Credit rating agencies and conflicts of interest

Credit rating agencies are controversial yet influential financial gatekeepers. Many have attributed the recent failures of credit rating agencies to conflicts of interest, such as the agencies’ issuer-pays business model and the agencies’ provision of ancillary services. This report identifies these conflicts; examines recently-finalized Security and Exchange Commission (SEC) regulations proscribing these conflicts; and suggests other possible regulatory measures. The strategies available to regulators are diverse and differ widely in their political and administrative feasibility. These strategies include outright prohibition of conflicts; removing regulatory references to credit ratings; enhancing agency liability; organizational firewalls; performance disclosures; demonstrating due diligence and its results; increasing competition; staleness reforms; internal governance; administrative registration; and requiring alternative business models. While the report primarily focuses on how the most recent financial crisis—and the related market for asset-backed securities—highlighted conflicts of interest at credit rating agencies, this report also examines how credit ratings—and their limitations—affect sovereign debt markets.