Sam Brotman, JD, LLM, MBA January 15, 2014 5 min read

Rules for Credit Rating Agencies

Additional Rules for Credit Rating Agencies Under the Dodd-Frank Act

The Dodd-Frank Act also has some new rules for the credit rating agencies themselves with the goal of having better corporate governance and maintaining better internal control. First, the Act places more stringent requirements on the company’s board of directors and institutes are requirement for an independent board. Now, half the board members (but no less than two board members in instances where there is a three person board) must be independent of the credit rating agencies. Independence from the NRSRO is defined by statute as not participating or supervising the rating of a security or money market where the director has a financial affiliation with and also may not accept any sort of fee or payment for services from the credit rating agency in connection with their interest.

Board members also have newly defined responsibilities under the Act. They are required to specifically address the efficiency of the internal control system as well as safeguard against conflicts of interest. In addition, they ensure that policies are in place for determining the criteria used in ratings, the compensation structure for employees, and that those policies are enforced. The board also has new reporting requirements in connection with this new oversight. They must now submit annual reports to the SEC, signed and attested to by the CEO, detailing management’s efforts in these areas. Finally, the credit rating agencies, particularly the board, also have a new mandatory requirement to whistle blow in circumstances where they suspect or have credible information of law breaking by issuers, underwriters, and others associated with the process.

There are additional disclosure requirements imposed by the Dodd-Frank Act on the ratings themselves. Again, the goal with this is to produce greater transparency surrounding the ratings and the basis for the ratings. All ratings are required to be accompanied by a new form, which mandates disclosure in a variety of areas. In addition, credit rating agencies must now publicly disclose a variety of information surrounding their initial rating, and then must make separate and subsequent disclosures about changes in ratings. Furthermore, additional disclosures must be made with respects to third parties. The Act states that the “issuer or underwriter of any asset-based security will be required to make public any finding or report of third party due diligence that it obtains”.[1] These disclosure requirements also extend to the third parties themselves, who have additional although yet undefined disclosure requirements. These rules will be later formulated by the government agencies, including the SEC.

 

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[1] “Dodd-Frank Wall Street Reform and Consumer Protection Act: Credit Rating Agency Provisions.” http://www.orrick.com/fileupload/2822.htm. Last Accessed November 15, 2011

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
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