Regulating Credit Rating Agencies

At the SEC open meeting on November 19th, there will be a discussion about regulation of credit rating agencies. So begins another chapter in the checkered history of the SEC's attempts to regulate these entities. In 1975, the SEC created the "concept" of the Nationally Recognized Statistical Rating Organization (NRSRO), but it didn't bother to define the term. Later that year the agency was asked, in a no-action letter, which agencies qualified as NRSROs. It named Moody's, S&P and Fitch (Coughlin & Company, Incorporated, 12/25/75, 1975 WL 10745). In the intervening years six other rating agencies received no-action recognition of their NRSRO status.

At the same time, the SEC issued a stream of rule proposals that went nowhere. A 1994 concept release (Release No. 34-34616, 1994 WL 469346) suggested a definition for NRSRO, but the resulting rule proposal was never adopted (Release No. 34-39457, 1997 WL 777260). After the Enron unpleasantness, Congress got involved. Section 702 of Sarbanes-Oxley ordered the SEC to study the role played by rating agencies. The mandated report led to a 2003 concept release, which led to a 2005 proposal which was also never adopted. Congress intervened, again. The Credit Rating Agency Reform Act of 2005 (CRARA, PL 109-291) added definitions of "credit rating agency" and NRSRO to section 3 of the '34 Act. CRARA also did away with the no-action letter approval process. In June of 2007, the SEC finalized implmenting rule 17g-1 and created form NRSRO.