Washington Law Review


Frank Partnoy


Scholars and regulators generally agree that credit rating agency failures were at the center of the recent financial crisis. Congress responded to these failures with reforms in the 2010 Dodd-Frank Act. This Article demonstrates that those reforms have failed. Instead, regulators have thwarted Congress’s intent at every turn. As a result, the major credit rating agencies continue to be hugely profitable, yet generate little or no informational value. The fundamental problems that led to the financial crisis—overreliance on credit ratings, a lack of oversight and accountability, and primitive methodologies—remain as significant as they were before the financial crisis. This Article addresses each of these problems and proposes several solutions. First, although Congress attempted to remove credit rating agency “regulatory licenses,” the references to ratings in various statutes and rules, regulatory reliance on ratings remains pervasive. This Article shows that regulated institutions continue to rely mechanistically on ratings and demonstrates that regulations continue to reference ratings, notwithstanding the Congressional mandate to remove references. This Article suggests several paths to reduce reliance. Second, although Congress authorized new oversight measures, including an Office of Credit Ratings (OCR), that oversight has been ineffective. Annual investigations have uncovered numerous failures, many in the same mortgage-related areas that precipitated the financial crisis, but regulators have imposed minimal discipline on violators. Moreover, because regulators refuse to identify particular rating agencies in OCR reports, wrongdoers do not suffer reputational costs. This Article proposes reforms to the OCR that would enhance its independence and sharpen the impact of its investigations. Third, although Congress authorized new accountability measures, particularly removing rating agencies’ exemptions from liability under section 11 of the Securities Act of 1933 and Regulation FD, the Securities and Exchange Commission has gutted both of those provisions. The SEC performed an end-run around Dodd-Frank’s explicit requirements, reversing the express will of Congress. Litigation has not been effective as an accountability measure, either, in part because rating agencies continue to assert the dubious argument that ratings are protected speech. This Article argues that the SEC should reverse course and implement Congress’s intent, including encouraging private litigation.

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