Proposed Credit Rating Agency Regulation Requires Compromise
Filed under: SEC, The Rating Agencies, Wall Street Reform
The Senate financial reform bill does not currently contain a provision included in the House version of the bill that overturns a Securities and Exchange Commission (SEC) rule that has shielded credit rating agencies from civil lawsuits for nearly 30 years.
Rule 436(g) exempts recognized rating agencies from experts’ liability under the Securities Act. In an extreme case, a credit rating agency would even be protected from liability if they knowingly made false or misleading statements in connection with securities registration statements. It is argued that this rule is needed to protect credit rating agencies’ First Amendment rights to free speech.
An amendment included in the Senate bill, introduced by Senators George LeMieux (R-FL) and Maria Cantwell (D-WA), does eliminate some statutory protections for credit rating agencies and applies new standards of credit worthiness, but it does not go as far as the House version of the bill.
The House bill is direct and reads, “Rule 436(g), promulgated by the Securities and Exchange Commission under the Securities Act of 1933, shall have no force or effect.”
This idea is awful. Leave the legal protectors for NRSROs. Let’s all try “caveat emptor” instead.
The Effects of Reform
Filed under: Bond Regulation, SEC, The Rating Agencies
So, after protecting ratings as a First Amendment opinion, Congress changed the 2300-page regulatory reform bill and exposed the raters to legal liability if the ratings don’t reflect an ultimate change in the price of the bonds, or a default (crank up the class action lawsuit machine…).
What does this mean? Can a bond holder sue an NRSRO if the market value of a bond declines after a downgrade?
It means that this chills the value of a rating, if it exposes the rater to monetary liability. It seems there is a loophole, however.
If the rating was not part of the submitted OS or documents submitted to the SEC, the rating would be legally exempted, since it was not officially part of the submitted deal documents.
This is a stupid, populist nod to the worst of Congressional impulses. AT BEST, it will raise the cost of credit, and make it less available. AT WORST, it will put lawyers in charge of credit allocation.
What’s next, broker/ dealer stock buy and sell ratings? Will realtors be subject to legal liability if a house depreciates after you buy it? Will Las Vegas odds makers be subject to legal action if the odds are wrong and you don’t win?
The only good news is municipal bonds would be exempt because they do not have to register with the SEC.
Bond Sale? Don’t Quote Us, Request Credit Firms – WSJ.com, July 21, 2010
Goldman Sachs Hit With Civil Fraud Charge
The Securities and Exchange Commission (SEC) has announced a lawsuit against Goldman Sachs for creating and selling a mortgage investment that was secretly intended to fail. Goldman repudiated the charges, calling them “completely unfounded in law and fact,” and that it would “vigorously contest them and defend the firm and its reputation.” Furthermore, Goldman pointed out that it lost money on the transactions in question.
Central to the SEC’s case against Goldman and numerous others is how credit-rating firms downgraded 99% of the underlying mortgage securities by January 2008.
Though the SEC had informed Goldman as far back as the middle of last year of a possible suit, the fact that it was a civil fraud lawsuit came as a surprise. Goldman was not given the normal opportunity to discuss a settlement or prepare for the announcement.
Politicizing the SEC isn’t good for anyone. The market demands a level playing field. That the SEC terms some actors as worse than others is not good public policy. Everyone should get the same treatment, neither better nor worse.
