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 SEC Approves New Credit-Rating Rules
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SEC Approves New Credit-Rating Rules
The Securities and Exchange Commission took aim at the big credit rating firms Wednesday, passing ne
bydesign001
Thu, 04 Dec 2008 00:07:40 +0000
The Securities and Exchange Commission took aim at the big credit rating firms Wednesday, passing new rules designed to prevent conflicts of interest and increase transparency in the $5 billion a year industry.
The three largest ratings firms -- Standard & Poor's, Moody's Investors Service and Fitch Ratings -- have been widely criticized for their role in the global financial crisis brought on by the collapse of the subprime mortgage market.
Critics claim the rating firms gave their highest ratings to securities laced with risky mortgage backed assets in order to curry favor -- and profits -- from the firms buying and selling the securities.
The new rules specifically forbid the firms from advising banks on how to package securities in order to secure high ratings.
Thousands of securities initially given AAA ratings were later downgraded as the financial crisis washed across Wall Street, forcing nearly every large bank to write down billions of dollars in losses.
SEC commissioners voted unanimously at a public meeting to adopt the new rules.
SEC Chairman Christopher Cox called adoption of the new rules "a significant and substantive action."
The industry had regulated itself for nearly a century, but that ended in 2007 as it became clear that many mortgage-backed securities given AAA ratings were likely to collapse in value.
The agencies have long been as almost de facto regulators, issuing ratings on the creditworthiness of public companies and securities. Investors depend on the ratings to purchase the safest possible securities.
Their grades can be key factors in determining a company's ability to raise or borrow money, and at what cost which securities will be purchased by banks, mutual funds, state pension funds or local governments.
Among the other new rules is one that will require the rating firms to disclose how much verification they performed on the quality of the securities they review.
SEC Approves New Credit-Rating Rules By FBN, http://www.foxbusiness.com/story/markets/industries/finance/sec- approves-new-credit-rating-rules/
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