SEC seeks comment on whether to broaden disclosure of mutual bond fund risk ratings.

WASHINGTON -- The Securities and Exchange Commission is asking for comments on whether it should push for increased disclosure of market-risk ratings on mutual funds, a move that one rating agency official said could ultimately lead to broader reliance on those ratings by investors.

In a statement issued Wednesday, the commission said it is requesting comment "regarding whether the commission should encourage or require these types of ratings to be disclosed in fund prospectuses, sales literature and advertisements."

Even though the SEC does not regulate municipal bond offerings, a decision by the commission to require increased disclosure of market risk ratings on mutual funds would probably end up affecting municipal bond funds as well, because market risk ratings would become more broadly used across the board, said a rating agency official.

"I think that would be a positive thing," said Nell Baron, vice chairman and general counsel at Fitch Investors Service.

"If you look at the losses that have been taken in bond funds because of investments in derivatives, I think that volatility ratings would enable investors to better quantify market risk associated with their investments," Baron said.

"Ideally, what would develop in the market for investors would be an ability to look at these investments and look at the rating on them and have those ratings be as understandable and available as credit-ratings are," he said. Fitch already provides market risk ratings for municipal bond funds, Baron added.

Standard & Poor's Corp. has also provided market risk ratings for municipal bond funds and other types of investments, and has been working to clarify for investors what those ratings mean, said Glenn Goldberg, managing director at the agency.

Goldberg noted that most of Standard & Poor's ratings still "only address credit risks, and as we move into increasingly complex instruments, non-credit risks may be as important, and may be more important in the overall risk-reward equation."

The commission also requested comment from market participants on whether it needs to more carefully regulate the rating agencies.

The SEC said it wants input "on the appropriate role of ratings in the federal securities laws, and the need to establish formal procedures for designating and monitoring the activities of nationally recognized statistical rating organizations."

Currently, six agencies are designated as nationally recognized statistical rating organizations, including Fitch, Standard & Poor's, and Moody's Investors Service. But the commission noted there are no formal guidelines for designating an agency as such an organization.

"Commentators are requested to address whether the current practice needs to be formalized and, if so, how this should be accomplished," the SEC said.

The commission also requested comment on the practice by which rating agencies charge fees for their ratings, and specifically, "whether it is appropriate for an NRSRO to charge an issuer based on the size of the transactions being rated."

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