SC reviews framework to strengthen rating objectivity

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KUALA LUMPUR: The Securities Commission (SC) said it would continue to take proactive steps to strengthen the independence and objectivity of ratings and, where appropriate, impose additional conditions on approvals given to applicants.

As such, the regulator is reviewing the existing framework, including rating committees and their composition.

In the future, the SC intends to require that the majority of the members of the board of directors (of both the holding companies and the rating companies) as well as the rating committee are independent and that any decision of paying dividends to shareholders requires prior SC approval.

This is to ensure that the Credit Rating Agency (CRA) continues to operate with sufficient resources to support its rating operations.

Commenting on recent reports on possible changes to the shareholding of RAM Holdings Bhd, the SC clarified that any change in shareholding that results in one person controlling 20% ​​or more of an ARC’s paid-up capital requires their prior approval. .

Prior SC approval is also required for any subsequent cumulative increase in ownership of 10% or more of ARC’s paid-in capital. Both requirements are prescribed under the CRA Guidelines.

When evaluating these applications, CS takes into account, among other things, the value proposition proposed by the applicants, in relation to the increasingly competitive environment in which the rating agencies operate.

These include product expansion, business growth and sustainability, regional collaboration, skills enhancement and overall contribution to the development of the local credit rating industry and of the Malaysian bond market.

This is in line with the objectives of the capital market master plan, he noted. To date, the SC has allowed more than one applicant to hold more than 20% of the shares of an ARC.

In addition to acquiring a stake in an existing credit rating agency, applications could also be made for the establishment and registration of a third rating agency, subject to the requirements set out in the credit rating guidelines. credit rating agency.

Shareholders of credit rating agencies may be companies, including publicly listed companies, in accordance with similar practices in other jurisdictions.

The regulator also stressed that the independence and objectivity of the credit assessment process and rating decisions of rating agencies should never be compromised.

To ensure this, the SC Guidelines on CRAs have established the obligations that a CRA must comply with at all times.

This includes subjecting the appointment of board members and CEOs of rating agencies to a fit and proper assessment and approval by the oversight committee.

Other requirements include the creation of a ratings committee, composed of experienced, qualified and independent members, to assign and decide on all credit ratings, thus avoiding the involvement of the board of directors and shareholders in the discussions. and rating decisions.

Additionally, the SC has stated that the chair of the rating committee must be a qualified and independent member.

In carrying out its duties to ensure a fair, efficient and transparent marketplace, the SC will continue to adhere to its robust decision-making process in accordance with its strict governance protocols. The CS is directly responsible for supervising and controlling the activities of market institutions.

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