Friday, April 30, 2010

Sen. Bill Nelson Aims to Enhance Credit Rating Agency Oversight in Dodd Reform Bill

Amendments offered by Senator Bill Nelson (D-Fla) would significantly strengthen the oversight of credit rating agencies embodied in the Senate financial reform bill, S 3217, by randomly assigning credit ratings and providing for SEC enforcment of a mandated ongoing monitotring of ratings by the rating agencies that issued them.

Senator Nelson praised the Dodd bill for requiring rating agencies to consider information in their ratings that comes from outside sources. But when it comes to addressing the fundamental
conflict of interest in the credit rating agency business model, he said, the bill falls short. It would require the rating agencies to separate ratings activities from their sales and marketing activities. But the Senator said that he would offer an amendment establishing a clearinghouse to randomly assign rating assignments with rating issuers. In his view, the conflict of interest in the credit rating industry would end if, randomly, it is going to be assigned among companies that rate issuers of financial instruments. Cong Record, Apr 28, 2010, S2742.

Second, the Senator offered an amendment (SA 3739) to require the rating agencies to monitor, to review, and to update their credit ratings after the initial issuance of their credit rating so it does not become stale. They are going to have to continue to look at it to review it, to update it, and to publish it. In the Senator's view, the rating agency should not be able to walk away from a rating after it has been issued. It is going to be fresh. The rating agencies ought to conduct continued surveillance of these securities and update them along the line.

The amendment would amend Sec. 15E of the Exchange Act to require the SEC to issue rules requiring each nationally recognized statistical rating organization to regularly monitor, review, and update the credit ratings they issued to ensure that the ratings remain current and reliable. The SEC would be authorized to enforce the rules with the power to censure, fine or place limitations on the activities of agencies that do not comply with the rule, and also to suspend or revoke the registration of agencies not compliant with the rules. Cong. Record, Apr 29, 2010, p. S 3751.