By Scott McCleskey, Complinet

Suppose a law were passed that made driver licenses optional. If you want one, you’d still need to pass exams and pay fees every few years, and you’d be subject to fines for speeding and parking violations. Or you could just say ‘no thanks’, turn in your license, and get back on the road. Of course, no lawmaker would contemplate such a thing. But flawed provisions in the Dodd–Frank Act would do exactly that for the credit ratings agencies, making regulation an optional multimillion dollar expense.

The license in question is designation as a Nationally Recognized Statistical Rating Organization (NRSRO). Having this status used to mean something. NRSRO ratings have been written into the financial regulations for a good thirty years, so that the designation was a license to print money. Yet until Congress passed a law regulating them in 2006 (only implemented in late 2007), there were virtually no regulatory requirements imposed on NRSROs and their activities. We all know how that turned out.

OUT FOR BLOOD

The 2006 law imposed requirements, costs and penalties for non-compliance on the NRSROs, but it was still worth the bother to be one because the designation was required in order to do business. But the financial crisis exposed both the flaws in the way the NRSROs conducted their ratings and the widespread damage that their mistakes could cause, and the politicians were out for blood.

Putting a large portion of the blame on the rating agencies was not unfair. (Disclosure: I was responsible for compliance at one of the NRSROs, but have testified in Congress against the firm and we are no longer on speaking terms). Yet the policymakers’ obsession with killing off the NRSROs led them to take the foolhardy approach of requiring the removal of references to NRSRO ratings from all federal regulations. In so doing, they will remove the primary reason to be an NRSRO, taking away the benefit and leaving only the cost.

And the cost is not small: In the quarterly report most recently issued by Moody’s, the firm estimated the cost of complying with new regulations to increase by approximately $15m in 2010 and $15m to $25m in 2011. That’s on top of whatever they’re spending now, and it’s a safe bet that S&P and Fitch are also writing some pretty big checks. Only a fraction of that figure will actually go to compliance departments, as the figure no doubt includes defending themselves in court and the cost of lobbying Congress. Nonetheless, that’s all money they could keep if they didn’t have to comply with NRSRO regulations.