NRSRO Nullification : Why Ratings Reform May Be in Peril
NRSROs (or nationally recognized statistical rating organizations) are those ten credit rating agencies, such as Moody’s, S&P and Fitch (the Big Three), that are registered with and regulated by the Securities and Exchange Commission. In the wake of the financial crisis of 2008, Congress found that one of the root causes of the crisis was inaccurate NRSRO credit ratings on structured finance products. While Congress sought to address this problem in July 2010 as part of the Dodd-Frank Act, it omitted to close a significant loophole: the right of the NRSROs to opt out of the regulatory regime at will. This voluntary withdrawal right threatens to undermine, if not completely nullify, ratings reform. This poses a serious problem because its exercise by the seven smallest NRSROs would return the regulated club to only the Big Three while its exercise by the whole group would precipitate de facto deregulation. Either result would deprive society of a regulatory mechanism to effectively promote accurate and reliable ratings. I refer to the exercise of this right as “NRSRO Nullification.” This Article identifies and discusses the financial and reputational implications that today’s most critical unresolved items – the Franken Proposal and the new standards of creditworthiness – and existing distinctions based on NRSRO status will have on the exercise of this right. It also assesses the legal implications of NRSRO Nullification. To promote accurate and reliable ratings and prevent NRSRO Nullification, I argue for the creation of an investor-controlled “rater” of the NRSROs without the power to allocate ratings business. I theorize that rating the NRSROs will cause investment fiduciaries to demand an interest rate premium from issuers who hire NRSROs that the "rater" deems to be poor performers. I also suggest a rule that investment fiduciaries certify agreement with the rater's methodology for rating the NRSROs or publicly explain their reasons for disagreeing. The intent is to motivate issuers to hire those NRSROs that the investment community believes are the best performers. Under this proposal, it would not be necessary to close the voluntary withdrawal loophole through a mandatory registration requirement, though this possibility is also considered
Year of publication: |
2012
|
---|---|
Authors: | Parsont, Jason W. |
Publisher: |
[S.l.] : SSRN |
Saved in:
freely available
Extent: | 1 Online-Ressource (73 p) |
---|---|
Type of publication: | Book / Working Paper |
Language: | English |
Notes: | In: Brooklyn Law Review Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments April 27, 2012 erstellt |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10014180306
Saved in favorites
Similar items by person
-
Crowdfunding : The Real and the Illusory Exemption
Parsont, Jason W., (2015)
- More ...