Way back in July, a few days after the Dodd-Frank financial regulation bill was signed by the President, a problem became clear. The bill's assertion that credit rating agencies should be held liable for their ratings was a little too hasty. The agencies view their ratings as mere opinions for which they don't want to be held liable. So they refused to allow their ratings to be included in asset-backed bond offering documents. Yet, such ratings are required to be included, by the Securities and Exchange Commission. So the market shut down until the SEC temporarily relaxed that requirement. Now, it appears that temporary fix is becoming permanent, effectively nullifying the new rule about rating agency liability from Dodd-Frank.
Although four months have passed since the SEC devised its temporary solution, neither the regulator nor Congress has devised a better one. Sarah Mulholland from Bloomberg reports:
The Securities and Exchange Commission indefinitely extended the timeframe for asset-backed bond issuers to omit credit ratings from marketing materials, effectively exempting companies from part of the U.S. Dodd-Frank financial reform act.
Pending further notice, the SEC won't recommend enforcement action if an asset-backed issuer doesn't include the ratings disclosure required by law, according to a letter today from Katherine Hsu, senior special counsel for the SEC.
This may, in fact, turn out to be a permanent solution. If it is, then that isn't so bad. If these ratings aren't a part of official deal documents, then investors won't be able to rely on them as legitimately. The spirit of rating agency reform shouldn't be to stick it to the agencies, but to strengthen market practices to be able to endure mistakes raters make. If investors are doing more of their own work to determine the quality of bonds, then this end should be met -- even if the agencies are never held liable for their ratings as the Dodd-Frank bill intends.
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