Sifma Says Structured-Debt Ratings Shouldn't Change (Update1)

July 31 (Bloomberg) -- Credit-rating companies should be required to increase disclosure of their methods and fee structures to help restore confidence among debt investors, Wall Street's biggest lobbying group said.

The Securities Industry and Financial Markets Association, in a 12-point recommendation aimed at addressing flaws in credit ratings, advised against proposals by regulators to force the companies to add symbols that differentiate structured-finance ratings from corporate- and municipal-debt assessments. A 37- person task force at Sifma said in a statement that such a change would impair credit availability and further damage markets.

``The scarlet letter syndrome is what we're concerned about first and foremost, and we don't think it's necessary in the context of fuller disclosure,'' Deborah Cunningham, the chief investment officer at Pittsburgh-based Federated Investors Inc., said on a Sifma-sponsored conference call with reporters today.

The task force, which includes investors, underwriters and issuers, made the recommendations after the Securities and Exchange Commission and other regulators worldwide proposed stricter measures for credit-rating methods and disclosure. Moody's Investors Service, Standard & Poor's and other rating companies have been criticized by investors and lawmakers after the collapse of the U.S. mortgage market last year exposed flaws in the AAA rankings for thousands of asset-backed bonds.

European Proposal

The SEC last month proposed using a separate ratings scale for structured debt; banning the companies from rating a bond if they also advise underwriters on how to gain a higher ranking; and limiting gifts to analysts from employees at investment banks. The SEC said this month that a probe found rating firms improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.

As part of a European Union proposal unveiled today, ratings firms may have to submit to a new European agency to assign ratings in the region. The plan would also tackle ``an excessive reliance on ratings in EU legislation,'' a statement from the European Commission said.

Sifma said that the cost of system changes needed if the structured-finance ratings scale were to change, such as a requirement to turn AAA designations into AAA.SFs, ``in a number of instances would be millions of dollars per financial firm.'' The group recommended that rating firms should expand disclosures about how bonds are ranked, the data involved in the process, how assessments are reviewed, and historical ratings accuracy.

``Limited transparency in the ratings process, and the resulting inability of the market to understand clearly the bases of ratings of certain structured products, were primary causes of misunderstandings,'' Sifma said. ``These misunderstandings, in turn, were central to the ratings-related market turmoil of the past year.''

Understanding Ratings

Ratings firms also should address conflict-of-interest concerns with stronger firewalls between their rating activities and other businesses, and disclose to regulators fee structures and top clients, Sifma said. Global regulators and lawmakers should coordinate efforts to enact credit-rating changes and Sifma itself should establish an advisory board, it said.

``If the recommendations are followed, we will enhance the ability of market participants to understand credit ratings and to incorporate ratings properly into their own independent risk assessments,'' Sifma said.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

To contact the editor responsible for this story: Emma Moody at emoody@bloomberg.net