Transparency in Bond Credit Rating Process

The SEC met yesterday in a Credit Rating Agencies Roundtable to discuss the oversight of credit rating agencies with the goal of providing investors increased accessibility to all credit ratings for municipal bonds.

Municipal Securities Rulemaking Board (MSRB) supports the effort, believing that retail investors would benefit from clearer articulation of the considerations used in the ratings process, increased transparency in that process, and the disclosure or elimination of potential conflicts of interest.

According to the MSRB, the reasons for increased oversight include:

• The municipal bond market is dominated by retail investors and credit ratings are an important indicator of credit quality.
• Recent bond insurer and liquidity bank downgrades have made access to underlying and enhanced credit ratings even more important. 
• The underlying rating (or the lack thereof) may be relevant to a transaction, particularly when the credit rating of the bond insurer is downgraded or is the subject of information from the rating agency about a potential rating action.
• An underlying credit rating is assigned to reflect the credit quality of an issue, independent of credit enhancements such as bond insurance.

“Access to all credit ratings is vitally important for investors given the recent downgrades of bond insurer and liquidity bank ratings,” said Ronald A. Stack, Chair of the MSRB. “We applaud the SEC for convening today’s roundtable and look forward to progressive discussions on these issues that will benefit investors. We also support providing better disclosure of credit ratings of municipal bonds because knowledge of all ratings is a critical piece of investor protection.”

The Municipal Securities Rulemaking Board (MSRB) was established in 1975 by Congress to develop rules regulating securities firms and banks involved in underwriting, trading, and selling municipal securities. They are currently considering options to make credit ratings more readily available, including disclosure to investors on the MSRB’s Electronic Municipal Market Access (www.emma.msrb.org) system.

Image Credit: David Paul Ohmer