[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2990 Introduced in House (IH)]






109th CONGRESS
  1st Session
                                H. R. 2990

To improve ratings quality by fostering competition, transparency, and 
          accountability in the credit rating agency industry.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             June 20, 2005

 Mr. Fitzpatrick of Pennsylvania introduced the following bill; which 
          was referred to the Committee on Financial Services

_______________________________________________________________________

                                 A BILL


 
To improve ratings quality by fostering competition, transparency, and 
          accountability in the credit rating agency industry.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; REFERENCES.

    (a) Short Title.--This Act may be cited as the ``Credit Rating 
Agency Duopoly Relief Act of 2005''.
    (b) References.--Except as otherwise expressly provided, whenever 
in this Act an amendment or repeal is expressed in terms of an 
amendment to, or repeal of, a section or other provision, the reference 
shall be considered to be made to a section or other provision of the 
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).

SEC. 2. FINDINGS.

    Upon the basis of facts disclosed by the record and report of the 
Securities and Exchange Commission made pursuant to section 702 of the 
Sarbanes-Oxley Act of 2002 (116 Stat. 797), hearings before the House 
Committee on Financial Services during the 108th and 109th Congresses, 
comment letters to the concept releases and proposed rules of the 
Securities and Exchange Commission, and facts otherwise disclosed and 
ascertained, the Congress finds that--
            (1) credit rating agencies are of national concern, in 
        that, among other things--
                    (A) their ratings, publications, writings, 
                analyses, and reports are furnished and distributed, 
                and their contracts, subscription agreements, and other 
                arrangements with clients are negotiated and performed, 
                by the use of the mails and means and instrumentalities 
                of interstate commerce;
                    (B) their ratings, publications, writings, 
                analyses, and reports customarily relate to the 
                purchase and sale of securities traded on securities 
                exchanges and in interstate over-the-counter markets, 
                securities issued by companies engaged in business in 
                interstate commerce, and securities issued by national 
                banks and member banks of the Federal Reserve System;
                    (C) the foregoing transactions occur in such volume 
                as substantially to affect interstate commerce, and 
                securities markets, the national banking system, and 
                the national economy; and
                    (D) their regulation serves the compelling interest 
                of investor protection; and
            (2) the Securities and Exchange Commission--
                    (A) has, through its designation of certain credit 
                rating agencies as nationally recognized statistical 
                rating organizations, created an artificial barrier to 
                entry for new participants; and
                    (B) will, in its latest proposed rule defining 
                nationally recognized statistical rating organizations, 
                codify and strengthen this barrier.

SEC. 3. DEFINITIONS.

    Section 3(a) (15 U.S.C. 78c(a)) is amended by adding at the end the 
following new paragraphs:
            ``(60) Statistical rating organization.--
                    ``(A) Definition.--The term `statistical rating 
                organization' means an entity--
                            ``(i) the primary business of which, for at 
                        least the most recent three consecutive years, 
                        has been the issuance of publicly available 
                        ratings; and
                            ``(ii) that employs either a quantitative 
                        or qualitative model, or both, to determine its 
                        publicly available ratings.
                    ``(B) Publicly available ratings.--For purposes of 
                subparagraph (A), the term `publicly available ratings' 
                means ratings on public companies or specific debt 
                securities or both disseminated on the Internet for 
                free or a fee.
            ``(61) Nationally registered statistical rating 
        organization; nrsro.--The term `nationally registered 
        statistical rating organization' or `NRSRO' means a statistical 
        rating organization registered or required to register pursuant 
        to section 15E of this title.''.

SEC. 4. REGISTRATION OF STATISTICAL RATING ORGANIZATIONS.

    (a) Amendment.--The Securities Exchange Act of 1934 is amended by 
inserting after section 15D (15 U.S.C. 78o-6) the following new 
section:

``SEC. 15E. REGISTRATION OF STATISTICAL RATING ORGANIZATIONS.

    ``(a) Registration Required.--Except as provided in subsection (b), 
it shall be unlawful for any statistical rating organization, unless 
registered under this section, to make use of the mails or any means or 
instrumentality of interstate commerce in connection with its business 
as a statistical rating organization.
    ``(b) Exceptions.--The Commission, by rule or order, as it deems 
consistent with the public interest and the protection of investors, 
may conditionally or unconditionally exempt from subsection (a) of this 
section any statistical rating organization specified in such rule or 
order.
    ``(c) Registration Procedures.--
            ``(1) Filing of application form.--A statistical rating 
        organization may be registered by filing with the Commission an 
        application for registration in such form and containing such 
        of the following and any other information and documents 
        concerning such statistical rating organization and any persons 
        associated with such statistical rating organization as the 
        Commission, by rule, may prescribe as necessary or appropriate 
        in the public interest or for the protection of investors:
                    ``(A) conflicts of interest faced by such 
                statistical rating organization and the management of 
                those conflicts by such statistical rating 
                organization;
                    ``(B) the procedures and methodologies such 
                statistical rating organization uses in determining 
                ratings;
                    ``(C) ratings performance measurement statistics 
                over short-term and long-term periods of such 
                statistical rating organization; and
                    ``(D) procedures put in place by such statistical 
                rating organization to prevent the misuse of non-public 
                information.
            ``(2) Review of application.--
                    ``(A) Initial determination.--Within 90 days of the 
                date of the filing of such application (or within such 
                longer period as to which the applicant consents) the 
                Commission shall--
                            ``(i) by order grant such registration; or
                            ``(ii) institute proceedings to determine 
                        whether registration should be denied.
                    ``(B) Conduct of proceedings.--Such proceedings 
                shall include notice of the grounds for denial under 
                consideration and opportunity for hearing and shall be 
                concluded within 90 days of the date of the filing of 
                the application for registration. At the conclusion of 
                such proceedings the Commission, by order, shall grant 
                or deny such registration. The Commission may extend 
                the time for conclusion of such proceedings for up to 
                90 days if it finds good cause for such extension and 
                publishes its reasons for so finding or for such longer 
                period as to which the applicant consents.
                    ``(C) Grounds for decision.--The Commission shall 
                grant such registration if the Commission finds that 
                the requirements of this section are satisfied. The 
                Commission shall deny such registration if it does not 
                make such a finding or if it finds that if the 
                applicant were so registered, its registration would be 
                subject to suspension or revocation under subsection 
                (d) of this section.
    ``(d) Censure, Denial, or Suspension of Registration; Notice and 
Hearing.--The Commission, by order, shall censure, place limitations on 
the activities, functions, or operations of, suspend for a period not 
exceeding 12 months, or revoke the registration of any statistical 
rating organization if the Commission finds, on the record after notice 
and opportunity for hearing, that such censure, placing of limitations, 
suspension, or revocation is in the public interest and that such 
statistical rating organization, or any person associated with such 
statistical rating organization, whether prior to or subsequent to 
becoming so associated--
            ``(1) has committed or omitted any act, or is subject to an 
        order or finding, enumerated in subparagraph (A), (D), (E), 
        (H), or (G) of paragraph (4) of section 15(b), has been 
        convicted of any offense specified in subparagraph (B) of such 
        paragraph (4) within 10 years of the commencement of the 
        proceedings under this subsection, or is enjoined from any 
        action, conduct, or practice specified in subparagraph (C) of 
        such paragraph (4);
            ``(2) has been convicted during the 10-year period 
        preceding the date of filing of any application for 
        registration, or at any time thereafter, of--
                    ``(A) any crime that is punishable by imprisonment 
                for 1 or more years, and that is not described in 
                section 15(b)(4)(B); or
                    ``(B) a substantially equivalent crime by a foreign 
                court of competent jurisdiction; or
            ``(3) is subject to any order of the Commission barring or 
        suspending the right of the person to be associated with a 
        statistical rating organization.
    ``(e) Withdrawal of Advisers Registration.--Each statistical rating 
organization registered under section 203 of the Investment Advisers 
Act of 1940 shall withdraw from registration under such section by 
filing a written notice of withdrawal with the Commission pursuant to 
section 203(h) of the Investment Advisers Act, upon the granting of 
registration of such organization by the Commission pursuant to 
subsection (c) of this section.
    ``(f) Representations.--
            ``(1) Representations of sponsorship by united states or 
        agency thereof.--It shall be unlawful for any statistical 
        rating organization registered under this section to represent 
        or imply in any manner whatsoever that such statistical rating 
        organization has been sponsored, recommended, or approved, or 
        that such statistical rating organization's abilities or 
        qualifications have in any respect been passed upon, by the 
        United States or any agency or any officer thereof.
            ``(2) Statement of registration under securities exchange 
        act of 1934 provisions.--No provision of paragraph (1) shall be 
        construed to prohibit a statement that a statistical rating 
        organization is a nationally registered statistical rating 
        organization under the Securities Exchange Act of 1934, if such 
        statement is true in fact and if the effect of such 
        registration is not misrepresented.
    ``(g) Prevention of Misuse of Nonpublic Information.--Each 
statistical rating organization subject to this section shall 
establish, maintain, and enforce written policies and procedures 
reasonably designed, taking into consideration the nature of such 
statistical rating organization's business, to prevent the misuse in 
violation of this title, or the rules or regulations thereunder, of 
material, nonpublic information by such statistical rating organization 
or any person associated with such statistical rating organization. The 
Commission, as it deems necessary or appropriate in the public interest 
or for the protection of investors, shall adopt rules or regulations to 
require specific policies or procedures reasonably designed to prevent 
misuse in violation of this title (or the rules or regulations 
thereunder) of material, nonpublic information.
    ``(h) Management of Conflicts of Interest.--Each statistical rating 
organization subject to this section shall establish, maintain, and 
enforce written policies and procedures reasonably designed, taking 
into consideration the nature of the business of such statistical 
rating organization and affiliated persons and affiliated companies of 
such statistical rating organization, to address and manage the 
conflicts of interest that can arise from such business. The 
Commission, as it deems necessary or appropriate in the public interest 
or for the protection of investors, shall adopt rules or regulations to 
require specific policies or procedures reasonably designed to address 
and manage such conflicts of interest.
    ``(i) Prohibition on Anti-Competitive Practices.--The Commission 
shall adopt rules or regulations to prohibit specific anti-competitive 
practices common to the statistical rating organization industry.
    ``(j) Elimination of Commission Designation Process for Nationally 
Recognized Statistical Rating Organizations.--
            ``(1) Cessation of designation.--Within 30 days after the 
        enactment of the Credit Rating Agency Duopoly Relief Act of 
        2005, the Commission shall cease to designate persons and 
        companies as nationally recognized statistical rating 
        organizations, as that term is used under rule 15c3-1 of the 
        Commission's rules (17 C.F.R. 240.15c3-1).
            ``(2) Prohibition on reliance on no-action relief.--The no-
        action relief that the Commission has granted with respect to 
        the designation of nationally recognized statistical rating 
        organizations, as that term is used under rule 15c3-1 of the 
        Commission's rules (17 C.F.R. 240.15c3-1), shall be void and of 
        no force or effect.
            ``(3) Notice to other agencies.--Within 30 days after the 
        date of enactment of the Credit Rating Agency Duopoly Relief 
        Act of 2005, the Commission shall give notice to the Federal 
        agencies which employ the term `nationally recognized 
        statistical rating organization' (as that term is used under 
        rule 15c3-1 of the Commission's rules (17 C.F.R. 240.15c3-1)) 
        in their rules and regulations regarding the actions undertaken 
        pursuant to paragraphs (1) and (2).''.
    (b) Conforming Amendments to the 1934 Act.--
            (1) Section 3(a)(41) of the Securities Exchange Act of 1934 
        (15 U.S.C. 78c(a)(41)) is amended by striking ``recognized'' 
        and inserting ``registered''.
            (2) Section 3(a)(53)(A) of such Act is amended by striking 
        ``recognized'' and inserting ``registered''.
            (3) Section 15(b)(4)(B)(ii) of such Act (15 U.S.C. 
        78o(b)(4)(B)(ii)) is amended by inserting ``statistical rating 
        organization,'' after ``transfer agent,''.
            (4) Section 15(b)(4)(C) of such Act is amended by inserting 
        ``statistical rating organization,'' after ``transfer agent,''.
            (5) Section 21B(a) of such Act (15 U.S.C. 78u-2(a)) is 
        amended by inserting ``15E,'' after ``15C,''.
    (c) Other Conforming Amendments.--
            (1) Section 5136A(a)(3)(A)(i) of the Revised Statutes of 
        the United States (12 U.S.C. 24a(a)(3)(A)(i)) is amended by 
        striking ``recognized'' and inserting ``registered''.
            (2) Section 28(d)(4)(A) of the Federal Deposit Insurance 
        Act (12 U.S.C. 1831e(d)(4)(A)) is amended by striking 
        ``recognized'' and inserting ``registered''.
            (3) Section 1319 of the Housing and Community Development 
        Act of 1992 (12 U.S.C. 4519) is amended by striking 
        ``effectively'' and all that follows through ``broker-dealers'' 
        and inserting ``that is a nationally registered statistical 
        rating organization, as such term is defined in section 3(a) of 
        the Securities Exchange Act of 1934''.
            (4) Section 6(a)(5)(A)(iv)(I) of the Investment Company Act 
        of 1940 (15 U.S.C. 80a-6(a)(5)(A)(iv)(I)) is amended by 
        striking ``recognized'' and inserting ``registered''.
            (5) Section 439 of the Higher Education Act of 1965 (20 
        U.S.C. 1087-2) is amended--
                    (A) in each of the following provisions, by 
                striking ``nationally recognized'' and inserting 
                ``nationally registered'': subsections 
                (d)(5),(r)(1)(B), (r)(11), and (r)(15)(A); and
                    (B) in subsection (r)(15)(A) by striking ``means 
                any entity recognized as such by the Securities and 
                Exchange Commission'' and inserting ``means any 
                nationally registered statistical rating organization 
                as that term is defined under the Securities Exchange 
                Act of 1934''.
            (6) Section 181(11) of title 23, United States Code, is 
        amended by striking ``identified by the Securities and Exchange 
        Commission as a Nationally Recognized Statistical Rating 
        Organization'' and inserting ``registered with the Securities 
        and Exchange Commission as a statistical rating organization as 
        that term is defined under the Securities Exchange Act of 1934 
        (15 U.S.C. 78 et seq.)''.
            (7) Section 1004(d)(2)(D)(i)(II) of the LOCAL TV Act (47 
        U.S.C 1103(d)(2)(D)(i)(II)) is amended by striking 
        ``recognized'' and inserting ``registered''.

SEC. 5. ANNUAL AND OTHER REPORTS.

    Section 17(a) (15 U.S.C. 78q(a)) is amended by adding at the end 
the following new paragraph:
    ``(4) Every nationally registered statistical rating organization 
shall also make and keep for described periods such records, furnish 
such copies thereof, and make and disseminate such reports as the 
Commission, by rule, prescribes as necessary or appropriate in the 
public interest, for the protection of investors, or otherwise in 
furtherance of the purposes of this title.''.

SEC. 6. GAO STUDY AND REPORT REGARDING CONSOLIDATION OF CREDIT RATING 
              AGENCIES.

    (a) Study Required.--The Comptroller General of the United States 
shall conduct a study--
            (1) to identify--
                    (A) the factors that have led to the consolidation 
                of credit rating agencies;
                    (B) the present and future impact of the condition 
                described in subparagraph (A) on the securities 
                markets, both domestic and international; and
                    (C) solutions to any problems identified under 
                subparagraph (B), including ways to increase 
                competition and the number of firms capable of 
                providing credit rating services to large national and 
                multinational business organizations that are subject 
                to the securities laws;
            (2) of the problems, if any, faced by business 
        organizations that have resulted from limited competition among 
        credit rating agencies, including--
                    (A) higher costs;
                    (B) lower quality of services;
                    (C) anti-competitive practices;
                    (D) impairment of independence; and
                    (E) lack of choice; and
            (3) whether and to what extent Federal or State regulations 
        impede competition among credit rating agencies.
    (b) Consultation.--In planning and conducting the study under this 
section, the Comptroller General shall consult with--
            (1) the Securities and Exchange Commission;
            (2) the Department of Justice; and
            (3) any other public or private sector organization that 
        the Comptroller General considers appropriate.
    (c) Report Required.--Not later than 180 days after the date of 
enactment of this Act, the Comptroller General shall submit a report on 
the results of the study required by this section to the Committee on 
Banking, Housing, and Urban Affairs of the Senate and the Committee on 
Financial Services of the House of Representatives.

SEC. 7. EFFECTIVE DATE.

    The amendments made by section 4 and 5 shall take effect on January 
1, 2007, except as otherwise provided in subsections (e), (j)(1), and 
(j)(3) of section 15E of the Securities Exchange Act of 1934 (as added 
by such amendments), and except that the Securities and Exchange 
Commission is authorized to prescribe rules and regulations to carry 
out such amendments beginning on the date of enactment of this Act.
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