Best Comments on Impact of Dodd-Frank Act on Rating Agencies

July 23, 2010

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act has specific provisions applicable to rating agencies. A comment on the Act’s potential impact from A.M. Best notes that the legislation’s “far-reaching financial market reforms” contain provisions “aimed at enhancing regulation and transparency for credit rating agencies.”

Best said that it believes that many of the provisions, “directed toward credit rating agency reform will benefit the capital markets as a whole. However, the new law presents a host of new requirements and legal uncertainties that credit ratings agencies such as A.M. Best must now address.”

Best indicated that it is in the process of “carefully examining its current practices in light of the new requirements in the Act and will explore ways to ensure that it can fully meet the needs of the marketplace while effectively mitigating its risks under the new law.” Best added that it would take whatever “additional steps” might be required to “mitigate any potential risks associated with the new law.”

As an example, Best pointed out that the new law “rescinds Rule 436(g), thus exposing credit rating agencies to “expert” liability if they consent to be named as such in registration statements and related prospectuses.”

As a result Best said it would not “consent to the use of its ratings in registration statements and related prospectuses. The Act also exposes credit rating agencies to a lower pleading requirement in government and private lawsuits and modifies the ability of credit rating agencies to receive certain information of a material, non-public nature from issuers.”

Best added that it “believes that its long-standing internal controls and procedures are strong and fulsome, it will continue to work with its attorneys and the SEC staff to ensure that its policies effectively address the new requirements set forth in the Act.”

Source: A.M. Best

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