A sample of comments in response to the SEC's rating agency reform proposals suggests the market could find itself in a situation where the government must balance its interest in oversight and control with its plans to avoid more responsibilities and liabilities. It also may need to balance its aim to restrict conflicts of interest with another reform goal involving more sharing of information and transparency.

The American Securitization Forum and Standard & Poor's, for example, have said they are opposing a proposal to create a board that would choose which rating agency is allowed to rate any given new issue securitization on the grounds that government involvement could be a concern.

The board was originally Sen. Al Franken's idea, introduced as part of Dodd-Frank. It would be set up and monitored by the SEC, which would choose its members initially and be responsible for making changes aimed at improving its performance.

The ASF and S&P both said among their concerns is that the board could cause investors to view ratings as government sanctioned and rely too heavily on them. Also both said they were concerned it would reduce incentives to compete. ASF said it would, for example, limit discounts as it would set rating agency fees and not allow investors to learn the agency's identity until late in the securitization process.

Ian Linnell, Fitch Ratings group managing director and head of global structured finance, notes in a comment letter to the SEC that the board on one hand “runs counter to the mandate of Dodd-Frank to reduce the role of ratings in regulations.” But on the other hand, he notes that Dodd-Frank also instructs the SEC to implement the proposal “unless the SEC determines that an alternative system would better serve the public interest and the protection of investors.”

While the Franken Amendment is not mandated as part of the final bill, the SEC has to consider the rating agency board concept and report back to congress on it by July of next year, according to the ASF. Instead of the board, what the ASF is supporting is a package of reforms called the Rule 17g-5 program that would among other things establish guidelines that would separate rating agency analysts from sales and marketing functions at the companies. Linnell also has said it sees Rule 17g-5 as the most effective option for managing potential conflicts within the credit rating agency selection process, with some caveats.

Under the proposal, the SEC would prohibit rating agencies from issuing or maintaining a credit rating if an analyst on the transaction also participated in the firm's sales and marketing effort.

However, Moody's Investors Service said in a letter to the SEC it believes the wording in the draft it viewed was too ambiguous and could lead to misunderstanding and misuse of this part of the reform, “leading to the incorrect conclusion that rating personnel are prohibited from engaging in essential analytical discussions with persons outside” the rating agency.

Moody's has recommended instead a Dodd-Frank provision that requires rating agencies to have, enforce and document measures “reasonably designed to prevent sales and marketing considerations from influencing the quality or integrity of the credit rating process.”

The SEC proposal also would require issuers to immediately make available to all nationally recognized rating agencies any information they provide to the agencies they hire, allowing outside rating agencies to reach independent conclusions. Fitch's letter said making the information available only to other rating agencies “clearly limits its usefulness to investors” and instead suggests making it available to both investors and the public.

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