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Opinion

Dodd-Frank: Bill in a china shop

In trying to make rating agencies liable for their structured finance opinions, Dodd-Frank could end up killing off the US ABS industry altogether.

It is ironic that the latest regulatory consequence of the failure of the credit rating agencies to accurately assess the risk inherent in many structured finance products is that in future their opinions are to be treated as those of experts, whereas before they were not. This development is part of the final version of the Dodd-Frank legislation and goes to the root of the market’s misinterpretation – wilful or otherwise – of what ratings actually mean.

Under Rule 436(g) of The Securities Act (which Dodd-Frank will repeal) credit ratings are not considered part of a registration statement prepared or certified by an expert. This has been just fine with the rating agencies as it exempts them from expert liability if those ratings turn out to be wrong.

But all that will now change. Regulation AB has already stated that the inclusion of ratings in a prospectus is mandatory if the sale of securities is contingent on them achieving said rating. By treating credit ratings as expert opinions, Dodd-Frank will make sure that the rating agencies are potentially exposed to expert liability under section 11 of the Securities Act when those ratings are included.

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