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SEC ends reliance on credit ratings

Jaime Lizárraga, commissioner at the United States Securities and Exchange Commission (Photograph supplied)

The US Securities and Exchange Commission has taken the final step in fulfilling a congressional mandate to reduce reliance on, and references to, credit ratings in agency regulations.

In the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress enacted comprehensive reforms to the credit ratings system.

SEC commissioner Jaime Lizárraga said in a statement that he supports the adoption of Tuesday’s final rules.

He said: “I would like to commend all the commission staff that worked on this rule and the other rules to fulfil the mandate under Section 939A of the Dodd-Frank Act.”

He said that in the 2011 Final Report, the Financial Crisis Inquiry Commission found that “the failures of credit-rating agencies were essential cogs” in the 2008 financial crisis.

The report concluded that the “crisis could not have happened without the rating agencies”.

He added: “These entities’ ratings were key to the marketing and sales of mortgage-backed securities, relied on by investors to make informed investment decisions — flaws and conflicts of interest notwithstanding. In some instances, federal regulations required the use of credit ratings.

“As the 2011 report noted, the markets’ — and, at times the federal government’s — reliance on credit ratings that turned out to be highly misleading had consequences that reverberated ‘throughout the financial system’. And not in a good way.

“In today’s final rules, the commission is replacing the references to credit ratings in Rules 101 and 102 of Regulation M with an alternative standard of creditworthiness that relies on credit-risk models.

“This alternative approach is designed to minimise the risk of evasion and manipulation of the new creditworthiness standard.”

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Published June 08, 2023 at 7:58 am (Updated June 08, 2023 at 7:58 am)

SEC ends reliance on credit ratings

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