Proposed Legislation for NRSROs

By Lisa Valentine

Nationally recognized statistical rating organizations (NRSROs) are likely to face new regulatory oversight from the U.S. government. NRSROs have come under fire for failing to properly rate what wound up being highly risky subprime residential mortgages. Not only did the NRSROs assign ratings that were way too high, they also didn’t adjust these rates in the face of looming mortgage defaults. Detractors also charge NRSROs with unsavory business practices such as maintaining independence from the issuers and underwriters they were rating.

As a result, the NRSROs--Standard & Poors, Moody’s and Fitch (and the four other registered ratings agencies with names nobody remembers)--are facing proposed legislation that will impact their liability if they “knowingly or recklessly” violated the securities laws by not properly supervising or conducting sufficient ratings surveillance in determining their ratings.

In addition to allowing issuers to sue NRSROs, the rating agency would lose, either temporarily or permanently, their registration and preferred status with the government.

In a speech, Daniel Gallagher, Jr., Co-Acting Director of the SEC Division of Trading and Markets, noted that other countries are also looking at reining in their ratings agencies: the European Union recently passed new laws to govern credit rating agencies starting in 2010 and Japan is also gathering public comment on a new set of rules. It’s likely that Canada and Australia may follow suit, said Gallagher.