The Securities Industry and Financial Markets Association’s (SIFMA) Credit Rating Agency Task Force, in a comment letter filed with the Securities and Exchange Commission (SEC) on parts one and two of the SEC’s proposed rules for credit rating agencies, broadly supports the SEC’s efforts to address the issues relating to credit ratings of structured finance products, as well as improve the ratings process in general. In the letter, the Task Force notes the need for greater disclosure and increased transparency of the credit ratings process, while at the same time suggesting modifications to the proposals which it believes will make them more effective.
“We support the goals outlined in the SEC’s proposal of improving disclosure of ratings methodologies, addressing conflicts of interest, and improving the transparency of ratings performance,” said Deborah Cunningham, chief investment officer at Federated Investors and co-chair of SIFMA’s Credit Rating Agency Task Force. “We encourage the SEC to ensure its ratings proposals are as effective as possible in achieving these goals, and in helping to prevent the credit-rating related issues which contributed to market turmoil over the last year.”
SIFMA suggests that the SEC require increased disclosure of the ratings process itself in the pre-sale report. This would include clear and concise descriptions of the model used to determine ratings, material deviations from the model, qualitative factors, and the risks and sensitivities to changes in key variables which could cause a rating to change. SIFMA also supports additional disclosure of the information used in the ratings process.
SIFMA strongly supports the SEC’s proposal to enhance disclosure regarding the verification of underlying assets, and on surveillance procedures for existing ratings. The Task Force notes that more timely and diligent surveillance of rated structured securities would decrease the incidence of significant delays between deteriorating asset performance and related ratings downgrades, and makes several specific recommendations in the letter for enhancing due diligence and surveillance procedures.
“Better disclosure of information and more transparent and clearer explanations of ratings and the ratings process, combined with more frequent scrutiny of each rating, will, taken together, help boost investor confidence,” said Boyce Greer, president, fixed income and asset allocation division at Fidelity and co-chair of SIFMA’s Credit Rating Agency Task Force. “Providing investors with improved understanding of the basis for and limitations of credit ratings will undoubtedly be beneficial to the global markets.”
The Task Force agrees with the proposal to prohibit a rating agency from rating securities if it made certain recommendations regarding aspects of the obligor or issuer of such securities, but cautions against undermining the necessary interaction between the parties involved in the ratings process. To manage conflicts of interest, the Task Force recommends that rating agencies maintain an adequate governance structure designed to minimize the likelihood that such conflicts arise, and to manage conflicts if they arise.
The Task Force also broadly agrees with the proposal to require each credit rating agency to make records of its ratings publicly available, and suggests the proposal include requirements to sort the credit ratings by asset class, provide the performance data on a central SEC database, and reduce the timeframe for disclosure of ratings surveillance to one or two months, from six, to make it more useful. In addition, the Task Force recommends that verifiable, quantifiable, historical information about the ratings also be published, in a format that facilitates investors’ ability to compare performance across different ratings agencies.
Finally, the Task Force strongly opposes the use of ratings “modifiers” to identify structured finance products, because such additional designations would not provide new information to investors and—even if this is an “alternative” solution, and were to have a “burn-in” period—could lead to significant and unnecessary costs, and could trigger unintended harmful consequences.
About the SIFMA Credit Rating Agency Task Force:
The Task Force is a global, investor-led industry member task force formed to examine key issues related to credit rating agencies. It is comprised of 37 individuals from the US, Europe, and Asia, and includes asset managers, underwriters, and issuers who are experts in structured finance, corporate debt, municipal debt, and equity securities. The Task Force has been designated by the President’s Working Group on Financial Markets (the “PWG”) as the private-sector group to provide the PWG with industry recommendations on credit rating matters. More information on the Task Force, including a roster of Task Force members, can be found at www.sifma.org/capital_markets/cra-taskforce.shtml.
