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SEC releases study on credit rating compensation models

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Al Franken

The SEC released a study on Tuesday regarding credit rating compensation models that called for a roundtable discussion on various model alternatives.

The study had the largest impact on the top three credit rating companies, including Fimalac SA’s Fitch, McGraw-Hill Cos. Inc’s Standard and Poor’s, and Moody’s Corp, MarketWatch reports.

Under the 2010 Dodd-Frank Act, the SEC is required to analyze and consider the various models used to calculate credit ratings. At present, rating agencies compete for the process, leading to inflated ratings that did not reflect the real risks. The provision requiring the SEC to consider the different models, which was introduced by Sen. Al Franken (D-Minn.), however, could change the way agencies rate complex finance products like mortgage securities.

One model would require the SEC to establish a government-mandated clearinghouse through which credit raters would randomly be assigned financial products. Another model would involve sophisticated investors who would establish and maintain an investor-owned credit rating agency. Firms seeking a credit rating would be required to obtain one rating from the investor-owned agency and one from another rater, according to MarketWatch.

The SEC also provided a “stand-alone” model, in which firms could continue to pick their raters, and the rater would be compensated through transaction fees that would fund the ratings. Another approach would allow encourage unsolicited ratings by allowing raters that conduct the ratings access to information used to assign the original rating.

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