[Congressional Bills 111th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3214 Introduced in House (IH)]
111th CONGRESS
1st Session
H. R. 3214
To provide for credit rating reforms, and for other purposes.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
July 14, 2009
Mr. Rooney introduced the following bill; which was referred to the
Committee on Financial Services
_______________________________________________________________________
A BILL
To provide for credit rating reforms, and for other purposes.
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 ``Rating Accountability and
Transparency Enhancement Act of 2009'' or the ``RATE Act''.
SEC. 2. FINDINGS.
Congress finds that--
(1) because of the systemic importance of credit ratings
and the reliance placed on them by individual and institutional
investors and financial regulators, the activities and
performances of credit rating agencies, including nationally
recognized statistical rating organizations, are the subject of
national public interest, as they are central to capital
formation, investor confidence, and the efficient performance
of the United States economy;
(2) credit rating agencies, including nationally recognized
statistical rating organizations, play a critical
``gatekeeper'' role that is functionally similar to that of
securities analysts, who evaluate the quality of securities,
and auditors, who review the financial statements of firms, and
such role justifies a similar level of public oversight and
accountability;
(3) because credit rating agencies perform evaluative and
analytical services on behalf of clients, their activities are
fundamentally commercial in character and should be subject to
the same standards of liability and oversight as apply to
auditors and securities analysts;
(4) in certain of their roles, particularly in advising
arrangers of structured financial products on potential ratings
of such products, credit rating agencies face conflicts of
interest that need to be carefully monitored and that therefore
should be addressed explicitly in legislation in order to give
clear authority to the Securities and Exchange Commission;
(5) in the recent credit crisis, the ratings of structured
financial products have proven to be inaccurate, and have
contributed to the mismanagement of risks by financial
institutions and investors, which impacts the health of the
economy in the United States and around the world; and
(6) credit rating agencies should determine their ratings
independently, without regulatory approval of methodologies, in
order to avoid overreliance on ratings and to ensure that the
rating agencies, rather than the Securities and Exchange
Commission, are accountable for such methodologies, except that
regulators should have strong authority to ensure that all
other aspects of rating agency activities are designed to
ensure the highest quality ratings and accountability for those
creating them.
SEC. 3. ENHANCED REGULATION OF NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATIONS.
Section 15E of the Securities Exchange Act of 1934 (15 U.S.C. 78o-
7) is amended--
(1) in subsection (c)--
(A) in the second sentence of paragraph (2), by
inserting ``including the requirements of this
section,'' after ``Notwithstanding any other provision
of law,''; and
(B) by adding at the end the following:
``(3) Review of internal controls for determining credit
ratings.--
``(A) In general.--Credit ratings by, and the
policies, procedures, and methodologies employed by,
each nationally recognized statistical rating
organization shall be reviewed by the Commission to
ensure that--
``(i) the nationally recognized statistical
rating organization has established and
documented a system of internal controls for
determining credit ratings, taking into
consideration such factors as the Commission
may prescribe by rule;
``(ii) the nationally recognized
statistical rating organization adheres to such
system; and
``(iii) the public disclosures of the
nationally recognized statistical rating
organization required under this section about
its ratings, methodologies, and procedures are
consistent with such system.
``(B) Scope of reviews.--The Commission shall
conduct the reviews required by this paragraph--
``(i) for all types of credit ratings; and
``(ii) for new credit ratings, in a timely
manner.
``(C) Manner and frequency.--The Commission shall
conduct reviews required by this paragraph in a manner
and with a frequency to be determined by the
Commission.
``(4) Provision of information to the commission.--Each
nationally recognized statistical rating organization shall
make available and maintain such records and information, for
such a period of time, as the Commission may prescribe, by
rule, as necessary for the Commission to conduct the reviews
under this subsection;'';
(2) in subsection (d)--
(A) by inserting ``fine,'' after ``censure,'' each
place that term appears;
(B) in the subsection heading, by inserting
``Fine,'' after ``Censure,'';
(C) in paragraph (4), by striking ``or'' at the
end;
(D) in paragraph (5), by striking the period at the
end and inserting ``; or''; and
(E) by adding at the end the following:
``(6) fails to conduct sufficient surveillance to ensure
that credit ratings remain current, accurate, and reliable.'';
(3) by amending subsection (h) to read as follows:
``(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, manage, and disclose
any conflicts of interest that can arise from such business.
``(2) Governance improvements at nrsro.--Each nationally
recognized statistical rating organization shall establish
governance procedures to manage conflicts of interest,
consistent with the protection of users of credit ratings, in
accordance with rules issued by the Commission pursuant to
paragraph (3).
``(3) Commission authority.--The Commission shall issue
final rules 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--
``(A) conflicts of interest relating to 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) conflicts of interest relating to 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,
and the obligor, or any affiliate of the obligor;
``(C) disclosure of business relationships,
ownership interests, affiliations of nationally
recognized statistical rating organization board
members with obligors, 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) disclosure of 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 securities, entities, or other 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 users of
credit ratings.
``(4) Commission rules.--The rules issued by the Commission
under paragraph (3) shall include--
``(A) the establishment of a system of payment for
each nationally recognized statistical rating
organization that requires that payments are structured
to ensure that the nationally recognized statistical
rating organization conducts accurate and reliable
surveillance of ratings over time, and that incentives
for accurate ratings are in place;
``(B) a prohibition on providing credit ratings for
structured products that it advised on, in the form of
assistance, advice, consultation, or other aid that
preceded its retention by any issuer, underwriter, or
placement agent to provide a rating for the securities
in question (or any assistance provided after such
point for which additional compensation is paid
directly or indirectly);
``(C) requirements that a nationally recognized
statistical rating organization disclose any
relationship or affiliation described in subparagraphs
(C) and (D) of paragraph (3);
``(D) a requirement that, in each credit rating
report issued to the public, a nationally recognized
statistical rating organization disclose the type and
number of ratings it has provided to the obligor or
affiliates of the obligor, including the fees it has
billed for the credit rating and aggregate amount of
fees in the preceding 2 years that it has billed to the
particular obligor or its affiliates; and
``(E) any other requirement as the Commission deems
necessary or appropriate in the public interest, or for
the protection of users of credit ratings.
``(5) Look-back requirement.--
``(A) Review by nrsro.--In any case in which an
employee of an obligor or an issuer or underwriter of a
security or money market instrument was employed by a
nationally recognized statistical rating organization
and participated in any capacity in determining credit
ratings for the obligor or the securities or money
market instruments of the issuer during the 1-year
period preceding the date of the issuance of the credit
rating, the nationally recognized statistical rating
organization shall--
``(i) conduct a review to determine whether
any conflicts of interest of such employee
influenced the credit rating; and
``(ii) take action to revise the rating if
appropriate, in accordance with such rules as
the Commission shall prescribe.
``(B) Review by commission.--The Commission shall
conduct periodic reviews of the look-back policies
described in subparagraph (A) and the implementation of
such policies at each nationally recognized statistical
rating organization to ensure they are appropriately
designed and implemented to most effectively eliminate
conflicts of interest in this area.
``(6) Periodic reviews.--
``(A) Reviews required.--The Commission shall
conduct periodic reviews of governance and conflict of
interest procedures established under this subsection
to determine the effectiveness of such procedures.
``(B) Timing of reviews.--The Commission shall
review and make available to the public the code of
ethics and conflict of interest policy of each
nationally recognized statistical rating organization--
``(i) not less frequently than once every 3
years; and
``(ii) whenever such policies are
materially modified or amended.'';
(4) by amending subsection (j) to read as follows:
``(j) Designation of Compliance Officer.--
``(1) In general.--Each nationally recognized statistical
rating organization shall designate an individual to serve as a
compliance officer.
``(2) Duties.--The compliance officer shall--
``(A) report directly to the board of the
nationally recognized statistical rating organization
(or the equivalent thereof) or to the senior officer of
the nationally recognized statistical rating
organization; and
``(B) shall--
``(i) review compliance with policies and
procedures to manage conflicts of interest and
assess the risk that such compliance (or lack
of such compliance) may compromise the
integrity of the credit rating process;
``(ii) review compliance with internal
controls with respect to the procedures and
methodologies for determining credit ratings,
including quantitative and qualitative models
used in the rating process, and assess the risk
that such compliance with the internal controls
(or lack of such compliance) may compromise the
integrity and quality of the credit rating
process; and
``(iii) in consultation with the board of
the nationally recognized statistical rating
organization, a body performing a function
similar to that of a board, or the senior
officer of the nationally recognized
statistical rating organization, resolve any
conflicts of interest that may arise;
``(C) be responsible for administering the policies
and procedures required to be established pursuant to
this section; and
``(D) ensure compliance with securities laws and
the rules and regulations issued thereunder, including
rules promulgated by the Commission pursuant to this
section.
``(3) Limitations.--No compliance officer designated under
paragraph (1), may, while serving in such capacity--
``(A) perform credit ratings;
``(B) participate in the development of rating
methodologies or models;
``(C) perform marketing or sales functions; or
``(D) participate in establishing compensation
levels, other than for employees working for such
officer.
``(4) Other duties.--The compliance officer shall establish
procedures for the receipt, retention, and treatment of--
``(A) complaints regarding credit ratings, models,
methodologies, and compliance with the securities laws
and the policies and procedures required under this
section; and
``(B) confidential, anonymous complaints by
employees or users of credit ratings.
``(5) Annual reports required.--The compliance officer
shall annually prepare and sign a report on the compliance of
the nationally recognized statistical rating organization with
the securities laws and its policies and procedures, including
its code of ethics and conflict of interest policies, in
accordance with rules prescribed by the Commission. Such
compliance report shall accompany the financial reports of the
nationally recognized statistical rating organization that are
required to be furnished to the Commission pursuant to this
section.'';
(5) in subsection (k)--
(A) by striking ``, on a confidential basis,'';
(B) by striking ``Each nationally'' and inserting
the following:
``(1) In general.--Each nationally''; and
(C) by adding at the end the following:
``(2) Exception.--The Commission may treat as confidential
any item furnished to the Commission under paragraph (1), the
publication of which the Commission determines may have a
harmful effect on a nationally recognized statistical rating
organization.'';
(6) by amending subsection (p) to read as follows:
``(p) NRSRO Regulation.--
``(1) In general.--The Commission shall establish an office
that administers the rules of the Commission with respect to
the practices of nationally recognized statistical rating
organizations in determining ratings, for the protection of
users of credit ratings and in the public interest, and to
ensure that credit ratings issued by such registrants are
accurate and not unduly influenced by conflicts of interest.
``(2) Staffing.--The office of the Commission established
under this subsection shall be staffed sufficiently to carry
out fully the requirements of this section.
``(3) Rulemaking authority.--The Commission shall--
``(A) establish by rule fines and other penalties
for any nationally recognized statistical rating
organization that violates the applicable requirements
of this title; and
``(B) issue such rules as may be necessary to carry
out this section with respect to nationally recognized
statistical rating organizations.
``(q) Transparency of Ratings Performance.--
``(1) Rulemaking required.--The Commission shall, by rule,
require that each nationally recognized statistical rating
organization shall disclose publicly information on initial
ratings and subsequent changes to such ratings for the purpose
of providing a gauge of the accuracy of ratings and allowing
users of credit ratings to compare performance of ratings by
different nationally recognized statistical rating
organizations.
``(2) Content.--The rules of the Commission under this
subsection shall require, at a minimum, disclosures that--
``(A) are comparable among nationally recognized
statistical rating organizations, so that users can
compare rating performance across rating organizations;
``(B) are clear and informative for a wide range of
investor sophistication;
``(C) include performance information over a range
of years and for a variety of classes of credit
ratings, as determined by the Commission; and
``(D) are published and made freely available by
the nationally recognized statistical rating
organization, on an easily accessible portion of its
website and in written form when requested by users.
``(r) Credit Ratings Methodologies.--The Commission shall
promulgate rules, for the protection of users of credit ratings and in
the public interest, with respect to the procedures and methodologies,
including qualitative and quantitative models, used by nationally
recognized statistical rating organizations that require each
nationally recognized statistical rating organization to--
``(1) ensure that credit ratings are determined using
procedures and methodologies, including qualitative and
quantitative models, that are approved by the board of the
nationally recognized statistical rating organization, a body
performing a function similar to that of a board, or the senior
officer of the nationally recognized statistical rating
organization, and in accordance with the policies and
procedures of the nationally recognized statistical rating
organization for developing and modifying credit rating
procedures and methodologies;
``(2) ensure that when major changes to credit rating
procedures and methodologies, including to qualitative and
quantitative models, are made, that the changes are applied
consistently to all credit ratings to which such changed
procedures and methodologies apply and, to the extent the
changes are made to credit rating surveillance procedures and
methodologies, they are applied to current credit ratings
within a time period to be determined by the Commission by
rule, and that the reason for the change is disclosed publicly;
``(3) notify users of credit ratings of the version of a
procedure or methodology, including a qualitative or
quantitative model, used with respect to a particular credit
rating; and
``(4) notify users of credit ratings when a change is made
to a procedure or methodology, including to a qualitative or
quantitative model, or an error is identified in a procedure or
methodology that may result in credit rating actions, and the
likelihood of the change resulting in current credit ratings
being subject to rating actions.
``(s) Transparency of Credit Rating Methodologies and Information
Reviewed.--
``(1) In general.--The Commission shall establish a form,
to accompany each rating issued by a nationally recognized
statistical rating organization--
``(A) to disclose information about assumptions
underlying credit rating procedures and methodologies,
the data that was relied on to determine the credit
rating and, where applicable, how the nationally
recognized statistical rating organization used
servicer or remittance reports, and with what
frequency, to conduct surveillance of the credit
rating; and
``(B) that can be made public and used by investors
and other users to better understand credit ratings
issued in each class of credit rating issued by the
nationally recognized statistical rating organization.
``(2) Format.--The Commission shall ensure that the form
established under paragraph (1)--
``(A) is designed in a user-friendly and helpful
manner for users of credit ratings to understand the
information contained in the report; and
``(B) requires the nationally recognized
statistical rating organization to provide the
appropriate content, as required by paragraph (3).
``(3) Content.--Each nationally recognized statistical
rating organization shall include on the form established under
this subsection, along with its ratings--
``(A) the main assumptions included in constructing
procedures and methodologies, including qualitative and
quantitative models;
``(B) the potential shortcomings of the credit
ratings, and the types of risks excluded from the
credit ratings that the registrant is not commenting on
(such as liquidity, market, and other risks);
``(C) information on the reliability, accuracy, and
quality of the data relied on in determining the
ultimate credit rating and a statement on the extent to
which key data inputs for the credit rating were
reliable or limited (including, any limits on the reach
of historical data, limits in accessibility to certain
documents or other forms of information that would have
better informed the credit rating, and the completeness
of certain information considered);
``(D) whether and to what extent third party due
diligence services have been utilized, and a
description of the information that such third party
reviewed in conducting due diligence services;
``(E) a description of relevant data about any
obligor, issuer, security, or money market instrument
that was used and relied on for the purpose of
determining the credit rating;
``(F) an explanation or measure of the potential
volatility for the rating, including any factors that
might lead to a change in the rating, and the extent of
the change that might be anticipated under different
conditions; and
``(G) additional information, including conflict of
interest information, as may be required by the
Commission.
``(4) Due diligence services.--
``(A) Certification required.--In any case in which
third party due diligence services are employed by a
nationally recognized statistical rating organization
or an issuer or underwriter, the firm providing the due
diligence services shall provide to the nationally
recognized statistical rating organization written
certification of such due diligence, which shall be
subject to review by the Commission.
``(B) Format and content.--The nationally
recognized statistical rating organizations shall
establish the appropriate format and content for
written certifications required under subparagraph (A),
to ensure that providers of due diligence services have
conducted a thorough review of data, documentation, and
other relevant information necessary for the nationally
recognized statistical rating organization to provide
an accurate rating.''; and
(7) by amending subsection (m) to read as follows:
``(m) Accountability.--
``(1) In general.--The enforcement and penalty provisions
of this title shall apply to a nationally recognized
statistical rating organization in the same manner and to the
same extent as such provisions apply to a registered public
accounting firm or a securities analyst under the Federal
securities laws for statements made by them, and such
statements shall not be deemed forward-looking statements for
purposes of section 21E.
``(2) Rulemaking.--The Commission shall issue such rules as
may be necessary to carry out this subsection.''.
SEC. 4. STATE OF MIND IN PRIVATE ACTIONS.
Section 21D(b)(2) of the Securities Exchange Act of 1934 (15 U.S.C.
78u-4(b)(2)) is amended by inserting before the period at the end the
following: ``, except that in the case of an action brought under this
title for money damages against a nationally recognized statistical
rating organization, it shall be sufficient, for purposes of pleading
any required state of mind for purposes of such action, that the
complaint shall state with particularity facts giving rise to a strong
inference that the nationally recognized statistical rating
organization knowingly or recklessly failed either to conduct a
reasonable investigation of the rated security with respect to the
factual elements relied upon by its own methodology for evaluating
credit risk, or to obtain reasonable verification of such factual
elements (which verification may be based on a sampling technique that
does not amount to an audit) from other sources that it considered to
be competent and that were independent of the issuer and underwriter''.
SEC. 5. REGULATIONS.
The Securities and Exchange Commission shall issue final rules and
regulations, as required by the amendments made by this Act, not later
than 365 days after the date of enactment of this Act.
SEC. 6. STUDY AND REPORT.
(a) Study.--The Comptroller General of the United States shall
undertake a study of--
(1) the extent to which rulemaking the Securities and
Exchange Commission has carried out the provisions of this Act;
(2) the appropriateness of relying on ratings for use in
Federal, State, and local securities and banking regulations,
including for determining capital requirements;
(3) the effect of liability in private actions arising
under the Securities Exchange Act of 1934 and the exception
added by section 4 of this Act; and
(4) alternative means for compensating credit rating
agencies that would create incentives for accurate credit
ratings and what, if any, statutory changes would be required
to permit or facilitate the use of such alternative means of
compensation.
(b) Report.--Not later than 30 months after the date of enactment
of this Act, the Comptroller General shall submit to Congress and the
Securities Exchange Commission, a report containing the findings under
the study required by subsection (a).
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