UPDATE 2-Canada unveils rules for credit rating agencies

* Agencies to apply for special designation status

* Must build policies to manage conflicts of interest

* Agencies will be subject to compliance reviews
(Adds industry comment)

By Pav Jordan and Jennifer Kwan

TORONTO, July 16 (BestGrowthStock) – Canada proposed new
regulations for credit rating agencies on Friday to boost
investor confidence and prevent conflicts of interest that
critics say may have contributed to the global credit crisis.

The new rules on agencies that assign risk ratings to
corporate debt issues are the result of a pledge made by Canada
and the other G20 economies to overhaul financial regulation.

At the heart of the proposals is a requirement that credit
rating agencies apply to become so-called “designated rating
organizations,” or DROs.

The Canadian Securities Administrators (CSA), the umbrella
organization for the country’s 13 provincial and territorial
securities watchdogs, would then require designated agencies to
establish policies and procedures to manage conflicts of

“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,
chairman of the CSA.

“This CSA initiative is consistent with international
developments in addressing the oversight of credit rating
agencies, which can have a significant impact upon financial
markets,” he said in a statement posted on the CSA’s website.

The new regulations will give Canadian watchdogs the
authority for the first time to review and demand changes to
the way agencies operate.

The biggest credit rating agencies operating in Canada
include Toronto-based DBRS; Standard & Poor’s, owned by
McGraw-Hill Cos (MHP.N: ), and Moody’s Investors Service, owned
by Moody’s Corp (MCO.N: ).

Officials at the agencies, which would be subject to
greater liability under the proposed rules, could not be
reached immediately for comment.

“Clearly, they have to be audited from outside if people
are trading and buying and selling securities on the basis of
their ratings only. They have horrendous power and it has to be
monitored,” said Thomas Caldwell, chairman of wealth manager
Caldwell Financial Ltd.

Credit agencies came under attack during the global
economic crisis after they failed to spot problems with debt
that was linked to bad mortgages. The implosion of these
securities helped contribute to the global financial crisis.

The CSA said it will not oversee the content or methodology
of credit ratings.

As part of the new regime, DROs would have to set up
practices to prevent inappropriate use of information, appoint
a compliance officer and make an annual filing, among other

The new rules are subject to changes after a comment period
that ends in October.

“It’s a positive step forward and a long time coming,” said
Philip Anisman, a Toronto securities lawyer. “The real
questions will have to do with its administration.”

“The adequacy of the regime will depend on the enforcement
and compliance mechanisms adopted by the regulators.”

Closer oversight of credit rating agencies was a pledge
made by the Group of 20 emerging and developed economies at a
Toronto summit in June, and is part of a global move toward
overhauling financial regulation.
(Reporting by Pav Jordan and Jennifer Kwan; Editing by Frank
McGurty and Peter Galloway)

UPDATE 2-Canada unveils rules for credit rating agencies