Monday, August 03, 2015

GAO Report Finds Rating-Analyst Organization Viewed as Premature

By Amy Leisinger, J.D.

The U.S. Government Accountability Office (GAO) has issued a report on a Dodd-Frank-mandated study of the merits and feasibility of creating a professional organization responsible for establishing standards for, and overseeing compliance of, rating analysts employed by nationally recognized statistical rating organizations (NRSROs). According to a statement by the GAO, industry views varied on the propriety of this course of action and the attendant challenges, and some commenters suggested it may be premature to make a decision, particularly in light of the SEC’s new mandate that NRSROs establish standards for their credit rating analysts.

Findings. For the study, the GAO interviewed industry participants, experts, and stakeholders to gather information from all aspects of the market. Noting that independent professional organizations are generally established to help protect the integrity of a specific profession and provide safeguards for stakeholders, the report found many organizational participants believe that a group for NRSRO analysts would improve the industry's reputation, enhance the quality of work provided, and provide supplementary oversight to address issues in the industry.

However, some analyst and NRSRO representatives expressed concern that creating an organization could result in duplicative and even contradictory standards. In addition, they explained, obtaining funding through membership fees may present challenges, given the overall small population of analysts, and providing equitable representation for all members may be difficult, given the fact that the vast majority of analysts work for only three of the 10 total NRSROs. The differences in NRSRO operations and methodologies and analyst specialization may also make it difficult for an organization to develop uniform professional standards, education requirements, and training approaches and to create structures to oversee compliance, several commenters opined. According to the report, several study participants stated that it is unclear whether a professional organization truly could address the complicated, widely reported problems that have harmed the reputation of NRSROs. Some suggested that expanded SEC oversight or the use an existing organization may be more appropriate to govern analysts, the report states.

Further, some commenters explained, it may be too early to determine whether a professional organization would add value; the effectiveness of SEC's new rules requiring each NRSRO to establish training, experience, and competence standards for analysts should be evaluated first, they noted. According to these contributors, defining the purposes of an organization would be arduous without knowing how the impact the new rules will have on the industry. Commenters suggested that “it would be difficult at this time to effectively identify potential gaps in the training, credentialing, or oversight of credit rating analysts that a new organization would be designed to address,” the report notes.

The report was provided to the SEC for review and comment, as well as to appropriate congressional committees and other interested parties for their consideration.