Newly passed SEC rules force raters to disclose performance.
The Securities and Exchange Commission approved rules this week instituting the Dodd-Frank requirement that ratings agencies disclose performance information in a manner that allows market participants to compare the efficacy of their work.
The newly approved regulation reads, in part:
The Commission shall, by rule, require each NRSRO [nationally recognized statistical ratings organization] to publicly disclose information on the initial credit ratings determined by the NRSRO for each type of obligor, security, and money market instrument, and any subsequent changes to such credit ratings, for the purpose of allowing users of credit ratings to evaluate the accuracy of ratings and compare the performance of ratings by different NRSROs.
Section 15E(q)(2) provides that the Commission’s rules shall require, at a minimum, disclosures that:
- are comparable among NRSROs, to allow users of credit ratings to compare the performance of credit ratings across NRSROs;
- are clear and informative for investors having a wide range of sophistication who use or might use credit ratings;
- include performance information over a range of years and for a variety of types of credit ratings, including for credit ratings withdrawn by the NRSRO.
The measure is meant to increase transparency in the ratings world so investors can determine whether and how much credence to give any one NRSRO’s opinion. But the head of one of the world’s leading bond investment houses dismissed the measure yesterday as an “Angie’s List for ratings shoppers.” Angie’s List is a digital “word-of-mouth” network for consumers that rates local services.
While his comments were directed at purveyors of securitizations, they also are relevant to corporate issuers in two ways. First—and most fundamentally—the rules further reinforce the NRSRO oligopoly by making it hard for an issuer to justify securing a rating from a firm that does not have the necessary track record to publish industry-comparable performance data. That means treasurers will most likely have to continue to choose from the current selection of raters.
Second, non-random divergences, in either the direction of accuracy or inaccuracy, from the ratings herd’s average will quickly marginalize the less-accurate raters and concentrate business in the hands of the more accurate ones. This is, after all, the point of the regulation, and it would be a useful cull if the field was larger, or if raters’ methodologies differed in any meaningful ways.
But as any issuer who has sat through a ratings evaluation knows, there are few factors that distinguish one rater from another (they’re all annoying as far most treasurers are concerned), and there is no evidence that variations in accuracy are anything but statistical noise. Since the buy side will want to see ratings from the most accurate firms, treasurers may be forced to switch back and forth, depending on performance rankings, which is a waste of valuable time in the process.