SEC’s Proposed Regulations For Credit Rating Agencies Still Need Work

  Thumbnail for version as of 22:05, 23 July 2009

In our June blog post , we reported that the U.S. Securities and Exchange Commission  proposed new regulations in its effort to ensure that credit rating agencies no longer have conflicts with the issuers they rate.  During the last several months, various lawmakers and consumer advocates have suggested that the proposals are inadequate. 

For example, last week The New York Times reported that Sen. A. Franken, Democrat of Minnesota, participated in a conference call held by Americans for Financial Reform and said that the SEC’s proposals fail to respond to the conflict of interest inherent in the credit rating system.  Franken is an advocate for eliminating the current rating model in which corporations and banks that issue debt pay the rating agencies to rate their products. Instead, Franken has proposed that the SEC create an independent, self-regulatory organization that would be responsible for assigning ratings to different credit agencies. 

In recent commentary on CNN, Sen. Franken explained that his proposal “directs the Securities and Exchange Commission to create an independent self-regulatory organization that would assign the initial credit ratings of securities to one agency. The assignments could be based on agencies’ capacity, expertise, and, after time, their track record.  Our approach would incentivize and reward excellence. The current pay-for-play model — with its inherent conflict of interest — would be replaced by a pay-for-performance model. This improved market would finally allow smaller ratings agencies to break the Big Three’s oligopoly.”

Barbara Roper, director of investor protection at the Consumer Federation of America  (“CFA”), has also urged the SEC to strengthen the proposed rules.  The CFA believes that the “recent proposals from the SEC to improve regulation in these areas fall well short of what is needed to deliver the sweeping reforms promised by the Dodd-Frank Wall Street Reform and Consumer Protection Act.”  A copy of the CFA’s August 8, 2011 comment letter to the SEC which provides recommendations to improve the proposed rules can be found here.  

A list of additional comments to the SEC’s proposed rules can be found here.

Abbey Spanier, LLP is located in New York City, is a well recognized national class action and complex litigation law firm.