6 Pages Posted: 15 Oct 2008 Last revised: 21 Nov 2008
Date Written: June 26, 2008
On June 16, the SEC made public new rules intended to increase transparency and reduce conflicts of interest in the credit rating process for fixed-income instruments. The proposal may be most important for what it does not do: The SEC does not plan to forbid the "issuer-pays" system, in which the rating agencies are paid by the parties whose products are being evaluated. Although the SEC apparently has the power to ban issuer-pays and recognizes that the arrangement creates potential conflicts of interest, the proposed rules address issuer-pays only through a half measure that appears unlikely to be effective.
Keywords: rating agencies, credit crisis, SEC
JEL Classification: G18
Suggested Citation: Suggested Citation
By Lynn Bai