SEC changes credit rating regulation to protect investors from wrong decisions

On Thursday the U.S. Securities and Exchange Commission voted for the new rules under which credit agencies will have to disclose more of their ratings history, and creators of financial products will have to share data with all credit raters. The regulator adopted those rules and proposed new ones as it is seeking to better control credit rating industry that was blamed for contributing to the financial crisis by assigning and maintaining high ratings on toxic mortgage-backed securities.

According to SEC Chairman Mary Schapiro the industry should be regulated more strongly as these ratings are often considered by investors when they make decisions on where to put their money. She noted that over the last several years that reliance failed to serve them well.

In addition the agency also voted to seek comment on whether credit agencies should be categorized as "experts" under securities law, and thus subject to tougher standards of liability. The SEC said it is not proposing such a move yet, but wants feedback on its potential impact.

Further, under the adopted set of rules the banks will be required to disclose all preliminary ratings they receive from credit agencies in an attempt to stop banks from shopping for the best credit rating for their products. Credit rating agencies are required to provide more information on past ratings so investors can compare their relative performance. The information would be publicly disclosed on a delayed basis, with up to a one- or two-year lag, to protect the rating agencies' proprietary information.

This requirement would apply regardless of whether agencies are paid by issuers or by investors.

To reduce reliance on credit ratings, the SEC voted to remove references to ratings in some of its rules and forms. The SEC said the embedded references could make investors rely on the credit raters' actions instead of applying their own judgment on the value of securities.