Proposed Credit Rating Agency Regulation Requires Compromise

September 10, 2010 by · Leave a Comment
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.

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