RATE includes further strengthening of existing regulatory structures, with new authorities provided to the SEC. But the important component here is new rating disclosure requirements which would make the methods credit rating agencies use to rate bonds, MBS, CDO, and other derivatives transparent and auditable. I also like the proposal for a new independent Compliance Officer, which is a power long overdue in ALL corporations.
SUMMARY: The Rating Accountability and Transparency Enhancement (RATE) Act of 2009 (http://reed.senate.gov/newsroom/details.cfm?id=313172)
The bill strengthens the Securities and Exchange Commission’s (SEC) oversight of Nationally Recognized Statistical Rating Organizations (NRSROs) through enhanced disclosure and improved oversight of conflicts of interest, and makes credit rating firms more accountable through greater legal liability.
Accountability of NRSROs
• Holds NRSROs liable when it can be proved that they knowingly failed to review factual elements for determining a rating based on their methodology or failed to reasonably verify that factual information.
• Requires the SEC to explore alternative means of NRSRO compensation, and requires a Government Accountability Office study on payment methods, in order to create incentives for greater accuracy.
• Establishes an office in the SEC to coordinate activities for regulating NRSROs.
• Directs the SEC to ensure that NRSRO methodologies follow internal NRSRO guidelines and requirements for accuracy and freedom from conflicts of interest.
Due Diligence Certification
• Requires certification if due diligence services are used to ensure that appropriate and comprehensive information was received by the NRSRO for an accurate rating.
• Requires NRSROs to notify users when model or methodology changes occur that could impact the rating, and to apply the changes to the rating promptly.
• Requires the SEC to establish a form for NRSROs to provide disclosures on ratings, including methodological assumptions, fees collected from the issuer, and factors that could change the rating.
• Requires NRSROs to provide rating performance information, such as information on the frequency of rating changes over time.
Conflicts of Interests
• Requires NRSROs to have an independent compliance officer to manage conflicts of interest and independently review policies and procedures governing ratings so they are free from conflicts.
• Requires the SEC to regularly review NRSRO conflict of interest guidelines.
• Creates a look-back provision requiring that if an NRSRO employee later becomes employed by an issuer, the NRSRO must review any ratings that the employee participated in over the previous year to identify and remedy any conflicts of interest; and provides for SEC reviews of NRSRO look-back policies and their implementation.
I see this bill as another indication that financial regulatory reform will fix underlaps and gaps in existing authority rather than build a new systemic risk regulatory institution.