On June 28, 2010, the House and Senate conferees approved the financial regulatory reform conference report (known as the “Dodd-Frank Wall Street Reform and Consumer Protection Act”), and on June 30, 2010, the House approved a bill that has almost was almost identical to the conference report, except for a change in the so-called “pay-for” amendment (as discussed here). The Senate is now poised to vote on the legislation. The final version of the bill includes provisions that are intended to significantly improve the regulation of credit rating agencies (see Title IX, Subtitle C, starting on page 135 of this PDF version of Title IX).

Congressional Findings

Unlike many of the other areas in the regulatory reform bill, the improvements to the regulation of credit rating agencies begins with a section describing Congress’s findings regarding credit rating agencies. These findings seem intended to explain and justify the significant changes that Congress is making in the regulation of credit rating agencies. Specifically, Congress indicates that because credit ratings and the reliance placed on credit ratings are systemically important the activities of credit rating agencies, including nationally recognized statistical rating organizations (“NRSROs”), are a matter of public interest, because their activities are central to capital formation, investor confidence, and the efficient performance of the U.S. economy. Further, credit rating agencies play a “gatekeeper” role, similar to securities analysts and auditors, and this role justifies a similar level of public oversight and accountability, as well as the same standards of liability. Finally, the ratings on many structured financial products have turned out to be inaccurate, and these inaccuracies have adversely affected the health of the U.S. and world economies, which necessitates increased accountability on the part of credit ratings agencies. (more…)