Bond rating agencies have invested significant sums of money in an effort to det
ID: 2615070 • Letter: B
Question
Bond rating agencies have invested significant sums of money in an effort to determine which quantitative and nonquantitative factors best predict bond defaults. Furthermore, some of the raters invest time and money to meet privately with corporate personnel to get nonpublic information that is used in assigning the issue’s bond rating. To recoup those costs, some bond rating agencies have tied their ratings to the purchase of additional services. Do you believe that this is an acceptable practice? Defend your position.
Explanation / Answer
No, this is not an acceptable practice at all. Rather this is an unethical practice and forces other firms to spend money on additional services that they may not require at all.
Besides being unethical the situation also leads to a conflict of interest. There is also a strong possibility of malpractice occurring through such activities. Credit rating agencies should not be authorized to meet with corporate personnel on a one on one basis about non-public information. Interactions like these should be made in a group setting where the rating agency meets with several firms at once to discuss whatever the topic may be. Or if the topic is firm-sensitive or proprietary information and the group setting is not feasible, then a representative from the SEC should supervise the one on one session.
Eliminating the fact that companies pay for credit-rating agencies to rate their bonds would be difficult. These credit-rating agencies need funds to operate, and nationalizing or making the agencies government-run would probably diminish the quality of the rating system. So with this understanding, the revenue derived from companies who pay to have their bonds rated should be closely monitored by the SEC to watch for any malpractice activity.