SEC to host roundtable to find alternative compensation model.
The Securities and Exchange Commission will meet soon to discuss alternatives to the current issuer-pays ratings model.
The SEC is planning to hold a roundtable on credit ratings on May 14 at its headquarters in Washington. The roundtable will consist of three panels. The first two will relate to the agency’s approach to asset backed securities ratings.
The third, however, will likely be of more interest to treasurers. It will address, “alternatives to the current issuer-pay business model in which the issuer selects and pays the firm it wants to provide credit ratings for its securities.”
The issuer pays model has been a regulatory bugbear for years, although the SEC has been unable to change it. Originally, investors paid for ratings through subscriptions to ratings agency journals and updates. By contrast, investors today are the ones who expect ratings to be free, and it’s the issuer who must pay the rating firm for its blessing.
Among the questions the panel will address are:
- What are other potential alternatives to the current issuer-pay business model?
- What potential advantages and disadvantages would come from establishing a licensing and certification requirement for NRSRO analysts?
- Would a system of NRSRO rotation be workable?
- What would be the effects of requiring NRSROs to use compensation systems other than the issuer-pay model?
- Should the SEC require issuers to hire at least one smaller NRSRO to rate each structured finance issuance? Would opinions of these smaller NRSROs help to mitigate any conflicts of interest in the issuer-pay model of the larger NRSROs? How should “smaller NRSRO” be defined? Would such a requirement cause a race to the bottom among the smaller NRSROs? Would it increase costs to issuers?
- Should issuers be required to provide credit enhancement that is no lower than the second lowest quote it receives from NRSROs? Should the issuer be permitted to hire any NRSRO it chooses, as long as it provides enhancement no lower than an amount equal to the second lowest quote? Would this method help to satisfy investor guidelines and mitigate ratings “shopping”?
- Should issuers be required to disclose which rating firms they have solicited for feedback, regardless of which firm or firms, if any, they engage to issue a rating?
- Are investors’ voices being heard in the rating selection process and in the terms of structured finance transactions? If not, how could investors have more input?
- Would a compensation scheme that required NRSROs to charge a flat fee reduce the potential for inflated ratings?
Information about submitting comments before the roundtable and other details can be found here.