The attached study, conducted by the Staff of the SEC, examines the Exchange Act Section 15E(w) (”Registration of nationally recognized statistical rating organizations”), the credit ratings system and potential alternatives to that system. The study also discusses existing Exchange Act Rule 17g-5 (”Conflicts of interest”), which is intended to mitigate the issuer-pay conflict with respect to structured finance products.
The report does not make any definitive recommendations, but it does provide an easy-to-read description of the way that ratings are assigned, potential conflicts of interest, and various alternative means by which ratings agencies might function or be regulated.
This report was submitted to Congress pursuant to Dodd-Frank Section 939F.
Lofchie Comment: The proposals for restructuring the way in which the rating agencies determine to rate any particular product include proposals that would result in the government playing a far greater role in the decision as to which rating agency might rate any particular product. Although I can see the formal logic of an impartial goverment-directed process, I would be extremely nervous as to the thought of the government playing such a large role in determining the direction of capital, particularly given the scale of government “investment” in private industry and finance, as well as the government’s subsidization of certain industries. One can easily imagine political “inquiries” into why certain issuers are being upgraded or downgraded.
Click here to view study in full (links externally to SEC website).