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SEC Proposes New Rating System

The Securities and Exchange Commission plans to change the way credit rating agencies evaluate the risk of complex financial instruments. Recently, rating companies have been accused of embellishing the appropriate ratings for mortgage-related securities, especially after the decline in the housing market. 

Triple-A is currently the highest rating, meaning there is little chance the bond will fail, and if it does, little money will be lost. The new highest rating would be defined as Triple-A, S or V, representing structured or volatility.  The goal of the new rating scale is to insure inexperienced investors understand the risk of the structured product.              

But will a new rating scale be as effective as supporters hope? Many groups remain skeptical. According to Kara Scannell and Aaron Lucchetti in their Wall Street Journal article, SEC Pushes for New Risk Scorecard, critics believe the scale is not the problem, but the quality of ratings. Other lobbyists find the idea “counterproductive and will serve to further undermine, rather than restore, liquidity”.              

Credit-rating companies are taking the crisis into their own hands and developing new procedures. According to Standard & Poor’s Rating Services, the firm plans to improve on their current system instead of adapting a completely new scale. The SEC plans to vote on the entire proposal, which includes other changes as well, on June 11.  The proposal will then be sent to the public for comment before final approval.

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