[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 3850 Engrossed in Senate (ES)]


  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
109th CONGRESS
  2d Session
                                S. 3850

_______________________________________________________________________

                                 AN ACT


 
 To improve ratings quality for the protection of investors and in the 
    public interest by fostering accountability, transparency, and 
           competition 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.

    This Act may be cited as the ``Credit Rating Agency Reform Act of 
2006''.

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 
Committee on Banking, Housing, and Urban Affairs of the Senate and the 
Committee on Financial Services of the House of Representatives during 
the 108th and 109th Congresses, comment letters to the concept releases 
and proposed rules of the Commission, and facts otherwise disclosed and 
ascertained, Congress finds that credit rating agencies are of national 
importance, in that, among other things--
            (1) 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 other 
        means and instrumentalities of interstate commerce;
            (2) 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;
            (3) the foregoing transactions occur in such volume as 
        substantially to affect interstate commerce, the securities 
        markets, the national banking system, and the national economy;
            (4) the oversight of such credit rating agencies serves the 
        compelling interest of investor protection;
            (5) the 2 largest credit rating agencies serve the vast 
        majority of the market, and additional competition is in the 
        public interest; and
            (6) the Commission has indicated that it needs statutory 
        authority to oversee the credit rating industry.

SEC. 3. DEFINITIONS.

    (a) Securities Exchange Act of 1934.--Section 3(a) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is amended by adding 
at the end the following new paragraphs:
            ``(60) Credit rating.--The term `credit rating' means an 
        assessment of the creditworthiness of an obligor as an entity 
        or with respect to specific securities or money market 
        instruments.
            ``(61) Credit rating agency.--The term `credit rating 
        agency' means any person--
                    ``(A) engaged in the business of issuing credit 
                ratings on the Internet or through another readily 
                accessible means, for free or for a reasonable fee, but 
                does not include a commercial credit reporting company;
                    ``(B) employing either a quantitative or 
                qualitative model, or both, to determine credit 
                ratings; and
                    ``(C) receiving fees from either issuers, 
                investors, or other market participants, or a 
                combination thereof.
            ``(62) Nationally recognized statistical rating 
        organization.--The term `nationally recognized statistical 
        rating organization' means a credit rating agency that--
                    ``(A) has been in business as a credit rating 
                agency for at least the 3 consecutive years immediately 
                preceding the date of its application for registration 
                under section 15E;
                    ``(B) issues credit ratings certified by qualified 
                institutional buyers, in accordance with section 
                15E(a)(1)(B)(ix), with respect to--
                            ``(i) financial institutions, brokers, or 
                        dealers;
                            ``(ii) insurance companies;
                            ``(iii) corporate issuers;
                            ``(iv) issuers of asset-backed securities 
                        (as that term is defined in section 1101(c) of 
                        part 229 of title 17, Code of Federal 
                        Regulations, as in effect on the date of 
                        enactment of this paragraph);
                            ``(v) issuers of government securities, 
                        municipal securities, or securities issued by a 
                        foreign government; or
                            ``(vi) a combination of one or more 
                        categories of obligors described in any of 
                        clauses (i) through (v); and
                    ``(C) is registered under section 15E.
            ``(63) Person associated with a nationally recognized 
        statistical rating organization.--The term `person associated 
        with' a nationally recognized statistical rating organization 
        means any partner, officer, director, or branch manager of a 
        nationally recognized statistical rating organization (or any 
        person occupying a similar status or performing similar 
        functions), any person directly or indirectly controlling, 
        controlled by, or under common control with a nationally 
        recognized statistical rating organization, or any employee of 
        a nationally recognized statistical rating organization.
            ``(64) Qualified institutional buyer.--The term `qualified 
        institutional buyer' has the meaning given such term in section 
        230.144A(a) of title 17, Code of Federal Regulations, or any 
        successor thereto.''.
    (b) Applicable Definitions.--As used in this Act--
            (1) the term ``Commission'' means the Securities and 
        Exchange Commission; and
            (2) the term ``nationally recognized statistical rating 
        organization'' has the same meaning as in section 3(a)(62) of 
        the Securities Exchange Act of 1934, as added by this Act.

SEC. 4. REGISTRATION OF NATIONALLY RECOGNIZED 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 NATIONALLY RECOGNIZED STATISTICAL RATING 
              ORGANIZATIONS.

    ``(a) Registration Procedures.--
            ``(1) Application for registration.--
                    ``(A) In general.--A credit rating agency that 
                elects to be treated as a nationally recognized 
                statistical rating organization for purposes of this 
                title (in this section referred to as the `applicant'), 
                shall furnish to the Commission an application for 
                registration, in such form as the Commission shall 
                require, by rule or regulation issued in accordance 
                with subsection (n), and containing the information 
                described in subparagraph (B).
                    ``(B) Required information.--An application for 
                registration under this section shall contain 
                information regarding--
                            ``(i) credit ratings performance 
                        measurement statistics over short-term, mid-
                        term, and long-term periods (as applicable) of 
                        the applicant;
                            ``(ii) the procedures and methodologies 
                        that the applicant uses in determining credit 
                        ratings;
                            ``(iii) policies or procedures adopted and 
                        implemented by the applicant to prevent the 
                        misuse, in violation of this title (or the 
                        rules and regulations hereunder), of material, 
                        nonpublic information;
                            ``(iv) the organizational structure of the 
                        applicant;
                            ``(v) whether or not the applicant has in 
                        effect a code of ethics, and if not, the 
                        reasons therefor;
                            ``(vi) any conflict of interest relating to 
                        the issuance of credit ratings by the 
                        applicant;
                            ``(vii) the categories described in any of 
                        clauses (i) through (v) of section 3(a)(62)(B) 
                        with respect to which the applicant intends to 
                        apply for registration under this section;
                            ``(viii) on a confidential basis, a list of 
                        the 20 largest issuers and subscribers that use 
                        the credit rating services of the applicant, by 
                        amount of net revenues received therefrom in 
                        the fiscal year immediately preceding the date 
                        of submission of the application;
                            ``(ix) on a confidential basis, as to each 
                        applicable category of obligor described in any 
                        of clauses (i) through (v) of section 
                        3(a)(62)(B), written certifications described 
                        in subparagraph (C), except as provided in 
                        subparagraph (D); and
                            ``(x) any other information and documents 
                        concerning the applicant and any person 
                        associated with such applicant as the 
                        Commission, by rule, may prescribe as necessary 
                        or appropriate in the public interest or for 
                        the protection of investors.
                    ``(C) Written certifications.--Written 
                certifications required by subparagraph (B)(ix)--
                            ``(i) shall be provided from not fewer than 
                        10 qualified institutional buyers, none of 
                        which is affiliated with the applicant;
                            ``(ii) may address more than one category 
                        of obligors described in any of clauses (i) 
                        through (v) of section 3(a)(62)(B);
                            ``(iii) shall include not fewer than 2 
                        certifications for each such category of 
                        obligor; and
                            ``(iv) shall state that the qualified 
                        institutional buyer--
                                    ``(I) meets the definition of a 
                                qualified institutional buyer under 
                                section 3(a)(64); and
                                    ``(II) has used the credit ratings 
                                of the applicant for at least the 3 
                                years immediately preceding the date of 
                                the certification in the subject 
                                category or categories of obligors.
                    ``(D) Exemption from certification requirement.--A 
                written certification under subparagraph (B)(ix) is not 
                required with respect to any credit rating agency which 
                has received, or been the subject of, a no-action 
                letter from the staff of the Commission prior to August 
                2, 2006, stating that such staff would not recommend 
                enforcement action against any broker or dealer that 
                considers credit ratings issued by such credit rating 
                agency to be ratings from a nationally recognized 
                statistical rating organization.
                    ``(E) Limitation on liability of qualified 
                institutional buyers.--No qualified institutional buyer 
                shall be liable in any private right of action for any 
                opinion or statement expressed in a certification made 
                pursuant to subparagraph (B)(ix).
            ``(2) Review of application.--
                    ``(A) Initial determination.--Not later than 90 
                days after the date on which the application for 
                registration is furnished to the Commission under 
                paragraph (1) (or within such longer period as to which 
                the applicant consents) the Commission shall--
                            ``(i) by order, grant such registration for 
                        ratings in the subject category or categories 
                        of obligors, as described in clauses (i) 
                        through (v) of section 3(a)(62)(B); or
                            ``(ii) institute proceedings to determine 
                        whether registration should be denied.
                    ``(B) Conduct of proceedings.--
                            ``(i) Content.--Proceedings referred to in 
                        subparagraph (A)(ii) shall--
                                    ``(I) include notice of the grounds 
                                for denial under consideration and an 
                                opportunity for hearing; and
                                    ``(II) be concluded not later than 
                                120 days after the date on which the 
                                application for registration is 
                                furnished to the Commission under 
                                paragraph (1).
                            ``(ii) Determination.--At the conclusion of 
                        such proceedings, the Commission, by order, 
                        shall grant or deny such application for 
                        registration.
                            ``(iii) Extension authorized.--The 
                        Commission may extend the time for conclusion 
                        of such proceedings for not longer than 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 registration under this subsection--
                            ``(i) if the Commission finds that the 
                        requirements of this section are satisfied; and
                            ``(ii) unless the Commission finds (in 
                        which case the Commission shall deny such 
                        registration) that--
                                    ``(I) the applicant does not have 
                                adequate financial and managerial 
                                resources to consistently produce 
                                credit ratings with integrity and to 
                                materially comply with the procedures 
                                and methodologies disclosed under 
                                paragraph (1)(B) and with subsections 
                                (g), (h), (i), and (j); or
                                    ``(II) if the applicant were so 
                                registered, its registration would be 
                                subject to suspension or revocation 
                                under subsection (d).
            ``(3) Public availability of information.--Subject to 
        section 24, the Commission shall, by rule, require a nationally 
        recognized statistical rating organization, upon the granting 
        of registration under this section, to make the information and 
        documents submitted to the Commission in its completed 
        application for registration, or in any amendment submitted 
        under paragraph (1) or (2) of subsection (b), publicly 
        available on its website, or through another comparable, 
        readily accessible means, except as provided in clauses (viii) 
        and (ix) of paragraph (1)(B).
    ``(b) Update of Registration.--
            ``(1) Update.--Each nationally recognized statistical 
        rating organization shall promptly amend its application for 
        registration under this section if any information or document 
        provided therein becomes materially inaccurate, except that a 
        nationally recognized statistical rating organization is not 
        required to amend--
                    ``(A) the information required to be furnished 
                under subsection (a)(1)(B)(i) by furnishing information 
                under this paragraph, but shall amend such information 
                in the annual submission of the organization under 
                paragraph (2) of this subsection; or
                    ``(B) the certifications required to be provided 
                under subsection (a)(1)(B)(ix) by furnishing 
                information under this paragraph.
            ``(2) Certification.--Not later than 90 days after the end 
        of each calendar year, each nationally recognized statistical 
        rating organization shall furnish to the Commission an 
        amendment to its registration, in such form as the Commission, 
        by rule, may prescribe as necessary or appropriate in the 
        public interest or for the protection of investors--
                    ``(A) certifying that the information and documents 
                in the application for registration of such nationally 
                recognized statistical rating organization (other than 
                the certifications required under subsection 
                (a)(1)(B)(ix)) continue to be accurate; and
                    ``(B) listing any material change that occurred to 
                such information or documents during the previous 
                calendar year.
    ``(c) Accountability for Ratings Procedures.--
            ``(1) Authority.--The Commission shall have exclusive 
        authority to enforce the provisions of this section in 
        accordance with this title with respect to any nationally 
        recognized statistical rating organization, if such nationally 
        recognized statistical rating organization issues credit 
        ratings in material contravention of those procedures relating 
        to such nationally recognized statistical rating organization, 
        including procedures relating to the prevention of misuse of 
        nonpublic information and conflicts of interest, that such 
        nationally recognized statistical rating organization--
                    ``(A) includes in its application for registration 
                under subsection (a)(1)(B)(ii); or
                    ``(B) makes and disseminates in reports pursuant to 
                section 17(a) or the rules and regulations thereunder.
            ``(2) Limitation.--The rules and regulations that the 
        Commission may prescribe pursuant to this title, as they apply 
        to nationally recognized statistical rating organizations, 
        shall be narrowly tailored to meet the requirements of this 
        title applicable to nationally recognized statistical rating 
        organizations. Notwithstanding any other provision of law, 
        neither the Commission nor any State (or political subdivision 
        thereof) may regulate the substance of credit ratings or the 
        procedures and methodologies by which any nationally recognized 
        statistical rating organization determines credit ratings.
    ``(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 nationally 
recognized 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 necessary for the 
protection of investors and in the public interest and that such 
nationally recognized statistical rating organization, or any person 
associated with such an 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 section 15(b)(4), has been convicted of any 
        offense specified in section 15(b)(4)(B), or is enjoined from 
        any action, conduct, or practice specified in subparagraph (C) 
        of section 15(b)(4), during the 10-year period preceding the 
        date of commencement of the proceedings under this subsection, 
        or at any time thereafter;
            ``(2) has been convicted during the 10-year period 
        preceding the date on which an application for registration is 
        furnished to the Commission under this section, 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;
            ``(3) is subject to any order of the Commission barring or 
        suspending the right of the person to be associated with a 
        nationally recognized statistical rating organization;
            ``(4) fails to furnish the certifications required under 
        subsection (b)(2); or
            ``(5) fails to maintain adequate financial and managerial 
        resources to consistently produce credit ratings with 
        integrity.
    ``(e) Termination of Registration.--
            ``(1) Voluntary withdrawal.--A nationally recognized 
        statistical rating organization may, upon such terms and 
        conditions as the Commission may establish as necessary in the 
        public interest or for the protection of investors, withdraw 
        from registration by furnishing a written notice of withdrawal 
        to the Commission.
            ``(2) Commission authority.--In addition to any other 
        authority of the Commission under this title, if the Commission 
        finds that a nationally recognized statistical rating 
        organization is no longer in existence or has ceased to do 
        business as a credit rating agency, the Commission, by order, 
        shall cancel the registration under this section of such 
        nationally recognized statistical rating organization.
    ``(f) Representations.--
            ``(1) Ban on representations of sponsorship by united 
        states or agency thereof.--It shall be unlawful for any 
        nationally recognized statistical rating organization to 
        represent or imply in any manner whatsoever that such 
        nationally recognized statistical rating organization has been 
        designated, sponsored, recommended, or approved, or that the 
        abilities or qualifications thereof have in any respect been 
        passed upon, by the United States or any agency, officer, or 
        employee thereof.
            ``(2) Ban on representation as nrsro of unregistered credit 
        rating agencies.--It shall be unlawful for any credit rating 
        agency that is not registered under this section as a 
        nationally recognized statistical rating organization to state 
        that such credit rating agency is a nationally recognized 
        statistical rating organization registered under this title.
            ``(3) Statement of registration under securities exchange 
        act of 1934 provisions.--No provision of paragraph (1) shall be 
        construed to prohibit a statement that a nationally recognized 
        statistical rating organization is a nationally recognized 
        statistical rating organization under this title, if such 
        statement is true in fact and if the effect of such 
        registration is not misrepresented.
    ``(g) Prevention of Misuse of Nonpublic Information.--
            ``(1) Organization policies and procedures.--Each 
        nationally recognized statistical rating organization shall 
        establish, maintain, and enforce written policies and 
        procedures reasonably designed, taking into consideration the 
        nature of the business of such nationally recognized 
        statistical rating organization, to prevent the misuse in 
        violation of this title, or the rules or regulations hereunder, 
        of material, nonpublic information by such nationally 
        recognized statistical rating organization or any person 
        associated with such nationally recognized statistical rating 
        organization.
            ``(2) Commission authority.--The Commission shall issue 
        final rules in accordance with subsection (n) to require 
        specific policies or procedures that are reasonably designed to 
        prevent misuse in violation of this title (or the rules or 
        regulations hereunder) of material, nonpublic information.
    ``(h) Management of Conflicts of Interest.--
            ``(1) Organization policies and procedures.--Each 
        nationally recognized statistical rating organization shall 
        establish, maintain, and enforce written policies and 
        procedures reasonably designed, taking into consideration the 
        nature of the business of such nationally recognized 
        statistical rating organization and affiliated persons and 
        affiliated companies thereof, to address and manage any 
        conflicts of interest that can arise from such business.
            ``(2) Commission authority.--The Commission shall issue 
        final rules in accordance with subsection (n) to prohibit, or 
        require the management and disclosure of, any conflicts of 
        interest relating to the issuance of credit ratings by a 
        nationally recognized statistical rating organization, 
        including, without limitation, conflicts of interest relating 
        to--
                    ``(A) the manner in which a nationally recognized 
                statistical rating organization is compensated by the 
                obligor, or any affiliate of the obligor, for issuing 
                credit ratings or providing related services;
                    ``(B) the provision of consulting, advisory, or 
                other services by a nationally recognized statistical 
                rating organization, or any person associated with such 
                nationally recognized statistical rating organization, 
                to the obligor, or any affiliate of the obligor;
                    ``(C) business relationships, ownership interests, 
                or any other financial or personal interests between a 
                nationally recognized statistical rating organization, 
                or any person associated with such nationally 
                recognized statistical rating organization, and the 
                obligor, or any affiliate of the obligor;
                    ``(D) any affiliation of a nationally recognized 
                statistical rating organization, or any person 
                associated with such nationally recognized statistical 
                rating organization, with any person that underwrites 
                the securities or money market instruments that are the 
                subject of a credit rating; and
                    ``(E) any other potential conflict of interest, as 
                the Commission deems necessary or appropriate in the 
                public interest or for the protection of investors.
    ``(i) Prohibited Conduct.--
            ``(1) Prohibited acts and practices.--The Commission shall 
        issue final rules in accordance with subsection (n) to prohibit 
        any act or practice relating to the issuance of credit ratings 
        by a nationally recognized statistical rating organization that 
        the Commission determines to be unfair, coercive, or abusive, 
        including any act or practice relating to--
                    ``(A) conditioning or threatening to condition the 
                issuance of a credit rating on the purchase by the 
                obligor or an affiliate thereof of other services or 
                products, including pre-credit rating assessment 
                products, of the nationally recognized statistical 
                rating organization or any person associated with such 
                nationally recognized statistical rating organization;
                    ``(B) lowering or threatening to lower a credit 
                rating on, or refusing to rate, securities or money 
                market instruments issued by an asset pool or as part 
                of any asset-backed or mortgage-backed securities 
                transaction, unless a portion of the assets within such 
                pool or part of such transaction, as applicable, also 
                is rated by the nationally recognized statistical 
                rating organization; or
                    ``(C) modifying or threatening to modify a credit 
                rating or otherwise departing from its adopted 
                systematic procedures and methodologies in determining 
                credit ratings, based on whether the obligor, or an 
                affiliate of the obligor, purchases or will purchase 
                the credit rating or any other service or product of 
                the nationally recognized statistical rating 
                organization or any person associated with such 
                organization.
            ``(2) Rule of construction.--Nothing in paragraph (1), or 
        in any rules or regulations adopted thereunder, may be 
        construed to modify, impair, or supersede the operation of any 
        of the antitrust laws (as defined in the first section of the 
        Clayton Act, except that such term includes section 5 of the 
        Federal Trade Commission Act, to the extent that such section 5 
        applies to unfair methods of competition).
    ``(j) Designation of Compliance Officer.--Each nationally 
recognized statistical rating organization shall designate an 
individual responsible for administering the policies and procedures 
that are required to be established pursuant to subsections (g) and 
(h), and for ensuring compliance with the securities laws and the rules 
and regulations thereunder, including those promulgated by the 
Commission pursuant to this section.
    ``(k) Statements of Financial Condition.--Each nationally 
recognized statistical rating organization shall, on a confidential 
basis, furnish to the Commission, at intervals determined by the 
Commission, such financial statements, certified (if required by the 
rules or regulations of the Commission) by an independent public 
accountant, and information concerning its financial condition, as the 
Commission, by rule, may prescribe as necessary or appropriate in the 
public interest or for the protection of investors.
    ``(l) Sole Method of Registration.--
            ``(1) In general.--On and after the effective date of this 
        section, a credit rating agency may only be registered as a 
        nationally recognized statistical rating organization for any 
        purpose in accordance with this section.
            ``(2) Prohibition on reliance on no-action relief.--On and 
        after the effective date of this section--
                    ``(A) an entity that, before that date, received 
                advice, approval, or a no-action letter from the 
                Commission or staff thereof to be treated as a 
                nationally recognized statistical rating organization 
                pursuant to the Commission rule at section 240.15c3-1 
                of title 17, Code of Federal Regulations, may represent 
                itself or act as a nationally recognized statistical 
                rating organization only--
                            ``(i) during Commission consideration of 
                        the application, if such entity has furnished 
                        an application for registration under this 
                        section; and
                            ``(ii) on and after the date of approval of 
                        its application for registration under this 
                        section; and
                    ``(B) the advice, approval, or no-action letter 
                described in subparagraph (A) shall be void.
            ``(3) Notice to other agencies.--Not later than 30 days 
        after the date of enactment of this section, the Commission 
        shall give notice of the actions undertaken pursuant to this 
        section to each Federal agency which employs in its rules and 
        regulations the term `nationally recognized statistical rating 
        organization' (as that term is used under Commission rule 15c3-
        1 (17 C.F.R. 240.15c3-1), as in effect on the date of enactment 
        of this section).
    ``(m) Rules of Construction.--
            ``(1) No waiver of rights, privileges, or defenses.--
        Registration under and compliance with this section does not 
        constitute a waiver of, or otherwise diminish, any right, 
        privilege, or defense that a nationally recognized statistical 
        rating organization may otherwise have under any provision of 
        State or Federal law, including any rule, regulation, or order 
        thereunder.
            ``(2) No private right of action.--Nothing in this section 
        may be construed as creating any private right of action, and 
        no report furnished by a nationally recognized statistical 
        rating organization in accordance with this section or section 
        17 shall create a private right of action under section 18 or 
        any other provision of law.
    ``(n) Regulations.--
            ``(1) New provisions.--Such rules and regulations as are 
        required by this section or are otherwise necessary to carry 
        out this section, including the application form required under 
        subsection (a)--
                    ``(A) shall be issued by the Commission in final 
                form, not later than 270 days after the date of 
                enactment of this section; and
                    ``(B) shall become effective not later than 270 
                days after the date of enactment of this section.
            ``(2) Review of existing regulations.--Not later than 270 
        days after the date of enactment of this section, the 
        Commission shall--
                    ``(A) review its existing rules and regulations 
                which employ the term `nationally recognized 
                statistical rating organization' or `NRSRO'; and
                    ``(B) amend or revise such rules and regulations in 
                accordance with the purposes of this section, as the 
                Commission may prescribe as necessary or appropriate in 
                the public interest or for the protection of investors.
    ``(o) NRSROs Subject To Commission Authority.--
            ``(1) In general.--No provision of the laws of any State or 
        political subdivision thereof requiring the registration, 
        licensing, or qualification as a credit rating agency or a 
        nationally recognized statistical rating organization shall 
        apply to any nationally recognized statistical rating 
        organization or person employed by or working under the control 
        of a nationally recognized statistical rating organization.
            ``(2) Limitation.--Nothing in this subsection prohibits the 
        securities commission (or any agency or office performing like 
        functions) of any State from investigating and bringing an 
        enforcement action with respect to fraud or deceit against any 
        nationally recognized statistical rating organization or person 
        associated with a nationally recognized statistical rating 
        organization.
    ``(p) Applicability.--This section, other than subsection (n), 
which shall apply on the date of enactment of this section, shall apply 
on the earlier of--
            ``(1) the date on which regulations are issued in final 
        form under subsection (n)(1); or
            ``(2) 270 days after the date of enactment of this 
        section.''.
    (b) Conforming Amendments.--
            (1) Securities exchange act of 1934.--The Securities 
        Exchange Act of 1934 (15 U.S.C. 78 et seq.) is amended--
                    (A) in section 15(b)(4) (15 U.S.C. 78o(b)(4))--
                            (i) in subparagraph (B)(ii), by inserting 
                        ``nationally recognized statistical rating 
                        organization,'' after ``transfer agent,''; and
                            (ii) in subparagraph (C), by inserting 
                        ``nationally recognized statistical rating 
                        organization,'' after ``transfer agent,''; and
                    (B) in section 21B(a) (15 U.S.C. 78u-2(a)), by 
                inserting ``15E,'' after ``15C,''.
            (2) Investment company act of 1940.--The Investment Company 
        Act of 1940 (15 U.S.C. 80a et seq.) is amended--
                    (A) in section 2(a) (15 U.S.C. 80a-2(a)), by adding 
                at the end the following new paragraph:
            ``(53) The term `credit rating agency' has the same meaning 
        as in section 3 of the Securities Exchange Act of 1934.''; and
                    (B) in section 9(a) (15 U.S.C. 80a-9(a))--
                            (i) in paragraph (1), by inserting ``credit 
                        rating agency,'' after ``transfer agent,''; and
                            (ii) in paragraph (2), by inserting 
                        ``credit rating agency,'' after ``transfer 
                        agent,''.
            (3) Investment advisers act of 1940.--The Investment 
        Advisers Act of 1940 (15 U.S.C. 80b et seq.) is amended--
                    (A) in section 202(a) (15 U.S.C. 80b-2(a)), by 
                adding at the end the following new paragraph:
            ``(28) The term `credit rating agency' has the same meaning 
        as in section 3 of the Securities Exchange Act of 1934.'';
                    (B) in section 202(a)(11) (15 U.S.C. 80b-2(a)(11)), 
                by striking ``or (F)'' and inserting the following: 
                ``(F) any nationally recognized statistical rating 
                organization, as that term is defined in section 
                3(a)(62) of the Securities Exchange Act of 1934, unless 
                such organization engages in issuing recommendations as 
                to purchasing, selling, or holding securities or in 
                managing assets, consisting in whole or in part of 
                securities, on behalf of others; or (G)''; and
                    (C) in section 203(e) (15 U.S.C. 80b-3(e))--
                            (i) in paragraph (2)(B), by inserting 
                        ``credit rating agency,'' after ``transfer 
                        agent,''; and
                            (ii) in paragraph (4), by inserting 
                        ``credit rating agency,'' after ``transfer 
                        agent,''.
            (4) Housing and community development act of 1992.--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 recognized statistical rating organization, as 
        such term is defined in section 3(a) of the Securities Exchange 
        Act of 1934''.
            (5) Higher education act of 1965.--Section 439(r)(15)(A) of 
        the Higher Education Act of 1965 (20 U.S.C. 1087-2(r)(15)(A)) 
        is amended by striking ``means any entity recognized as such by 
        the Securities and Exchange Commission'' and inserting ``means 
        any nationally recognized statistical rating organization, as 
        that term is defined in section 3(a) of the Securities Exchange 
        Act of 1934''.
            (6) Title 23.--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 nationally recognized 
        statistical rating organization, as that term is defined in 
        section 3(a) of the Securities Exchange Act of 1934''.

SEC. 5. ANNUAL AND OTHER REPORTS.

    Section 17(a)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 
78q(a)(1)) is amended--
            (1) by inserting ``nationally recognized statistical rating 
        organization,'' after ``registered transfer agent,''; and
            (2) by adding at the end the following: ``Any report that a 
        nationally recognized statistical rating organization is 
        required by Commission rules under this paragraph to make and 
        disseminate to the Commission shall be deemed furnished to the 
        Commission.''.

SEC. 6. COMMISSION ANNUAL REPORT.

    The Commission shall submit an annual report to the Committee on 
Banking, Housing, and Urban Affairs of the Senate and the Committee on 
Financial Services of the House of Representatives that, with respect 
to the year to which the report relates--
            (1) identifies applicants for registration under section 
        15E of the Securities Exchange Act of 1934, as added by this 
        Act;
            (2) specifies the number of and actions taken on such 
        applications; and
            (3) specifies the views of the Commission on the state of 
        competition, transparency, and conflicts of interest among 
        nationally recognized statistical rating organizations.

SEC. 7. GAO STUDY AND REPORT REGARDING NATIONALLY RECOGNIZED 
              STATISTICAL RATING ORGANIZATIONS.

    (a) Study Required.--The Comptroller General of the United States 
shall conduct a study--
            (1) to determine the impact of this Act and the amendments 
        made by this Act on--
                    (A) the quality of credit ratings issued by 
                nationally recognized statistical ratings 
                organizations;
                    (B) the financial markets;
                    (C) competition among credit rating agencies;
                    (D) the incidence of inappropriate conflicts of 
                interest and sales practices by nationally recognized 
                statistical rating organizations;
                    (E) the process for registering as a nationally 
                recognized statistical rating organization; and
                    (F) such other matters relevant to the 
                implementation of this Act and the amendments made by 
                this Act, as the Comptroller General deems necessary to 
                bring to the attention of the Congress;
            (2) to identify problems, if any, that have resulted from 
        the implementation of this Act and the amendments made by this 
        Act; and
            (3) to recommend solutions, including any legislative or 
        regulatory solutions, to any problems identified under 
        paragraphs (1) and (2).
    (b) Report Required.--Not earlier than 3 years nor later than 4 
years 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.

            Passed the Senate September 22, 2006.

            Attest:

                                                             Secretary.
109th CONGRESS

  2d Session

                                S. 3850

_______________________________________________________________________

                                 AN ACT

 To improve ratings quality for the protection of investors and in the 
    public interest by fostering accountability, transparency, and 
           competition in the credit rating agency industry.