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Conclusions about CRA and Dodd-Frank

The success or failure of the Dodd-Frank Act will be ultimately judged by history and the impact that it has with combatting some of the problems that have existed with credit rating agencies both before and after the financial crisis of 2008. Already critics have been quick to condemn the act for the perceived over burden that it places on the credit rating agencies or for what others feel is too little regulation that does too little to prevent the evils of the past four decades. Through the research and analysis involved with paper, however, we have come to several conclusions about how the law can be made more effective or where potential shortcomings exist despite its overall intent to promote fairer dealing and more transparency among the agencies.

First, although it is clear that the Act gives greater power and authority to the regulatory bodies and particularly the SEC, it does not mandate a greater allocation of resources to the department to ensure compliance and enforcement of these rules. This could potentially be a major shortcoming of the legislation as without the necessary tools to guarantee enforcement, the provisions of the Act carry little deterrent for malfeasance. With the broad expansion of power and the creation of the new Office of Credit Ratings, Congress needs to also ensure the SEC is adequately equipped to deal with the new challenges that it has been presented with. In order to achieve the lofty goals that the Act sets out to achieve, Congress should increase the size of the SEC and devote more manpower toward combatting the problems that it faces.

Second, although great effort is taken in the Act to ensure good corporate governance and reduce conflicts of interest, very few specific provision elaborate on the details on how these goals are to be specifically achieved. While the Act defines the conduct that the Congress wants to promote, ultimately the methods for greater internal control and reducing conflicts of interests are left to the discretion of the credit rating agencies. This places a lot of trust in the very agencies where the problems originated and it is questionable whether they will do an efficient job of policing themselves. Even though government oversight does exist over their methodology, the Act does not define any specific timetables for correction if deficiencies are found, nor penalties for repeat offenders. Although presumably the SEC will better elaborate on these rules, this could be another potential shortcoming of the Act.

Finally, even though the Act tries to address the conflicts of interest and potential for abuse through its’ various provisions, it does little to solve the underlying problem: ultimately it is the issuers of these securities who are paying and funding the credit rating agencies. These issuers are repeat customers of the rating agencies and the Act does little to address payment to the rating agencies. Although greater controls are put into place and attempts to separate the sales and marketing functions of the credit rating agencies from the actual rating divisions are made, this principal conflict of interest still exists. As such, it would appear that the underlying problem still exists. Perhaps with greater resources and oversight, the SEC will address the conduct the government wishes to deter. However, the main problem with the system still exists.

In conclusion, I believe there is a lot of good movement forward and that the Act, if enforced with the vigor that was intended, will be successful in reducing the behavior that partially contributed to the financial crisis of 2008. The regulations imposed are good ones, and created added liability for credit rating agencies (particularly the private right of action) will likely serve as a strong backstop for risky behavior. However, it is important that this new level of red tape and oversight be given equal resources to ensure the enforcement of these provisions. One of the other contributors of the financial crisis was an understaffed and overworked SEC and the government must be given the necessary tools to ensure proper behavior. No piece of legislation is perfect; however, this represents a good first step toward tackling some of the historic problems with these credit agencies. Ultimately, I hope that this will be enough to prevent future malfeasance and to restore some stability the credit rating system.

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