Dodd Frank Act 2010 establishes a new Office of Credit Rating Agencies at the Securities and Exchange to strengthen regulation of credit rating agencies. New rules for internal controls, independence, transparency and penalties for poor performance will address shortcomings and restore investor confidence in these ratings.
Why was the change needed? Rating agencies market themselves as providers of independent research and in -depth credit analysis. but in this crisis, instead of helping people better understand risk, they failed to warn people about risks hidden throughout layers of complex structures
Flawed methodology, weak oversight by regulators, conflicts of interest, and a total lack of transparency contributed to a system in which AAA ratings were awarded to complex, unsafe asset-backed securities adding to the housing bubble and magnifying the financial shock caused when the bubble burst. When investors no longer trusted these ratings during the credit crunch, they pulled back from lending money to municipalities and other borrowers.
