Credit rating agencies in a post-Enron world: Congress revisits the NRSRO concept

Abstract

This paper gives an overview of the regulatory reforms in the US credit rating industry, most notably through the Credit Rating Agency Reform Act of 2006. The paper first explicates the developments that accelerated the regulatory reform in the credit rating industry and puts them in the broader context of the Sarbanes–Oxley Act of 2002. Next, the paper explains that the no-action letter NRSRO designation process has been replaced by a voluntary registration process that no longer has as essential criterion that a credit rating agency must be ‘nationally recognized’. The Securities and Exchange Commission (SEC) aims to improve the quality and integrity of the credit rating industry foremost by increasing competition between credit rating agencies, be it among existing credit rating agencies or be it through de novo entrants. Moreover, the SEC has been equipped with enforcement powers, which include the suspension and revocation of the NRSRO status. These powers may be put into effect, for example, when a credit rating agency does not comply with procedures regarding the prevention of the misuse of material non-public information, certain (prohibited) conflicts of interest, and other abusive practices. In addition, credit rating agencies are subject to (onsite) examination and extensive documentation retention and management programmes. While important barriers to de novo entry into the credit rating industry have been eliminated, it remains to be seen whether and to what extent increased competition in the credit rating industry will be realised and will have the desired effect of improving the quality and integrity of the credit rating industry. Given the influence of credit rating agencies in the capital markets and their regulatory responsibility as private-sector watchdogs, increased oversight of the credit rating industry is a necessary and laudable development. Credit rating agencies currently remain prominently in the spotlight of national, federal, and international securities regulators.