November 5th, 2010
Mary Schapiro, Chairwoman
The Securities and Exchange Commission
Washington, DC 20549
Re: Regulation of Credit Rating Agencies under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
Dear Ms. Schapiro:
We write on behalf of Americans for Financial Reform, a coalition of over 250 national, state, and local groups working together to reform the financial industry. Members of our coalition include civil rights, community, and religious organizations, as well as advocacy groups for investors, retirees, and consumers.
We write to encourage the Commission to ensure the enforcement of key Dodd- Frank Wall Street Reform and Consumer Protection Act provisions relating to liability of nationally recognized statistical ratings organizations (“NRSROs”).
Historically, issuers of debt securities have included credit ratings in registration statements, prospectuses, term sheets and press releases to market offerings and raise capital with debt. In the case of registered offerings of some bonds, notably those backed by consumer loans, the law generally requires that issuers include credit ratings from NRSROs in their official documentation such as registration statements and prospectuses.
Before the passage of the Dodd-Frank Act, NRSROs were effectively sheltered from liability for even egregious misconduct. Rule 436(a), promulgated under the Securities Act of 1933 (the “Securities Act”), requires issuers to file consents from experts whose reports were used in registration statements or prospectuses. However, Rule 436(g) specifically excluded NRSROs from the definition of experts—an exemption that precluded private litigants from bringing suit against NRSROs under Section 11 of the Securities Act.
One important achievement of the Dodd-Frank Act was to ensure that NRSROs would be subject to the same standards of liability as other key players in the financial sector. In Section 931 of the Act Congress found that:
Because credit rating agencies perform evaluative and analytical services on behalf of clients, much as other financial “gatekeepers” do, the activities of credit ratings agencies are fundamentally commercial in character and should be subject to the same standards of liability and oversight as apply to auditors, analysts, and investment bankers.
In furtherance of this goal, the Dodd-Frank Act repealed Rule 436(g). Now NRSROs are considered experts for the purposes of Rule 436(a), and consequently may be found liable for misstatements in connection with such registration documents, just as any other expert can be.
Despite the fact that SEC disclosure rules and regulations generally require that a registration statement or prospectus include actual or expected ratings, in response to the repeal of Rule 436(g), the three largest NRSROs refused to consent to the inclusion of ratings information without the opportunity for the ratings agencies to “further review” the companies issuing the subject debt securities. This action effectively shut down the market for asset-backed securities and led to a temporary halt in the issuance of a number of offerings.
In response, on July 22, 2010, the SEC issued a temporary “no-action” letter allowing rating information to be omitted from prospectuses relating to offers of asset-backed securities for six months. While this no-action letter stemmed the immediate crisis that had been precipitated by the NRSROs themselves, it did little to ensure industry compliance with Congress’ intent to hold NRSROs to a higher standard.
AFR urges that the SEC ensure that the NRSRO liability provisions in the Dodd-Frank Act not be circumvented by the further extension of the temporary “no-action” letter. Rather, the Commission should seriously consider alternative measures that will ensure orderly markets while protecting the integrity of the credit ratings through strong liability standards.
Americans for Financial Reform