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.).

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.

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.

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:

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.

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.

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.

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.