"Credit Rating Agencies: Out of Control and in Need of Reform” – Institutional Investors’ Important Role to Ensure Meaningful Change

July 8, 2009

In the most recent issue of Andrews' Securities Litigation & Regulation Reporter (Thomson/Reuters), BLB&G partner Blair Nicholas and associate Ian Berg offer their commentary: “Credit Rating Agencies: Out of Control and in Need of Reform. ” The article details the pervasive role that credit rating agencies play in the financial markets and how their expanding, quasi-governmental powers and judicial protection from civil liability helped set the stage for the recent financial meltdown.

Specifically, the article examines the inherent conflicts of interest created by a system where credit rating agencies are being paid hundreds of millions of dollars by the companies and issuers of the securities being rated, in what has become a $5 billion industry dominated by only three companies – Moody’s, S&P and Fitch. Ultimately, the current system incentivizes credit rating agencies to abandon objectivity for profit. As stated by a former credit rating agency official, “Profits were primary, analytics were secondary.”

Recently, the SEC issued a report confirming that the rating agencies failed to adequately manage these conflicts of interests. It has now become clear to regulators and investors that reform is necessary. Nicholas and Berg present a concise and critical review of the proposed remedies and reforms currently being considered to prevent a reoccurrence in the future, covering compelling ideas from the current administration, as well as other influential state regulators and executives of the ratings agencies themselves. Change is clearly in the works, but it remains to be seen exactly what meaningful changes will take place.

Additionally, the authors highlight the need for institutional investors to provide input and actively support meaningful reform while outlining the impact of these potential reforms on the institutional investor community. For the full text of “Credit Rating Agencies: Out of Control and in Need of Reform,” click here.

Download: "Credit Rating Agencies: Out of Control and in Need of Reform” (PDF, 178.18 K)