Alert June 17, 2008

SEC Proposes Additional Rulemaking for Credit Rating Process

At a recent open meeting, the SEC voted to propose the first two portions of additional rules that will apply to nationally recognized statistical rating organizations (“NRSROs”) overseen by the SEC under the new regulatory program established by the Credit Rating Agency Reform Act.  The first part of the proposed rulemaking addresses conflicts of interest for NRSROs, such as gifts to credit analysts from the issuers of securities being rated, and provides for public disclosure of performance statistics, ratings, ratings actions and information on rating methodologies, with a particular focus on structured products.  The second part of the proposed rules would require credit rating agencies to make a clear distinction between ratings they issue on structured products as opposed to ratings they issue on bonds; under this aspect of the proposed rules, a credit rating agency would have to either (a) publish a report that would accompany a structured finance credit rating and describe the methodology used to determine the rating and how the rating and the risks associated with the structured finance security were different from those of other types of securities, or (b) use rating symbols for structured finance products distinct from those used for other types of debt securities.  Comments on the proposed rules must be received by the SEC within thirty days after publication of the proposing release in the Federal Register.  A third set of proposed rules, which deals with the role the SEC has assigned to ratings in its rules, is scheduled to be considered at the SEC’s June 25, 2008 open meeting.