Standing accused of playing a key role in fuelling the global
financial crisis, rating agencies have come under close scrutiny by
legislators in the US culminating in the House of Representatives’
Financial Services Committee’s passing of the Accountability and
Transparency in Rating Agencies Act in October.
Though the Act must pass through the final legislative process,
overwhelming bipartisan support in the committee means it is very
likely it will become law.
“The Accountability and Transparency in Rating Agencies Act aims to
curb the inappropriate and irresponsible actions of credit rating
agencies which greatly contributed to our current economic
problems,” commented the committee’s chairman Paul Kanjorski.
“This legislation builds on the Administration’s proposal and takes
strong steps to reduce conflicts of interest, stem market reliance
on credit rating agencies, and impose a liability standard on the
agencies,” he added.
Among the act’s features are:
• Increasing accountability of rating agencies by enabling them to
be sued by individuals;
• Requiring rating agencies to have a board with at least one-third
independent directors focused on preventing conflicts of
• Oversight of rating agencies by the Securities and Exchange
• Requirements designed to mitigate the conflicts of interest that
arise out of the issuer-pays model for compensating rating
• Significant enhancement of responsibilities and accountability of
credit rating agency compliance officers.
In addition, the act contains “revolving-door protections” which
require that when certain rating agency employees go to work for an
issuer, that the rating agency conduct a review of ratings in which
the employee was involved over the past year to ensure that its
procedures were followed and proper ratings issued.
Across the Atlantic the US legislation has a parallel in a
regulation adopted by the Council of the European Union (EU) on 27
July 2009. Similar to the US legislation the EU regulation is aimed
at ensuring that credit rating agencies avoid conflicts of interest
in the rating process, improve quality of methodologies used and
adhere to specified disclosure obligations.