The Securities Industry and Financial Markets Association (SIFMA) cautioned against proposals to remove references to credit ratings in regulations that the Securities and Exchange Commission (SEC) issued with the intention of avoiding overreliance on credit ratings and promoting independent analysis. 

These objections were contained in a comment letter filed today with the SEC.

According to a release from SIFMA, the association's Credit Rating Agency Task Force does not believe the possibility of undue reliance on credit ratings supports the deletion of references to and use of credit ratings in regulations. 

Furthermore, SIFMA said that the Task Force finds that the incorporation of credit ratings in regulations in many cases offers an appropriate independent minimum threshold, and is an important data point that should be retained as part of an investor's overall credit analysis.  

Taking away these references might increase apprehension among market players who are faced with the challenge of complying with new, vague standards, increase uncertainty among investors who depend on the protection and transparency the ratings provide and increase confusion among market participants subject to competing regulatory frameworks.

The letter also said that determining the appropriate degree of reliance on credit ratings is less of a regulatory issue and more of a best practices one. 

On a final note, the Task Force stresses that credit ratings and the ratings process itself will be more transparent once the SEC implements Part 1 of its recent credit rating agency reform proposals and suggests that the SEC focus its efforts on ensuring that the proposed rule amendments in Part 1 achieve their stated objective.

"While we support the promotion of due diligence and independent investment analysis by market participants, we believe removing references to credit ratings from securities regulations will not achieve that objective,” said Deborah Cunningham, chief investment officer at Federated Investors and co-chair of SIFMA's Credit Rating Agency Task Force.  "Credit ratings provide an important data point that is a useful component in an investor's risk analysis process and offer an objective minimum threshold in bright-line, rating-based compliance standards.  Rather than undertake a sweeping regulatory reform which may potentially destabilize the market and harm investors, the Task Force encourages the SEC to instead continue to pursue its efforts to improve investor confidence in ratings.”

The SEC proposal would amend portions of the Investment Company Act, the Investment Advisers Act and the Securities Exchange Act.  In several instances, the proposals would remove an objective, ratings-based component of specific rules under these Acts and replace it with subjective standards.  In its letter, SIFMA notes the potential for uncertainty, decreased transparency and market disruption caused by the new discretionary standards.

The SEC proposal would also amend Rule 15c3-1, which is commonly known as the net capital rule, under the Securities Exchange Act, by substituting two new subjective standards for the rating-based standards now utilized to determine the haircut on commercial paper and non-convertible debt securities or preferred stock. 

A commercial paper instrument would have to be subject to a minimal amount of credit risk and have sufficient liquidity such that it can be sold at or near its carrying value almost immediately.  For non-convertible debt securities or preferred stock, the instrument would have to be subject to no greater than moderate credit risk and have sufficient liquidity such that it can be sold at or near its carrying value within a reasonably short period of time. 

Brokers would be required to explain how the securities they use for net capital purposes meet the new subjective standards. The SIFMA said that broker-dealers have dependably relied on credit ratings under the existing rule and finds no substantial added benefit to the amendments, but does caution that the removal of a transparent and predictable standard creates uncertainty.

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