Don't Forget The Role of The Rating Agencies

Don't forget the role of the rating agencies in the financial crisis. In the 1975 the U.S. Congress designated the Nationally Recognized Statistical Rating Organizations (NRSRO's). When Congress passed the legislation anointing the NRSRO’s it gave this limited number of organizations oligopoly status and unique competitive advantage. At the same time, Congress appointed the Securities and Exchange Commission as regulator of the NRSRO's. 

Most investment advisors and portfolio managers use rating agency guidelines (ratings) to assist their evaluation of the quality and risk associated with the securities they purchase* and fiduciaries are restricted by law as to the minimum rating level from which they can select the investments they can purchase and manage. So, the rating agencies provide a seal of approval, so to speak, for the securities and companies they rate.

* In most cases, the ratings securities an investment advisor, or a portfolio manager will use are defined in a prospectus, offering circular, or by some other form of disclosure. 

If you would like to see a CEO of a rating agency squirm, watch and listen to, The Role of The Rating Agencies

and Too Little, Too Late 

 

 

 

 

He Who Pays The Piper Calls the Tune

A reminder that, in real life: “He who pays the piper calls the tune”.

The mandatory implementation of fully-negotiated brokerage commissions [May Day 1975] and shortly thereafter, The U.S. Congressional approval of Section 28(e)* created an environment in which institutional ‘order flow’ became a vastly more important component in the profitability of full-service brokerage firms. [‘order flow’ = code words for undisclosed institutional soft dollar commissions]

Given the implications of fully-negotiated (retail client) commissions and 37 years of serial interpretations and uneven enforcement of Section 28(e), should anyone expect the brokerage industry to look any different than it does today?

* Section 28(e) of the Securities Exchange Act of 1934 [Also, go to linked letter requesting substantial revision or repeal of section 28(e). The letter is from past SEC Chairman Christopher Cox to former Chairman of the Senate Banking Committee, Senator Christopher Dodd, a similar letter was sent to then Chairman of the House Financial Services Committee, Barney Frank > http://www.scribd.com/doc/13752510/Cox-Requests-Legislative-Action 

Links to two related New York Times newspaper articles of interest follow:

Editorial

Not All Investors Are Equal

Published: July 17, 2012

* http://www.nytimes.com/2012/07/18/opinion/not-all-investors-are-equal.html?_r=1&nl=todaysheadlines&emc=edit_th_20120719

 

Surveys Give Big Investors an Early View From Analysts

By GRETCHEN MORGENSON
Published: July 15, 2012
* http://www.nytimes.com/2012/07/16/business/in-surveys-hedge-funds-see-early-views-of-stock-analysts.html
 

· Fair Disclosure, Regulation FD - SEC

http://www.sec.gov/answers/regfd.htm - 5k - similar pages

Aug 30, 2004 ... On August 15, 2000, the SEC adopted Regulation FD to address the selective disclosure of information by publicly traded companies and other ...