Credit Rating Agencies Code of Conduct revise in Paksitan

ISLAMABAD–January15: The Securities and Exchange Commission of Pakistan (SECP) has issued revised Code of Conduct for the Credit Rating Agencies (CRAs) which will replace the 2005 code. Company can break the contract with CRA and appoint other agency without no objection certificate.

The regulatory landscape for the CRAs has experienced a shift on the global level as a number of jurisdictions have taken various regulatory measures to strengthen oversight of CRAs and to raise their standards. Considering this development, it was important for the SECP to ensure that domestic CRAs continuously adhere to the international standards and best practices.

In order to review the role and responsibilities of CRAs, the SECP constituted a committee having representation from the SECP, State Bank of Pakistan and both domestic CRAs. The committee in its report proposed revamp of the 2005 code in light of the best international practices and the IOSCO Code of Conduct for CRAs. Considering recommendations of the committee and in order to fairly regulate affairs of CRAs and to develop and promote the debt capital market, the SECP has issued the revised code.

The salient features of the new code include well-defined rating criteria, methodologies and procedures to enhance the quality and integrity of the rating process. The CRAs are required to have analysts who are competent and qualified to carry out rating assignments. The code requires appointment of a compliance officer for continuous monitoring of compliance with the provisions of law.

The concept of “rating shopping” has been introduced, i.e. the CRAs will not accept a rating assignment where a client has prematurely terminated a rating contract with its existing CRA, without obtaining an NOC from its existing CRA.

Now the CRAs are also required to have detailed policies for whistle-blowing, rotation of analysts and complaints handling for combating the misuse of inside information by the employees.

The code requires the CRAs to monitor and review all the outstanding ratings continuously and any potential change therein is to be disseminated to the market, in a timely and effective manner. Confidentiality of information has also been covered and the procedure for treatment of confidential information has been laid out. Further, the CRA is now required to conduct training programs for the skill development of the employees of market participants.

The new code has covered the independence and avoidance of the conflict of interest situations by including the concept of independent directors requiring the CRAs to have at least one third or two independent directors whichever is higher. The CRAs have to follow the SECP’s fit and proper criteria for appointment of members on their board of directors, including chairman and chief executive.  The CRAs are now also required to disclose their latest pattern of shareholding and the name of the entity/group contributing 10% or more in CRA’s revenue as well as their criteria, methodologies and procedures for both solicited and unsolicited credit ratings. The code requires the CEO of the CRA to be independent, with no direct or indirect shareholding in the CRA. Moreover, the shareholding by an institution has been restricted to less than 26% and that of an individual to less than 10%, whereas the Individual aggregate shareholding shall not exceed 40% at any time. The SECP has directed the CRAs to diversify their shareholding by December 31, 2014.

Investors and other stakeholders give immense importance to the assessment conducted and opinions expressed by the CRAs. The growing importance placed on their assessments and opinions, requires the CRAs to conduct their credit rating activities in accordance with the principles of integrity, transparency, quality and good governance. This will help to assure that investors and issuers are treated fairly and the confidential material information provided to them by the issuers is safeguarded and not misused.