North Carolina Law Review

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Earning a "C"for Rulemaking: The Ambiguity and Potential Impact of a Recent SEC Rule Governing Nationally Registered Statistical Rating Organizations

March 26, 2015

93 N.C. L. Rev. Addendum 150 (2015)


Imagine the world's richest person, Bill Gates, and his more than $80 billion net worth. Now imagine 136 equally wealthy individuals, whose combined $11 trillion net worth would exceed the 2013 gross domestic product ("GDP") of every country in the world except for the United States. Finally, imagine that all of these individuals and their associated wealth very quickly disappeared, such that every person even remotely tied to them and their enterprises felt the ensuing negative repercussions. Such was the magnitude of the 2008 global financial crisis.


Nationally registered statistical rating organizations' ("NRSRO") actions exacerbated behavior that ultimately led to the 2008 financial collapse, and these entities have been subjected to additional regulation as the public has become more aware of the credit rating agencies' missteps. Most recently, the Securities and Exchange Commission ("SEC"), on August 27, 2014, promulgated rules pursuant to 2011's Dodd-Frank Wall Street Reform and Consumer Protection Act that established guidelines for credit rating agency behavior. A portion of one of these rules, specifically the second prong of the two-pronged addition of Paragraph (c)(8) of Rule 17g-5, "prohibits an NRSRO from issuing or maintaining a credit rating where a person within the NRSRO who participates in determining or monitoring the credit or rating, or developing or approving procedures or methodologies used for determining the rating.., is influenced by sales or marketing considerations." This broad definition of influence is a very vague restriction and will result in an uncertain and ambiguous regulatory landscape where the SEC could bring an action claiming that almost anything influenced a targeted analyst. For this reason, Rule 17g-5(c)(8) will not prove viable over the long run for legal and policy-related reasons. 


This Recent Development analyzes the rule's vulnerabilities and argues that the SEC would be wise to remove the ambiguity associated with this rule by issuing a formal clarifying statement that posits what specific behavior the rule covers.  



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