Canada seeks to boost regulation of ratings agencies

Canada is seeking to boost supervision of credit ratings agencies in the latest tweak to financial regulations aimed at avoiding a repeat of the 2008 market meltdown.

Under the proposals put forward by the Canadian Securities Administrators, all credit rating agencies would be required to apply for “designated rating organization” status before their reviews can be used by companies in official documents, such as prospectuses for debt securities.

Once a credit rating agency obtains approval, it will need to adopt and enforce a code of conduct, appoint a compliance officer, establish policies and procedures to manage conflicts of interest and may be subject to compliance reviews.

The agencies, such as Moody’s Investors Service, Standard & Poor’s and DBRS, came under fire during the financial crisis for failing to spot and warn investors about the potential risks involved in securities linked to the U.S. housing market. The ratings are widely used by investors when considering the risk involved in buying a company or country’s debt.

“We are reviewing the proposal and look forward to the opportunity to comment and to work with the regulators on a framework that is globally consistent,” a spokesperson for Standard & Poor’s wrote in an email.

Moody’s didn’t immediately return calls seeking comment.

The CSA is not proposing to oversee the way companies come up with their evaluations, it said.

"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 Chief Executive Officer of the Autorité des marchés financiers (Québec).

The CSA is seeking comment on the proposals until October 25.