Saturday, October 13, 2012

European Commission Finds SEC Regulation of Credit Rating Agencies Equivalent to EU Regulation

In a significant decision that paves the way for cross-border harmonization and cooperation, the European Commission found that the US regulatory regime for credit rating agencies is equivalent to the US regime. The Commission said that the US framework for regulating credit rating agencies provides for equivalent protection in terms of integrity, transparency, good governance of credit rating agencies and reliability of the credit rating activities. Similarly, the Commission found that the Canadian and Australian regimes for credit rating agencies are also equivalent.

One condition of equivalence is that the credit rating agencies in the US or other third country must be subject to registration and subject to effective supervision and enforcement on an ongoing basis. The US legal and supervisory framework for credit rating agencies consists of the Credit Rating Agency Reform Act of 2006, noted the Commission, which seeks to improve the quality of ratings in order to protect investors and in the public interest, by fostering accountability, transparency, and competition in the credit rating industry. The operative provisions of the Act became applicable upon the SEC’s adoption in June 2007 of a series of rules implementing a registration and oversight program for credit rating agencies that register as Nationally Recognized Statistical Ratings Organizations (NRSRO).

In order to allow the use of their ratings for regulatory purposes, credit rating agencies have to register with the SEC and are subsequently supervised by the SEC on an ongoing basis. The SEC is endowed with a comprehensive range of supervisory powers allowing it to investigate whether credit rating agencies comply with their legal obligations, including the power to access documents, to conduct investigations and to carry out on-site inspections, as well as the power to require access to records of telephone recordings and electronic communication. The SEC can exercise these powers not only in respect of credit rating agencies, but also in respect of other persons involved in credit rating activities. Section 15E of the Exchange Act requires the SEC to conduct an examination of each NRSRO at least annually and to report on the findings of these examinations.

When the SEC has established that an NRSRO is in breach of any obligation arising from the relevant regulatory framework, said the Commission, it may adopt a wide range of supervisory measures in order to stop the infringement, including the power to withdraw the registration, to suspend the use of ratings for regulatory purposes and to order the credit rating agencies to stop the infringement. The SEC can also impose severe penalties on credit rating agencies for breaches of the relevant requirements. Therefore, the Commission found that NRSROs are subject to effective supervision and enforcement on an on-going basis. Further, the cooperation agreement concluded between ESMA and the SEC provides for information exchange with regard to enforcement and supervisory measures taken against cross-border credit rating agencies.

Another condition of equivalence is that the regulatory regime in the US or any other third country must prevent interference by the supervisory authorities and other public authorities of that third country with the content of credit ratings and methodologies. In this respect, the Commission found that the SEC and any other public authority in the US are prohibited by law from interfering with the substance of credit ratings and credit rating methodologies.