Credit-rating agencies will have to disclose more details about their ratings process and better manage conflicts of interest under rules unveiled on Wednesday that are expected to lightly touch industry practices.
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The 500-plus pages of proposals by the Securities and Exchange Commission aim to ensure credit-raters don't rubber-stamp complex financial products and would seek to manage conflicts that could arise if analysts leave their jobs to work for the firms issuing the products they rate.
The proposals are all required by the Dodd-Frank Wall Street overhaul law in an effort to hold the firms such as Moody's Corp (MCO), McGraw Hill's (MHP), Standard and Poor's and Fimalac SA's Fitch Ratings more accountable for their performance after they slapped inflated ratings on complex mortgage securities during the financial crisis.
However, none of Wednesday's proposals strike directly at the heart of what many say is an inherent conflict of interest at the big three credit-rating agencies which all get paid by issuers.
The measures being considered on Wednesday include requiring raters to provide the SEC with an annual report that assesses the effectiveness of each firm's internal controls.
Raters would also be subject to more robust disclosure rules about their initial ratings and any subsequent changes so the investing public can better gauge their accuracy and quality.
For addressing conflicts of interest, the proposal would create a firewall of sorts between the sales and marketing division and the division that establishes and monitors ratings. Any firm that violates this provision could be subject to penalties, and smaller companies with fewer resources could seek an exemption from this requirement.
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In addition, the proposals would implement a "look back" provision by which credit-raters would need to establish procedures to monitor when employees leave the company to work for an issuer that received a rating within a one-year time frame.
The firms would be responsible for determining if any conflicts exist and whether they need to re-issue the rating.
In addition to rules targeting credit-raters, the SEC on Wednesday will also consider a plan that requires third-party firms conducting due diligence reviews of asset-backed securities to certify the information provided to the credit-raters.