2006, Congress passed the Credit Rating Agency Reform Act (Act), which intended to improve credit ratings by fostering accountability, transparency, and competition. The Act established Securities and Exchange Commission (SEC) oversight over Nationally Recognized Statistical Rating Organizations (NRSRO), which are credit rating agencies that are registered with SEC. The Act requires GAO to review the implementation of the Act. This report (1) discusses the Act's implementation; (2) evaluates NRSROs' performance-related disclosures; (3) evaluates removing NRSRO references from certain SEC rules; (4) evaluates the impact of the Act on competition; and (5) provides a framework for evaluating alternative models for compensating NRSROs. To address the mandate, GAO reviewed SEC rules, examination guidance, completed examinations, and staff memoranda; analyzed required NRSRO disclosures and market share data; and interviewed SEC and NRSRO officials and market participants.

Securities and Exchange Commission: Action Needed to Improve Rating Agency Registration Program and Performance-Related Disclosures

Current and future issues in the global accounting/consulting, business opportunity, and credit rating agency (CRA) industries can have significant multiplier-effects on international trade, sustainable growth, and compliance (as physical phenomena). These three industries are among the most international and human-capital-intensive of all service industries. In these industries, analysis of business models and industry dynamics can provide insights about how human-computer interaction (HCI) and contract theory affect the evolution of financial market ecosystems and cross-border information flows, and how business models, work-allocation mechanisms, and liability allocation can evolve to manage change. An often-overlooked issue is that non-performing loans (NPLs), sustainability, and CRA efficiency can be significantly affected by business processes, corporate strategy, and HCI in industry ecosystems, multinational corporations (MNCs), and economic systems. Complex Systems and Sustainability in the Global Auditing, Consulting, and Credit Rating Agency Industries compares these three industries and introduces theories of public policy and “inter-business” processes. The book links industry structure, complex systems (including networks), behavioral game theory, structural changes, and antitrust problems to sustainability and the efficiency of pollution-remediation systems. The book introduces new “informal algorithms” and business/resource-allocation models that solve social-choice problems, and also contravene “impossibility theorems” that are at the core of modern computer science and mechanism design. This book is essential for professors and masters/PhD-level students and employees (in industry, financial services, research institutes, consulting firms, and government agencies) who are interested in industrial mathematics and theoretical computer science.

Emerging Markets and Sovereign Risk provides case studies, commentary and analysis on the financial risk management and measurement in the context of frontier and developing counties from international experts covering three key areas of emerging market investments, the rating sovereign risk and managing sovereign risk.

The SEC's proposal that rating agencies be required to disclose 100% of their ratings actions in a publicly accessible format is a step in the right direction, especially in light of the dominant rating agencies' claims that their issuer-pays business model is justified on the ground that it facilitates public availability of ratings. The Commission should consider further steps, including (1) reduction of rating-dependent regulation - a proposal it took up and has apparently tabled or abandoned; (2) a regime that directly hold rating agencies accountable for their rating quality; and (3) alternatives to the issuer-pays business model. Although it may be the case that conflicts presented by issuer-pays can be managed effectively, as the dominant rating agencies claim, it would be irresponsible for the Commission not to engage in a rigorous and detailed analysis of the pros and cons of this business model, which it possesses the statutory authority to ban outright.