The Credit Rating Agency Reform Act () is a United States federal law whose goal is to improve ratings quality for the protection of

investors An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...

and in the public interest by fostering accountability, transparency, and competition in the

credit rating agency A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may ra ...

industry. Enacted after being signed by President Bush on September 29, 2006, it amended the

Securities Exchange Act of 1934 The Securities Exchange Act of 1934 (also called the Exchange Act, '34 Act, or 1934 Act) (, codified at et seq.) is a law governing the secondary trading of securities (stocks, bonds, and debentures) in the United States of America. A landma ...

to require

nationally recognized statistical rating organization A nationally recognized statistical rating organization (NRSRO) is a credit rating agency (CRA) approved by the U.S. Securities and Exchange Commission (SEC) to provide information that financial firms must rely on for certain regulatory purp ...

s (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 S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities. S&P is con ...

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 international ...

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 Financial crisis of 2007–2008, 2007–2008 global financial crisis. It was triggered by a large decline ...

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 Joseph Nocera (born May 6, 1952) is an American business journalist, and author. He has written for The New York Times since April 2005, writing for the Op-Ed page from 2011 to 2015. He was also an opinion columnist for Bloomberg Opinion. Early ...

. '' 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 The McClatchy Company, commonly referred to as simply McClatchy, is an American publishing company incorporated under Delaware's General Corporation Law and based in Sacramento, California. It operates 29 daily newspapers in fourteen states and ...

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".

Dodd–Frank Wall Street Reform and Consumer Protection Act The Dodd–Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd–Frank, is a United States federal law that was enacted on July 21, 2010. The law overhauled financial regulation in the aftermath of the Great Recessi ...

References

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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