Fitch Ratings submitted its comment letter in response to the Securities and Exchange Commission's Solicitation of Comment to Assist in Study on Assigned Credit Ratings, which is required by Section 939F of the Dodd-Frank Act.
In its comment letter, Fitch said that different factors influence the rating agency selection process. Among them are the depth and breadth of coverage, quality of ratings and research, investor preference and level of service.
The rating firm added that different Nationally Recognized Statistical Rating Organization (NRSRO) compensation models also exist. "Each of these models has benefits to offer the market but none are free from the necessity to manage conflicts of interest," Fitch said.
The rating agency explained that a government-sanctioned NRSRO selection system significantly devalues investor influence in the selection of an NRSRO and its corresponding business model that suits buysiders' needs. This also fosters, according to the firm, the very government sanctioning of rating agencies that Dodd-Frank intends to stop.
Furthermore, substantial change has happened and is still occurring rapidly among all securitization market participants, specifically NRSROs, the rating agency said. Many of these shifts have already caused improvements to the ratings quality, transparency of the rating selection process and the level of investor disclosure.
As these changes have all happened within a very short period and in a securitization sector that remains "fragile", the rating agency thinks that the most effective and efficient method for limiting conflicts of interest within the NRSRO selection process is to maintain and consider additional enhancements to Rule 17g-5.
Rule 17g-5, specifically if enhanced as suggested, would make the proposed alternative NRSRO selection and compensation models not necessary. In this way, the considerable practical challenges some of them raise and the potential for a lot of unintended consequences are all avoided.
These negative results can include reduced NRSRO competition, securitization market disruption, greater deal expenses and, finally a rise in the fiscal burden of taxpayers.
The letter can be read by visiting ‘www.fitchratings.com’ under the ‘Regulatory Affairs’ page.