An 18-page draft bill sent to Congress on Tuesday details new laws that would delegate regulation powers to the Securities and Exchange Commission so that the industry and companies would be required to disclose when they go ‘ratings shopping’.
‘Ratings shopping’ is the practice by which firms can go to each of the three agencies and see which would offer the best rating for the cheapest amount.
Additional regulation would include that ratings reports have a history of issuers’ fee payments for the past two years, that the practice of providing consulting services to firms that agencies rate would be banned. Also, agencies would have to provide details of the amount of fees issuers have paid to obtain ratings.
The Treasury Department says: “In recent years, investors were overly reliant on credit rating agencies that often failed to accurately describe the risk of rated products.”
Treasury Department assistant secretary for financial institutions Michael Barr said in The Washington Post: “Our basic approach is to say we understand the potential for conflict in this area and we need tough rules to regulate conflict of interest.”
However, Egan-Jones Rating Co. managing director Sean Egan was quoted in the Wall Street Journal as saying: “This is a non-solution to a massive problem. The incentives for issuing inflated ratings remain healthy and well. The proposal issued by the Treasury will do nothing to correct that.”