Credit Rating Agency Reform Act
U.S. federal law / From Wikipedia, the free encyclopedia
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The Credit Rating Agency Reform Act (Pub. L.Tooltip Public Law (United States) 109–291 (text) (PDF)) is a United States federal law whose goal is to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating agency industry.[1]
Enacted after being signed by President Bush on September 29, 2006,[1][2] it amended the Securities Exchange Act of 1934 to require nationally recognized statistical rating organizations (NRSROs) to register with the Securities and Exchange Commission (SEC).[2][3][4]
Critics had complained that the dominance of "the big three" rating agencies – Standard & Poor's Ratings Services, Moody's Investors Service and the smaller Fitch Rating—were in part responsible for the subprime mortgage crisis of 2006–8.[5] The agencies rated 98% of the trillions of dollars of home-mortgage oriented "structured investment" products. Hundreds of billions of dollars' worth of securities given the agencies highest—triple-A—rating were later downgraded to "junk" status,[6][7][8] and the writedowns and losses came to over half a trillion dollars.[9][10][11]
The Act permitted smaller, newer credit rating agencies to register as "statistical ratings organizations".[2][12] The intent of the U.S. Congress was to increase the choice for consumers by opening the market to a greater number of ratings agencies, and also to incent accurate and reliable ratings.[4][12]