The Securities and Exchange Commission has proposed rule changes to make the limits and purposes of credit ratings clear to investors and ensure that the role assigned to ratings in SEC rules is consistent with the objectives of having investors make an independent judgment of credit risks.
The Commission voted unanimously to issue for public comment this third set of proposed recommendations to bring increased transparency to the credit ratings process and curb practices that contributed to recent turmoil in the credit markets.
“This action is designed to ensure that the role we assign to ratings in our rules is consistent with the objective of having investors make an independent judgment of the risks associated with a particular security,” says SEC Chairman Christopher Cox. “It should be neither the purpose nor the effect of any SEC rule to discourage investors from paying close attention to what credit ratings actually mean.”
The Commission has reviewed the requirements in its rules and forms that rely on credit ratings. In many cases, it has concluded that such references can be removed or revised. These proposals also address recent recommendations issued by the President’s Working Group on Financial Markets, the Financial Stability Forum, and the Technical Committee of the International Organization of Securities Commissions (IOSCO). Consistent with these recommendations, the SEC has considered whether the inclusion of requirements related to ratings in its rules and forms has, in effect, placed an “official seal of approval” on ratings that could adversely affect the quality of due diligence and investment analysis. The SEC’s proposal would reduce undue reliance on credit ratings and result in improvements in the analysis that underlies investment decisions.
Public comments on this third set of proposed rules should be received by the Commission no later than 5 Sept. 2008.