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The three big agencies have been blamed for helping fuel the 2008 financial crisis by giving unrealistically high ratings to risky mortgage securities, a type of asset-backed security. Those investments later soured when the housing market went bust. Spurred by a widely perceived lack of competition in the ratings industry that critics said lowered the quality of ratings, inflated the price of securities, stifled innovation and allowed conflicts of interest to thrive, Congress enacted the Credit Rating Agency Reform Act in 2006. It required rating agencies to apply to the SEC to be nationally recognized statistical rating organizations, or NRSROs. Once officially approved, ratings companies must provide the SEC detailed information
-- some of which remains confidential -- including lists of their largest customers, audited financial statements, the qualifications of their credit analysts and their procedures for preventing conflicts of interest or misuse of confidential company information. The SEC approved Egan-Jones's initial application to register as an NRSRO for companies, financial institutions and insurers in December 2007. The firm applied in July 2008 to gain the NRSRO designation for rating asset-backed securities as well as securities issued by governments, including foreign governments and U.S. municipalities. Egan-Jones, a small firm with only about 20 employees, says it is the only NRSRO that is independent because it's paid by subscribers
-- not the companies and governments issuing securities. That arrangement prevents the sort of conflicts of interest that the big rating agencies are susceptible to, the firm says. Frenkel, the attorney representing Egan and the firm, said "It is clear that the SEC does not want independent firms as NRSROs, even though Congress does."
[Associated
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