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Specifically, Section 939F of Dodd-Frank requires the Commission to study and develop rulemaking to establish a system related to the assignment of initial credit ratings on structured finance products by nationally-recognised statistical rating organisations (NRSROs) that prevents the issuer from selecting the NRSRO that will determine initial credit ratings. If the SEC is unable to find a superior alternative, they are required to implement a regime that was found in the Senate’s version of the Dodd-Frank Act (the “15E(w) system”), but which was replaced with Section 939F in the final bill.
In today’s letter, SIFMA strongly opposes the implementation of the 15E(w) system because it would represent an unprecedented intrusion of government control into a private financial market, and strongly supports the alternative proposed by the SEC that Rule 17g-5 satisfy the requirements of Section 939F. Rule 17g-5 provides transparency into the data and information used by a rating agency, allows other rating agencies to access and use that data and information as desired, and most importantly, allows market participants to discern whether or not conflicts of interest have influenced a rating.
The 15E(w) system would create a Credit Rating Agency Board that would, among other things, determine qualification standards for NRSROs deemed eligible to provide an initial rating, direct the flow of business to NRSROs by assigning them to transactions for which they would provide an initial rating, levy fees on NRSROs, review the performance of NRSROs, and limit the compensation of NRSROs who perform an initial rating.
“We believe the 15E(w) system would impose unprecedented government control on private markets”, said SIFMA executive vice president, Randy Snook. “If implemented, this regime would further entangle the government in credit ratings, running counter to the other parts of Dodd-Frank which compel regulators to disentangle government from credit ratings. This regime would also run the risk of significantly disrupting securitisation markets which are essential to economic recovery, at great cost and limited benefit.”