JUPITER, Florida (June 3, 2010) — Weiss Ratings, an independent rating agency that accepts no compensation from issuers, today recommended that Congress go much further to reform the nation’s rating agencies in order to provide clear, unconflicted company ratings to investors.
Weiss Ratings recommended the following urgent steps:
1. To retain their designation as Nationally Recognized Statistical Ratings Organizations (NRSROs), Moody’s, Standard & Poor’s, Fitch and insurance rating agency A.M. Best must renounce their business model based on accepting fees from issuers for their ratings (issuer-pay model).
2. The NRSRO designation should be promptly removed from those rating agencies that do not comply, ending the government’s endorsement of their conflicted practices.
3. At the point and time of distribution of their ratings, all agencies using the issuer-pay model should fully disclose:
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the precise payments made by each rated company for acquiring its rating,
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any additional payments made for ratings publications or publication rights,
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other business relationships, such as consulting services, and the payments received for such services, and
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any formal or informal procedure that grants the rated companies the right to delay or suppress publication of their ratings.
4. Rating agencies that do not abide by these disclosure rules should be subject to civil and, potentially, criminal penalties.
With the implementation of these recommendations, Weiss Ratings believes that:
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consumers and investors will be empowered to make more informed decisions regarding which ratings to trust and where to place their funds;
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market pressure should help foster a wider diversity of ratings and opinions regarding the financial stability of issuers of bonds, insurance policies, and other investments;
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independent research organizations will be able to play a larger role in guiding public opinion;
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the relevance and relative importance of issuer-pay ratings will decline substantially; and
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the global financial system, grounded in greater objectivity and accuracy, will be substantially stronger.
Martin D. Weiss, president of Weiss Ratings, commented, “I believe the recent proposal by Minnesota Senator Al Franken — to establish an overarching government agency over the conflicted rating agencies — does not adequately address the fundamental problem of conflicts. I fear it will merely consolidate and further entrench the ratings monopoly controlled by S&P, Moody’s and Fitch, shifting much of its control to the federal government, while sidestepping and inhibiting urgently needed reforms.”
Weiss Ratings sent a proposal for rating agency reform to the Securities and Exchange Commission similar to the proposed set of reforms it sent previously to the agency in 2002. Weiss Ratings noted a series of conflicts of interest at NRSROs:
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The [leading] NRSROs are paid substantial fees for their ratings by the rated companies. This creates a not-so-subtle pressure to award ratings that are favorable to their clients in order to retain business. In fact, the NRSROs’ revenues derived from the rated companies far exceed any revenues from the sale of ratings or rating-related publications to individual investors.
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Rated companies are almost universally empowered to begin or end a rating contract. During the initial rating process, if a company does not like the treatment it is getting from one NRSRO, it may terminate the contract and begin work with a different NRSRO that may give the company a more favorable rating.
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Publication of a rating may be censored. With two of the three NRSROs, if a rated company does not like its initial rating, it can request that the rating not be published, and the rating firms will comply.
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Unsolicited ratings can give the appearance of extortion. When an NRSRO issues both solicited and unsolicited ratings, an unfavorable unsolicited rating has the potential to serve as an incentive for a company to purchase a more favorable solicited rating.
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Additional revenues are derived from other business lines within the NRSRO. Each of the current NRSROs uses its existing client relationships as leverage to perform other additional services for that client. Thus, a rating downgrade could lead to the loss of significant revenues for other divisions within the NRSRO. This conflict is similar to that faced by accounting firms that offered consulting services to their auditing clients, and we have already witnessed the serious consequences of that business model.
The earlier Weiss Ratings proposal was submitted to the SEC on December 16, 2002. “Unfortunately, however,” commented Weiss, “despite much debate at the time, neither the SEC nor Congress took substantive action, and no meaningful changes were enacted in the issuer-pay model of the leading credit rating agencies. The banking crisis and other events have demonstrated that those changes are long overdue.”
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Weiss Ratings is the nation’s only provider of independent ratings on the nation’s 900 life and annuity insurers, 2,700 property and casualty insurers, as well as 600 health insurers and HMOs. It is among the nation’s leading providers of independent ratings on 8,000 banks and S&Ls. Plus, it also distributes independent ratings on the shares of thousands of publicly traded companies, mutual funds, closed-end funds and ETFs.
By adhering to its independent business model, Weiss outperformed Standard and Poor’s, Moody’s, A.M. Best and Duff & Phelps (now Fitch) in warning of future life and health insurance company failures according to a 1994 study by the U.S. Government Accountability Office (GAO), while also outperforming its competitors in identifying the safest insurers, according to its follow-up study using the GAO’s research methodology. Similarly, Weiss was the only one to identify, in advance, nearly all major banks that failed or required a federal bailout in the 2008-2009 debt crisis. (See Weiss Warnings of Financial Failures in Debt Crisis of 2008-2009.)
Thanks to its strong track record and independence, The New York Times wrote that Weiss was “the first to see the dangers and say so unambiguously;” Barron’s wrote that Weiss is “the leader in identifying vulnerable companies;” and Esquire concluded that Weiss Ratings is “the one company [that] … provides financial grades free of any conflicts of interest.”
