Nationally Recognized Statistical Rating Organizations

Today we are considering a series of proposal that would significantly bolster the regulatory framework around nationally recognized statistical rating organizations, or “NRSROs.”

We are also considering a recommendation to propose a ban on the practice of flashing marketable orders. Flash orders provide a momentary head-start in the trading arena that can produce inequities in the markets and create disincentives to display quotes.

We begin with the credit rating recommendations. In 2006, the Credit Rating Agency Reform Act gave the Commission the exclusive authority over rating agency registration and qualifications. In the three years since, the Commission has undertaken several rulemaking initiatives. But as I have said previously, more needs to be done.

So, today we will consider six items that are intended to create a stronger, more robust regulatory framework. In particular, these proposals would improve the quality of ratings by requiring greater disclosure, fostering competition, helping to address conflicts of interest, shedding light on rating shopping, and promoting accountability.

These proposals are needed because investors often consider ratings when evaluating whether to purchase or sell a particular security. That reliance did not serve them well over the last several years and it is incumbent upon us to do all that we can to improve the reliability and integrity of the ratings process and give investors the appropriate context for evaluating whether ratings deserve their trust.

Collectively, the changes and concepts being adopted, proposed and considered today would benefit investors in many ways:

• They would promote greater accountability by requiring compliance officers to file annual reports with the Commission.
• They would foster competition by enabling unsolicited ratings for structured finance products.
• They would decrease the level of undue reliance on the nationally recognized statistical rating organizations by beginning the process of removing references to NRSRO ratings in certain existing rules. It is time that we started this process to systematically minimize the use of ratings in the SEC’s rules and, while I know, there is much to do in this regard, I am pleased that we are taking these steps today.
• And finally, they would empower investors to make more informed decisions by helping to expose rating shopping and potential revenue-linked conflicts.

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