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.
