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.
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.
revised Code of Conduct for the Credit Rating Agencies (CRAs) which
will replace the 2005 code.
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.
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