President George W. Bush signed the Credit Rating Agency Reform Act into law last week, setting in motion substantial changes that could revamp the rating agency business by next year.
The law combines elements from the Senate and House of Representatives versions of the bill, which were adopted days before the president granted it final approval. Proponents say it will bring much-needed competition to the rating agency business, by allowing more than 130 rating agencies to potentially apply for and receive status as nationally recognized statistical rating organizations (NRSROs). The legislation also gives the Securities and Exchange Commission oversight of the industry.
Industry participants welcomed the change.
"Fitch Ratings believes that The Credit Rating Agency Reform Act of 2006 represents a significant step forward to enhance competition in the rating agency industry," said Charlie Brown, Fitch Ratings' general counsel. Specifically, Brown added: the law "appropriately introduces objectivity to the long-standing criteria of market acceptance by requiring definitive evidence that institutional investors use a rating agency's ratings. Market acceptance is one of the most appropriate ways for the SEC to assess the reliability of ratings as part of the recognition process."
Currently, the SEC recognizes only five rating agencies: Moody's Investors Service, Standard & Poor's, Fitch Ratings, Dominion Bond Rating Service (DBRS) and Oldwick, N.J.-based A.M. Best, an insurance specialist. Two of those agencies, Moody's and S&P command an 80% share of the credit ratings market. The SEC granted DBRS and A.M. Best NRSRO status just within the last three years.
The law charges the SEC with issuing rules regarding registered credit rating agencies' conflicts of interest and the misuse of public information. Registered rating agencies must disclose information that improves the industry's transparency, including conflicts of interest; procedures and methodologies used in determining credit ratings; and performance measurement statistics over varying time periods.
Before any laws can be implemented, the SEC will begin a rulemaking period. That period is expected to begin in the next few months and be completed 270 days later, as required by law, said Brown.
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