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Interview: Paul Atkins on credit rating agency regulation Back  
An SEC proposal to remove all references that expresses reliance upon credit ratings is part of the ongoing refinement of approach towards credit rating agencies, according to US Securities and Exchange Commission (SEC) Commissioner, Paul Atkins in this exclusive interview with FINANCE. Atkins says he and the SEC will watch with ‘interest’ the developments following Commissioner McCreevy’s call for a registration and oversight system in Europe that McCreevy announced at the Finance Dublin Global Financial Services Centres Conference conference on June 16th, which was also addressed by Commissioner Atkins.
Earlier this month, the SEC considered a proposal to strengthen the SEC’s rules governing credit rating agencies. Do you support the proposal, and how will it work to increase transparency?

I generally support the proposal. If adopted, the amendments should provide more information to investors so that they can judge the opinions that credit rating firms provide, especially on investments such as structured products. This enhanced transparency also could lead to increased competition among firms providing credit ratings. Transparency and competition make for healthy markets, because investors have a better view of what is going on in the market and can make better decisions.

Towards this end, the SEC’s proposal would require disclosure of information that credit rating agencies use in the development and surveillance of their ratings, enhanced disclosures of their rating methods, and more comprehensive information about changes in ratings. The focus of the amendments on ratings of structured finance products is warranted given recent events. I hope that our efforts in this area will help to restore confidence in the market for structured finance products, through providing a basis for investors to have a better understanding of those products.

I opposed one aspect of the proposed release that would require credit rating agencies, in connection with any structured finance rating, essentially to add a symbol – such as a “dot SF” – to its structured finance product ratings. Likewise, I did not agree with the inclusion of a recommendation for different symbols in the IOSCO credit rating agency code of conduct.
This proposed change in my view is merely cosmetic - a shiny, but costly, veneer on an otherwise good set of proposals. Given that investors in the market for these structured finance 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 much of a revelation to investors. Certainly, the symbol might serve as a warning of sorts - will it become “Beware the dreaded ‘SF’ rating”? The effect of that scarlet letter might quickly fade away, though, as people learn to ignore it and focus only on the rating to which it is attached. In addition, how much information can a “dot SF” provide an investor about the underlying investment? It is questionable whether investors would pay much attention anyway, since the line between which products fall within the definition and which ones outside is somewhat vague and arbitrary.

How should the proposals avoid the danger of infringing on free speech, and of perpetuating a moral hazard that encouraged/enabled investors to rely of credit ratings as a substitute for proper research and risk taking?

A rating is an expression of opinion - one that, barring self-dealing or lack of integrity, enjoys the protection of free speech. A rating issued by a credit rating agency - no matter how much expertise it may have - is no substitute for an investor’s making an informed decision and undertaking careful due diligence. As regulators, we should not perpetuate a regulatory regime that creates a moral hazard for investors by encouraging them to rely on credit ratings. Over the years, explicit references to credit ratings had worked their way into our rules. For that reason, last month, the SEC proposed to remove from many of our rules expressed reliance on credit ratings.

With increased transparency and competition, which the SEC proposals seek to accomplish, investors should be able to better judge for themselves the risks and appreciate the fact that ratings are merely opinions and the first step in their own, independent credit analysis.

How should credit rating proposals be developed to deal with the specific issues of structured finance ratings?

The SEC has been seeking to bring more transparency and competition to the process of rating structured finance products. We also have conducted an examination of some of the credit rating firms who rate structured products. Obviously, the focus on ratings of structured finance products is warranted given recent events. Our goal is to provide a basis for investors to have a better understanding of those products and to appreciate the risks through greater transparency. Transparency also should increase competition in the field of credit ratings. We must remember that government regulators should never substitute their judgement made in hindsight for that of the rating agencies. Our job is to ensure that rating agencies handle their inherent conflicts of interest with honestly and with integrity.

Can you provide a comment on the proposals of Commissioner McCreevy at the Global Financial Services Centres Conference on June 16th in Dublin, in relation to a possible ‘harmonised’, or joint Trans-Atlantic approach to the question? Or indeed, would such an approach be desirable?

Credit rating agencies have been the focus of scrutiny in the United States and in Europe. Ratings, of course, have an effect not only in the United States but also abroad. The large credit rating firms do business around the world. The SEC has been working with our counterparts in Europe and with multinational groups, including the Financial Stability Forum and the International Organisation of Securities Commissions, to study this area and make recommendations for change.

Commissioner McCreevy has called for a registration and oversight system in Europe. I will be following these discussions with interest. The implementation problems of the Sarbanes-Oxley Act of 2002 demonstrated how important efforts for coordination are for both sides of the Atlantic.

I have had the pleasure of working with Commissioner McCreevy for many years now, including on other issues before the Transatlantic Economic Council. I have a great deal of respect for him and his efforts toward finding global solutions to economic challenges. I look forward to hearing and studying the developments by the European Commission and the European Council concerning credit ratings and credit rating agencies.

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