The SEC unanimously proposed sweeping new rules on Wednesday to overhaul the rating business – regulations that would force tougher internal controls, curb conflicts of interest and even mandate that the agencies periodically test the competence of their employees, the NYTimes reports.  The changes were mandated by the Dood-Frank Act.

“These rules are intended to help investors and other users of credit ratings better understand and assess the ratings.  It is a massive proposal.”  - - SEC Chairman Mary Schapiro, talking about the 500-page rule proposal. 

Republican Commissioners indicated they would push for some changes, with Kathleen Casey noting that the proposals “could be life threatening” to small rating agencies.  Rating agencies, for instance, would have to take on the costs of periodically administering performance exams that would "test its credit analysts on the credit rating procedures and methodologies it uses."

The SEC also would require rating agencies to tighten their internal controls and evaluate the effectiveness of the controls in an annual report to the SEC.  The proposal also takes aim at the revolving door between the rating agencies and Wall Street firms that seek the grades.  As proposed, rating agencies would have to examine whether their former analysts awarded overly rosy ratings to a firm that later hired that person.  If that were ascertained, the rating agencies would have to evaluate its earlier credit rating and make appropriate revisions. 

For further details, go to:   [NYT Dealbook, 5/18/11, "Rating Agencies Face Crackdown"]