The Credit Rating Agency Reform Act () is a United States federal law whose goal is to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating agency industry. Enacted after being signed by President Bush on September 29, 2006, it amended the Securities Exchange Act of 1934 to require nationally recognized statistical rating organizations (NRSROs) to register with the

Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...

(SEC). Critics had complained that the dominance of "the big three" rating agencies – Standard & Poor's Ratings Services,

Moody's Investors Service Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides internationa ...

and the smaller Fitch Rating—were in part responsible for the

subprime mortgage crisis The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in US home prices after the col ...

of 2006–8. The agencies rated 98% of the trillions of dollars of home-mortgage oriented "structured investment" products. Hundreds of billions of dollars' worth of securities given the agencies highest—triple-A—rating were later downgraded to "junk" status, McLean, Bethany and Joe Nocera. '' All the Devils Are Here: The Hidden History of the Financial Crisis'', Portfolio, Penguin, 2010 (p.111) and the writedowns and losses came to over half a trillion dollars.Bloomberg-Smith-Bringing Down Ratings Let Loose Subprime Scourge
By Elliot Blair Smith , bloomberg.com, September 24, 2008Bloomberg-Smith-Race to Bottom at Rating Agencies Secured Subprime Boom, Bust
By Elliot Blair Smith , bloomberg.com, September 25, 2008 The Act permitted smaller, newer credit rating agencies to register as "statistical ratings organizations". The intent of the U.S. Congress was to increase the choice for consumers by opening the market to a greater number of ratings agencies, and also to incent accurate and reliable ratings.

Effectiveness of act

However, in the 12 months that ended in June 2011, the SEC found the big three still issued 97% of all credit ratings, down from 98% in 2007.Status quo for rating agencies
(chart of percentage of outstanding credit ratings reported to the SEC 2007 and 2011; and Moody's revenue and income 1996, 2000, 2010, 2012), mcclatchydc.com McClatchy Newspapers found that "little competition has emerged in rating the kinds of complex home-mortgage securities whose implosion led to the 2007 financial crisis". Critics have complained that the criteria to designate a rating agency as "a nationally recognized statistical rating organization" was written by a "yet-to-be-identified official of one of the big three ratings agencies" and is so difficult it has "prevented at least one potential competitor from winning approval and have dissuaded others from even applying". According to critics, the law has set "odd barriers that are very favorable to the incumbents," made it "exceptionally difficult for a younger player to qualify" as a SEC recognized agency, and "absolutely slammed the door on any new competition" in structured products—"the most lucrative part of the ratings business".

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External links

the ActUnited States Securities and Exchange Commission (SEC)
– Official site U.S. Securities and Exchange Commission Acts of the 109th United States Congress United States federal securities legislation Credit rating

Effectiveness of act

See also

References

External links