A few years later, the Credit Rating Agency Reform Act of 2006 provided the SEC with statutory authority to regulate credit ratings firms and required the SEC to clarify the guidelines for obtaining the NRSRO
The report notes that despite changes by some of the examined credit rating agencies to improve their operations, Commission staff identified concerns at each of the NRSROs
. These concerns included apparent failures in some instances to follow ratings methodologies and procedures, to make timely and accurate disclosures, to establish effective internal control structures for the rating process and to adequately manage conflicts of interest.
Chicago-based Morningstar Inc., which made its name in mutual fund ratings, acquired credit ratings firm Real-point LLC, an NRSRO
, in early 2010.
Reiss says there has been a rush of rating agencies joining the NRSRO
club, but "none have taken away much market share from the big players."
Until recently, the black hole surrounding NRSRO
licensing helped the Big Three retain their market hold.
(75) Generally, most investors just trusted the letter grade rating, looking primarily to rating agencies for informational guidance for which products were safe bets.76 Reasonable or not, the reality is that investors relied heavily on NRSRO
credit ratings in making their investment decisions.
Since 1975, the Securities and Exchange Commission has limited competition in the market for credit ratings by anointing only certain firms as ''Nationally Recognized Statistical Rating Organizations'' (NRSROs
Compounding the problem was the SEC's lack of transparency in the NRSRO
The system afforded substantial advantages to the handful of credit rating agencies that received the NRSRO
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:
"It is a conflict of interest if an NRSRO
allows its personnel to directly own securities or money market instruments or have direct ownership interests in issuers or obligors subject to a credit rating determined by that NRSRO
," states the SEC report.
SEC's proposed rules would require that the NRSRO
include a description of how the representations, warranties and enforcement mechanisms differ from those in issuances of similar securities.