Council of Institutional Investors

SEC Tightens Rules Governing Credit Rating Agencies
Thursday, August 28, 2014
by: Rosemary Lally

Section: CII Governance Alert

The SEC, as part of its rulemaking requirements under the Dodd-Frank Act, on August 27 adopted new requirements for credit rating agencies.

The new rules include requirements that credit rating agencies registered with the commission as nationally recognized statistical rating organizations (NRSOs):
  • set up strict firewalls between sales staff and employees responsible for issuing credit ratings,
  • establish comprehensive internal controls structures,
  • implement “look back” reviews to determine if the prospect of future employment by a company or underwriter influenced an employee issuing a credit rating,
  • disclose how often they downgraded or upgraded credit ratings,
  • adopt certain procedures and models prescribed by the SEC for determining credit ratings,
  • disclose with their credit ratings the procedures and methods used to determine the ratings,
  • establish standards of training and competence for employees who issue credit ratings,
  • periodically test these employees on their knowledge of the procedures and methodologies used to determine credit ratings and
  • require that at least one employee with no less than three years of experience in credit analysis be involved in issuing credit ratings.
Two Republican SEC commissioners, Daniel Gallagher and Michael Piwowar, voted against these new credit rating regulations. “This new rule text sets an impossible standard for compliance and has no limiting principle,” said Piwowar.

The rules on internal controls go into effect on Jan. 1, 2015, and those dealing with the other issues are expected to be in place by early summer 2015.  
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