To discourage what it saw as an unhealthy overreliance on credit ratings, the Securities and Exchange Commission spent the past year pruning its rule book. The goal was to remove various passages that referenced rating requirements.

For example, under the Securities Exchange Act of 1934, Rule 10b-10, there is a paragraph requiring a broker-dealer to inform a customer about any transaction involving a debt instrument, other than a government security, that isn’t rated by a nationally recognized statistical rating organization. So the SEC proposed cutting the paragraph from the rule altogether so as to eliminate any implication about the significance of ratings. Talk about being written out of history.

Similarly, with respect to minimum net capital rules for broker-dealers, the SEC proposed removing references to ratings. The issue comes up whenever broker-dealers calculate their assets minus their liabilities. Under the current rules, broker-dealers are allowed to take a lower capital charge, or haircut, on certain securities rated investment-grade. The SEC now proposes inserting new phrasing that, while bordering on nebulous (a haircut-worthy instrument would need to be subject to “a minimal amount of credit risk and have sufficient liquidity such that it can be sold at or near its carrying value almost immediately”) would nonetheless be devoid of any reference to a credit rating. ....

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