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As of this week, new SEC rules are now in effect as part of the Credit Rating Agency Reform Act of 2006 that require credit rating agencies to register themselves with the SEC. These are not consumer reporting agencies, such as Eperian or Equafax, but the agencies such as AM Best and Moody’s, that rate securities for investors. How will this new legislation affect you as an investor?

The intent of the legislation is to increase competition among the agencies. The agencies are also required to submit more documentation to government regulators so the agencies have less rope with which to hang themselves. It creates a new set of rules for registering a class of companies known as “nationally recognized statistical rating organizations”, or NRSROs. It makes my brain hurt just saying all that. It’s been so complicated to register such companies, that only 6 such firms are with us, but that number is now expected to grow.

What the new SEC rules will not do, however is to demand that the individual ratings companies use common standards for metrics they use in their evaluations. That was because the different firms don’t use the same systems to derive their ratings and default definitions, and it would create problems for them. It also requires that the agencies make bond rating and default information available to the public for free or for a reasonable fee, but fails to disclose what reasonable means. I’m sure reasonable for you and me isn’t the same as reasonable for Raymond McDaniel or Kathleen Corbet. Just a thought.

These new rules were originally released 9 months ago, but made some changes after comments on them were evaluated. It’s thought that these new rules have the potential to increase the umber of credit ratings firms doing business from the current 6 to somewhere around 30. This could enable the small investor to more easily obtain detailed information, and for a more reasonable cost.

Other SEC rule changes coming late this month include the reduction of the capital reserves required of investment banks. This is great for the banks and their shareholders because they can now use this for additional investments, bonuses and profit. Since 2004, investment banks have been able to use non-cash assets for the purposes of calculating capital reserves. The new calculation requirements are called Basel 2. The GAO released a report in February stating that this new rule would mean “large drops in minimum required risk based capital” held by the banks. As of this time, only the 6 banks that petitioned the SEC for the change are affected.

Lastly, on Wednesday, the SEC announced new rules aimed at making things easier for investors. YEEHA! Oh, wait! They didn’t mean easier for us to make money, although it could help. The new ruling forms the SEC Advisory Committee on Improvements to Financial Reporting. It’s hoped that they’ll find ways to “make financial reports clearer and more beneficial to investors, reduce costs and unnecessary burdens for preparers, and better utilize advances in technology to enhance all aspects of financial reporting” according to SEC Chairman Cox’s press release.