SEC Proposal to Reduce Reliance on Credit Ratings

The Securities and Exchange Commission today published for public comment proposed rule changes to make the limits and purposes of credit ratings clear to investors and ensure that the role assigned to ratings in SEC rules is consistent with the objectives of having investors make an independent judgment of credit risks.

The Commission voted unanimously on June 25, 2008, to issue for public comment this third set of proposed recommendations to bring increased transparency to the credit ratings process and curb practices that contributed to recent turmoil in the credit markets. The Commission voted to propose the first two sets of recommendations on June 11, 2008.

"This action is designed to ensure that the role we assign to ratings in our rules is consistent with the objective of having investors make an independent judgment of the risks associated with a particular security," said SEC Chairman Christopher Cox. "It should be neither the purpose nor the effect of any SEC rule to discourage investors from paying close attention to what credit ratings actually mean."

Erik R. Sirri, Director of the SEC's Division of Trading and Markets, said, "These proposals complete the rulemaking initiative begun two weeks ago with respect to NRSROs. I believe the proposed amendments will further promote the Commission's goals of strengthening the ratings process by reducing any undue reliance on NRSRO ratings and by encouraging independent evaluation and analysis of credit risk."

John White, Director of the SEC's Division of Corporation Finance, added, "These proposals are an important step toward clarifying the appropriate role of credit ratings in investors' decisions about the securities in which they invest. Not only do the proposals establish new criteria, independent of ratings, for issuers to access our forms and utilize the shelf registration process, they do so in a manner that protects the interests of investors."

The Commission has reviewed the requirements in its rules and forms that rely on credit ratings. In many cases, it has concluded that such references can be removed or revised. These proposals also address recent recommendations issued by the President's Working Group on Financial Markets, the Financial Stability Forum, and the Technical Committee of the International Organization of Securities Commissions (IOSCO). Consistent with these recommendations, the SEC has considered whether the inclusion of requirements related to ratings in its rules and forms has, in effect, placed an "official seal of approval" on ratings that could adversely affect the quality of due diligence and investment analysis. The SEC's proposal would reduce undue reliance on credit ratings and result in improvements in the analysis that underlies investment decisions.

Public comments on this third set of proposed rules should be received by the Commission no later than Sept. 5, 2008.

The proposing releases comprising this third set of rule proposals have been posted to the SEC Web site:
http://www.sec.gov/rules/proposed/2008/34-58070.pdf
http://www.sec.gov/rules/proposed/2008/33-8940.pdf
http://www.sec.gov/rules/proposed/2008/ic-28327.pdf