The Securities and Exchange Commission has voted to propose a series of reforms to credit-rating agencies to curb practices that led to trouble in the credit markets.

"This package of proposed rules would foster increased transparency, accountability and competition in the credit-rating agency industry for the benefit of investors," said SEC Chairman Christopher Cox (pictured) in a statement.

The SEC is proposing the rulemaking in three parts. The first part would prohibit a credit-rating agency from issuing a rating on a structured product unless information on the assets underlying the product was available, and prohibit credit-rating agencies from structuring the same products that they rate. It would also require credit-rating agencies to make all of their ratings and subsequent rating actions publicly available. The data would have to be provided in a way that would facilitate comparisons of each credit-rating agency's performance.

The SEC also wants to curb the practice of buying favorable ratings by prohibiting anyone who participates in determining a credit rating from negotiating the fee that the issuer pays for it, and prohibiting gifts from those who receive ratings to those who rate them, in any amount over $25.

Other proposals would require credit-rating agencies to publish performance statistics for one, three, and 10 years within each rating category, in a way that facilitates comparison with their competitors in the industry. Rating agencies would be required to disclose the way they rely on the due diligence of others to verify the assets underlying a structured product. Disclosure would also be required of how frequently credit ratings are reviewed; whether different models are used for ratings surveillance than for initial ratings; and whether changes made to models are applied retroactively to existing ratings.

Credit-rating agencies would have to make an annual report of the number of ratings actions they took in each ratings class, and they would need to maintain a database in Extensible Business Reporting Language of all rating actions on their Web site. XBRL format would permit easy analysis of both initial ratings and ratings change data.

The SEC would also require the public disclosure of the information a credit-rating agency uses to determine a rating on a structured product, including information on the underlying assets, to permit broad market scrutiny, as well as competitive analysis by other rating agencies that are not paid by the issuer to rate the product. The SEC wants to require documentation of the rationale for any significant out-of-model adjustments.

The second part of the SEC's proposal would require credit-rating agencies to differentiate the ratings they issue on structured products from those they issue on bonds, either through the use of different symbols, such as attaching an identifier to the rating, or by issuing a report disclosing the differences between ratings of structured products and other securities. The third set of recommendations will be considered on June 25.

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