The Canadian Securities Administrators (CSA), an umbrella organization of provincial and territorial securities regulators, wants credit rating agencies to apply to become "designated rating organizations" (DROs) and adhere to a code of conduct. These new policies would bring the industry under control of regulators for the first time.
"Many investors consider credit ratings as one of the factors in making investment decisions, and ratings continue to be referred to within securities legislation, so it is important to develop a formal regulatory regime for the oversight of credit rating organizations," said Jean St-Gelais, Chair of the CSA.
The biggest credit rating agencies operating in Canada are DBRS, Standard & Poor's, and Moody's Investors Service.
Ratings fees: Those who determine a company's security rating could not negotiate the fees paid for the assessment, ensuring a split between the sales and credit rating service.
Code of conduct: Credit rating agencies who successfully become a "designated rating organization" (DRO) must follow a code of conduct based on an existing global code published by the International Organization of Securities Commissions. Canada's biggest rating agencies have already agreed to support these international guidelines. This code addresses the credit rating agencies' responsibilities to the investing public, improving the quality and integrity of the rating process by avoiding conflicts of interest.
What do these rules mean for investors?
"The new rules are supposed to address the conflicts of interest by preventing agencies rate securities or issuers whom they have helped structure investments for, and by requiring the individuals involved with setting the fees to not be involved with ratings. There are other measures as well such as a Code of Conduct being introduced," says Preet Banerjee, a money expert on the W Network and the writer of Where Does All My Money Go.
"Personally, it would be better to have the ratings agencies funded by investors, or perhaps their dealers, directly rather than by the debt issuers. The chances of that happening are pretty slim though."
Credit rating agencies were highly criticized during the global economic crisis for their failure to see the debt that backed bad mortgages. Canadians who invested in non-bank asset backed commercial paper in 2007 found that the market halted since there were few real assets supporting some securities which had been given high ratings by credit rating agencies.
Kerry K. Taylor writes at Squawkfox.com, a blog where personal finance is fun. Kerry is the author of 397 Ways To Save Money: Spend Smarter & Live Well on Less.
Your Turn: Have your investments recovered from the market meltdown? Will the new rules change anything?
Thanks for the post, Kerry. Unfortunately my investments haven't recovered yet from the meltdown but next time my broker advises buying something based on particular rating, I'll be asking who put the rating together and what their relationship is to the fund!
Posted by: Andrea | 07/19/2010 at 11:46 AM
I think the banks should be scrutanized for conflict of interest as sellers of stocks/mutual funds and be held responsible poor mangement, on most part they have no idea of the stocks they are selling. They should stick to banking only..not the stock markets or the Insurance business. Since they bought most of the exchanges may problems have surfaced in the industry. The more money they profit the greedier. Along with greed come big mistakes(exactly what is happening in the industry. They do not share the wealth with depositors.They are only deposit takers not deposit makers.
Posted by: adam Julian | 07/20/2010 at 08:36 AM
Um, a conflict of interest policy is not currently being adhered to? That seems logical doesn't it? It amazes me how the financial world gets away with stealing, while the average person would go to jail for comparable crimes.
Posted by: Jenni | 07/20/2010 at 08:43 AM
Admin fee and management fee should be waived when the investment is losing money consistently. Also, with so many "experts", I am surprised after 2 crashes in my adulthood lifetime, no one actually saw the meltdown coming this time.
Or is it that the investment agencies use this meltdown to as someone already mentioned "steal" the investors money.
Posted by: embr c | 07/20/2010 at 08:53 PM