MBA Praises SEC Proposal on Ratings Agencies

MBA (6/13/2008 ) Vasquez, Jason
The Mortgage Bankers Association praised the Securities and Exchange Commission for issuing proposed credit ratings agency reform measures this week that it said would promote transparency, accountability and credibility.
Although opposed different types of ratings for structured finance versus other investment products, MBA Chairman Kieran Quinn, CMB, said MBA appreciates the agency's recognition of the controversial nature of this issue by considering under a separate track, the proposal to require structured securities to have a unique identifier or enhanced disclosure information.

"We recognize that credit rating agencies play a pivotal role in the investment community by making assessments about financial services providers and financial instruments used in the secondary mortgage market," Quinn said. "We are pleased the SEC's recognizes the valuable impact ratings agencies have on the relationship between issuers and investors."

The SEC on June 11 voted to issue, in proposed format, the series of credit rating agency reforms (http://www.sec.gov/news/press/2008/2008-110.htm). According to the SEC, the proposed changes are intended to bring increased transparency to the ratings process and curb practices that contributed to recent turmoil in the credit markets.

The SEC's rulemaking initiative consists of three segments, with the first two segments issued June 11. A vote on whether to issue the third segment will be considered at a June 25 board meeting.

The first segment significantly increases the scope and depth of disclosures ratings agencies would be required to make. For example, a ratings agency would be required to publicly disclose information it uses to determine a rating on a structured product. It would also would require rating agencies to disclose the way they rely on the due diligence of others to verify the assets underlying a structured product. The segment also includes measures to decrease opportunities for ratings agency conflicts of interest. For example, ratings agencies would be prohibited from structuring the same products that they rate. MBA supports efforts to increase transparency and credibility of credit ratings.

The second segment would require credit rating agencies to differentiate structured products ratings from bond ratings, either through the use of different symbols or by issuing a report disclosing the differences between the ratings of these two investment categories. MBA believes separate ratings for structured products versus bonds would create further confusion and disruption to secondary market transactions. MBA will advocate that this portion of the segment be withdrawn or modified. The SEC's vote on this portion of the Proposal was not unanimous, and SEC board members opposing the proposal referenced MBA's position. Quinn said. MBA continues to review thsi segment and will submit formal comments during the comment period of 30 days after its publication in the Federal Register.

The third segment, to be considered by the agency on June 25, will be to evaluate the extent to which ratings requirements embedded in SEC regulations influence investors' decisions to rely exclusively on credit ratings rather than making independent judgments of risks.

"MBA is pleased that the SEC has agreed to review the differentiation of structured rating under a separate approval track because it will allows for the separate consideration of constructive rating agency reforms while at the same time maintaining MBA's strong opposition to the proposed structured rating's identifier," said MBA Senior Vice President for Commercial/Multifamily Jan Sternin.

MBA will work with the SEC and other industry participants to address concerns about separate ratings approaches for structured securities.