Research On Legal Regulation Of Credit Rating Agency

As the "gatekeepers" and "quasi-regulators" of capital market, credit rating agencies should have the function on early warning of the risk and stabilizing financial market, nevertheless it not only failed to play its role in the subprime crisis, instead made the entire financial market more turbulent. From the role of credit rating agencies in this crisis, we can see that government regulation of credit rating agencies is inadequate; relying solely on industry self-regulatory system and government certification rating industry is unable to satisfy capital market development's regulatory requirements to credit rating agencies. Strengthen the construction of credit rating agencies supervision system have become the important subject to consummate financial supervision legal system in the period of post-crisis era.(In this paper, it analyze evolutionary changes and practical experience of the credit rating industry regulatory in some main developed countries, to clarify the main legal issues of regulation on credit rating, and provide relevant suggestion to the credit rating industry regulatory system in our country. The full text is divided into seven chapters.The first chapter is the basic theory of the credit rating, which is the theoretical basis of the full text. First, it define the concept and content of credit ratings, while clarify the characteristics and classification of the credit rating, then demonstrate the necessity of the existence of the credit rating industry from the economic angle. Further analyze the different nature of the credit rating agencies between stock market information intermediaries and relevant intermediaries, pointing out the different roles of credit rating institution, securities analysis institution and financial audits institution in transmission information, and therefore bear different legal responsibility correspondingly.The second chapter is based on the development of the evolution of the U.S. credit rating industry, in-depth analysis the changes of the U.S. credit rating industry regulatory system, in contrast to the "reputation capital theory" and the "regulatory license theory", give the reason of the necessity of the regulation of credit rating. That because the rating results are widely used in the financial regulation and financial regulators and investors over-reliance on the rating, the credit rating agency got a powerful voice, who has a quasi-regulatory status, in order to avoid the phenomenon of imbalance in the rights and responsibility, we should strengthen the supervision of rating agencies. Also due to the credit rating industry is a typical oligopolistic market, from improving market efficiency and reduce the total social cost perspective, the credit rating industry should be regulation. Also, due to the consistency of preferences, herd behavior of investors and the procyclicality of rating results, the rating volatility will have a direct impact on financial markets, and bring a domino effect, therefore it should maintain the market stable through government regulation. Then through comparative analysis of the recent changes in credit rating regulatory system of the major developed countries, such as United States, European Union, Australia, as well as the recommendations for improvement which issued by the Financial Stability Board, the International Organization of Securities Commissions and others, pointed out the similarities and the difference of the reform. Then suggested that under the present circumstances, self-regulation and market discipline can not work properly, a strict regulatory regime is appropriate for the rating industry is concerned, replacing the self-discipline supervision with legal regulation has become the trend of the industry regulation system.The third chapter point out that rating industry is a natural monopoly property industry, reputation capital and the over-reliance by regulatory constitute the main barriers to market access, after the early market competition, the rating industry gradually become an oligopoly situation,competitive dynamic is clearly insufficient and seriously affected the effect of the reputation capital binding mechanism. In response to this situation, it is appropriate to the industry that asymmetrical access control measures should be taken to narrow the gap between mainstream and non-mainstream operators between operators as soon as possible, to promote the formation of effective competition. It should also focus on the establishment of a scientific assessment of the quality rating system, eliminating the regulatory reliance on ratings, which accommodate the dual demands of both economies of scale and compete effectively of the rating industry. On this basis, analyzes the characteristics of American NRSRO system, and the European Union registered certification procedures, then briefly describes the recognized standards of the other countries.The fourth chapter analyzes the problems of conflict of interest which exists in rating industry, firstly analyses the causes of the conflicts of interest, then points out in particularly that the conflict of interest caused by the "issuer pay" model is magnified in structured finance product ratings, and regardless of rating analysts or the rating agencies are all faced with many unavoidable conflict of interest, so to avoid and manage conflicts of interest is the inevitable requirement to ensure the independence and impartiality of the rating, to improve the quality of ratings.Then compares the related rules of conflict of interest of the United States and the European Union legislation, and the pros and cons of three alternative plans for the "issuer pay" were analyzed.The fifth chapter studies the issue of information disclosure in the rating industry regulatory. Firstly, depth analysis of the main problems of information disclosure in the rating process of structured financial products. Considered that as an important part of the securities market, the design of information disclosure system in rating industry should insist on the dual goals of investor protection and improve market efficiency, and the constraints of effects in rating information disclosure were analyzed, points out that information disclosure must identify the balance point in the dual objective of disclosure, too simple or too complex are all undesirable. Then give a brief review on the evolution of stock market information disclosure, combined with the rating market situation, the advantages and disadvantages of voluntary disclosure and mandatory disclosure both are analyzed, Considered that under current market conditions, the information disclosure should be given priority to with mandatory disclosure, and to supplement with voluntary disclosure. At last, describes the main rules of information disclosure, safeguards and the preventing of the abuse of non-public information in the United States.The sixth chapter studies the legal responsibility of credit rating agency. For a long time, credit rating agencies in the United States had been seen as a publishing organization while enjoyed the protection from the first amendment, U.S. courts always hold a restrictive attitude for financial intermediaries to bear unlimited liability to non-specific public, there was only few case which rating agencies accused by the investors or issuers who suffered loss because of the false ratings, and almost all cases ended in the plaintiff lost. But after the subprime crisis, the lawsuits increased, and the cause of action is diverse, on the basis of the analysis of the relevant cases, the author believes that the key to building a reasonable rating agency liability system is that should be reach a reasonable balance between " the reasonable demand for rating information in capital market "and" the reasonable expect for high quality rating information from investors".The seventh chapter is the comments and recommendations on the regulation of credit rating agencies in our country. Firstly, reviewed the development of China's credit rating industry and the existing regulatory system. Then points out that the current main problems of legal regulation of credit rating agencies are:there is a lag on the construction of regulatory legal system, it is difficult to effectively monitor and regulate the activities of credit rating agencies; Currently under regulatory fragmentation, unified market supervision system has not been established; lack of industry self-regulation mechanisms, industry self-regulation almost empty. In order to grow our national credit rating agencies as soon as possible to enhance voice in international financial markets and to protect national economic security, China should accelerate the establishment of the regulation legal system of credit rating agencies, clarify the regulatory goal which regard both development and supervisory as equally important,adopt legal regulatory as the main regulatory mode, establish the effective unified organization system and reasonable scope of regulation, as well as strengthen international coordination and cooperation, so as to promote the sound and rapid development of China's credit rating industry.