The SEC has approved rules granting the agency more control over credit rating agencies and obligates asset-backed securities issuers to reveal additional information about underlying loans. S.E.C. Chairwoman Mary Jo White says that the reforms will give investors crucial protections while making the securities market stronger.
The rules target the activities, products, and practices that were key factors in the 2008 financial crisis. They would apply to more than $600 billion of the asset-backed securities market, over which the SEC presides. The rules, however, won’t apply to bonds guaranteed by Fannie Mae (FNMA) and Freddie Mac (FMCC). Both entities are exempt from SEC rules.)Also, the new disclosure requirements won’t apply to private placements that are only sold to sophisticated investors.
Leading up to the economic crisis, Wall Street had packaged mortgages into investments that were given high ratings even though they didn’t necessary contain the highest quality subprime loans. Investors sustained huge losses when the securities plunged in value.
Under the new rules, banks and other firms will have to give investors more information about mortgages and asset-backed securities, including credit card receivables, residential-mortgage loans, student loans, and commercial loans. Investors will be given more time to assess disclosure before the bonds’ first sale.
Firms that issue securities will have to submit reports on the underlying loan data to the Commission, which will make the data available online. SEC Commissioner Luis A. Aguilar, however, has noted that the rules do not include the enactment of the risk-retention rule, which would allow securitizers’ incentives to match up with those of investors.
As for the new credit rating agencies rules, they will require Standard & Poor's (S & P), Moody's Investor Services (MCO), and others to put into place internal procedures for setting and modifying ratings, as well as provide greater disclosure regarding their accuracy. The credit raters will have to implement procedures to make sure that the incentive to win business doesn’t hurt their ability to provide fair and accurate analysis.
Credit raters will also have to let market participants comment on whether a firm’s methodology for ratings should be updated. Agency employees involved in the marketing or sales of a service or product will not be allowed to monitor or decide its credit rating or take part in establishing the methodology to establish the ratings.
Credit rating agencies also will be required to perform a “look-back” review to see if a credit rating analysis was influenced by a conflict of interest. In addition, agencies must providing information about initial credit ratings and any changes that follow to the public so that investors can determine the accuracy of the ratings and compare the credit rating performances issued by the different agencies.
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