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More Disclosures for Bond-Rating Firms

The Securities and Exchange Commission is expected to propose today new requirements that will require bond-rating firms to disclose more information to the public. But will that be enough to restore confidence in the $5 billion-a-year industry?  

SEC officials found the old models used by the rating firms for complex structured products were underdeveloped. A majority of the new proposals will hold the firms more accountable and encourage them to change their practices. This proposal is the first step the SEC is taking against claims that bond-rating firms were ranking mortgage-related securities higher than necessary. 

The SEC is expected to mandate companies disclose historical ratings performance, including the dates of downgrades and upgrades. Rating firms, like Moody’s Corp., Standard & Poor’s and Fitch, will be required to publicize information used to determine ratings, the amount of research they acquired and how often they check the effectiveness of the ratings.  

The SEC will also suggest a new ratings scale to clear up confusion between complex structured debt from corporate debt. It will most likely propose rating firms identify the difference by using a notation “v” (for volatility), or explain how the methodology and risk of that bond differ from a similarly rated corporate bond.  

The hope is the new analysis and suggested rating system will give investors a better understanding of the accuracy of the rating.  

The SEC also hopes to demolish conflicts of interests in the proposal. According to The Wall Street Journal online, these issues range from bond issuers’ ability to influence which analysts are chosen to rate a particular bond, to expensive dinners, and to analysts being permitted to rate deals they helped structure. Analysts will also receive new boundaries dealing any type of bribes with the bond issuers or their bankers.  

This proposal comes just a week after the three largest rating companies settled with New York Attorney General Andrew Cuomo on how the firms collect fees in order to not rely on winning bond issuers business.

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