. . . The Big Three rating agencies—S&P, Moody’s, and Fitch Ratings—control approximately 95 percent of the industry, although there are small rating agencies like Kroll and Morningstar. They are typically paid by the issuers of the securities, a major conflict of interest that was identified during the financial crisis. Rating agencies may be inclined to give good ratings to the issuer that pays them, in the hopes of getting more business. An attempt to change the issuer-pays model during Congress’s crafting of Dodd-Frank failed miserably (link).

. . . One problem with getting accountability for rating agencies is an obscure decision made by the SEC in 2010. Ford Motor Credit (FMC) wanted to promote an asset-backed security without putting its credit ratings in their registration statement. This would have violated Section 939G of Dodd-Frank, but the SEC went along with it by issuing a “no-action” letter, essentially giving FMC and anyone else the ability to do this. By eliminating rating agencies from the registration statement, it removes their Section 11 liability, which allows investors to sue over misrepresentations or omissions in a registration statement.

Current SEC Chair Gary Gensler and the Division of Corporation Finance could withdraw that no-action letter unilaterally, without new rules. A bipartisan group of issue-based groups and analysts asked the SEC’s Division of Corporation Finance to withdraw the FMC no-action letter in 2022. A separate letter from experts was sent in 2023 urging the SEC to subject rating agencies to Section 11 liability. But the letter’s policy remains in effect.

This is why rating agencies largely escaped liability for the financial crisis, and why lawyers for investors see little way to hold rating agencies accountable for failures today.
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