Idea of the Week: SEC Suspends Implementation of Credit Rating Expert Liability with Respect to New Asset-Backed Securities
Jul 30, 2010
Just one day after the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the Securities and Exchange Commission (SEC) issued a six-month moratorium on one of the provisions of the Act related to credit rating agencies. The Dodd-Frank Act rescission of the exemption from expert liability previously afforded to credit rating agencies under Rule 436(g) threatened to halt securitizations for credit cards, asset-backed securities, and student loans. Immediately upon passage, the leading credit rating agencies refused — citing liability concerns — to provide the necessary consents for ratings to be included, as required by law, in registration statements. The SEC quickly suspended for six months the requirement that registration statements for certain securitizations include ratings. The SEC set forth this action in a published series of Compliance and Disclosure Interpretations (C&DIs), which can be found here.
Representatives of the rating agencies and key financial institutions that securitize asset-backed securities remain engaged with the SEC’s Division of Corporate Finance to find a permanent resolution of this issue. The SEC staff strongly signaled that they do not intend to make this suspension permanent, stating that they expect all market participants to use the six month reprieve to develop practices to comply with the law. Some market experts believe issuers may avoid public markets altogether in response to these concerns, relying on private placements or 144a transactions, which can be marketed only to sophisticated buyers.