The SEC proposed yesterday to prohibit credit-rating agencies from issuing ratings on structured products unless information on the underlying assets is available.
The Securities and Exchange Commission voted to issue two proposals aimed at increasing transparency, accountability and competition in the credit-rating- agency industry in the wake of the subprime-mortgage crisis that has hobbled the economy over the past year.
High-risk mortgages that led to the subprime crisis were “typified by lax loan underwriting, unverified borrower information and, even in many cases, clear signs of fraud in the loan files,” said SEC chairman Christopher Cox at the meeting at which the proposals were approved.
“Because credit-rating agencies relied on others to verify the quality of the assets underlying the structured products they rated, it is very likely those ratings were often based on incorrect information,” he said.
Credit-rating agencies would have to publish performance statistics for one, three and 10 years.
Separately, to prevent companies from influencing their own ratings, anyone who participates in determining a credit rating would be prohibited from negotiating the fee that the issuer pays for the rating.
Commissioner Paul Atkins voted against a proposal that would require credit-rating agencies to differentiate ratings issued on structured products from those they issue on bonds through the use of different symbols, or by disclosing the differences between the ratings of structured products and other securities.
Despite his negative vote, the second proposal was approved by 2-1.
“This proposed change is a shiny but potentially costly veneer on an otherwise good set of proposals,” Mr. Atkins said.
“Given that investors in the market for these structured products are institutional and other sophisticated investors, the fact that a structured finance product is different from other types of securities ought not to come as a revelation to many of these investors,” he said.
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