SOHAIL SARFRAZ

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has proposed certain restrictions on the credit rating companies, directing them to refrain from disclosing price sensitive information to any person or take any other action which is unethical, unfair and against the interest of investors and the market.

The SECP Monday issued Draft Credit Rating Companies Regulations, 2015 for the existing and new credit rating companies.

Under the draft rules, a credit rating company shall not rate its own instruments; rate its associated companies and undertakings or the instruments issued by them or rate any borrower of its sponsors or any instrument issued by such borrower.

A credit rating company shall not be party to creation of false market; disclose price sensitive information to any person or take any other action which is unethical, unfair and against the interest of investors and the market or disclose or discuss with outside parties or make improper use of the non-public information which has come to its knowledge during business relationship with the customer.

Restrictions on and duties and obligations of credit rating companies: The SECP said that no director of a credit rating company shall be a director of a corporate entity or a business firm or a shareholder holding five percent (5%) or more of any corporate entity or business firm or in any other way interested in such an entity subject to rating by the credit rating company. Provided that this restriction shall not apply to a director of a credit raring company nominated as a director of an entity by the Federal Government or a Provincial Government or an institution which is directly or indirectly owned or controlled by the Federal Government or a Provincial Government.

Provided further that the director of the credit rating company shall inform the Commission of such nomination within fifteen days of the receipt of the rating mandate from such entity together with an undertaking that he shall not participate in the rating process of that entity.

A credit rating company must not accept a rating assignment where a person holding more than 10% of share capital of the credit rating company also holds directly or indirectly 10% or more of the share capital of the entity subject to rating or of the entity which issued the instrument subject to rating by the credit rating company, SECP proposed.

Any change in the shareholding of a credit rating company shall be subject to prior written approval of the Commission.

No director, officer or employee of the credit rating company shall communicate the information, acquired by him for use for rating purposes, to any other person except where required under law to do so.

The SECP said that a proposed director, chairman or chief executive of the credit rating company shall not assume the charge of office until their appointment has been approved by the Commission in writing. The application for seeking approval of the Commission shall be submitted by the credit rating company along-with the requisite information required under the fit and Proper Criteria along-with the undertaking specified therein.

An institution involved in the financial and capital market businesses may hold shares in a credit rating company provided that the direct and indirect shareholding of such institution is not more than 26%. An individual shall not directly and indirectly hold more than 10% shares in a credit rating company and all the individuals’ aggregate shareholding shall not exceed 40% of the credit rating company’s shares at any time, it said.

A credit rating company shall ensure that at least one third or two members, whichever is higher, of its board of directors are independent. The directors on its board shall not involve in the rating process and shall provide an undertaking to this effect at the time of appointment as directors on the board.

A credit rating company shall ensure that its rating committee is able to perform its duties free of undue intervention or influence from its shareholders, its management or its board of directors. It has not appointed any individual as a member of a rating committee who has or is perceived to have a business development function of the credit rating company; or who initiates or participates in a discussion regarding fee or payment with any customer of the credit rating company;

It shall not provide consultancy/advisory services or other services to any of its customers or to any of its customers’ associated companies and associated undertakings that is being rated or has been rated by it during the preceding three years unless it has adequate mechanism in place ensuring that provision of such services does not lead to a conflict of interest situation with its rating activities;

A credit rating company shall ensure that it has included a statement in each rating report that the credit rating company, the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the credit rating done by them. In case there is any conflict of interest, the credit rating company shall disclose the fact in the respective rating report, nature of such conflict of interest and its impact on the rating grade assigned;

It has disclosed in the rating report if a shareholder holding 5% or more of the share capital of credit rating company also holds directly Or indirectly 5% or more of the share capital of the entity which is subject to rating or the entity which issued the instrument subject to raring by the credit rating company, SECP said.

It has made the reporting lines and compensation arrangements for its employees in a way to eliminate or effectively manage actual and potential conflicts of interest. An analyst must not be compensated on the basis of revenue generated from the entities rated by him.

The SECP said that the analysts and members of the rating committee including the external members have disclosed all the conflicts of interest, including those of their family members, if any, to the officer designated by the credit rating company for the purpose and the analysts or any of their family members shall not buy or sell or engage in any transaction in any security which falls in the analyst’s area of primary analytical responsibility. This clause shall, however, not be applicable on investment in securities through collective investment schemes.

A credit rating company shall not accept any rating assignment except through a rating agreement in writing and the rating agreement must contain all the necessary provisions including but not limited to the following:

Firstly, requiring the customer to provide the credit rating company true, accurate, complete, and updated information to enable it to arrive at and maintain a fair and true rating of the customer and/or the instrument, as the case may be. Secondly, empowering the credit rating company to call and obtain, any time during the validity period of the agreement or during the tenure of the instrument, all such information as deemed necessary by it for conducting effective and timely review of the rating assigned;

Thirdly, consent of the customer authorizing the credit rating company to conduct review of the rating any time during the validity period of the agreement or during the tenure of the instrument, SECP added.