Instead of overregulate the industry, as it is the recent regulatory trend, we propone to focus
on accountability on CRAs through liability: it would obviate the need for regulators to provide
parameters upfront governing when NRSROs have satisfied their responsibilities as part of the
oversight process. Ex ante oversight does not need to be as specific or draconian if regulators and
investors can rely on ex post adjudication of CRAs negligence, recklenessess and fraud. We
analyze the fundamental trade-off between the potentially adverse impact of CRAs liability on
relevant market and the incentives such liability provides for them to foil wrongdoing. On one
hand, enhanced liability can positively influence the accuracy of CRAs’ analyses and induce them
to prevent the issuers they rate from committing misconduct. Threat of liability should lead CRAs
to ensure that their analysts have the requisite competences to undertake credit ratings. Moreover,
CRA liability may supplement reputational sanctions, controlling those elements of performance
that are not subject to reputational control. On the other hand, expanding the scope of liability will
make CRAs increase the price of their services to reflect their liability exposure. Although initially
appealing as a means to screen out wrongdoers, this price increase may turn out to have adverse
consequences: rather than screen out wrongdoers, gatekeeper liability may drive out only lawabiding
clients.