The Securities and Exchange Commission voted to adopt two rules intended to prevent weak or fraudulent loans from being bundled into securities and sold to investors, including an overhaul of the way that rating agencies work.
SEC Chairwoman Mary Jo White said the “very strong package of reforms will improve the quality of credit ratings for the benefit of investors and the capital markets.”
The SEC will implement a reform of credit rating agencies, including Fitch, Standard and Poor's, and Moody’s, mandated by the 2010 Dodd-Frank financial reform law that has been under discussion since 2011.
The rules will include tighter controls on how ratings are made and measures to prevent analysts from producing inflated ratings to create sales. In particular, the SEC will prohibit credit ratings by analysts who could be influenced by sales or marketing considerations, separating the roles within the agencies, and trying to close the “revolving door” between the agencies and the companies whose products they rate.
The Financial Crisis Inquiry Commission called rating agencies “essential cogs in the wheel of financial destruction” for their role in the 2008 crisis, because the “the mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval.” In many cases, securities backed by subprime mortgages that later failed were rated triple-A.
There are 10 “nationally recognized statistical rating organizations” whose ratings are used in certain regulations, according to the SEC, including the big three of Fitch, S&P and Moody’s.
A spokesman for Standard and Poor’s told the Washington Examiner that the firm is “evaluating the new regulations to determine what changes to our operations may be required,” and that it is “committed to the highest standards in our ratings activities and complying with the new requirements.”
The SEC also voted on a final rule regarding information about assets packaged into securities.
White said securities backed by faulty mortgages were an “epicenter” of the crisis, leading investors astray by “wrapping serious financial risks in a thin veneer of creditworthiness.”
The rule would require lenders to disclose information about the assets included in a securitization, including home and auto loans. In recent months, regulators have raised concerns that securities backed by subprime auto loans could be abusive.
The asset-backed securities rule was unanimously approved by the five-member SEC commission. The two Republican-appointed members of the commission voted against the rating agencies regulation.