Where are the Rating Agencies in the Financial Regulatory Overhaul?
posted by Frank Pasquale
Jonathan Stempel of Reuters notes that “rating agencies [were] largely spared” in the financial industry regulatory overhaul proposed by the Obama administration. Jonathan Macey of Yale critiques the oversight:
“The overall impact of existing and proposed regulatory changes on rating agencies is extraordinarily easy to summarize: They reward abject failure,” said Jonathan Macey, deputy dean of Yale Law School.
“Any credit rating agency that relies on an NRSRO rating [nationally recognized statistical rating organization pursuant to the Securities and Exchange Act of 1934], which is effectively a government subsidy, should be subject to lawsuits by investors,” he went on. “It should also be made clear to professional investors that it is not a defense or a sufficient discharge of their fiduciary duties to rely on credit ratings when assembling portfolios.”
Given my recent series of posts on the “public/private” divide, I was heartened to see Macey characterize the government licensure of rating agencies as a “subsidy.” As I noted in my 2007 post “From First Amendment Absolutism to Financial Meltdown?,” the agencies have used a “free expression” shield to protect against legal consequences for their incompetence, malfeasance, and conflicts of interests. Following the reasoning of FAIR v. Rumsfeld, Congress may be able to condition the “subsidy” of requiring investor reliance on ratings agencies’ work on ratings agencies’ willingness to give up First Amendment immunity from lawsuits.
Admittedly, Congress has gone in precisely the opposite direction in the recent past. In 2006, the Rating Agency Reform Act specifically prohibited the SEC from regulating the “substance of the credit rating or the procedures and methodologies.” We can only hope that current Congress is more serious about either really regulating this field, or getting out of the “implicit subsidy” business altogether.
June 19, 2009 at 8:27 am
Posted in: Corporate Finance, Economic Analysis of Law
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