Strengthening credit rating
The BondFactor Company, New York, New York, USA, and
Great Neck, New York, USA
Purpose – The purpose of the article is to explain the signicance of key features of the SEC’s new
rules for credit rating agencies. Those rules include three key items: they prohibit the inuence of sales
or marketing considerations on criteria development; they include guidance that preserves the ability of
ratings to serve as relative, rather than absolute, measures of credit risk; and they require cross-sector
consistency of rating symbols. When they were released, the signicance of the rules was
under-appreciated because of other, simultaneous regulatory announcements.
Design/methodology/approach – The approach is to consider how effectively the rules address
their target issues. In doing so, the article explores how the nal rules evolved from their original
proposed form and from the statutory specications in the 2010 Dodd-Frank Act.
Findings – The new rules should promote the integrity of credit ratings in the future. They should be
effective in reducing the inuence of sales and marketing considerations on the development of rating
criteria. In addition, they should enhance rating integrity through superior cross-sector consistency in
the meanings of rating symbols while allowing rating agencies to maintain their traditional emphasis
on relative risk.
Originality/value – The authors are not aware of any similar work assessing the selected provisions
of the new SEC rules for credit rating agencies.
Keywords Regulation, Dodd-Frank act, Financial crisis, Credit rating, NRSRO, Rating agency
Paper type General review
The new SEC rules for credit rating agencies, issued on August 27, 2014, represent
an important milestone for the US xed-income markets (SEC, 2014b). The rules
cover a broad swath of issues, but three particular items stand out as being
especially important for promoting the integrity and practical utility of credit
ratings. First, the rules include a clear prohibition against allowing sales or
marketing considerations to inuence the development of the criteria for
determining ratings. Second, the rules carefully avoid forcing credit ratings to
embody absolute probabilities of default. Third, the rules require each rating agency
to assign consistent meanings to its rating symbols across sectors. In each case, the
SEC had to navigate difcult issues to come to its nal result.
The release of the new rules was somewhat overshadowed by the SEC’s release on
the same day of its long-awaited update to the rules for asset-backed securities (SEC,
2014c). The latter garnered disproportionate media attention because the ABS rules will
materially affect the work ow of thousands of individuals in the securitization
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Journalof Financial Regulation
Vol.23 No. 4, 2015
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