U.S. Mulls Liability Standards for Credit Rating Firms

September 14, 2009

U.S. securities regulators are roughing out ideas that would make Moody’s Corp., Standard & Poor’s and other credit raters more accountable to investors by potentially exposing the firms to greater legal
liability.

The Securities and Exchange Commission is expected to issue a general discussion paper Thursday that questions whether credit rating agencies should be regulated as “experts” under securities law, and thus subject to a tougher liability standard.

Currently, the rating agencies are not considered experts. They have argued that they are exempt from these rules because they are only providing an opinion and are protected by free speech laws.

Meanwhile, others such as auditors that companies use and cite in their public filings are considered experts and can be sued by investors. Other experts include engineers that oil and gas companies rely on to determine the amount of resources in the ground.

The SEC’s general discussion paper, also known as a “concept release” among securities lawyers, can be the first step in the agency’s rulemaking process. However, some past discussion papers have been abandoned with no action.

Moody’s, Fimalac SA’s Fitch Ratings and S&P, a unit of McGraw-Hill Cos. Inc., have been blamed for contributing to the financial crisis by not doing enough due diligence on securities linked to shoddy mortgages.

Many lawmakers are outraged by how the rating agencies performed and want to make them more accountable.

Legislation has been introduced in the U.S. Senate that would allow investors to sue credit rating agencies that recklessly failed to review key information in developing a rating.

he bill aims to hold rating agencies liable when it can be proven that the firms knowingly failed to review data for determining a rating based on their methodology or failed to reasonably verify data.

he SEC’s concept release will ask the public to comment on whether deeming credit agencies as experts would improve investor protection, whether it would impede capital raising and what kind of impact it would have on rating agencies’ business, among other things.

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