WASHINGTON (CN) – The Securities and Exchange Commission will temporarily use credit ratings in its definitions of “mortgage related securities” and “small business related securities” despite a Dodd-Frank Wall Street Reform and Consumer Protection Act mandate that such ratings be dropped from federal regulations.
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After the failure of credit ratings agencies, also known as nationally recognized statistical rating organizations (NRSROs), to properly assign risks to credit default swaps and other securities offerings leading up to the financial collapse in 2008, Congress decided that no federal regulations should depend on their rankings.
Instead Dodd-Frank mandated that federal agencies develop their own standards of credit worthiness that were not just analogs of NRSRO ratings.
The SEC says it needs more time to develop its own ratings given the complexity of the task and the wide-spread impact they will have beyond entities regulated by the SEC.
Until the new standards of creditworthiness are developed, the definition of the term “mortgage related security” will include a requirement that such securities are rated in one of the two highest rating categories by at least one NRSRO; and “small business related security” must be rated in one of the four highest rating categories by at least one NRSRO.
NRSROs use ten rating categories from AAA to D. The four highest are AAA, AA, A and BBB.
The rule is retroactively effective July 20.