¹ Lord Myners, Financial Services Secretary to the Treasury, quoted in House of Lords European Union Committee, The Future of EU financial regulation and supervision (14^th Report of Session 2008–09 Vol 1) HL Paper 106–I, para 6.

² F Partnoy, FIASCO (2^nd edn Profile Books, 2009) Afterword 264.

³ Remarks by Lloyd C Blankfein, Chairman and CEO, The Goldman Sachs Group, Inc. Before the Council of Institutional Investors Spring Meeting of April 7, 2009 (http://www2.goldmansachs.com/ideas/public-policy/speech.pdf).

⁴ See (n 38) and accompanying text.

⁵ Basel Committee on Banking Supervision, Strengthening the resilience of the banking sector (Consultative document, December 2009) para 183 (http://www.bis.org/publ/bcbs164.pdf?noframes=10).

⁶ Sinclair, TJ, ‘The Infrastructure of Global Governance: Quasi-Regulatory Mechanisms and the New Global Finance’ (2001) 7 Global Governance 441Google Scholar.

⁷ The term ‘gatekeeper’ is typically associated with independent private entities which fulfil a ‘watchdog’ or ‘monitoring’ role. See generally, JC Coffee, Gatekeepers: The Professions and Corporate Governance (OUP, New York, 2006). Some gatekeepers are, however, public: eg the Financial Services Authority (FSA) when acting in its capacity as the UK Listing Authority (UKLA) and the US Securities Exchange Commission (SEC) when performing a similar role.

⁸ According to one widely held view, in performing this role gatekeepers seek to place their not inconsiderable ‘reputational capital’ behind the judgments they make. In the context of credit rating agencies, see, Partnoy, F, ‘The Siskel and Ebert of Financial Markets: Two Thumbs Down For the Credit Rating Agencies’ (1999) 77 Washington University Law Quarterly 619Google Scholar, 627 ff (outlining but rejecting the ‘reputational capital’ thesis as the basis for CRA influence). See also, JP Hunt, ‘Credit Rating Agencies and The ‘Worldwide Credit Crisis’: The Limits of Reputation, the Insufficiency of Reform, and a Proposal for Improvement' [2009] Columbia Business Law Review footnotes 68–68 (and sources cited therein). These judgments are made either by withholding their seal of approval or by publically acknowledging their endorsement. Coffee ibid 6.

⁹ See, for example, IMF Working Paper (prepared by A Sy), ‘The Systemic Regulation of Credit Rating Agencies and Rated Markets’ (June 2009, WP/09/129); and The Forum, Joint, ‘Stocktaking on the Use of Credit Ratings’ (Basel Committee on Banking Supervision, June 2009). See also, CM Bruner, ‘States, Markets, and Gatekeepers: Public-Private Regulatory Regimes in an Era of Economic Globalization’ (2008) 30 Michigan Journal of International Law 125Google Scholar.

¹⁰ For a sample of this literature, see S Rousseau, ‘Enhancing the Accountability of Credit Rating Agencies: The Case for a Disclosure-Based Approach’ (2006) 51 McGill L J 617; F Partnoy, ‘How and Why Credit Rating Agencies are not like other Gatekeepers’ in RE Litan and Y Fuchita, (eds) Financial Gatekeepers: Can They Protect Investors? (Brookings Institution Press and Nomura Institute Of Capital Markets Research 2006) 59–99; and SL Schwarcz, ‘The Role of Rating Agencies in Global Market Regulation’ in E Ferran & CAE Goodhart, Regulating Financial Services in the Twenty First Century (Hart, Oxford, 2001) 297–310. Not all of this criticism is thought to have been justified. See, for example, Hill in response to claims regarding CRA involvement in the Enron debacle: ‘while the regime could be improved, it is certainly not in dire need of repair … . The rating agencies also have apparently learned some lessons from Enron and its aftermath.’ Hill, CA, ‘Regulating The Rating Agencies’ (2004) 82 Washington University Law Quarterly 43Google Scholar, 44.

¹¹ Partnoy ibid 68–73.

¹² Partnoy (n 8) 621, 658–662; and Sinclair (n 6) 422.

¹³ D Kerwer, ‘Holding Global Regulators Accountable: The Case of Credit Rating Agencies’ (2005) 18 Governance 3, 453, 455.

¹⁴ Credit Rating Agency Reform Act of 2006. The Sarbanes-Oxley Act 2002 had already mandated the SEC to prepare a report on CRAs and their possible reform. In essence, the Credit Rating Agency Reform Act of 2006 establishes a legal framework for the voluntary registration and qualification process for CRAs (Nationally Recognised Statistical Rating Organizations (NRSROs)). To enable the SEC to carry out its oversight functions under the legislation, the Agency is given extensive supervisory and investigative powers. The SEC rules implementing the Act took effect only weeks before the implosion of the subprime mortgage market. Significantly, on the 11^th June, 2008, the SEC voted formally to propose a comprehensive series of credit rating agency reforms designed, inter alia, to further enhance the integrity and transparency of ratings in relation to structured products. These new rules became effective as of April 2009: SEC, Amendments to Rules for Nationally Recognized Statistical Rating Organizations 17 CFR Parts 240 and 249b [Release No. 34-59342; File No. S7-13-08] (hereinafter SEC Proposal).

¹⁵ See (n 89) and accompanying text.

¹⁶ In the EU, following advice from CESR in March 2006, the European Commission initially decided against legislative proposals.

¹⁷ See Regulation (EC) No 1060/2009 of the European Parliament and the Council on Credit Rating Agencies. For a copy of the Regulation, see, Official Journal, L 302, Volume 52, 17 November 2009. For a discussion of the Regulation, see (n 108) and accompanying text. See also F Amtenbrink and J de Haan, ‘Regulating Credit Rating Agencies in the European Union: A Critical First Assessment of Regulation 1060/2009 on Credit Rating Agencies’ (2009) 46 CMLR 1915.

¹⁸ IOSCO, Report on the Activities of Credit Rating Agencies (September 2003) fn 4.

¹⁹ Although the head offices, main management teams, and main administrative hubs are in the US, they operate in the EU through subsidiaries established in number of European countries. However, Fitch is dual headquartered in the US and the UK.

²⁰ Blaurock, U, ‘Control and Responsibility of Credit Rating Agencies’ (2007) 11 Electronic Journal of Comparative Law 3Google Scholar, 1 (http://www.ejcl.org).

²¹ Equity securities are not rated since ‘they have neither a specified maturity date nor a contractually fixed principal amount.’ S L Schwarcz, ‘Private Ordering of Public Markets: The Rating Agency Paradox’ (2002) University of Illinois Law Review 1, 6.

²² Schwarcz ibid 7 (and sources cited therein).

²³ The following section is based largely on IOSCO Report 2003 (n 18) 5.

²⁴ ibid. Though, according to Coffee, ‘S&P is known to be more quantitative and rule bound; Moody's more qualitative and subjective, leaving most decisions to a committee.’ JC Coffee, ‘The Role and Impact of Credit Rating Agencies on the Subprime Credit Markets’ Testimony Before the Senate Banking Committee (26 September, 2007) 12.

²⁵ IOSCO Report (2003) (n 18) 5.

²⁶ In the UK, both the Market Abuse Directive (MAD) 2003/6/EC and the Transparency Directive (TD) 2004/109/EC require companies to disclose information to the market on a timely basis. As a result, there is only limited scope to withhold inside information.

²⁷ IOSCO Report (2003) (n 18).

²⁸ ibid.

²⁹ Memorandum from the London Investment Banking Association, cited in House of Commons Treasury Committee, The Run on the Rock Vol II: Oral and Written Evidence (Fifth Report of Session 2007–08) Ev 247, 252, para 35 (hereinafter HCTC Report Vol II).

³⁰ BJ Kormos, ‘Quis Custodiet Ipsos Custodes? Revisiting Rating Agency Regulation’ (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1085132) 2.

³¹ Schwarcz (n 21) 6.

³² IOSCO Report (2003) (n 18) 3.

³³ Typically, institutional investors prefer securities to have been rated by more than one agency.

³⁴ According to one commentator, ratings are virtually essential to ensure the marketability of newly issues securities: Hurst, T, ‘The role of credit rating agencies in the current worldwide financial crisis’ (2009) 30 Company Lawyer 2Google Scholar, 61.

³⁵ Schwarcz (n 21) 8.

³⁶ B Cheffins, Company Law: Theory, Structure and Operation (Clarendon Press, Oxford, 1997) 5–6.

³⁷ S&P's Rating Service, ‘Role and Function of Credit Rating Agencies in the US Securities Markets’ (US SEC Public Hearings, November 15 2002) (http://www.sec.gov/news/extra/credrate/standardpoors.htm).

³⁸ The alternative method is the so-called ‘internal ratings-based’ approach, which means that banks rely on their own risk assessment models.

³⁹ The committee consists of the central banks and (where different) banking regulators of the world's most important economies and leading banking centres.

⁴⁰ External Credit Assessment Institution (ECAI) is the terminology used both in Basel II and by the EU's Capital Requirements Directive 2006/48/EC (CRD).

⁴¹ The CRD affects all deposit-takers (except credit unions) and certain types of investment firms.

⁴² The Securities and Exchange Commission (SEC) performs a similar service in relation to nationally recognised statistical rating organizations (NRSROs).

⁴³ Partnoy (n 8) 627.

⁴⁴ Kormos (n 30) 3.

⁴⁵ Among the largest of the non US CRAs are Baycorp Advantage (Australia), Dominion Bond Ration Service (Canada), and Japan Credit Rating Agency (Japan).

⁴⁶ HCTC Report Vol II, (n 29) Ev 273.

⁴⁷ A number of sources of potential conflict of interest abuse have been identified, but by far the most serious—at least with regard to the triopoly of leading agencies—revolves around issuer fees. See generally IOSCO Report (2003) (n 18) 3. For a discussion of these conflicts in the context of the subprime mortgage debacle, see (n 70) and accompanying text.

⁴⁸ According to Partnoy, studies illustrate that ratings operate as ‘rearview mirror analyses’ (n 8) 659, and that downgrades of ‘existing bond issues tend to lag behind the events that prompt the change’: ibid 658 (footnote omitted). Indeed, somewhat remarkably, Enron was not downgraded until just four days before it filled for bankruptcy, despite the fact that its difficulties were widely known: Coffee (n 24) 9.

⁴⁹ Kerwers (n 13) 455: ‘CRAs are often criticized for wielding illegitimate power.’ The common retort to such a claim is that CRAs are, in fact, held to account for the power that they exert—by way of the market. Yet, as Kerwers and others have sought to demonstrate, market constraints are largely ineffective (eg as a result of high barriers to entry). Moreover, CRAs have been co-opted within the regulatory framework by public and act as coercive de facto regulators. ibid 461–466.

⁵⁰ See (n 8) 658.

⁵¹ ibid 711.

⁵² House of Commons, Financial Stability and Transparency (Sixth Report) HC 371 para 43. (hereinafter HC Financial Stability).

⁵³ Figures indicate that, after 2002, annual asset-backed securitizations exceeded the annual total volume of corporate bond issues issued in the US: See JC Coffee, Jr. J Seligman, and H Sale, Securities Regulation: Cases and Materials (10^th edn, 2007, Foundation Press) 10.

⁵⁴ HC, Financial Stability (n 52).

⁵⁵ ibid 45.

⁵⁶ Securitization of this type is riddled with potential difficulties. Since banks originating the loans sell them on, and thus do not bear the immediate cost of default in the event that the borrower proves non creditworthy, banks have little incentive to undertake a costly investigation into the quality of the underlying collateral. Likewise, since the SPV, and everyone else, passes the ‘risk to the next buyer in the chain … all tend to economise on due diligence and ignore signs that assets are not creditworthy.’ JC Coffee, ‘Enhancing Investor Protection and the Regulation of Securities Markets’ Testimony Before the United States Senate Committee on Banking, Housing and Urban Affairs (March 10, 2009) 53. As Coffee recognizes, this gives rise to an acute moral hazard problem, whereby there are perverse incentives to engage in suboptimal levels of risk-taking. Coffee ibid 6. The end result is that risk is underpriced.

⁵⁷ This search to avoid regulatory requirements is referred to as ‘regulatory arbitrage’.

⁵⁸ Coffee (n 56).

⁵⁹ This confidence which evaporated in August 2007.

⁶⁰ HC, Financial Stability (n 52) para 59.

⁶¹ ibid para 60.

⁶² I Bell, Managing Director and Head of European Structured Finance at Standard & Poor's, quoted in House of Commons, Financial Stability and Transparency (Sixth Report), ibid. In addition to tranching (or subordination), this credit cushion is bolstered by way of a number of other ‘credit enhancements’. For example, the use of: third party guarantees; excess serving techniques (which ensures that pre-set amounts of interest are expressly set aside from the servicing of the collateral to ensure that any short falls in cash flow for the senior tranche are covered); and, residual trading techniques (the apportionment of additional cash flows beyond those used for excess servicing). See ibid para 61.

⁶³ For example, according to figures supplied by Fitch, the average percentage of subprime RMBS in collateral pools of CDOs it rated grew from $3.32 per cent in 2003 to 71.3 per cent in 2006: quoted in SEC Proposal (n 14) 11.

⁶⁴ Coffee (n 24) 2.

⁶⁵ G Morgenson, ‘Debt Watchdogs: Tamed or Caught Napping?’ New York Times (New York USA 7 December 2008) cited in Coffee (n 56) 13.

⁶⁶ ibid 12.

⁶⁷ FSA, A Regulatory Response to the Global Banking Crisis (Discussion Paper 09/2) (March 2009) para 10.9 (hereinafter ‘FSA DP 09/2’).

⁶⁸ ibid. See also SEC Proposal (n 14) 25.

⁶⁹ ‘It has escaped almost no one's attention that the credit rating agencies bear much responsibility for the 2008 financial crisis, with the consensus view being that they inflated their ratings in the case of structured finance offerings’ Coffee (n 56) 10. See also, HC Financial Stability (n 52) para 191.

⁷⁰ See, FSA DP 09/2, (n 67): ‘ratings of structure finance products have proved less reliable’ (para 1.57); ‘[CRAs] allowed business pressures and conflicts of interest to affect the integrity of their ratings’ (para 10.9). In the US, see eg, SEC, Summary Report of Issues Identified in the Commission Staff's Examinations of Select Credit Rating Agencies (July 2008) available at http://www.sec.gov/news/studies/2008/craexamination070808.pdf): ‘The rating agencies performance in rating these structured finance products raised questions about the accuracy of their credit ratings generally as well as the integrity of the ratings process as a whole’ (2).

⁷¹ ibid.

⁷² Coffee (n 24) 4–5.

⁷³ Quoted in ‘Commission Staff Working Document Accompanying The Proposal For A Regulation Of The European Parliament And Of The Council On Credit Rating Agencies’ Impact Assessment (Com 2008) 704 Final) para 3.1.1. (http://ec.europa.eu/internal_market/securities/docs/agencies/impact_assesment_en.pdf) (hereinafter ‘Impact Assessment’).

⁷⁴ ibid.

⁷⁵ ibid para 3.1.2.1.

⁷⁶ SEC Proposal (n 14) 26. According to Coffee, Moody's reported that since it downgraded a series of structured finance offerings in July 2007, its market share in the relevant market for mortgage-backed securitizations dropped from 75 to 25 per cent. Coffee (n 24) 6. As Coffee goes on to conclude: ‘business in the market for ratings is mobile, retaliation is relatively costless, and hence the gatekeeper can become compromised, particularly with regard to structured finance products.’ ibid.

⁷⁷ See the FSA DP 09/2 (n 67) referring to claims that the methodologies and assumptions used to rate structured finance products were ‘not fit for purpose’ (para 10.9). Furthermore, according to the European Commission ‘[r]ecent figures show … that CRAs have serious and systematically failed to assess correctly the creditworthiness of structured finance instruments.’ Impact Assessment (n 73) 7.

⁷⁸ Paul Taylor (an Executive from Fitch) quoted in the HC, Financial Stability (n 52) para 193.

⁷⁹ Financial Stability Forum (FSF), Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience (7 April 2008) (agencies underestimated the correlation in defaults that could occur in the event of a market wide downturn) (33).

⁸⁰ HC Financial Stability (n 52) para 194.

⁸¹ FSA DP 09/2, (n 67) para 10.9, quoting criticisms that ‘[CRAs] did not dedicate sufficient resource and attention to the monitoring of outstanding ratings.’

⁸² HC, Financial Stability (n 52) para 191.

⁸³ FSA DP 09/2 (n 67) para 10.13.

⁸⁴ See (n 24) 5.

⁸⁵ ibid 8.

⁸⁶ For example, the Market Abuse Directive (MAD) 2003/6/EC. According to art 6(5) of MAD, Member States are under an obligation to ensure that ‘persons who produce or disseminate research concerning financial instruments or issuers of financial instruments and persons who produce or disseminate other information recommending or suggesting investment strategy, intended for distribution channels or for the public, take reasonable care to ensure that such information is fairly presented and disclose their interests or indicate conflicts of interest concerning the financial instruments to which that information relates’. However, although Recital 10 of Directive 2003/125/EC, which implements MAD, stipulates that CRA's opinions on the creditworthiness of a particular issuer or financial instrument on a given date do not constitute a recommendation within the meaning of MAD (and are therefore not subject to the legal framework set out in the Directive), the Recital nevertheless recommends that CRAs ‘should consider adopting internal policies and procedures designed to ensure that credit ratings published by them are fairly presented and that they appropriately disclose any significant interests or conflicts of interest concerning the financial instruments or the issuers to which their credit ratings relate.’ Despite the tenor of this injunction, there exists no mechanism under the relevant Directives to require CRAs to monitor to what extent and by what means they seek to comply with this recommendation. European Securities Markets Expert Group (ESME), Role of Credit Rating Agencies (Report to the European Commission, June 2008) 6. (http://ec.europa.eu/internal_market/securities/docs/esme/report_040608_en.pdf).

⁸⁷ For example, see, the Capital Requirements Directive (CRD) 2006/48/EC. The CRD sets out a number of requirements which ECAIs are required to meet before a recognition order is granted. In this respect, art 81(2) of the CRD states that the: ‘competent authorities shall recognise an ECAI as eligible … only if they are satisfied that its assessment methodology complies with the requirements of objectivity, independence, ongoing review and transparency, and that the resulting credit assessments meet the requirements of credibility and transparency.’ Annex VI, Part 2 of the Directive then goes on to outline the relevant technical criteria and requirements which prospective agencies need to satisfy. The competent authorities should assess whether individual credit assessments are recognised in the market as credible and reliable by the users of such credit assessments and accessible at equivalent terms to all interested parties.

⁸⁸ However, although assigning a rating does not amount to ‘investment advice’ within the means of art 4(4) of MiFID (2004/39/EC), CRAs which do offer ‘investment services’, as defined by Annex I of that Directive, on a professional basis, will need to seek authorization from the relevant home state authority.

⁸⁹ http://www.iosco.org/library/pubdocs/pdf/IOSCOPD180.pdf, 2. Member States are not permitted to sanction CRAs for failure to meet these international ‘soft’ law standards.

⁹⁰ FSA, Hedge Funds: A Discussion of Risk and Regulatory Engagement (Discussion Paper 05/04) (June 2005) para 3.93.

⁹¹ IOSCO, The Role of Credit Rating Agencies in Structured Finance Markets (May, 2008).

⁹² A Review of Implementation of the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies (March 2009) 3. According to the IOSCO's examination of the 32 CRAs assessed in the study, the 3 largest agencies had ‘substantially implemented’ the Code, while a relatively large group of albeit mostly small CRAs had ‘only minimal or non existent implementation’ 5.

⁹³ For more detailed discussion of the Lamfalussy law-making process, see N Moloney, EC Securities Regulation (2^nd edn, OUP, Oxford, 2008) ch XIII.

⁹⁴ CESR's response to the consultation document of the Commission services on a draft proposal for a Directive/Regulation on Credit Rating Agencies (16 September 2008), available at http://www.cesr.eu/popup2.php?id=5222).

⁹⁵ For an indication of the FSA's new emphasis, see, H Sants, ‘Delivering Intensive Supervision and Credible Enforcement’ (Speech on behalf of the FSA March 2009 http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/0312_hs.shtml): ‘What principles-based regulation does mean and should mean, is moving away from prescriptive rules to a higher level articulation of what the FSA expects firms to do. In other words, it helps emphasize that what really matters is not that any particular box has been ticked but rather that when making decisions, executives know they will be judged on the consequences—the results of those actions … . a better strapline is “outcomes-focused regulation” ’.

⁹⁶ See JE Parkinson, Corporate Power and Responsibility (OUP, Oxford, 1993) 132. See also, Coffee (n 24) 8.

⁹⁷ The subprime mortgage market meltdown is an excellent illustration of the fact that the pursuit of private interests (even under what many considered as highly competitive financial market conditions more generally) and the public good can easily become misaligned in seriously damaging ways.

⁹⁸ European Commission's Proposal for a Regulation of the European Parliament and the Council on Credit Rating Agencies COM(2008) (12 November 2008). <http://ec.europa.eu/internal_market/securities/docs/agencies/proposal_en.pdf>(3).

⁹⁹ ibid.

¹⁰⁰ Though note the recent law suit filed by the USA's biggest pension fund, the California Public Employees' Retirement Fund (CalPERS), against the three largest Credit Rating Agencies (CRAs), Fitch, Moody's and Standard and Poor's, alleging that the ratings of certain structured finance vehicles were ‘wildly inaccurate and unreasonably high’ and that such ratings constituted ‘negligent misrepresentation’. L Wayne, ‘Calpers Sues Over Ratings of Securities’ The New York Times (New York USA 14 July 2009). See also J Stempel, ‘CalPERS may pursue lawsuit against rating agencies’ Reuters (4 May 2010) (available at http://www.reuters.com/article/idUSN0412418520100504).

¹⁰¹ CRAs continued to publicly promote structured investment vehicles even though moves were afoot to downgrade them: ‘Ten days after Moody's had downgraded some securitized packages in 2007, it issued a report titled “Structured Investment Vehicles: An Oasis of Calm in the Subprime Maelstrom.” Wayne ibid.

¹⁰² Despite scaling back the use of ratings as a means of securing regulatory compliance, regulatory authorities have been reluctant to do away with ratings completely.

¹⁰³ L 302, Volume 52, 17 November 2009. Already these arrangements are set to be reformed. See, ‘Commission proposes improved EU supervision of Credit Rating Agencies and launches debate on corporate governance in financial institutions’ IP/10/656 (Brussels, 2 June 2010). For a summary of the proposed measures, see Postscript.

¹⁰⁴ ‘Commission Adopts Proposal to Regulate Credit Rating Agencies’ (12 November 2008), (available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1684).

¹⁰⁵ ibid.

¹⁰⁶ FSA, The Turner Review: A Regulatory Response to the Global Banking Crisis (March 2009) (para 2.5).

¹⁰⁷ Global Plan for Recovery and Reform: the Communiqué from the London Summit (2 April, 2009) (http://www.londonsummit.gov.uk/resources/en/PDF/final-communique).

¹⁰⁸ Arts 2(3) and 14. The registration shall be valid for the entire territory of the Community: art 14(2). Competent authorities may not impose additional requirements on the registration process: art 14(5).

¹⁰⁹ A ‘credit rating agency’ is defined as ‘a legal person whose occupation includes the issuing of credit ratings on a professional basis’ (art 3(1)(b)). A ‘credit rating’ is defined as ‘an opinion regarding the creditworthiness of an entity, a debt or financial obligation, debt security, preferred share or other financial instrument, or of an issuer of such a debt or financial obligation, debt security, preferred share or other financial instrument, issued using an established and defined ranking system of rating categories (art 3(1)(a)).

¹¹⁰ For those financial institutions covered, see art 4.

¹¹¹ Art 3(1)(g).

¹¹² Art 2(2).

¹¹³ Art 15(1), (4). Arts 15(2) and 17 contains special provisions dealing with groups of CRAs. In essence, when examining the applications for registration submitted by a group of CRAs, the relevant competent authorities must consider the group structure and agree on a facilitator who will be responsible for coordinating the registration process.

¹¹⁴ Art 16.

¹¹⁵ Art 21(1)–(2).

¹¹⁶ Art 21(1). Indeed, according to art 17, CESR should be closely involved in the registration process from the outset and be entitled to give its advice on the granting or withdrawal of the registration by the competent authority of the home Member Stated and may request re-examination of draft decisions.

¹¹⁷ CESR, Annual Report (2008) (24) (http://www.cesr-eu.org/popup2.php?id=5865). Proposed reforms—see Postscript—will further enhance CESR's role, albeit that as part of a broader package of EU supervisory reforms CESR will be transformed in a European Securities and Markets Authority (ESMA).

¹¹⁸ Art 23(2).

¹¹⁹ Art 23(3). But they may not interfere with the content of credit ratings or methodologies: art 23(1).

¹²⁰ Recital 46, and arts 21 and 29. The composition and functioning of the college is governed by art 21(2).

¹²¹ Recital 48.

¹²² Recital 49.

¹²³ ibid and art 29(6). However, it is clear from Recital 51 that the ‘current supervisory architecture should not be considered as the long-term solution for the oversight of credit rating agencies’ and that ‘more consolidated supervision of the credit rating industry’ may be needed. According to Recital 51, ‘[t]he Commission should, as soon as possible, and in any event by 1 July 2010, report to the European Parliament, the Council and other institutions concerned, any findings in this respect and should put forward any legislative proposal needed to tackle the shortcomings identified as regards supervisory coordination and cooperation arrangements.’ These proposals have now been made and are set out in the Postscript.

¹²⁴ Art 4(3)(a)–(h).

¹²⁵ Recital 13 and art 4(3). However, according to art 4(4), a CRA established in the Community and registered in accordance with the Regulation must not use the endorsement regime as a way of avoiding the requirements of the Regulation.

¹²⁶ Recital 14; art 5(1), (2).

¹²⁷ Art 5(1).

¹²⁸ Art 5(2)–(3).

¹²⁹ Art 5(4).

¹³⁰ Art 5(7).

¹³¹ Annex I, s A(1).

¹³² Annex I, s B(1).

¹³³ ibid B(2).

¹³⁴ ibid B(3)(a).

¹³⁵ ibid B(3)(b).

¹³⁶ ibid B(3)(c).

¹³⁷ ibid B(3)(d).

¹³⁸ Annex I, s B (4). Although a CRA is free to determine what it considers to be an ancillary services it is, nevertheless, under an obligation to disclose this: Annex I, s E (I)(2).

¹³⁹ Defined in art 3(1)(l): ‘structured finance instrument’ means an instrument resulting from a securitization transaction or scheme referred to in point (36) of art 4 of Directive 2006/48/EC.

¹⁴⁰ Art 7(4).

¹⁴¹ Art 7(5).

¹⁴² Art 8(3).

¹⁴³ Art 8(2).

¹⁴⁴ Art 10(1).

¹⁴⁵ Art 10(2).

¹⁴⁶ Art 10(3).

¹⁴⁷ Annex I, s D, Part II.

¹⁴⁸ ibid para 2.

¹⁴⁹ Art 10(4).

¹⁵⁰ Art 10(5).

¹⁵¹ Art 10(5).

¹⁵² Art 12 and Annex I, s E, Part III.

¹⁵³ Annex I, s B, points 7–9.

¹⁵⁴ As the EU Commission acknowledges, there has been a ‘manifest failure of self-regulatory efforts, both formal and informal, to ensure high standards of independence, integrity and professional diligence [in CRAs]’. EU Commission, Consultation on Policy Proposals Regarding Credit Rating Agencies (July 2008), available at http://ec.europa.eu/internal_market/consultations/doc/securities_agencies/consultation-cra-framework_en.pdf.

¹⁵⁵ Most commentators have tended to view the SEC's recent reforms of CRAs as something of a ‘damp squib’. See, for example, A Ackerman, ‘SEC votes to remove NRSRO from 38 rules’ Bond Buyer 26 June (http://www.bondbuyer.com/printthis.html?id=20080625YA9RHPDA); H Power, ‘SEC Plans Rule change that will curb agency power’ 25 June 2008 Daily Telegraph; M Sisk ‘A ‘radical’ answer to credit- ratings conflict' US Banker (1 July 2008); and N Roland, ‘SEC's plan to lessen credit raters’ clout hemmed in by other regulators' Financial Week (3 July 2008) (available at http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080703/REG/395782074). Even more recent reforms are contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is due to become law in July 2010. Although there are certain areas of overlap with EU reforms, the US measures different in certain significant respects. For example, in the US, investors are to be granted private rights of action against CRAs for a knowing or reckless failure to conduct a reasonable investigation of the facts.

¹⁵⁶ ‘In spite of the much proclaimed US-EU transatlantic dialogue, regulation of … CRAs … remains an area of fundamental divergence and contention between the world's largest … economic blocs … . In short, EU authorities aim to promote CRAs’ accountability through supervision, whereas US authorities prefer market discipline through transparency and competition.' K Lannoo, Comparing EU & US Responses to the Financial Crisis (ECMI Policy Brief, No 14, January 2010) 5–6, footnote omitted (http://transatlantic.sais-jhu.edu/bin/g/i/us-eu_book_crisis_response_karel_lannoo.pdf).

¹⁵⁷ J Barroso, ‘Leading by Example: The EU and Global Governance’ (Speech by President of the European Commission, 12 May 2009, Brussels), availableat http://www.europa-eu-un.org/articles/fr/article_8708_fr.htm).

¹⁵⁸ ibid.

¹⁵⁹ See generally, R Abdelal, Capital Rules: The Construction of Global Finance (Harvard University Press, Cambridge, 2007). In the financial market context, a similar dissonance can be detected in relation to EU and US plans to regulate hedge funds.

¹⁶⁰ P De Grauwe, ‘Crisis in the Eurozone and How to Deal with it’ (15 February 2010). http://www.ceps.be/book/crisis-eurozone-and-how-deal-it; T Barber and D Oakley, ‘EU signals last-resort backing for Greece’ Financial Times (London England 29 January 2010) http://www.ft.com/cms/s/0/866e1246-0c43-11df-8b81-00144feabdc0.html; D Gros ‘Greek Burdens Ensure Some Pigs Won't fly’ (1 February 2010) http://www.ceps.be/book/greek-burdens-ensure-some-pigs-wont-fly; and G Gilmore, ‘Greece's use of Derivatives Puts Further Pressure on Single Currency’ The Times (London England 16 February 2010).