Credit Rating Agency Reform A Review of Dodd-Frank Section 933(b)’s Effect (or Lack Thereof) Since Enactment

Abstract

Credit rating agencies have come under increased scrutiny since the global financial crisis of 2007–2008, and they have been recognized as holding a key gatekeeping role in the capital markets. As such, an entire subtitle of the comprehensive Dodd-Frank Act—Subtitle C of Title IX—is dedicated to rating agency reform. In particular, given the importance of private enforcement in the overall regulatory framework, the language of Section 933(b) is especially promising, as it relaxes the scienter requirement for complaints filed as part of private class action suits against rating agency defendants. Indeed, that section received specific attention immediately following the passage of the Dodd-Frank Act for its potential to effect reform.

Using a framework of policy and economic considerations, this Note analyzes the theoretical effectiveness of Dodd-Frank Section 933(b) in comparison with its actual effect since enactment. The discussion explores potential explanations, both intrinsic and extrinsic to the legal system, for why the observed effect of the provision has thus far fallen short of expectations. The analysis suggests that rating agencies have reacted to Section 933(b) by adopting generic provisions in their respective codes of conduct stipulating compliance, greatly decreasing the efficacy of the provision in private securities litigation in light of pleadings standards that have become increasingly stringent over the past decade. The Note concludes by proposing potential solutions to this inefficacy.