The agencies defended themselves and the courts

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ratings with additional (potentially more lucrative) services. The agencies defended themselves (and the Courts agreed) on the grounds that ratings are merely opinions and thus, protected under the First amendment. r The Credit Rating Agency Reform Act of 2006 established a registration system for credit rating agencies. Under this law, credit rating agencies with three years of experience are allowed to register with the SEC and will be considered nationally recognized statistical ratings organiza- tions (NRSROs). Prior to this law, the SEC had sole authority to designate credit rating agencies as NRSROs. Of the more than 130 credit rating agencies, the SEC has designated only ten as NRSROs (see Business Insight box below). BUSINESS INSIGHT Competition Among Credit Rating Agencies When this book went to print, the SEC had designated only ten organizations as nationally recog- nized statistical ratings organizations (NRSROs). The ten are: (AgenCY Moody's Investor Service . Standard & Poor's . Fitch Ratings . A. M. Best Company . Dominion Bond Rating Service, Ltd . Japan Credit Rating Agency, Ltd . R&I, Inc . Egan-Jones Rating Company . . . . . . . . . . . . . . . Kroll Bond Rating Agency. . . . . . . . . . . . . . . . . . Morningstar, Inc . U.S.A. U.S.A. U.S.A. U.S.A. Canada Japan Japan U.S.A. U.S.A. U.S.A. The Credit Rating Agency Reform Act has detractors and supporters. Some contend that NRSRO designation bestows a competitive advantage to certain agencies. This view is supported by the vigor with which non-recognized agencies seek NRSRO status. On the other hand, the NRSRO designation might have actually increased competition in the industry by providing a "seal of approval" to smaller agencies. Regulation can have another benefit: "Importantly, the new law gives the SEC the tools necessary to hold recognized rating agencies accountable if they fail to produce credible and reliable ratings," declared Jim Kaitz, president of the Association for Financial Professionals. RESEARCH INSIGHT Value Relevance of Credit Ratings Upgrades and Downgrades The SEC enacted Regulation Fair Disclosure (Reg FD) in 2000 which prohibits public companies from selectively disclosing information to favored investment analysts. However, companies are still permitted to make private disclosures to credit rating agencies. Research shows that stock-price reactions to ratings downgrades and upgrades are more pronounced after the new rules came into play. It appears that credit ratings are now a more important source of information because credit analysts at rating agencies have an informational edge over equity analysts under Reg FD. (Source: "Informational Effects of Regulation FD: Evidence from Rating Agencies" Journal of Financial Economics, 2008, by Philippe Jorion, Zhu Liu, and Charles Shi; ).
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DICTING BANKRUPTCY RISK Module 4 I Credit Risk Analysis and Interpretation 4-28 cnptcy is a worst-case scenario for creditors. Accordingly, creditors are very interested in - g the likelihood that a company will go bankrupt.
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