On Regulating Conflict of Interests in the Credit Rating Industry

79 Pages Posted: 27 Apr 2010

See all articles by Lynn Bai

Lynn Bai

University of Cincinnati - College of Law

Date Written: May 1, 2010


This paper discusses issues giving rise to conflict of interest concerns in the credit rating industry and examines whether and how those issues are addressed in the current regulation that builds on the guidelines of the Credit Rating Agency Reform Act of 2006, the SEC rules that were initially adopted in 2007 and recently amended in 2009, and the internal code of conducts of rating agencies. The examination leads to a conclusion that conflict of interest at the individual rating analyst level and some concerns of conflict of interest at the agency level have been largely addressed in the current regulation, but conflict of interest arising from the issuer-pay business model and influences of large subscriber clients of rating agencies remains a concern. To address this concern, the paper proposes changes to the current regulation to enhance ex-ante risk disclosure and sharpen ex-post performance reporting requirements.

Keywords: credit rating agencies, conflict of interest, regulation

JEL Classification: K23, K29

Suggested Citation

Bai, Lynn, On Regulating Conflict of Interests in the Credit Rating Industry (May 1, 2010). New York University Journal of Legislation and Public Policy, Vol. 13, 2010, U of Cincinnati Public Law Research Paper No. 10-17, Available at SSRN: https://ssrn.com/abstract=1594462

Lynn Bai (Contact Author)

University of Cincinnati - College of Law ( email )

P.O. Box 210040
Cincinnati, OH 45221-0040
United States
513-556-0194 (Phone)

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