Subtitle C: Improvements to the Regulation of Credit Rating Agencies

Subtitle C is the weirdest piece of the administration's proposed Investor Protection Act of 2009 because a lot of it is a spanking for the SEC.

It has been nearly 5 years since Congress gave the SEC explicit regulatory oversight of credit rating agencies, but the agency has had trouble imposing any control. Despite being implicated in the Enron collapse and, of course, in the current financial unpleasantness, credit rating agencies have managed to avoid any substantive oversight. They have evaded regulation of the content of their ratings by arguing that ratings are opinions and therefore protected speech under the First Amendment. They are free from public disclosure obligations, beyond form NRSRO, because they have convinced regulators that secrecy is essential to their business.

This then, is why section 932 of Subtitle C requires that, "The Commission shall establish an office that administers the rules ... with respect to the practices of nationally recognized statistical rating organizations," and why the Commission is directed to "conduct reviews required by this paragraph no less frequently than annually," and to make "[a] report summarizing the key findings of the reviews ... available to the public in a widely discernible format." Most embarrassingly, section 936 orders the Comptroller General to write a report assessing "the extent to which the rulemaking of the Securities and Exchange Commission has carried out the provisions of this Act." Ouch.

Subtitle C also imposes new obligations on credit rating agencies. For starters, they must promulgate a written conflict-of-interest policy and elect a Chief Compliance Officer to police same. For more see this one-page summary from Morrison & Forester.

The SEC has a slew of rules out that cover much of the same territory. It isn't clear whether Subtitle C and the SEC's proposal are coordinated. The SEC has "deferred" its plan to reduce the reliance placed on the NRSRO classification. Subtitle C would put this program where it belongs - with the President's Working Group.

Bullish on Downgrades

When the history of this period is written, yesterday may become known as "Downgrade Wednesday." To quote Montagu Norman, "I should like this prediction to be filed for future reference."

S&P started off by putting all CMBS instruments on watch. For dessert, they downgraded the entire mortgage insurance sector. Moody's, not to be outdone, downgraded Berkshire Hathaway.

I Give Up. Why?

FT Alphaville reports on a press release from the Connecticut Attorney General asking "why are we bailing out the credit rating agencies?"

At This Rate ...

Just as the Treasury is reinforcing the value of a triple-A ratings through its toxic-asset purchase programs (this appears to be the moniker of least resistance. Make a note.) The SEC is planning to examine the way it approves and monitors credit rating agencies. Yesterday, the SEC announced the panelists for its April 15th credit rating agency discussions. Click here for details from the Securities Law Prof blog.

While we're on the subject, why is the Treasury making a prior triple-A rating a condition for its toxic MBS purchase program? Hasn't it been established that the credit rating agencies were at their most irresponsible when they rated these securities? What's the reason for this seemingly requirement-less requirement?

SEC Update

The SEC had a busy week! It seems Mary Schapiro is starting to reveal her regulatory priorities, viz:

Counterparty Like its 1999: the SEC has approved another central counterparty for credit default swap transactions and even though, as the release admits, they can only regulate "those CDS that are not swaps" (what does that "S" stand for?), they're game.

Round 'n' Roundtable: on April 16th, yet another discussion of how to regulate credit rating agencies. Mary Schapiro calls it "clearly one of this agency's most important responsibilities."

Tweeeet: the SEC has brought in a consulting firm to help evaluate and improve the way it handles whistleblower complaints.

Credit Rating Agency Suit Not Junk

Legal Currents Extra has a rundown of lawsuits filed against credit rating agencies and Reuters reports that one of those cases (Teamsters v. Moody's) has survived a motion for summary judgement.

Words Fail

Reuters reports that Hank Greenberg is very, very angry at credit rating agencies, "what they did is outragous."

Another Do-Over For Rating Agencies

On the 2nd, the SEC published the newest round of credit rating agency rules (release no 34-59342). They look approximately like the proposed rules, but as is typical with rulemaking involving our friends the NRSROs, a large chunk of the proposal has been taken out and re-proposed (release no 34-59343).

For a summary from an extremely authoritative source (Annette Nazareth - she wrote the old rules) see this memo on the Harvard Corporate Governance blog.

New Credit Rating Agency Rules!

On Wednesday, the SEC announced that it has voted to adopt new regulations governing the conduct of Nationally Recognized Statistical Rating Organizations. The rules themselves haven't been released yet, but based on the SEC's "Fact Sheet" they have been diluted some since being proposed in June.

More when the rules appear.

SEC Update: IOSCO task forces, central clearing update

The IOSCO Technical Committee has created three task forces to study:
- short selling
- unregulated financial markets (OTC derivative)
- unregulated entities (hedge funds)

The SEC has granted a large number of fund cancellations

On December 3rd, the SEC will, maybe, talk about credit rating agency regulation

Corporation Finance has issued guidance for issuers replacing shelf registrations

Erik Sirri updated the House Ag Committee on the progress toward central clearing for credit default swaps

SEC General Counsel Brian Cartwright will resign

SEC Update

Insider trading complaint against Mark Cuban
Linda Chatman Thomsen (the actual Director of Enforcement) on why we need the SEC.
Open meeting votes to stregthen mutual fund disclosure (nothing about credit rating agencies, though).

Regulating Credit Rating Agencies

At the SEC open meeting on November 19th, there will be a discussion about regulation of credit rating agencies. So begins another chapter in the checkered history of the SEC's attempts to regulate these entities. In 1975, the SEC created the "concept" of the Nationally Recognized Statistical Rating Organization (NRSRO), but it didn't bother to define the term. Later that year the agency was asked, in a no-action letter, which agencies qualified as NRSROs. It named Moody's, S&P and Fitch (Coughlin & Company, Incorporated, 12/25/75, 1975 WL 10745). In the intervening years six other rating agencies received no-action recognition of their NRSRO status.

At the same time, the SEC issued a stream of rule proposals that went nowhere. A 1994 concept release (Release No. 34-34616, 1994 WL 469346) suggested a definition for NRSRO, but the resulting rule proposal was never adopted (Release No. 34-39457, 1997 WL 777260). After the Enron unpleasantness, Congress got involved. Section 702 of Sarbanes-Oxley ordered the SEC to study the role played by rating agencies. The mandated report led to a 2003 concept release, which led to a 2005 proposal which was also never adopted. Congress intervened, again. The Credit Rating Agency Reform Act of 2005 (CRARA, PL 109-291) added definitions of "credit rating agency" and NRSRO to section 3 of the '34 Act. CRARA also did away with the no-action letter approval process. In June of 2007, the SEC finalized implmenting rule 17g-1 and created form NRSRO.