Tuesday, July 21, 2009
The Treasury Dept. announced that it has sent to Congress proposed reform to credit rating agencies. (Although the announcement refers to a link to the legislative language, in fact I couldn't link to it.) The announcement says that:
Continuing its push to establish new rules of the road and make the financial system more fair across the board, the Administration today delivered proposed legislation to Capitol Hill to increase transparency, tighten oversight, and reduce reliance on credit rating agencies. The legislation would also work to reduce conflicts of interest at credit rating agencies while strengthening the Securities and Exchange Commission's (SEC) authority over and supervision of rating agencies. In recent years, investors were overly reliant on credit rating agencies that often failed to accurately describe the risk of rated products. This lack of transparency prevented investors from understanding the full nature of the risks they were taking. The Administration's legislation would tighten oversight of credit rating agencies, protect investors from inappropriate rating agency practices, and bring increased transparency to the credit rating process.
At a quick glance at Treasury's description of the provisions, I did not see a fix to a major inadequacy in the current law -- the SEC has no authority to review the substance or methodology of the ratings. Instead, the SEC will require each rating agency to document its policies and procedures for the determination of ratings. The SEC will examine the internal controls, due diligence, and implementation of rating methodologies for all credit rating agencies to ensure compliance with their policies and public disclosures.