Credit agencies will have to disclose more of their ratings history, and creators of financial products will have to share data with all credit raters, under rules adopted by U.S. regulators on Thursday.
The U.S. Securities and Exchange Commission approved those rules and proposed others as it took aim at the credit rating industry, blamed for fueling the financial crisis by assigning and maintaining high ratings on toxic mortgage-backed securities.
SEC Chairman Mary Schapiro said the industry needs to be subjected to stronger regulation because investors frequently consider ratings in making investment decisions. That reliance did not serve them well over the last several years, she said.
The agency voted to seek comment on whether credit agencies should be categorized as experts under securities law, and thus subject to tougher standards of liability. The SEC said it is not proposing such a move yet, but wants feedback on its potential impact.
Further, the SEC proposed on Thursday to require banks to disclose all preliminary ratings they receive from credit agencies in an attempt to stop banks from shopping for the best credit rating for their products.
Under new rules finalized by the SEC on Thursday, credit rating agencies will have to reveal more information about past ratings so investors can compare their relative performance. The information would be publicly disclosed on a delayed basis, with up to a one- or two-year lag, to protect the rating agencies' proprietary information.
This requirement would apply regardless of whether agencies are paid by issuers or by investors.
In another rule adopted on Thursday, the SEC said banks and credit rating agencies should be required to share data used to rate bonds with all credit rating agencies, in an attempt to generate unsolicited ratings.
To reduce reliance on credit ratings, the SEC voted to remove references to ratings in some of its rules and forms. The SEC said the embedded references could make investors rely on the credit raters' actions instead of applying their own judgment on the value of securities.
Legislation in 2006 gave the SEC greater responsibility for overseeing credit raters, and charged the agency with fostering more competition in the industry long dominated by a few firms: Moody's Corp's Moody's Investors Service, McGraw-Hill Cos' Standard & Poor's, and Fimalac SA's Fitch Ratings.
At its meeting Thursday, the SEC also proposed a ban on flash orders that stock exchanges send to a select group of traders fractions of a second before revealing them publicly. The practice has been criticized for giving an unfair advantage to some market participants who have lightning-fast computer trading software.
Meanwhile, Standard & Poor's said on Thursday it may downgrade around $578 billion of collateralized debt obligations backed by corporate debt as a result of changes the rating agency is making to the way it rates the deals.
S&P is changing its criteria for rating CDOs after being criticized for awarding high ratings to risky deals that in many cases have lost all, or most of their value.
Losses from the deals, portfolios of debt sliced into pieces of varying risk and return, helped spark the financial crises that caused the downfall of Lehman Brothers and the government rescue of American International Group .
(Reporting by Karey Wutkowski with additional reporting by Karen Brettell in New York, Editing by Tim Dobbyn)