Financial Planning | Legislative / Regulatory

And so it begins: SEC cracks down on rating agencies

UpdownHere come the regulators.

Insiders have been predicting a wave of new rules in the wake of the financial crisis for a while now, and proof that they're right is finally surfacing.

It comes in the form of the SEC's new rules governing credit rating agencies -- the folks who, back in the day, told us all those subprime mortgages were safe investment vehicles.

Turns out they were wrong, of course, and though that little faux pas didn't cause the crisis, it didn't do anything to prevent it, either.

The SEC wants to make sure the analysts don't fall asleep at the wheel again. According to's Sarah Johnson, the new rules focus on "reducing the (credit rating agencies') conflicts of interest and making them more accountable" for their analyses.

"The new rules may also open up the concentrated market to more competition," Johnson writes. "In addition, the SEC is requiring firms that are paid by issuers to post online a random sample of their ratings' history, based on asset class."

The rules seem like a logical first step. They take aim at a practice that, according to Louisiana State University banking professor Joseph Mason, has acted as a sort of journalism-- an opinion page that operates under, and is afforded, protection by the First Amendment's free speech provisions.

"(Rating agencies) are publishers. They are reporters," Mason said in an illuminating interview for a recent NPR "Planet Money" podcast. "They may publish an opinion about a firm and not be held responsible for that opinion with any degree of accuracy or reasonability. Rating agencies have had that protection for some time. ... It's been called 'the world's shortest editorial,' and an editorial is nothing you can be held to for investor losses or any responsibility for being correct or having looked at recent data or done any work to properly evaluate the firm."

Under the SEC's new rules, some of that might be about to change. The question is, how much else is going to change, too? The SEC also is examining the role fair-value accounting may have played in the crisis, and other regulators and lawmakers are sure to chime in before all is said and done. How much of that regulatory action is going to have a positive impact, and how much of it is going to consist of nothing more than knee-jerk reactions for sake of scoring political points?

If history is any indication, there'll be too much of the latter and not nearly enough of the former.

Whatever happens, a couple of things are certain: (a) There'll be plenty for CPAs to do, and (b) it'll definitely be interesting.


Bill Sheridan