By now, it is well known that the three major credit rating agencies were strongly criticized by lawmakers, regulators, and investors for failing to timely and accurately downgrade mortgage-backed securities. On December 3, 2008, the SEC approved several measures to increase transparency and accountability at the credit rating agencies, Moody’s, S&P, and Fitch Ratings after uncovering serious deficiencies in the agencies. The SEC believes that the new measures will “impose additional requirements on credit rating agencies, whose ratings of residential mortgage-backed securities...contributed to the recent turmoil in the credit markets.”
By reforming the credit rating process, the SEC hopes that there will be more competition in the rating market. One major purpose is to give investors detailed information on the ratings process in order to reduce the firms’ conflict of interests and make them more accountable for their ratings.
As such, the rating agencies will no longer be allowed to advise investment banks on how to package securities for the purpose of securing favorable ratings. Also, the agencies will now have to refuse gifts of more than $25 from securities issuers. In addition, the agencies will now have to disclose information on all their upgrades and downgrades of various securities and maintain records of complaints by banks and investors.
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