Research On Regulatory Legal Issues Of Credit Rating Agencies Regarding Conflict Of Interest

Subprime Lending Crisis occurring in USA as well as consequential global financial crisis was closely relevant to assets securitization which is based on financial innovation. As a result, disordered and irregular assets securitization and hidden subprime credit risk lead to subprime crisis. Subprime securities are unable to be issued and traded without credit rating. Credit rating is the basis of assets securitization. Credit rating agency plays a role of filter and firewall against credit risk in the process of assets securitization. However some issues often incurred(i.e. independence of credit rating agencies got disturbed or rating standard was decreased improperly) which showed that credit rating agencies failed to perform its duties of filtering risk. Only research concerning guarantee credit rating agencies objective and impartial in Economics aspect is far from resolving current issues. We need to explore some legal methods in supervision area in order to coordinate with Economics methods.In respect to the role of credit rating, it has two aspects. From the perspective of microcosmic, it plays its function on assisting with investors in making decisions. From the perspective of macroscopic, it plays its function on regulating the whole market and industry. Credit rating becomes indispensible part of debt financing. So bond issuers have motion to pay fees in order to obtain credit rating. And “Issuer-pay” comes up. This mode inevitably brings out conflict of interest. The issuer induces credit rating agencies make inflated ratings and even establishes “Credit Rating Transaction” with credit rating agencies by paying higher service fees. This dissertation provides two reform methods. One is to reform the current pay mode, including returning back to “Investor-pay” mode, or “Government-pay” mode or “Government-lease” mode, “Public Credit Rating Agency” mode, “Centralized Appointment” mode or “Centralized Settlement” mode and so on. They have their own advantages and disadvantages. In this dissertation, another reform method suggests that under “Issuer-pay” mode, deciding credit rating agencies by distinguishing rated securities should be taken. It means that, as for traditional financial products or securities, the issuer is entitled to choose credit rating agencies; as for high-risky financial derivatives, securities regulator or SEC has the power to appoint credit rating agencies for the issuer. Meanwhile optimized charge standard is also necessary. It is advised that establishing a fund of rating fees and paying rating fees on the basis of rating quality rather than amount of rated subject which paying rating fees prior to obtaining rating service is not required. It’s also necessary to establish other regulatory systems to cooperate with implement of above mentioned system, including beforehand system--market access system of credit rating agencies, in-process system--credit rating information disclosure systems and afterwards system--liabilities systems, which are beneficial to fully prevent conflict of interest in the process of credit rating.There are totally four chapters in this dissertation, which include:Chapter Ⅰmainly analyzes connotation of credit rating and credit rating agencies. It introduces credit rating regarding origin, definition in theory, definition in the laws, function. It also introduces definition and characters of credit rating agencies as well as legal relationship between credit rating agencies and issuers and legal relationship between credit rating agencies and investors.Chapter Ⅱ introduces two aspects of conflict of interest regarding rating agencies, including conflict of interest between credit rating agencies and issuers, and conflict of interest between credit rating agencies and investors. It also analyzes causes of conflict of interest, including the following aspects. The first is lead by “Issuer-pay” mode; second is lead by subsidiary business; third is lead by voluntary rating; fourth is lead by interfusion of marketing; fifth is lead by closely relationship between credit rating agencies or its employees and its clients; sixth is lead by structured financial products which includes increasing of rating income, centralization of issuers’ clients and positive influence of credit rating agencies.Chapter Ⅲ introduces regulation on conflict of interest of credit rating agencies. Firstly, it introduces current situations and issues of domestic regulations on conflict of interest of credit rating agencies. Then it introduces USA’s regulatory mode and regulatory system and analyzes its inspiration and experience for reference.Chapter Ⅳ mainly talks about the improvement suggestion regarding regulation on conflict of interest. There are two choices: giving up “Issuer-pay” mode and continuing using “Issuer-pay” mode.If giving up current charging mode, there are following modes for our reference: return back to “Investor-pay” instead of “Issuer-pay” mode; government pays or leases credit rating services so as to mitigate conflict of interest; government establishes public credit rating agencies to assure its independence; “Centralized Appointment” mode or “Centralized Settlement” mode and so on.If continuing using “Issuer-pay” mode, we need to improve this mode. In this dissertation, it is presented a newly reform method, that deciding credit rating agencies by distinguishing rated securities and optimizing charging standard. It means that distinguishing credit rating based on risk degree of rated securities. As for traditional financial products or securities, the issuer is entitled to choose credit rating agencies; as for high-risky financial derivatives, securities regulator or SEC has the power to appoint credit rating agencies for the issuer. Meanwhile credit rating fees depends on rating quality. It suggests that establishing a fund of rating fees and paying rating fees on the basis of rating quality which paying rating fees prior to obtaining rating service is not required. It also necessary to establish other regulatory systems to cooperate with implement of above mentioned system, including beforehand system--market access system of credit rating agencies, in-process system--credit rating information disclosure systems and afterwards system--liabilities systems, which are beneficial to fully prevent conflict of interest in the process of credit rating.