Last week, the Madrid-based International Organization of Securities Commissions proposed a code of conduct for credit rating agencies, which is intended to protect the integrity and analytical independence of the credit rating process.
The code, which has been in the works for over a year, was initiated after several high-profile companies like Enron imploded with their credit ratings intact or unchanged until the last moment.
The Code of Conduct Fundamentals for Credit Rating Agencies
are expected to be included in the general codes of conduct at credit rating agencies, or CRAs. In addition, the IOSCO envisions that securities regulators may decide to incorporate the CRA code into their own regulatory oversight of the rating firms.
Details & Questions
The CRA Code Fundamentals are broken into three sections that cover the integrity of the rating process, the avoidance of conflicts of interest, and responsibilities to investors and companies.
Among the issues to be decided during a comment period lasting through early November is the topic of disclosure. Specifically, the IOSCO is seeking comment on whether CRAs should be required to disclose to companies any changes to rating criteria. Some have argued that such a provision would undermine investor protection by overinforming companies of the rating firms' methodologies.
The IOSCO is also seeking comment on how the code should be enforced, given different legal and market circumstances in different jurisdictions. The current draft recognizes that different jurisdictions may adopt different
mechanisms to help ensure compliance.
The complete code and a related report are available from the box above right.
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