The Securities and Exchange Commission (SEC) of the Philippines has imposed stricter governance and accreditation requirements on credit rating agencies (CRAs), introducing curbs on ownership ties and business activities that could undermine the independence of their ratings.

Credit ratings are standardized assessments of an issuer's ability to meet its debt obligations, and investors rely on them when weighing fixed-income risk — a dependence that makes the independence of the agencies assigning these grades central to how the local debt market functions.

Under Memorandum Circular No. 29, Series of 2026, issued on Oct. 20, CRAs are barred from issuing ratings when specified ownership or influence relationships create conflicts of interest between the agency and the entity being rated. The prohibition applies where a person directly or indirectly holds at least 10% of the ownership or voting rights in both entities, or exercises significant influence over both.

The revised rules also require agencies to report unaccepted and private ratings to the SEC, a measure intended to discourage rating shopping, a practice in which issuers seek more favorable credit assessments. Bringing unaccepted and private ratings to the regulator is meant to close that gap: without such reporting, an issuer could quietly walk away from an agency whose assessment falls short and keep shopping for a better grade.

Accountability Concerns

SEC Chairperson Francisco Ed. Lim said credit rating agencies face accountability challenges because issuers pay for the ratings that investors use to assess debt securities.

"When a listed company performs poorly, the market says so through its share price. A credit rating agency faces no such test. Its ratings are paid for by issuers and relied on by investors, yet a CRA that gets its ratings wrong pays little price for it," he said in a statement on Tuesday.

"These rules hold credit rating agencies to the standards of independence, governance and transparency that investors are entitled to expect. By aligning our local framework with international best practices, we are reinforcing the integrity and independence of the rating process," he added.

Higher Capital Requirements

The revised framework raises the minimum paid-up capital requirement for CRAs to P50 million upon application for accreditation, increasing to P70 million three years after accreditation takes effect.

Existing accredited agencies have 12 months from the circular's effectivity to comply with most of the revised requirements, while the P50-million and P70-million capital thresholds must be met within 36 and 72 months, respectively.

New agencies applying for accreditation within the first 12 months after the circular takes effect may initially maintain P30 million in paid-up capital, subject to the same capital milestones.

The SEC said the higher capitalization requirements are designed to help agencies sustain independent rating operations and provide investors with adequate information on debt securities, particularly during economic downturns.

The revised rules also expand the coverage of credit rating regulations to include corporate bonds, commercial paper, structured products, sukuk instruments, covered bonds, sustainability-linked instruments, and other debt securities. The expanded scope brings newer asset classes, such as sukuk and sustainability-linked instruments, under the same independence safeguards as conventional bonds.

Governance and Transparency

Under the new framework, at least 30% of a CRA's board, including its chairperson, must consist of independent directors, who must serve fixed, non-renewable terms of no more than five years.

Agencies must also establish policies to identify and manage conflicts of interest, and obtain SEC approval for changes in their ownership structures that result in a new controlling shareholder.

The rules restrict ancillary services that could compromise the independence of credit ratings. CRAs may continue offering services such as economic forecasts, general data analysis, and financial research, provided these do not place the agencies in a position of rating their own work. Revenue from ancillary services must also not exceed revenue from credit rating activities as the agencies' largest source of income.

The framework adopts a target rotation period of four years for lead analysts, followed by a two-year cooling-off period. Agencies must document any deviation from the target.

CRAs are likewise required to review their rating methodologies every three years, with the review function kept independent of revenue-generating activities.

"Under the revised rules, CRAs must now conduct a mandatory methodology review every three years. This review function must not be subordinated to any revenue-generating function of the CRA," the SEC said.

"Findings and recommendations from all methodology reviews must be communicated to the Commission for supervisory purposes," it added.

To strengthen transparency, agencies must publish annual reports within four months after the end of each fiscal year, detailing their governance structures, staffing, remuneration policies, and compliance systems. They must also publicly disclose historical default rates and rating transition matrices to help investors assess the performance of past ratings.

For each rating assignment, agencies must maintain a policy for publishing a press release and a rating report on their websites. Information submitted by issuers or related entities for credit rating purposes must remain confidential and cannot be used for other purposes.

The SEC said the revised framework aligns Philippine regulations with the principles and conduct standards of the International Organization of Securities Commissions, the global standard-setter for securities markets. International scrutiny of rating agencies intensified after the 2008 global financial crisis, when highly rated structured products suffered widespread downgrades, prompting standard-setters to tighten global guidance on conflicts of interest in the issuer-pays model. With compliance deadlines ranging from 12 to 72 months, the transition will unfold in phases, and the annual reports, default-rate disclosures, and transition matrices the rules mandate will give market participants a running record of agencies' compliance and rating performance as the new regime takes hold.

— Alexandria Grace C. Magno, BusinessWorld

Source: SEC tightens credit rating independence rules