Credit rating agencies (CRAs) provide investors with what is presumed to be an informed perspective on securities' debt risk (also referred to as credit risk), the risk that issuers will fail to make promised interest or principal payments when they are due. The agencies provide judgments ("opinions") on the creditworthiness of bonds issued by a wide spectrum of entities, including corporations, nations, nonprofit firms, special purpose entities, and state and municipal governments. The judgments take the form of ratings that are usually displayed in a letter hierarchical format: AAA being the highest and safest, with lower grades representing an increasing scale of risk to the investor. In terms of market share, the three dominant CRAs are Moody's, Standard & Poor's (S&P, a subsidiary of McGraw-Hill), and Fitch (a subsidiary of FIMILAC, a French business services conglomerate); a number of smaller U.S.-based agencies also exist. Insufficient CRA Regulation. Various Responses to the Perceived Rating Agency Failings

There have been a variety of responses to the perceived failings of the rating agencies with respect to structured mortgage-backed securities. It however, also conceded that the distinction between providing feedback during the rating process and making recommendations could be a potential gray area; require an NRSRO or NRSRO applicant to provide rating change statistics for each asset class of credit ratings for which it is registered or is seeking registration, broken out over 1, 3, and 10 year periods; require an NRSRO to provide all rating change statistics (upgrades as well as downgrades) and disclose default statistics relative to the initial rating, including defaults that occur after a credit rating is withdrawn; require an NRSRO to provide enhanced disclosure in three areas: (1) whether (and, if so, how much) verification performed on assets underlying or referenced by the structured finance transaction is relied on in determining credit ratings; (2) whether (and, if so, how) assessments of the quality of originators of structured finance transactions play a part in the determination of the credit ratings; and (3) more detailed information on the surveillance process, including whether different models or criteria are used for ratings surveillance than for determining initial ratings; prohibit a person within an NRSRO who has responsibility in determining credit ratings or for developing or approving procedures or methodologies used for determining credit ratings from participating in any fee discussions, negotiations, or arrangements; prohibit an NRSRO from allowing a credit analyst who has participated in determining or monitoring the credit rating to receive gifts, including entertainment, from the obligor being rated or from the issuer, underwriter, or sponsor of the securities being rated, other than items provided in the context of normal business activities, such as meetings, that have an aggregate value of no more than $25; require an NRSRO to make publicly available on its corporate website a random sample of 10% of its issuer-paid credit ratings and their histories for each class of issuer-paid credit rating for which it is registered and has issued 500 or more ratings; require an NRSRO to keep records of all rating actions related to a current rating from the initial rating to the current rating. On September 17, 2009, the SEC continued its efforts toward NRSRO reforms by: 
adopting rules to provide greater information concerning ratings histories; adopting rules to enable competing CRAs to offer unsolicited ratings for structured finance products, by granting them access to the necessary underlying data for structured products; adopting amendments to the SEC's rules and forms to remove certain references to credit ratings by nationally recognized statistical rating organizations; reopening public comment to allow additional comment on SEC proposals to eliminate references to NRSRO credit ratings from certain other rules and forms; and proposing amendments aimed at strengthening NRSRO compliance by requiring annual compliance reports and enhance disclosure of potential sources of revenue-related conflicts. 4173 , which was passed in the House as amended on December 11, 2009. In the Senate, Chairman Christopher Dodd of the Senate Banking, Housing, and Urban Affairs Committee issued a single comprehensive committee print on November 16, 2009, the Restoring American Financial Stability Act of 2009. This original bill was amended in committee on March 22, 2010, and ordered reported to the Senate floor. H.R. It would strike references to "not investment grade" or to "ratings" or similar language in a number of federal statutes such as the Federal Deposit Insurance Act (which embodies the basic authority for the operation of the Federal Deposit Insurance Corporation, FDIC); the Investment Company Act of 1940 (which regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public); the National Bank Act (which established a system of national banks headed by the Comptroller of the Currency); and the Securities Exchange Act of 1934 and substitute language requiring the regulator instead to establish standards of creditworthiness. •    It would require NRSROs to disclose the primary assumptions used in constructing the procedures and methodologies for arriving at credit ratings. •    It would require NRSROs to have established internal controls over the processes used to determine credit ratings. Neither H.R. Both H.R. H.R. H.R. H.R.
Credit rating agencies (CRAs) are expected to provide investors with an informed and unbiased view on securities' debt risk (also referred to as credit risk), the risk that issuers will fail to make promised interest or principal payments when they are due. The agencies provide judgments ("opinions") on the creditworthiness of bonds issued by a wide spectrum of entities, including corporations, nonprofit firms, special purpose entities, sovereign nations, and state and municipal governments. They take the form of ratings that are usually displayed in a letter hierarchical format: AAA being the highest and safest, with lower grades representing an increasing scale of risk to the investor. The three dominant CRAs are Moody's, Standard & Poor's, and Fitch.
CRAs have been a fixture of securities markets since the 19th century; they predate federal regulation of the markets. The Securities and Exchange Commission (SEC) issues a designation of Nationally Recognized Statistical Rating Organization (NRSRO), which is important because a variety of laws and regulations reference their use. (For example, the amount of risk-based capital that banks must hold against a portfolio of securities is linked to ratings; and thrift institutions are not allowed to own bonds rated below investment grade.)
In recent years, many assert that the performance of the dominant rating agencies has been marked by a number of spectacular failures. Companies like Enron and WorldCom retained their high credit ratings until a few days before they filed for bankruptcy. More recently, many mortgage-backed securities initially rated AAA have defaulted or have been sharply downgraded. In both situations, investors who relied on the ratings suffered heavy losses. The SEC and other observers have criticized the three dominant CRA's ratings of mortgage-backed securities.
Between December 2008 and September 2009, the SEC adopted several reforms aimed at enhancing NRSRO disclosures, and mitigating NRSRO conflicts of interest, including a prohibition on NRSRO personnel involved in rating determination participating in fee discussions, negotiations, or arrangements; a requirement that each NRSRO and NRSRO applicant provide rating change statistics for each asset class of credit ratings for which it is registered or is seeking registration; an authorization for competing NRSROs to offer unsolicited ratings for structured finance products by granting them access to the necessary underlying data for structured products; and an elimination from federal securities regulations and laws certain references to credit ratings by NRSROs. On December 11, 2009, the House passed H.R. 4173. On March 22, 2010, the Senate Banking, Housing, and Urban Affairs Committee ordered reported out an amended version of the Restoring American Financial Stability Act of 2010, which had been released on March 15, 2010. The bill also contains rating agency reform provisions. Both H.R. 4173 and the Senate committee bill would require NRSROs to have established internal controls over the processes used to determine credit ratings, enhance the rights of entities to bring private actions against rating agencies for certain knowing or reckless failures in research with respect to rating determinations, and disclose the primary assumptions used in constructing the procedures and methodologies for arriving at credit ratings. Separately, H.R. 4173 would strike references to "not investment grade" or to "ratings" or similar language in a number of federal statutes, including the Federal Deposit Insurance Act; replace the term ''nationally recognized statistical rating'' with ''nationally registered statistical rating'' in the Securities Act of 1933 and the Securities Exchange Act of 1934; and require the removal of references by federal financial regulators and in certain federal laws. Other bills that would also provide for rating agency reforms include S. 927 (Pryor), S. 1073 (Reed), H.R. 1181 (Ackerman), H.R. 1445 (McHenry), and H.R. 2253 (Delahunt). This report will be updated as events dictate.