The SEC is Pushed to take a Stronger Approach to Credit Rating Reporting


On March 11th, the Investor Advisory Committee within the SEC discussed the issue of reporting problems within the SEC’s reporting framework for credit rating agencies. The discussion – found here in the SEC’s webcast archive – was based on the analysis of the Market Structure Subcommittee (list of sub-committee members found here) and the proposal regarding how the SEC should mandate the annual reporting of credit rating agencies and how they are assessed by the Commission.

 

Essentially, the issue relates to the annual report that the SEC must develop as part of wider regulations. This report must detail any rule infractions that SEC Examiners found, alongside a number of other elements (like the market share and concentration within the industry etc.) This process is replicated in the E.U. via ESMA, and in the U.S. this is conducted through the post-Dodd Frank developed ‘Office for Credit Ratings’ (OCR). The sub-Committee’s Chair, J.W. Verret, explained in the webcast (starting exactly 15 minutes from the end of the webcast) that the SEC allow for anonymity in their reports, something which is not mandated by wider statutes. For example, the SEC may state, in their annual report, that ‘a large credit rating agency’ or ‘a small credit rating agency’ did this or did that. The problem is, as Verrett explains, there are a number of instances whereby certain credit rating agencies are falling foul of the rules, and those same rating agencies are not, necessarily, seeking to alleviate those issues. Furthermore, the public then do not get to know which credit rating agencies are falling foul of the rules as examined by the SEC, and then what happens next.

 

The proposal is that the OCR take the same approach as the PCAOB which allows for the identification of its subjects during the examination phase. A warning was put forward regarding a potential disproportionate effect of de-anonymisation on smaller credit rating agencies, but the sub-Committee found that this was unlikely to be a problem. The webcast moved forward to hear from Mina Nguyen, another member of the sub-Committee, who suggested a number of important elements (unfortunately many of which are long-standing issues) need to be considered more by the SEC, like the relevance of qualitative and subjective analysis, the impact of ancillary services (which my PhD thesis and first book extensively covered) and other important elements.

 

The switch to de-anonymising the annual report could be an important one, but with important limitations. It will reveal the progress made by certain agencies with regards to compliance. It will also shine a light on the SEC’s enforcement of the rules, and their approach taken to regulating this important industry. However, it will not be backdated (unless I am mistaken), so any trends will only be revealed moving forward, and this in itself may change the behaviour of both the agencies and the regulator. Also, there will likely be no change in what the impact may be on the agencies for non-compliance, because as we well know in this blog, the agencies are not suspectable to the reputational capital theory that many have suggested. However, it will be an interesting addition to the analysis of the credit rating industry nonetheless.

 

Keywords – SEC, regulation, Annual Report, @finregmatters

Comments

Post a Comment

Popular posts from this blog

Lloyds Bank and the PPI Scandal: The Premature ‘Out of the Woods’ Rhetoric

Image
Today’s very short post focuses upon the news that the Financial Conduct Authority (FCA) has recently extended the deadline to claim compensation for mis-sold ‘Payment Protection Insurance’ (PPI). Whilst a lot of financial institutions will have to prepare to offset the extended deadline, it is Lloyds that has grabbed the business headlines by apportioning an extra £350 million to offset any further claims that may be made of it – however, this comes only a week or two after the Bank posted its best performance figures in over a decade, as was previously discussed in Financial Regulation Matters . This post will therefore argue that the rhetoric being advanced recently regarding Lloyds – rhetoric like Lloyds represents ‘ a modern day success story ’ is wide of the mark and creates a false sense of security that we simply cannot afford to believe in. The ‘ robust recovery ’ was heralded far and wide upon the publication of Lloyds Bank’s financial performance for the previous fi
Read more

The Analytical Credit Rating Agency: A New Entrant That Will Further Enhance Russia’s Isolation

Image
This short post is based upon a forthcoming article by this author that examines the viability of the latest entrant into the credit rating arena, the Analytical Credit Rating Agency (ACRA). The article, which is due to be published in the European Company Law Journal (and is available here in a pre-published version), looks at the chances of the ACRA succeeding when viewed within the parameters of perception , an aspect that underpins the credit rating sector. For this post, the focus will be upon introducing the ACRA, and then on examining the effect it may have upon the wider political issues affecting the Russian Federation. The Analytical Credit Rating Agency was established in November 2015 and comprises of 27 major Russian companies and financial institutions that serve as its shareholders. The agency, which became the first rating agency to receive accreditation from the Russian Central Bank under the new N 222-FZ Law which was designed to protect investors, has a re
Read more

The Case of Purdue Pharma, the Sackler Family, and the Opioid Crisis

Image
In the first of two short posts today, we will look at the case of the billionaire Sackler Family and their remarkable effect upon American society. The family, who own Purdue Pharma amongst a list of other ventures, have this week seen a massive legal action taken against them by the State of New York who argue that the company is ‘ responsible for the opioid epidemic ’ sweeping through the United States. The attorney-general for New York has called the lawsuit the ‘ nation’s most extensive ’ with respect to the pharmaceutical industry and comes right on the heels of a $270 million suit that was settled in the State of Oklahoma on exactly the same grounds. Whilst the company and the billionaire family who own it did not admit guilt (settling parties rarely do, hence why they settle outside of court) it has potentially opened the trapdoors for litigation. It comes as no surprise then that the company is reportedly considering bankruptcy proceedings in the face of such an onsl
Read more