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Wall Street's New Clothes: SEC Strives for Transparency

By Neetal Parekh on September 18, 2009 10:00 AM

The SEC has been getting down to business this week, and it could mean a whole new fall wardrobe line for Wall Street.  In striving for transparency, the SEC voted to require credit agencies to disclose more ratings history and to require banks to reveal data used to rate financial products to all credit agencies.  And the rules promise to affect businesses big and small who either invest in companies or, themselves, are the subjects of investment.

Mary Schapiro, head of the SEC, reiterated the need for increased transparency, in stating that investors often rely on ratings in making investment decisions, and for that very reason, the increased regulation of the rating agency industry is needed. 

In addressing a suite of concerns, the SEC also proposed a rule that requires banks to disclose all of the preliminary ratings they receive from credit agencies, to curb the practice of banks to shop around for the most favorable credit ratings.

The SEC also set forth a proposal to ban the practice of "flash trading"--which gives some traders a split-second upper hand in buying or selling stock. 

Are these multiple measures for transparency justified?

The SEC would remind you that it was the credit agency industry that was piled with the most blame in the subprime mortgage meltdown that pulled the economy into troubled waters.  Because of credit agency failure to identify risks in securities that were backed by subprime mortgages, thousands of securities had to be downgraded last year while home-loan delinquencies multiplied and the value of the securities diminished.  The securities downgrades were a contributing factor to the losses and writedowns faced by major banks and investment firms.

And, considering that sometimes fashion should not repeat itself, the SEC has taken steps to move from shrouded attire to the clean lines of transparency.  

 

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