Responding to the scrutiny toward credit ratings agencies during the past couple of years, Standard & Poor’s outlined four new reforms to restore investor confidence in its ratings and in credit markets. In yesterday’s statement, McGraw-Hill Cos. unit president Deven Sharma, said, “The performance of our ratings in the area of residential mortgage-related securities was a major disappointment. Through this process, we have identified and undertaken four core reforms.” First, to address conflict of interest and the issuer pay model, S&P will now rotate its analysts through different assignments. The agency has also established a risk oversight committee, as well as “look back” reviews when employers leave the company to work for an issuer. Additionally, S&P might potentially tie analyst compensation to ratings performance so that there can be further independence from issuers. As published reports have said, ratings agencies have received much criticism from lawmakers and others for giving ‘AAA’ rankings to subprime-mortgage bonds before their collapse, resulting in nearly $1.5 trillion in writedowns and losses since 2007. Second, S&P said it has published ‘what if’ scenario analyses and has shared risk factors considered when analyzing securities to increase transparency in the ratings process to investors. Third, S&P has revised its criteria to incorporate a measure of stability into investment grade ratings and has published economic stress scenarios for comparing ratings across sectors over time. Finally, to address accountability, S&P pointed out that it is now subject to the authority of the Securities and Exchange Commission (SEC) if it fails to meet regulations for disclosing conflicts of interest and ratings methodologies. In December, the SEC voted to reduce conflicts of interest at ratings firms due to their questionable independence. It also barred those who assess debt from discussing compensation with bankers seeking a better grade before they sell bonds, or offering advice on structuring debt in a way that would earn top grades. Sharma said that the new securitization reforms proposed by the administration, along with global regulatory initiatives and regulations pushing greater transparency for the investor, “will improve the quality of the securitization process for investors as well as ratings firms.” These changes come two weeks after S&P reassigned Vickie Tillman, an executive vice president who headed ratings services, to a new role at McGraw-Hill.
Ray Groves was also hired in January as ombudsman for the credit-rating unit at McGraw-Hill, and can bring unresolved matters to the CEO of the company and also to the Audit Committee of the Board of Directors. Groves’ work is open to the SEC and to public scrutiny.