Ask FERF about ... credit rating agencies.

• Author: de Mesa Graziano, Cheryl
• Position: Resources - Financial Executives Research Foundation

The comment period ends on June 9 for the U.S. Securities and Exchange Commission (SEC)'s proposed rule on the Definition of Nationally Recognized Statistical Rating Organization (NRSRO). Under the proposed rule, any credit rating agency (CRA) that meets this codified definition would effectively be a NRSRO.

While the SEC originated use of "NRSRO" in its rules, it has never previously defined the term, although the use of the concept in regulatory determinations of liquidity and creditworthiness has become widespread. Ratings by NRSROs are used as benchmarks in federal and state legislation, financial regulations and private financial contracts.

According to the Basel Committee on Banking Supervision, over 100 CRAs are in operation worldwide, but only five CRAs hold NRSRO status: A.M. Best Co. Inc., Dominion Bond Rating Service Limited, Fitch Inc., Moody's Investors Service Inc., and the Standard & Poor's Division of the McGraw Hill Cos. Inc.

Currently, a CRA achieves NRSRO status by requesting a staff no-action letter from the SEC that states that SEC staff will not recommend enforcement action against persons who use an agency's credit ratings for purposes of the SEC's net capital rule. The notion of national recognition was designed to help ensure that credit ratings used under SEC rules are credible and can reasonably be relied upon by the marketplace.

In connection with the no-action letter, an assessment of a CRA's operational capability and ratings process is conducted that considers the following (related to the CRA); its organizational structure, financial resources; the size and quality of its staff, its independence from the companies it rates; its rating procedures; and, whether it has internal procedures to prevent the misuse of nonpublic information and whether those procedures are followed.

Based on the proposed rule, SEC staff will now include expiration dates in its no-action letters. And, under new considerations or changing conditions, NRSRO status previously granted to a CRA is subject to change.

The proposed rule states that the term NRSRO means any entity that:

* Issues publicly available credit ratings that are current assessments of the credit-worthiness of obligors with respect to specific securities or money market instruments. The public availability would apply only to the credit rating itself, not to other information otherwise developed by CRAs. This should not result in NRSROs charging higher fees and is...