The source of this material is SEC.gov.ng
In today’s complex financial landscape, credit ratings play a critical role for investors and issuers alike. To ensure the integrity and reliability of these ratings, the Nigerian Securities and Exchange Commission (SEC) has established a comprehensive Code of Conduct for Rating Agencies. This code outlines a series of essential principles that govern the operations of rating agencies, promoting transparency, objectivity, and a commitment to investor protection.
The code focuses on four key areas:
- Quality of the Rating Process: This section emphasizes the importance of robust methodologies, qualified personnel, and rigorous review procedures to ensure the accuracy and credibility of credit ratings.
- Independence and Avoidance of Conflicts of Interest: To maintain objectivity, the code addresses potential conflicts, requiring disclosure of financial ties and establishing clear policies to avoid external influences on ratings.
- Responsibilities to the Investing Public and Issuers: This section focuses on transparency and communication. Rating agencies are required to disclose historical data, rating limitations, and methodologies used to arrive at a rating.
- Disclosure of the Code of Conduct and Communications with Market Participants: To encourage public trust, the code mandates easy access to its own guidelines, along with information about the rating agency’s methodologies and performance data.
Adhering to these principles enables rating agencies to strengthen investor confidence and foster a more stable and transparent financial environment.
- Quality of the Rating Process:
A Rating Agency shall:
- prohibit Rating Agent analysts from making proposals or recommendations
regarding the design of structured finance products that the Rating Agency
rates;
- adopt reasonable measures so that the information they use is of sufficient
quality to support a credible rating.
- establish and implement a rigorous and formal review function for
periodically reviewing the methodologies models and significant changes to
the methodologies and models it uses;
- ensure that the decision-making process for reviewing and potentially up
grading or downgrading a current rating of a product is conducted in an
objective manner. The review of the rating report shall be published;
- ensure that Rating Agency employees that make up the Rating Agency rating
committees have appropriate knowledge and experience in developing a
rating opinion for the relevant type of credit;
- establish new products review process for reviewing the feasibility of
providing a rating for a structure that is materially different from the
structures a Rating Agency currently rates;
- assess whether existing methodologies and models for determining credit
ratings of structured products are appropriate when the risk characteristics
of the assets underlying a structured product change materially;
- ensure that adequate resources are allocated to monitoring and updating its
ratings.
- Independence and avoidance of conflicts of interest
A Rating Agency shall:-
- disclose whether any issuer, originator, issuing house, subscriber or other
client and its affiliates make up more than 10% of the Rating Agency’s
annual revenue;
- establish policy and procedures for reviewing the past work of analysts that
leave the employment of the Rating Agency;
- conduct formal and periodic reviews of remuneration policy and practices
for Rating Agency analysts to ensure that these policy and practices do not
compromise the objectivity of the Rating Agency’s rating process;
- define what it considers or not to be an ancillary business;
- Not rate an issuer that own the rating agency.
- Responsibilities to the Investing Public and Issuers
A Rating Agency shall:-
- publish verifiable, quantifiable historical information about its rating
opinions, and where possible, standardized in such a way to assist investors
in drawing performance comparisons between different Rating Agencies;
- differentiate ratings of structured finance products from other ratings,
preferably through different rating symbols;
- indicate the attribute and limitations of each credit opinion, and the limits to
which it verifies information provided to it by the issuer or originator of a
rated security;
- provide investors and/or subscribers (depending on the Rating Agency
business model) with sufficient information about its loss and cash-flow
analysis of structured finance products;
- disclose the principal methodology in use in determining a rating.
- Disclosure of the Code of Conduct and Communications with MarketParticipants
A Rating Agency shall publish in a prominent position on its home webpage links to the Rating Agency’s code of conduct, a description of the methodologies it uses and information about the Rating Agency’s historicperformance data.
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