SEC staff advises against identical stress tests, credit rating terms

Securities and Exchange Commission staff recommended against designing identical stress tests and terms for credit ratings on Friday but expressed support for measures designed to enhance greater transparency in the determination of grades.

“[T]he staff believes it would be more efficient to focus on the rule-making initiatives mandated under the Dodd-Frank Act, which, among other things, are designed to promote transparency,” SEC staff said, according to Bloomberg.

Dodd-Frank mandated that the agency considers requiring the application of ratings terms across various asset classes and requires that certain companies use similar economic scenarios for stress tests.

Following the inflation of credit ratings leading to the Great Depression, regulators and policymakers have searched for a method to ensure that grades are accurate. The 2010 Dodd-Frank Act instructed U.S. legislators to stop relying on ratings and enhanced regulatory oversight of the companies that issue the ratings Bloomberg reports.

In 1936, the Office of the Comptroller of the Currency prohibited banks from holding below-grade investment bonds.

The SEC initiated ratings rules in 1975 but specified that only certain companies’ grades could be used, including Moody’s, Fitch, and Standard & Poor, all of which were designated nationally recognized statistical rating organizations. Today, however, there are nine such firms.

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