Perspectives

Sally Hart
vice president, product strategy
SunGard’s wealth management
business

Will the SEC’s suggestions on how to strengthen the oversight of the rating agencies be enough to make a difference?

One of the fundamental conflicts of interest for credit rating agencies is that issuers, sponsors or underwriters of securities, pay to have their securities rated. One of the suggestions of the SEC is to provide additional information on conflicts of interest and also on the magnitude of the conflicts. Nationally Recognized Statistical Rating Organizations (NRSROs) would be required to post on their websites, a consolidated report that shows:

• The percent of net revenue attributed to the 20 largest users of the credit rating services

• The percent of net revenue attributable to other services and products provided by that agency

• The percent of net revenue earned by the agency from other services (in addition to rating services) to each person who paid for a credit rating

• The relative standing of that person who paid for credit ratings in terms of the amount of net revenue earned by the agency. (top 10%, top 25%, top 50%, bottom 50%, or bottom 25%)

Will required annual filings of this information buried on the rating agencies’ websites be sufficient to effectively remove conflicts of interest? A more effective approach may be to eliminate the process of firms paying agencies to rate their securities. How can rating agencies objectively rate their clients’ securities without having some trepidation over potential biting the hand that feeds them?

What do you think? I am interested to hear your perspective on credit agency reform.