Presentation at the Dodd-Frank Wall Street Reform & Consumer Protection Act Symposium, November 4, 2011

1. The Dodd-Frank Act:
A “Nip and Tuck” Approach
to Credit Rating Agency Liability
Wendy Couture
The Dodd-Frank Wall Street Reform & Consumer Protection Act
Symposium
Gonzaga University School of Law
November 4, 2011

2. Increases liability exposure
Excepts
Excludes CRAs from
Nullifies CRA PSLRA’s
SEC Rule statements scienter
436(g) from 21E pleading
safe harbor standard
Stalemate Strawman So what?

3. Financial Crisis Inquiry Commission
Report, Conclusions, p.xxv
“We conclude the failures of credit rating agencies were
essential cogs in the wheel of financial destruction. The
three credit rating agencies were key enablers of the
financial meltdown...”

5. Dodd-Frank Act § 931(5) Findings
• “In the recent financial crisis, the ratings on
structured financial products have proven to
be inaccurate.”
• “This inaccuracy contributed significantly to
the mismanagement of risks by financial
institutions and investors, which in turn
adversely impacted the health of the economy
in the United States and around the world.”
• “Such inaccuracy necessitates increased
accountability on the part of credit rating
agencies.”

6. Reduces
reliance on Requires
credit CRAs to
ratings consider
Addresses info from
conflicts of non-issuers
interest CRAs
Prevents
issuers
Creates from
Office of “shopping”
Increases
Credit for rating
liability
Ratings exposure

7. § 11 of the Securities Act – Civil § 10(b) of the Securities
Liability on Account of False Exchange Act –
Registration Statement Manipulative and
Deceptive Devices
Imposes strict liability for material
misrepresentations in the registration Imposes liability for material
statement on the following parties: misrepresentations in
connection with the purchase
• every signatory or sale of any security. The key
• every director of issuer elements of a claim are:
• every expert who gives consent to be
named as having prepared or certified • materiality
expertised portion • falsity
• every underwriter with respect to • scienter
security • reliance
• loss causation
*Potential due diligence defense
available to non-issuers.

8. Increases liability exposure
Excepts
Excludes CRAs from
Nullifies CRA PSLRA’s
SEC Rule statements scienter
436(g) from 21E pleading
safe harbor standard
Stalemate

9. § 11 of the Securities Act – Civil Liability on Account of False
Nullifies Registration Statement
SEC Imposes strict liability for material misrepresentations in the
Rule registration statement on the following parties:
436(g) • every signatory
• every director of issuer
• every expert who gives consent to be named as having prepared
or certified expertised portion
• every underwriter with respect to security

10. § 11 of the Securities Act – Civil Liability on Account of False
Nullifies Registration Statement
SEC Imposes strict liability for material misrepresentations in the
Rule registration statement on the following parties:
436(g) • every signatory
• every director of issuer
• every expert who gives consent to be named as having prepared
or certified expertised portion
• every underwriter with respect to security
Rule 436(g) – NRSRO credit ratings “shall not be considered a part of the registration
statement prepared or certified by a person within the meaning of §§ 7 and 11 of the Act.”

11. § 11 of the Securities Act – Civil Liability on Account of False
Nullifies Registration Statement
SEC Imposes strict liability for material misrepresentations in the
Rule registration statement on the following parties:
436(g) • every signatory
• every director of issuer
• every expert who gives consent to be named as having prepared
or certified expertised portion
• every underwriter with respect to security
X
Rule 436(g) – NRSRO credit ratings “shall not be considered a part of the registration
statement prepared or certified by a person within the meaning of §§ 7 and 11 of the Act.”
Dodd-Frank § 939G – “Rule 436(g) . . . shall have no effect.”

12. § 11 of the Securities Act – Civil Liability on Account of False
Nullifies Registration Statement
SEC Imposes strict liability for material misrepresentations in the
Rule registration statement on the following parties:
436(g) • every signatory
• every director of issuer
• every expert who gives consent to be named as having prepared
or certified expertised portion
• every underwriter with respect to security
X
Rule 436(g) – NRSRO credit ratings “shall not be considered a part of the registration
statement prepared or certified by a person within the meaning of §§ 7 and 11 of the Act.”
Dodd-Frank § 939G – “Rule 436(g) . . . shall have no effect.”
NRSROs are withholding their consent!

13. § 11 of the Securities Act – Civil Liability on Account of False
Nullifies Registration Statement
SEC Imposes strict liability for material misrepresentations in the
Rule registration statement on the following parties:
436(g) • every signatory
• every director of issuer
• every expert who gives consent to be named as having prepared
or certified expertised portion
• every underwriter with respect to security
X
Rule 436(g) – NRSRO credit ratings “shall not be considered a part of the registration
statement prepared or certified by a person within the meaning of §§ 7 and 11 of the Act.”
Dodd-Frank § 939G – “Rule 436(g) . . . shall have no effect.”
NRSROs are withholding their consent!
• SEC No-Action Letter granting open-ended reprieve to asset-backed issuers
• H.R. 1539 – Asset-Backed Market Stabilization Act of 2011

14. Increases liability exposure
Excepts
Excludes CRAs from
Nullifies CRA PSLRA’s
SEC Rule statements scienter
436(g) from 21E pleading
safe harbor standard
Stalemate Strawman

15. § 10(b) of the Securities Exchange Act – Manipulative and
Excludes CRA Deceptive Devices
statements
from 21E Imposes liability for material misrepresentations in
connection with the purchase or sale of any security. The
safe harbor key elements of a claim are:
• materiality
• falsity
• scienter
• reliance
• loss causation

16. § 10(b) of the Securities Exchange Act – Manipulative and
Excludes CRA Deceptive Devices
statements
from 21E Imposes liability for material misrepresentations in
connection with the purchase or sale of any security. The
safe harbor key elements of a claim are:
• materiality
• falsity
• scienter
• reliance
• loss causation
Sec. 21E – Statutory safe harbor for issuers and persons “acting on behalf of” such issuers
from liability for “forward-looking statements,” if identified as such and accompanied by
meaningful cautionary language.

17. § 10(b) of the Securities Exchange Act – Manipulative and
Excludes CRA Deceptive Devices
statements
from 21E Imposes liability for material misrepresentations in
connection with the purchase or sale of any security. The
safe harbor key elements of a claim are:
• materiality
• falsity
• scienter
• reliance
• loss causation
X
Sec. 21E – Statutory safe harbor for issuers and persons “acting on behalf of” such issuers
from liability for “forward-looking statements,” if identified as such and accompanied by
meaningful cautionary language.

18. § 10(b) of the Securities Exchange Act – Manipulative and
Excludes CRA Deceptive Devices
statements
from 21E Imposes liability for material misrepresentations in
connection with the purchase or sale of any security. The
safe harbor key elements of a claim are:
• materiality
• falsity
• scienter
• reliance
• loss causation
X
Sec. 21E – Statutory safe harbor for issuers and persons “acting on behalf of” such issuers
from liability for “forward-looking statements,” if identified as such and accompanied by
meaningful cautionary language.
Not excluded from § 27A safe harbor in Securities Act!

19. Increases liability exposure
Excepts
Excludes CRAs from
Nullifies CRA PSLRA’s
SEC Rule statements scienter
436(g) from 21E pleading
safe harbor standard
Stalemate Strawman So what?

20. § 10(b) of the Securities Exchange Act – Manipulative and
Excepts CRAs Deceptive Devices
from PSLRA’s
scienter Imposes liability for material misrepresentations in
connection with the purchase or sale of any security. The
pleading key elements of a claim are:
standard • materiality, falsity, scienter, reliance, loss causation

21. § 10(b) of the Securities Exchange Act – Manipulative and
Excepts CRAs Deceptive Devices
from PSLRA’s
scienter Imposes liability for material misrepresentations in
connection with the purchase or sale of any security. The
pleading key elements of a claim are:
standard • materiality, falsity, scienter, reliance, loss causation
PSLRA – requires a plaintiff who is seeking money damages in a private action to “state with
particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind”

22. § 10(b) of the Securities Exchange Act – Manipulative and
Excepts CRAs Deceptive Devices
from PSLRA’s
scienter Imposes liability for material misrepresentations in
connection with the purchase or sale of any security. The
pleading key elements of a claim are:
standard • materiality, falsity, scienter, reliance, loss causation
X
PSLRA – requires a plaintiff who is seeking money damages in a private action to “state with
particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind”
Dodd-Frank Act §933(b)(2)(B): “In the case of an action for money damages brought against
a credit rating agency or a controlling person under this title, it shall be sufficient, for
purposes of pleading any required state of mind in relation to such action, that the
complaint state with particularity facts giving rise to a strong inference that the credit rating
agency knowingly or recklessly failed –
(i) to conduct a reasonable investigation of the rated security with respect to the factual
elements relied upon by its own methodology for evaluating credit risk; or
(ii) to obtain reasonable verification of such factual elements (which verification may be
based on a sampling technique that does not amount to an audit) from other sources that
the credit rating agency considered to be competent and that were independent of the
issuer and underwriter.”

23. § 10(b) of the Securities Exchange Act – Manipulative and
Excepts CRAs Deceptive Devices
from PSLRA’s
scienter Imposes liability for material misrepresentations in
connection with the purchase or sale of any security. The
pleading key elements of a claim are:
standard • materiality, falsity, scienter, reliance, loss causation
X
PSLRA – requires a plaintiff who is seeking money damages in a private action to “state with
particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind”
Dodd-Frank Act §933(b)(2)(B) – lower scienter pleading standard

24. § 10(b) of the Securities Exchange Act – Manipulative and
Excepts CRAs Deceptive Devices
from PSLRA’s
scienter Imposes liability for material misrepresentations in
connection with the purchase or sale of any security. The
pleading key elements of a claim are:
standard • materiality, falsity, scienter, reliance, loss causation
X
PSLRA – requires a plaintiff who is seeking money damages in a private action to “state with
particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind”
Dodd-Frank Act §933(b)(2)(B) – lower scienter pleading standard
PSLRA – still must plead falsity with particularity

25. § 10(b) of the Securities Exchange Act – Manipulative and
Excepts CRAs Deceptive Devices
from PSLRA’s
scienter Imposes liability for material misrepresentations in
connection with the purchase or sale of any security. The
pleading key elements of a claim are:
standard • materiality, falsity, scienter, reliance, loss causation
X
PSLRA – requires a plaintiff who is seeking money damages in a private action to “state with
particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind”
Dodd-Frank Act §933(b)(2)(B) – lower scienter pleading standard
PSLRA – still must plead falsity with particularity
Case law – in order for an opinion to be false for purposes of securities fraud, it
must be both disbelieved by its maker (subjectively false) and objectively
unreasonable (objectively unreasonable).

26. Increases liability exposure
Excepts
Excludes CRAs from
Nullifies CRA PSLRA’s
SEC Rule statements scienter
436(g) from 21E pleading
safe harbor standard
Stalemate Strawman So what?
A “Nip and Tuck” Approach
to Credit Rating Agency Liability