Last Wednesday, 15 April, at a United States Securities and Exchange Commission (SEC) roundtable on the reform of credit rating agencies, Association for Financial Professionals’ president and CEO, Jim Kaitz, put forth two proposals for credit rating agency reform. Kaitz proposed:
- Implementing a model that is similar in nature to a utility, in which Nationally Recognised Statistical Rating Organisations (NRSROs) have a single line of business focused exclusively on providing credible and reliable ratings. These agencies would be able to interact with and advise organisations being rated, but could not charge fees for providing advice. The new NRSROs would be financed by a transaction fee.
- The US government would require that any federal programmes requiring credit ratings, as well as any business that has had a capital infusion from the government, utilise alternative NRSROs as additional credit analysis providers. This action would foster a more competitive environment and give credibility to alternative rating agencies now overshadowed by Moody’s and Standard & Poor’s (S&P).
According to Kaitz: “The current rating agency processes and business model are broken. The big two rating agencies were a catalyst for the sub-prime debacle and resulting financial meltdown. The time has come for a fundamental overhaul of the system to restore investor confidence and re-establish efficient global capital markets.”
AFP has been a long time advocate of credit rating agency reform. In April 2004, AFP co-authored its Code of Standard Practices for Participants in the Credit Rating Process, with the Association of Corporate Treasurers (UK) and the Association Française Des Trésoriers D’Entreprise (France), to provide an efficient and flexible solution to restoring confidence in credit rating agencies and the information they provide to global capital markets.
For additional information about AFP’s two reform proposals, please see: www.AFPonline.org/pub/res/news/ns_20090415_cra.html.
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