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Rating The Rating Agencies: SEC Appoints Wall Street Veteran

Harriet Davies Editor - Family Wealth Report 18 June 2012

Rating The Rating Agencies: SEC Appoints Wall Street Veteran

The Securities and Exchange Commission has appointed Thomas Butler as director of its new Office of Credit Ratings, mandated by Dodd-Frank and charged with oversight of the country’s main ratings agencies.

Butler will oversee a staff or around 25 lawyers, accountants and examiners responsible for monitoring the nine registered Nationally Recognized Statistical Rating Organizations (NRSROs). They will examine each agency on a yearly basis and release a public report.

Previously, the NRSRO exams required under Dodd-Frank were carried out by the SEC’s Office of Compliance Inspections and Examinations, starting 30 September 2011.

Before joining the SEC, Butler spent 14 years at Morgan Stanley Smith Barney and its predecessors, including Citi Global Wealth Management. His roles there included managing director for the investment strategy, investment advisory, global investments and public sector group divisions. He has also worked at UBS Securities and Babcock & Brown.

“Tom’s background and experience will bolster the agency’s oversight and review of credit rating agencies,” said Mary Schapiro, chairman of the SEC.

Credit rating agencies came under fire after the financial crisis due to potential biases in the “user pays” model, as well as deficiencies in the mathematical models used to rate collateralized debt obligations, for example.  

A two-year bipartisan investigation into the causes of the financial crisis by the Permanent Subcommittee on Investigations, released in 2011, concluded that “the most immediate cause of the financial crisis was the July 2007 mass ratings downgrades by Moody’s and Standard & Poor’s that exposed the risky nature of mortgage-related investments that, just months before, the same firms had deemed to be as safe as Treasury bills.” 

The report highlighted that over 90 per cent of the triple-A ratings given to mortgage-backed securities in 2006-2007 were later downgraded to junk status.

Before the financial crisis, in 2006, Congress passed the Credit Rating Agency Reform Act, requiring the SEC to establish guidelines to determine which agencies qualified as NRSROs. It also gave the SEC power to regulate these agencies’ internal processes on record-keeping and avoiding conflicts of interest. However, the law specifically prevented the SEC from regulating the agencies’ rating methodologies, according to the Commission’s website. The Dodd-Frank Wall Street Reform Act added a number of requirements on NRSROs.

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