An enhanced version of the ratings rule 17g-5 would provide additional benefits that would reduce both issuer conflict of interest and the concept of ratings shopping.
Industry sources speaking at the American Securitization Forum's Sunset Seminar on Ratings said that it would also virtually render consideration of the Franken Amendment unnecessary.
The amendment originally proposed that the Securities Exchange Commission (SEC) establish a board that would assign which rating agency would rate certain structured finance transactions.
That amendment didn't make it but the one that did calls for a study on the same topic. It requires the SEC to conduct a study on the ratings process and to consider the feasibility to establish the board.
The SEC must complete the study and come up with recommendation by July 2012. "What is important is that SEC has to recommend an alternative to the Franken amendment or an alternative to establishing this board for that not to happen," said Kevin Duignan, group managing director at Fitch Ratings, while speaking at the ASF event. "If the study is inconclusive or they don't make another recommendation then this board by the SEC will become functional."
Specifically the amendment would require that the board be established and compromised primarily by investor members, one issuer member, one rating agency representative and one independent member.
First the board would have to qualify an NSRO to be eligible to participate in the rating of certain types of transactions. Once the board determined who qualified, they would select from that pool as to who would assign the rating on that transaction. On an annual basis the board would conduct a performance review on the NSROs and determine eligibility going forward.
However Duignan believes that efforts and regulations that have already been introduced work towards the similar goal of the Franken amendment to reduce conflicts of interest within the rating agency network. Many are still being written and implemented.
"Our view is given all of those new rules and process that have been implemented at least give some time for things to play out," he said.
Under rule SEC Rule 17g-5 for instance, which came into force in June 2010, there have been nine unsolicited commentaries, including three by Fitch, two in the U.S. and one in Europe.
"All of the major rating agencies have issued some sort of unsolicited commentary which is one of the goals or the Franken amendment, to entice more opinions to be available to investors," said Duignan.
Duignan said that a better option might be to enhance the existing SEC rule 17g-5 which would create additional benefits that would cover what the Franken amendment seeks to achieve.