In June, the SEC proposed a series of comprehensive credit rating agency reforms, which included the bifurcated rating system for structured securities but also additional measures that would increase the transparency and efficiency of the rating agencies' decision-making processes.

The MBA supports the measures that would increase transparency and accountability in the rating process, Josh Denney, associate vice president of public policy with MBA, tells GlobeSt.com.

Proposed transparency measures included prohibiting a credit rating agency from issuing a rating on a structured product unless information on the underlying assets was available. Another proposed measure would require credit rating agencies to publish performance statistics for one, three, and 10 years within each rating category, in a way that facilitates comparison with their competitors in the industry.

"We support anything that would inject more confidence into the rating system," he says. "However the duel-track proposal for securities would only serve to increase confusion among investors."

In its letter, signed by chairman Kieran Quinn, the MBA explains that "such a symbol would brand all structured securities as a single asset category, despite the fact that different structured securities exhibit markedly different performance characteristics (e.g. CMBS, RMBS, and securities backed by credit card debt or automotive loans).

"This could spawn greater investor confusion because a wide variety of securities would be lumped into an equally broad investment category. Consequently, the performance of a single type of structured security might be attributed inaccurately to other structured security products due to their shared product identifier for structured securities would cause disruption and informational disparities in the securities market."

Duel ratings, Denney adds, would imply that real estate-backed asset securities are more risky than other securities. "One goal is to get investors willing to buy CMBS again--we think this proposal would in fact reinforce the current retreat [from these securities] in the market," Denney says.

This is the first of three public comment periods before the SEC makes its decision. While its duel-track proposal is a radical realignment of the current system, there is a good chance the agency will reconsider, especially after the comment periods are through. "There is not much support for the duel-track system," Denney says. "Regulators routinely make significant changes from a proposed rule to a final rule. When that happens it means the process is working."

Instant Insights /

MBA Asks SEC Not to Implement Separate Ratings

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