US and EU Soft Law: Self-Regulation

Abstract

The Big Three credit rating agencies (CRAs), Fitch, S&P and Moody’s, had in place their own ethical code of best practices, but it seems the regulators felt that in some respect they did not address the problem of gatekeeper failure, which had arisen as a result of conflicts of interest, lack of competition and lack of accountability. The basis for the foundations of the code of conduct introduced by the regulators after the crisis (whether through the International Organization of Securities Commissions (IOSCO) in the US and the EU) was the assumption that these regulations would go a long way to make CRAs responsible gatekeepers. “IOSCO’s Code of Conduct aims to improve investor protection, improve the fairness, efficiency and transparency of securities markets and to reduce systemic risk”. The IOSCO Code uses “comply or explain” principles that are based on a code of moral conduct. Those CRAs with nationally recognized statistical rating organization (NRSRO) status were compelled to adopt “soft law”—a code of conduct promulgated by IOSCO, as a global benchmark, based on the self-regulatory approach for industry oversight. Those CRAs without NRSRO status had to register with the regulators but were not required to adopt the IOSCO Code.