Credit rating agencies need review board

USA Today (Society for the Advancement of Education), April, 2005

The establishment of a review board should be the top priority for regulators seeking to eliminate the conflicts of interest inherent in today's credit rating agencies, according to Weiss Ratings, Inc., Jupiter, Fla., an independent provider of ratings and analyses of financial services companies, mutual funds, and stock.

"Regulators should take swift action to implement policies and procedures that will ensure oversight of an industry whose flawed business model has failed to protect the interests of investors over those of the rated companies," insists Bruce R. Fador, president and chief executive officer of Weiss.

In light of recent Congressional hearings calling for the Securities and Exchange Commission (SEC) to initiate regulation that addresses the conflicts of interest found among credit rating agencies, or nationally recognized statistical rating organizations (NRSROs), Weiss has made the following recommendations to the SEC:

* Establish a review board to evaluate and compare the track record of each NRSRO. Results should be disclosed to the public on a regular basis.

* A formal complaint procedure needs to be instituted so that rated companies can report any instances of perceived pressures by NRSROs.

* Remove "Regulation FD" exclusion so that relevant nonpublic information is made readily available by NRSROs, including the reasoning for any upgrades or downgrades.

* All NRSROs should be required to operate without any conflicts of interest in their business model. Those that do not comply could risk losing NRSRO status by the newly established review board.

* All NRSROs should make public a database that details historical fault rates by rating category. Default rate information should be represented in a clear and easy-to-understand format for investors.

* Regulators should allow other rating firms the opportunity to earn NRSRO designation. Firms should offer exclusively unsolicited ratings; never accept payments or compensation in any form from the rated companies for developing or publishing credit ratings; provide ratings-related publications to the rated companies at the same price at which those products are offered to investors and consumers; maintain no separate business relationship with the rated companies; and never grant the rated companies the right to delay or suppress publication of a rating.