The SEC today continued the process of removing references to ratings from its rules, as required by Section 939A of the Dodd-Frank Act (see FSM Report RATINGS37).  Commissioners unanimously agreed to propose a raft of changes to SEC regulations governing net capital rules for broker-dealers, the reserve fund for customer assets, the definition of “investment grade,” and the definitions of a mortgage-related security and a small business-related security.

Chairman Shapiro stated that the SEC is not looking for the simplest way to comply with the new law, but will attempt to tailor each change to the underlying purpose of the law. Although Commissioner Aguilar supported issuing the proposal for comment, he continued his strong critique of Section 939A, stating that there is as yet no appropriate substitute for ratings for an objective evaluation of credit risk.  He cautioned that the proposed net capital rule would incentivize broker-dealers to overestimate the creditworthiness of securities.  The SEC’s proposals are the first concrete effort by regulators to delete ratings from capital rules, a significant challenge for the banking agencies yet to date only with an advance proposal (see FSM Report RATINGS38).  This report analyzes today’s session; an in-depth report will follow on the proposals themselves.

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