S.E.C. Seeks to Reduce Reliance on Credit Ratings

Securities regulators proposed weaning investors and Wall Street institutions from over-reliance on credit ratings, part of changes to the rating industry prompted by the subprime mortgage crisis.
The Securities and Exchange Commission voted 3-0 on Wednesday in favor of reducing reliance on credit ratings, including proposing to eliminate a requirement that money market funds hold highly-rated securities.
“The official recognition of credit ratings… may have played a role in encouraging investors’ overreliance on ratings,” S.E.C. Chairman Christopher Cox told an open meeting of the commission.
Rating agencies such as Moody’s, McGraw-Hill’s Standard & Poor’s and Fimalac’s Fitch Ratings have been blamed for contributing to the crisis by assigning top ratings to mortgage-backed securities that later deteriorated.
“The recommendations we consider today are consistent with the objective of having investors make an independent judgment of the risks associated with a particular security,” Mr. Cox said.
Mr. Cox said high credit ratings are often not an indication of liquidity or low price volatility for structured financial products, such as mortgage-backed securities.
Fund managers would be required under the proposals to assess a security’s liquidity, or how easily the security can be bought or sold, before buying it for a money market fund.
The new rules would allow the asset to be valued based not only on credit ratings, but also on other subjective standards to determine credit risk.
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