The American Securitization Forum and the newly formed Structured Finance Industry Group will both speak against the so-called Franken Amendment, or section 939F of the Dodd-Frank Act, at the U.S. Securities and Exchange Commission ratings agency roundtable event in Washington D.C. on Tuesday.
The amendment to the Dodd-Frank Act, sponsored by Senator Al Franken (D-MN), requires the SEC to consider creating a ratings board to assign credit rating agencies to specific structured finance issuances. The board - compromising primarily by investor members, one issuer member, one rating agency representative and one independent member - would randomly assign rating agencies to individual transactions.
Among some of the problems the ASF outlined in a letter to the SEC, with the Franken Amendment is that it would limit investor choice and flexibility and works against the goals of Dodd-Frank.
It also raises concerns relating to the role of the U.S. government because it would create a performance measure that would “effectively replace NRSROs’ opinions of credit quality with that of the government-established assignment board.”
Instead, the ASF believes that the SEC’s Rule 17g-5, which requires structured finance issuers to more broadly disseminate transaction information, with certain modifications, would eliminate conflicts of interest in the current credit ratings system.
“We believe that, through improving a framework in which non-hired NRSROs can gain access to information to provide unsolicited credit opinions, an enhanced rule 17g-5 program will better serve the public interest and the protection of investors than implementation of the Franken Amendment provisions or any other compensation model,” said ASF executive director Tom Deutsch.
Rule 17-g 5 came into force on June 2, 2010. Under the regulation, rating agencies have access to all of the information they need to provide unsolicited ratings. The rule requires issuers, sponsors and underwriters of structured finance deals to maintain a password-protected Web site containing all of the data and documents they provide to the credit rating agencies they hire as well as transcripts of interactions with these agencies; the agencies that are not hired must have access to these Web sites as well.
Reggie Imamura, chairman of the board at SFIG said that the ratings assignment system currently considered “does not mitigate potential conflicts of interest and could be detrimental to investors, negatively impacting liquidity and access to the securitization market."
The SFIG also believes that enhancing rule 17g-5 could be the next step. “Rather than adopting a ratings assignment system, which has substantial negative effects on investors,” said Imamura. “Possible enhancements to 17g-5 include loosening the 10% requirement for access and permitting commentary by the non-hired rating agencies rather than just full ratings."