Good Afternoon. This is an open meeting of the U.S. Securities and Exchange Commission on September 17, 2009.
Today we are considering a series of proposal that would significantly bolster the regulatory framework around nationally recognized statistical rating organizations, or "NRSROs."
We are also considering a recommendation to propose a ban on the practice of flashing marketable orders. Flash orders provide a momentary head-start in the trading arena that can produce inequities in the markets and create disincentives to display quotes.
We begin with the credit rating recommendations. In 2006, the Credit Rating Agency Reform Act gave the Commission the exclusive authority over rating agency registration and qualifications. In the three years since, the Commission has undertaken several rulemaking initiatives. But as I have said previously, more needs to be done.
So, today we will consider six items that are intended to create a stronger, more robust regulatory framework. In particular, these proposals would improve the quality of ratings by requiring greater disclosure, fostering competition, helping to address conflicts of interest, shedding light on rating shopping, and promoting accountability.
These proposals are needed because investors often consider ratings when evaluating whether to purchase or sell a particular security. That reliance did not serve them well over the last several years and it is incumbent upon us to do all that we can to improve the reliability and integrity of the ratings process and give investors the appropriate context for evaluating whether ratings deserve their trust.
Collectively, the changes and concepts being adopted, proposed and considered today would benefit investors in many ways:
They would promote greater accountability by requiring compliance officers to file annual reports with the Commission.
They would foster competition by enabling unsolicited ratings for structured finance products.
They would decrease the level of undue reliance on the nationally recognized statistical rating organizations by beginning the process of removing references to NRSRO ratings in certain existing rules. It is time that we started this process to systematically minimize the use of ratings in the SEC's rules and, while I know, there is much to do in this regard, I am pleased that we are taking these steps today.
And finally, they would empower investors to make more informed decisions by helping to expose rating shopping and potential revenue-linked conflicts.
Specifically, the following six items related to NRSROs are being considered:
A recommendation to adopt rules to provide greater information concerning ratings histories — and to enable competing credit rating agencies to offer unsolicited ratings for structured finance products, by granting them access to the necessary underlying data for structured products.
A recommendation to propose amendments that would seek to strengthen compliance programs through requiring annual compliance reports and enhance disclosure of potential sources of revenue-related conflicts.
A recommendation to adopt amendments to the Commission's rules and forms to remove certain references to credit ratings by nationally recognized statistical rating organizations.
A recommendation to reopen the comment period to allow further comment on Commission proposals to eliminate references to NRSRO credit ratings from certain other rules and forms.
A recommendation to require disclosure of information including what a credit rating covers and any material limitations on the scope of the rating and whether any "preliminary ratings" were obtained from other rating agencies — in other words, whether there was "ratings shopping"
A recommendation to seek comment on whether we should amend Commission rules to subject NRSROs to liability when a rating is used in connection with a registered offering by eliminating a current provision that exempts NRSROs from being treated as experts when their ratings are used that way.
We will consider each of these six items separately. Following that, we will take up a proposal concerning flash orders.