A Council of Institutional Investors white paper has called for Congress to create a credit-rating agency oversight board to provide stronger oversight of credit-rating companies, while also urging an end to the firms exemption from liability, making them subject to civil lawsuits under anti-fraud provision of securities laws.
The CII report also recommended a reduction in reliance on ratings.
The new board should have the power to regulate rating agency practices, including disclosure, conflicts of interest, and rating methodologies, as well as the ability to coordinate the reduction of reliance on ratings, said the paper, Rethinking Regulation of Credit Rating Agencies: An Institutional Investor Perspective. It was written by Frank Partnoy, George E. Barrett Professor of Law and Finance and director of the Center on Corporate and Securities Law at the University of San Diego School of Law.
Alternatively, Congress could enhance the authority of the Securities and Exchange Commission to grant it similar power to oversee the rating business.
The paper doesnt necessarily represent the views of CII members. Most of our members believe credit-rating agencies should be more accountable and have more oversight, Amy Borrus, CII deputy executive director, said in an interview. Other than that, their views are all over the place. We dont have a policy on the issue of credit-rating oversight.
Credit-rating agencies helped to fuel the global credit crisis by failing to take steps to ensure that their ratings of structured financial products were accurate, Gregory Smith, general counsel of $36.6 billion Colorado Public Employees Retirement Association, Denver, and a council board member, said in a CII statement about the paper. Stronger oversight and real accountability for their actions will help restore the creditability of these financial gatekeepers.
Given the critical role that rating agencies play in the financial marketplace, the council commissioned the paper to elicit the pros and cons for investors of reforms that have been proposed for rating agencies designated as nationally recognized statistical rating organizations, the CII statement said.
Mr. Smith chairs the councils subcommittee on credit-rating agencies. Messrs. Partnoy and Smith participated in the SECs public round table on rating agencies today.
The 21-page paper is available at http://www.cii.org/UserFiles/file/CRAWhitePaper04-14-09.pdf.