Dodd-Frank Regulatory Rulemaking: Financial Reform's Second Act

    View Author 27 August 2010

    For Issuers, Investors, Regulators and Credit Rating Agencies

    Credit rating agencies have been identified as culpable market entities whose failures to identify key risks contributed to the financial crisis. Since that time, there has been significant discussion surrounding various proposals to restrict credit rating agencies’ ability to provide credit ratings for the instruments that played a significant role in the financial crisis – asset-backed securities and collateralized debt obligations.

    With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress gave the U.S. Securities and Exchange Commission (SEC) increased regulatory authority over nationally recognized statistical rating organizations (NRSROs) and, in particular, legislated new provisions designed to promote transparency and increase credit rating agency accountability in the issuance of credit ratings. The impact of these rules will extend to regulators, issuers of new securities and those who invest in these instruments, as well as companies subject to rules with statutory references to credit ratings, including banks and other institutions with investment guidelines.
    Notably, immediately after the enactment of the Dodd-Frank Act, Standard & Poor’s, Moody’s Investors Service and Fitch Ratings announced their refusal to allow their ratings to be disclosed in new bond deals for fear of being exposed to legal liability, as discussed in greater detail below. The credit rating agencies’ position resulted in the SEC issuing a no-action letter the following day indicating that issuers of asset-backed securities may omit ratings disclosures from their public disclosure documents for the next six months.

    This week’s spotlight attempts to highlight some of the most important issues that issuers, investors, regulators and credit rating agencies will face as the Dodd-Frank Act provisions are codified during the regulatory rulemaking process.

    1. What is the role of the new SEC Office of Credit Rating Agencies?
    2. For new issuances, what information must NRSROs disclose to the public?
    3. Will investors have access to more information on how a credit rating was determined?
    4. How does the Dodd-Frank Act address the inherent credit rating agency conflicts of interest in an “issuer pays” model?
    5. How are other federal regulators impacted by the credit rating agency provisions?