Dodd’s Bill Allows Credit Rating Agencies To Be Sued

Senator Christopher Dodd’s (D-CT) financial industry regulation reform bill was rolled out without too many surprises. However, the bill does include a provision that would, for the first time, allow credit rating agencies to be sued for “a knowing or reckless failure to conduct a reasonable investigation of the facts or to obtain analysis from an independent source.”

Deven Sharma, president of Standard & Poor’s, voiced two objections to the draft legislation.  He maintains that the agencies would be subjected to new discriminatory liability standards that would not apply to other market participants, such as accountants and security analysts. This, he argues, could lead to frivolous lawsuits, limit access to capital and delay a full economic recovery.

Second, Mr. Sharma maintains that the language encourages lawsuits against rating agencies whenever ratings change. The bill ignores that ratings may change because of “unforeseen economic developments, technological advances, new regulations or management changes.” In an opinion piece in USA Today, Mr Sharma writes, “Investors want rating agencies to provide updated analysis, and this provision would hamper their willingness and ability to do so.”  Dodd should pull this provision.  Sharma is right.  Investors don’t have to listen to S&P.  This will open the lawsuit floodgates on the NRSROs.  If Dodd wins, ratings will be so cautious as to be valueless.

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