Credit rating agenies would lose their protection against private lawsuits under current U.S. securities fraud law if a proposal by an institutional investors group becomes law.
The Council of Institutional Investors (CII) has released a white paper on the regulation of credit rating agencies that calls for stronger oversight and accountability for credit raters.
The group is calling on Congress to:
Enhance oversight by creating a new Credit Rating Agency Oversight Board or supplementing the authority of the Securities and Exchange Commission (SEC) to substantively regulate rating agency practices – including disclosure, conflicts of interest and rating methodologies – and reduce reliance on ratings.
Remove rating agencies’ exemption from liability under the Securities Act of 1933 and make Nationally Recognized Statistical Rating Organizations (NRSROs) subject to private rights of action under the anti-fraud provisions of the securities laws.
“Credit rating agencies helped to fuel the global credit crisis by failing to take steps to ensure that their ratings of structured financial products were accurate,” said Gregory Smith, general counsel of Colorado Public Employees’ Retirement Association and a Council board member. “Stronger oversight and real accountability for their actions will help restore the creditability of these financial gatekeepers.”
Smith chairs the CII’s Subcommittee on Credit Rating Agencies.
The group said it commissioned the white paper to elicit the pros and cons for investors of reforms that have been proposed for rating agencies designated as NRSROs. The views expressed in the paper do not necessarily represent the views or opinions of all CII members.
The paper, “Rethinking Regulation of Credit Rating Agencies: An Institutional Investor Perspective,” was written by Frank Partnoy, George E. Barrett Professor of Law and Finance and director of the Center on Corporate and Securities Law at the University of San Diego School of Law. The group said the views and opinions expressed in the paper do not necessarily represent the views or opinions of all CII members.
CII is a nonprofit association of public, union and corporate pension funds with combined assets that exceed $3 trillion.