(Refiles to add stock symbol MHP.N)
* S&P fears SEC will dictate error disclosure policy
* S&P says SEC should not define "significant error"
* Letter comes three days after U.S. debt downgrade
* Letter comes after Treasury accused S&P of major error
By Sarah N. Lynch
WASHINGTON, Aug 9 Standard & Poor's, whose
unprecedented downgrade of U.S. debt triggered a worldwide
stocks sell-off, is pushing back against a U.S. government
proposal that would require credit raters to disclose
"significant errors" in how they calculate their ratings.
S&P, which was accused by the Obama administration of
making an error in its calculations leading to Friday's
downgrade, raised concern about the proposed new corrections
policy and other issues in an 84-page letter to the Securities
and Exchange Commission, dated Aug. 8.
The SEC is weighing sweeping new rules designed to improve
the quality of ratings after their poor performance in the
The 517-page proposal includes a requirement that ratings
agencies post on their websites when a "significant error" is
identified in their methodology for a credit rating action.
The letter was sent three days after the U.S. Treasury
Department accused S&P of miscalculating -- by some $2 trillion
-- the U.S. debt in the next 10 years. That calculation was in
a draft press release announcing a downgrade in the
government's credit rating from AAA to AA-plus.
S&P vehemently denied it had made an error, but
acknowledged that it changed its long-term economic assumptions
after discussions with the Treasury Department. It switched to
another economic scenario that resulted in a debt load $2
trillion smaller by 2021. But it said that did not affect its
decision to downgrade the U.S. debt. [ID:nN1E77725M]
S&P's criticism of the "significant error" proposal is part
of a broader concern that the SEC's reforms prompted by the
Dodd-Frank financial oversight law could give the U.S.
government undue influence over its ratings decisions.
S&P in particular is facing a tense relationship with
Washington. Its downgrade sparked a backlash from
Administration officials and lawmakers from both sides of the
aisle. A Senate Banking Committee aide on Monday said the panel
has begun looking into S&P's decision to downgrade the U.S.
credit rating. [ID:nN1E7771XF]
WHAT'S AN ERROR?
The SEC's proposal, issued in May, contains a wide range of
provisions, including requiring credit raters to disclose more
about their internal controls, to protect against conflicts of
interest, and to reveal more about their rating methods.
But one issue that really rubbed Standard & Poor's the
wrong way was the proposed requirement that raters disclose
when a "significant error" is identified in a procedure or
methodology -- and especially, who should define what that is.
The SEC's proposal asks questions about whether the SEC
should define the term "significant error."
"If the commission were to define the term significant
error ... we believe it would effectively be substituting its
judgment" for the credit-rating agency's, S&P President Deven
Sharma said in the letter.
He said S&P's own error correction policy "has proven to be
effective and, where errors have occurred, our practice of
reacting swiftly and transparently has benefited the market."
Barbara Roper, director of investor protection for the
Consumer Federation of America, said that policy has proven
"What was their correction policy on their Enron rating?
What was their correction policy on their Lehman rating? What
was their correction policy on their Bear Stearns rating? They
don't have an error correction policy -- they have an error
denial policy, and the SEC is absolutely right to step in,"
McGraw Hill's MHP.N MHR.TO Standard & Poor identifies
numerous issues with the SEC's proposal, including concerns
about competition and that rules are consistent globally.
Of the big three raters -- S&P, Moody's Corp (MCO.N) and
Fimalac SA's (LBCP.PA) Fitch Ratings -- S&P was the only one to
raise major concerns in its letter to the SEC about the
"significant error" provision.
The measure was tucked into Dodd-Frank after the rating
firms gave glowing ratings to toxic subprime mortgage-backed
securities and then were slow to downgrade them.
A Senate investigations panel issued a report earlier this
year faulting S&P and Moody's for triggering the financial
crisis with their flawed ratings and subsequent decision to
downgrade them en masse.
The big three ratings agencies have spent well over $1
million lobbying Congress and federal agencies since January as
they press for changes to the regulations, according to data
Roper said S&P's pushback to the "significant error"
proposal underscores the need for tougher reforms.
"If anything, their letter suggests it is absolutely
essential that the SEC define it because absent a definition,
these guys will obfuscate," she said.
(Reporting by Sarah N. Lynch, with additional reporting by
Andrea Shalal-Esa; Editing by Karey Wutkowski, Gary Hill)