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May 24, 2022

SEC Must Do More To Reform the Corrupt, Conflict-Ridden Credit Ratings Process Before It Fuels Another Crisis and Crash

Why It Matters. 

Even before the 2008 financial crisis, when wildly inflated credit ratings played a central role in nearly destroying the U.S. financial system and economy, we knew that corrupted ratings could have a profound and destructive impact on our markets.  The Dodd-Frank Act called for a series of reforms to make the credit rating industry more transparent, accountable, and above all, less prone to intense conflicts of interest that inflate ratings in the pursuit of profits.  This Proposal will finally complete one of those reforms, the process of removing references to credit ratings from the SEC’s regulations, and it will play its part in making sure that regulators don’t rely on inflated or conflicted ratings as benchmarks, in this case in Regulation M.

Regulation M is a set of rules designed to protect the pricing integrity of the securities markets by prohibiting issuers, selling security holders, distribution participants, and any of their affiliated purchasers from engaging in activities that could artificially influence the market for an offered security. The exceptions in Regulation M have for years hinged on credit ratings, but Congress required the SEC to remove all references to ratings in its rules to prevent the corrupting effects of inaccurate ratings and to spur independent credit analysis.

What We Said. 

In our letter, we support the Proposal, while calling upon the SEC to fortify its approach to the use of credit risk models.  More broadly, we call upon the SEC to tackle all of the regulatory challenges that still surround credit ratings.   Reform of the credit rating world is nowhere near complete, and until it is, we face a constant risk that as our markets encounter increasing stresses and strains, flaws in credit ratings will surface once again as major sources of instability, necessitating another round of taxpayer bailouts to protect our financial system from collapse.”

Bottom Line. 

This proposal is perhaps most important as a reminder of all the unfinished business the SEC must undertake to fix a long list of enduring weaknesses in the oversight of the credit rating industry.  The SEC must do its utmost to solve the perennial problem of flawed and conflicted credit ratings once and for all, as Congress required.

Read our full Comment Letter here or click the button below.


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