The Canadian Securities Administrators recently published for comment a proposed rule that is intended to impose regulatory oversight over designated credit rating agencies and organizations. Until this proposed rule was published for comment, credit rating agencies were not subject to any formal oversight by the securities regulators in Canada.

Under the proposals, credit rating organizations wishing to become designated for the purposes of having their credit ratings eligible for use where credit ratings are referred to in securities legislation would have to apply and, once designated, maintain and ensure compliance with a code of conduct that complies with the provisions of the IOSCO Code of Conduct Fundamentals for Credit Ratings Agencies of the International Organization of Securities Commissions (IOSCO). The IOSCO Code addresses issues such as: (i) the quality and integrity of the rating process; (ii) credit rating agency independence and the avoidance of conflicts of interest; (iii) credit rating agency responsibilities to the investing public and issuers; and (iv) disclosure of the code of conduct and communication with market participants. Deviations, however, from the provisions of the IOSCO Code would be permitted under certain circumstances.

While this is a step in the right direction we wonder if much will change given that credit rating agencies are paid by issuers/sellers of securities.  What is needed is for (1) the interests of credit rating agencies to be aligned with buyers of securities and (2) there to be civil and penal consequences for credit rating agencies and senior management who breach regulatory requirements.