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The Credit Agency Reform Act: What Leasing Companies Need to Know

By Barbara M. Goodstein and Margarita Glinets
November 30, 2006

Any equipment leasing or finance company desiring to access the debt capital markets must quickly become adept at dealing with a unique feature of that world: the credit rating and its gatekeeper, the credit rating agency. Entering this realm can be a jolt for finance officers used to the relationship-friendly, competitive environment of commercial banks. Dominated by two monoliths, Standard & Poor's and Moody's, the rating agency process is steeped in the clinical analytics of credit modeling. Rating agencies are viewed by many as academic in perspective and, to some, remote and obscure in their approach.

Some of this may soon begin to change. On Sept. 29, 2006, President Bush signed into law the Credit Rating Agency Reform Act of 2006 (Public Law No. 109-291, at http://thomas.loc.gov/). This Act is the first legislation to regulate credit rating agencies and states its purpose as 'to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating agency industry.'

The Act results from long and extensive debate regarding: 1) the role of the credit rating agencies in the securities markets, and 2) the degree of governmental involvement needed to protect investors who rely on such credit ratings. Many see the Act, which grants the SEC the power to oversee and regulate credit rating agencies, as the final reform in the spirit of the Sarbanes-Oxley Act of 2002 ('SOX'). (It is not surprising that Representative Michael G. Oxley introduced the original House version of the legislation.)

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