AFP Decries Frank's Proposal for Credit Rating Agencies as Too Weak

Jun 16, 2010, 13:54 ET from Association for Financial Professionals

Focus on structured products too narrow, says advocate for CFOs and treasurers

WASHINGTON, June 16 /PRNewswire/ -- House Financial Services Committee Chairman Barney Frank (D-MA) yesterday announced plans to alter the section of the Wall Street Reform and Consumer Protection Act (H.R.4173) relating to the regulation of Credit Rating Agencies. While the Association for Financial Professionals (AFP) applauds all efforts to reform this broken safeguard to our capital markets, we believe that the changes Chairman Frank suggests do little to correct the problems that have plagued rating agencies.  

Significantly, Chairman Frank has suggested striking an amendment offered by Sen. Al Franken (D-MN) designed to prevent companies from wielding too much influence over the credit rating agencies they hire to evaluate their products. The Franken amendment also would create an independent board that would select ratings agencies to assess the risks of new structured finance products, replacing a long-standing practice where banks select and pay rating agencies to rate their new offerings.  

Chairman Frank instead would direct the Securities and Exchange Commission (SEC) to undertake a one-year study on conflicts of interest in the industry and to examine the feasibility of a ratings clearinghouse. We are extremely skeptical about whether this new study will produce sufficient results because past SEC studies that exposed critical flaws in the ratings system did not produce action.

In 2001, the Sarbanes-Oxley Act required the SEC to examine the role of rating agencies in evaluating debt issuers, the importance of that role to investors and any impediments to accurate appraisal.  In 2003, findings identified five major issues that the SEC stated it would examine further: information flow, conflicts of interest, anti-competitive or unfair practices, barriers to entry and ongoing oversight. Although the SEC subsequently produced a concept release exploring these issues, as of today, the SEC has not finalized any rules resulting from that concept release.

"We are troubled further by Chairman Frank's intent to strip language that would arm the SEC with the enforcement authority to deregister rating agencies that continually fail to produce accurate ratings," said Jim Kaitz, AFP's president and CEO.  

"Moreover, while AFP certainly believes that an effective system can only be achieved when conflicts of interest are eliminated, we also believe that the current focus on structured products is simply too narrow."

When AFP began advocating for changes to the structure of rating agencies in 2002, we asserted that ratings agencies did not adequately warn investors of the impending failure of companies like Enron and WorldCom because they continued to rate debt from those companies at investment grade just days before those companies declared bankruptcy.  We believe that the issues surrounding the rating agencies then continue to be a concern now.  Concerns about the information the rating agencies produce and the integrity of their processes apply equally to structured finance, corporate debt, and even to municipal finance.  

AFP continues to support reform that increases transparency, tightens oversight, and reduces conflicts of interest throughout the ratings process.


The Association for Financial Professionals (AFP) serves a network of more than 16,000 treasury and finance professionals. Headquartered outside Washington, DC, AFP provides members with news, economic research and data on the evolving world of treasury and finance, as well as treasury certification programs, networking events, financial analytical tools, training, and public policy representation to legislators and regulators. AFP is the daily resource for treasury and finance professionals.

AFP's global reach extends to over 150,000 treasury and financial professionals worldwide, including AFP of Canada; London-based gtnews, an on-line resource for the treasury and finance community; and bobsguide, a financial IT solutions network.

SOURCE Association for Financial Professionals