The Bond Market Association believes potential conflicts of interests pose the most pressing challenges to the Securities and Exchange Commission's objective to clearly define just what it means to be a nationally recognized statistical rating organization.
Marjorie Gross, senior v.p. and regulatory council at TBMA, said the trade group's critical view is rating agency analyst compensation should not be based on the amount of revenue generated for the rating agency by companies they cover. She likened this opinion to the SEC's regarding sell-side equity research analysts. "By analogy, we think it would be logical to do the same thing at the rating agencies," she said referring to guidelines that govern how research analysts' pay cannot be tied to profitability derived from the firms they cover. That, and the TBMA supports an absolute prohibition on analysts holding individual stocks in companies whose credit ratings they are responsible for, she said.
Overall, the bond group's position is that these inherent conflicts can be dealt with, preserving the credit ratings system. "We don't think it is a conflict that can knock the rating agencies out of the box; we think it's a conflict that can be managed," Gross said.
The SEC has proposed a rule that would define the NRSRO designation and has been accepting comment letters from the industry to shape its decision.
