Consequences for Non-Compliance of the Law
strategies-init
Rules for Credit Rating Agencies
Additional Rules for Credit Rating Agencies Under the Dodd-Frank Act
Key Takeaways
- Topic: Rules for Credit Rating Agencies
- Additional Rules for Credit Rating Agencies Under the Dodd-Frank Act The Dodd-Frank Act also has some new rules for the credit rating agencies themselves with the goal of having….
- First, the Act places more stringent requirements on the company’s board of directors and institutes are requirement for an independent board.
Conflicts of Interest and Credit Rating Agencies
Effects of the Dodd-Frank Act on Conflicts of Interest
Key Takeaways
- If any employee of an issuer, underwriter, or sponsor of a security…had previously been employed by the NRSRO and participated in determining the credit rating of that entity during the one year pe…
- By implementing this look-back requirement, the bill seeks to eliminate conflicts of interests by closing the ‘revolving door’ that exists between NRSROs and the agencies which they provide ratings…
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In addition to administering rating and disclosure rules, The Dodd-Frank Act also imposes several requirements on NRSROs to establish internal control systems that prevents conflicts of interest. The bill’s drafters made it a priority to put certain guidelines in place in order to mitigate the temptation toward favoritism within the rating agencies. Without the conflicts, or with the proper steps to mitigate them, the rationale is that more certainty would exist about the objectivity of the ratings.
Dodd-Frank and Credit Rating Agencies
Addressing Credit Rating Agencies Through Enactment of Dodd-Frank
Key Takeaways
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- [1] “BRIEF SUMMARY OF THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT”.
- [2] “Dodd-Frank Wall Street Reform and Consumer Protection Act: Credit Rating Agency Provisions.” http://www.orrick.com/fileupload/2822.htm .
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was passed and signed into on July 21, 2010. A small part of this act addressed credit rating agencies and their past practices. The act intends to (1) remove references in statutes and regulations to Nationally Recognized Statistical Rating Organizations (“NRSROs”), (2) create a new office of credit ratings, (3) to expand conditions that deal with conflicts of interest that may exist both inside the credit rating agencies and with the issuers and underwriters that they deal with, (4) promote rules for better internal governance and control, (5) define new requirements for the board of directors, and (6) institute harsher consequences for non-compliance with the law. [1]
Issues Affecting Credit Rating Agencies
Competency, Trustworthiness of Ratings, and Conflicts of Interest
Key Takeaways
- Competency, Trustworthiness of Ratings, and Conflicts of Interest Credit rating agencies have not been held accountable for their ratings.
- Providing these favorable ratings often required the agencies to jeopardize the integrity of these ratings by altering the methodology in which they are calculated.
Credit rating agencies have not been held accountable for their ratings. Meaning, an inaccurate rating brings no repercussion to these agencies. If one is not held accountable for their actions, logically there is less incentive to perform well or even at a high standard.
These agencies knew their services were needed under government recommendation yet they were not held to a standard which required the utmost diligence and scrutiny to measure the accuracy of their ratings (15 Chap. L. Rev. 138). This type of attitude towards the agencies allowed the agencies to become comfortable with their existing practices and did not encourage any improvements in the methods these agencies used to rate the instruments.
Credit Rating Agencies – Part One
What is a Credit Rating Agency and What Task Does it Perform?
Key Takeaways
- The courts viewed the ratings merely as opinions offered by these agencies based on the information available and the assumptions the agencies put in place while rating these instruments.
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Since 1931, the United States government has encouraged or even required certain types of investors to use financial instruments or securities that have been rated high by rating agencies (15 Chap. L. Rev. 139). These agencies use available financial data, economic conditions, and various other factors to determine the strength of a particular firm, security, or instrument offered on the market. Logically, no rational investor would choose to use a financial instrument that possessed primarily bad qualities. The market should realize these bad qualities and the price of this instrument should decrease accordingly.
The credit rating agencies provide ratings which investors are advised or even required to rely on when investing in certain financial instruments. These ratings are intended to provide the investor with an accurate picture toward the quality of the financial instrument without having to do the tedious homework required to determine if credit rating given by an agency is in fact an accurate rating. Under this logic, in comparison to the average individual investor, shouldn’t a credit rating agency be more qualified and have more information to provide the most accurate credit ratings available?
Innocent Spouse Relief & Actual Knowledge
Innocent Spouse Relief
This is the most commonly known form of relief, which can absolves a taxpayer from liability if their spouse or former spouse either did not report income, made an error in the calculation of income, or misapplied any deductions or credits that they were not entitled to.[1] Innocent Spouse Relief relieves a person of any tax, interest, and penalties associated with the account based on the preceding errors. However, the taxpayers are still held jointly and severally liable for any amounts that are not granted innocent spouse relief. The following requirements must be met in order for innocent spouse relief to be granted.
Key Takeaways
- 2. There is an understated tax on your return, i.e. the IRS determines that your total tax should be more than the amount that was actually shown on your return.
- 4. You can show that when you signed the joint return you did not know, and had no reason to know, that the understated tax existed (or the extent to which the understated tax existed (Absence of “Actual Knowledge” or “Reason to Know”).
- 5. Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax. (“Unfairness”).
Theory of IRS Innocent Spouse Relief
Because of certain benefits that filing jointly allows, many married taxpayers elect to file joint returns. However, filing a joint return carries the added burden of both parties being liable for the tax due. In addition, under the Internal Revenue Code, married taxpayers who file jointly are each liable for any additions to the tax, penalties, or interest associated with the account.[1] This is a concept in the law known as joint and several liability, meaning that the spouses are responsible for any tax liabilities together (jointly) but can be held responsible for them as individuals (severally).
Key Takeaways
- Because of certain benefits that filing jointly allows, many married taxpayers elect to file joint returns. However, filing a joint return carries the added burden of both parties being liable for the tax due.
- From a practical standpoint, the IRS does not have the resources to make the determination on its own of who is an innocent spouse.
- Courts have supported the IRS policy of targeting either spouse for a balance that is due. Spouses, even if both agree, may not insist that the IRS first try to collect from one spouse before going after the assets of the other.
Independent Contractor Reclassification Audit
The Employment Development Department in California has been particularly aggressive in the area of independent contractor reclassification audits. In the eyes of the Employment Development Department, California businesses have been abusing the system by treating workers who should be classified as employees as independent contractors. In doing so they shift the burden for payroll taxes onto the worker and avoid their own contributions to the payroll tax and unemployment insurance system. As a result, the Employment Development Department has been particularly vigilant in auditing businesses for perceived abused of the system. Often these independent contractor reclassification audits can be costly for businesses.
Key Takeaways
- The Employment Development Department in California has been particularly aggressive in the area of independent contractor reclassification audits.
- Employment Development Department independent contractor reclassification audits are potentially costly for businesses.
- Many businesses make serious mistakes during an independent contractor reclassification audits. First, they assume that having an independent contractor agreement will protect them in the audit. This categorically false.
How to Prevent Corporate Fraud
This is the fourth part in my series discussing corporate fraud. For more on this topic please read
Key Takeaways
- This is the fourth part in my series discussing corporate fraud.
- Ultimately, all institutions should have a comprehensive fraud prevention program tailored to meet the needs of the organization. Fraud prevention programs should also include three prongs to make them healthy enough to deter fraud.
- Whistleblower protections and training programs are another way to accomplish this task. Setting up a successful hotline and encouraging employees to speak out when they see or think they have discovered tool can serve as a valuable deterrent.