Canadian securites regulators have proposed a new regime to bring oversight to credit rating organizations.

Currently, the credit rating agencies in Canada aren’t subject to any oversight by securities regulators. However, in the wake of the credit crisis, and the central role played by the rating agencies in that crisis, regulators around the world are looking to bring these firms under greater supervision.

On Friday, the Canadian Securities Administrators published for comment its proposal, indicating that it is proposing this new regime because of the important role that rating agencies have within financial markets, and their status within securities legislation (as a prospectus requirement for certain offerings, for example).

Under the proposal, credit rating firms would be required to apply to become a ‘designated rating organization’ in order for their ratings to be used within securities legislation. DROs would be required to adopt, and enforce, a code of conduct based on a code published by the International Organization of Securities Commissions. That code addresses issues such as: conflicts of interest; the quality of information used in making rating decisions; the ability to rate novel products; the differentiation of ratings for different types of securities; rating agency staffing levels; investor misunderstandings of what ratings mean; and the public disclosure of historical information about the performance of ratings, among other things. Firms would be required to comply with the code, or explain how any deviation from the code achieves the same effect.

Additionally, designated rating firms would have to establish policies and procedures to manage conflicts of interest, prevent inappropriate use of information, appoint a compliance officer, and make an annual filing to regulators. They could also be subject to compliance reviews and/or enforcement action by the regulators.

The proposal does not seek to impose greater civil liability upon rating agencies, although the CSA says that monitoring developments in this area internationally. And, it notes that the regulators will generally not oversee the content or methodology of ratings.

“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 and president and CEO of Quebec’s Autorité des marchés financiers. “This CSA initiative is consistent with international developments in addressing the oversight of credit rating agencies, which can have a significant impact upon financial markets.”

Comments on the proposal are sought by October 25.

Canadian proposal in line with international efforts: DBRS

Toronto-based rating agency DBRS released a statement indicating that the proposed new rule is not a surprise, and is in line with similar international efforts. “DBRS is already regulated in the U.S. and soon will be in Europe, and believes it has laid the foundation to meet these new Canadian rules,” it said.

DBRS notes that it has made a number of changes to improve the quality and transparency of its credit ratings, in the wake of the financial crisis, as well as changes to strengthen its global policies, governance and disclosures. It says it already has a code of conduct that complies with the IOSCO code, including policies, procedures and internal controls to protect the integrity and independence of ratings and the ratings methodology.

IE