC little choice.
So far, SEC staff has not been able to come up with a suitable alternative to a rating, according to a person familiar with the matter. That means investors would only be able to rely on one source -- the adviser given the task of ensuring the securities are of a high quality.
This could raise concerns within the mutual fund industry, which has feared a removal of ratings generally could harm investor confidence.
(Editing by Steve Orlofsky)
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