SEC plans push to cut credit rating references, Gallagher says

The U.S. Securities and Exchange Commission is nearing adoption of rules for cutting references to credit ratings from regulations including those determining how much capital a broker must hold to meet obligations, Commissioner Daniel M. Gallagher said in a New York speech.

The SEC will “start the final push” toward removing all references to credit ratings from its rules by the end of the year, Gallagher said at a conference sponsored by the American Institute of CPAs and the Securities Industry and Financial Markets Association. The rules are part of a Dodd-Frank Act mandate to curb reliance on ratings by firms such as Moody’s Corp. and McGraw-Hill Financial Inc.’s Standard & Poor’s unit.

“Overreliance on credit ratings was, after all, at the heart of the collapse of securitized products that played a key role in the financial crisis,” Gallagher said in his remarks.

SEC commissioners voted in April 2011 to propose a measure that would strip references to credit ratings from standards that determine how much liquidity broker-dealers must maintain to cover obligations. Dodd-Frank, the 2010 regulatory overhaul enacted in response to the 2008 credit crisis, directed the SEC to replace ratings in federal regulations with an “appropriate” standard for gauging risk.

“Dodd-Frank has given us a mandate to change our rules so that we no longer rely on ratings as a proxy for credit standing,” then-SEC Chairman Mary Schapiro said at the time of the 2011 vote. “We are seeking not the simplest alternative but instead are trying to provide tailored responses that reflect the underlying purpose of each rule, and we are conscious of potential costs to market participants.”

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