[Congressional Bills 111th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3890 Reported in House (RH)]

                                                 Union Calendar No. 406
111th CONGRESS
   2d Session
                                H. R. 3890

                      [Report No. 111-685, Part I]

 To amend the Securities Exchange Act of 1934 to enhance oversight of 
 nationally recognized statistical rating organizations, and for other 
                               purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                            October 21, 2009

 Mr. Kanjorski (for himself, Mr. Capuano, Ms. Kilroy, Mr. Cleaver, and 
 Ms. Kosmas) introduced the following bill; which was referred to the 
                    Committee on Financial Services

                           December 16, 2010

   Reported with an amendment, and referred to the Committee on the 
  Judiciary for a period ending not later than December 17, 2010, for 
  consideration of such provisions of the bill and amendment as fall 
 within the jurisdiction of that committee pursuant to clause 1(k) of 
                                 rule X
 [Strike out all after the enacting clause and insert the part printed 
                               in italic]

                           December 17, 2010

  Committee on the Judiciary discharged; committed to the Committee of 
  the Whole House on the State of the Union and ordered to be printed
[For text of introduced bill, see copy of bill as introduced on October 
                               21, 2009]


_______________________________________________________________________

                                 A BILL


 
 To amend the Securities Exchange Act of 1934 to enhance oversight of 
 nationally recognized statistical rating organizations, 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 title may be cited as the ``Accountability and Transparency in 
Rating Agencies Act''.

SEC. 2. 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 (a)--
                    (A) in paragraph (1)(A), by striking ``furnish to'' 
                and inserting ``file with'';
                    (B) in paragraph (2)(A), by striking ``furnished 
                to'' and inserting ``filed with''; and
                    (C) in paragraph (2)(B)(i)(II), by striking 
                ``furnished to'' and inserting ``filed with'';
            (2) in subsection (b)--
                    (A) in paragraph (1)(A), by striking ``furnished'' 
                and inserting ``filed'' and by striking ``furnishing'' 
                and inserting ``filing'';
                    (B) in paragraph (1)(B), by striking ``furnishing'' 
                and inserting ``filing''; and
                    (C) in the first sentence of paragraph (2), by 
                striking ``furnish to'' and inserting ``file with'';
            (3) in subsection (c)--
                    (A) paragraph (2)--
                            (i) in the second sentence by inserting 
                        ``including the requirements of this section,'' 
                        after ``Notwithstanding any other provision of 
                        law,''; and
                            (ii) by inserting before the period at the 
                        end of the last sentence ``, provided that this 
                        paragraph does not afford a defense against any 
                        action or proceeding brought by the Commission 
                        to enforce the antifraud provision of the 
                        securities laws'';
                    (B) by adding at the end the following new 
                paragraph:
            ``(3) Review of internal processes for determining credit 
        ratings.--
                    ``(A) In general.--The Commission shall examine 
                credit ratings issued by, and the policies, procedures, 
                and methodologies employed by, each nationally 
                recognized statistical rating organization to review 
                whether--
                            ``(i) the nationally recognized statistical 
                        rating organization has established and 
                        documented a system of internal controls, due 
                        diligence and implementation of methodologies 
                        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 credit ratings, methodologies, and 
                        procedures are consistent with such system.
                    ``(B) Manner and frequency.--The Commission shall 
                conduct reviews required by this paragraph no less 
                frequently than annually in a manner 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 paragraph (3).
            ``(5) Disclosures with respect to structured securities.--
                    ``(A) Regulations required.--The rules and 
                regulations prescribed by the Commission pursuant to 
                this section with respect to nationally recognized 
                statistical rating organizations shall, with respect to 
                the procedures and methodologies by which any 
                nationally recognized statistical rating organization 
                determines credit ratings for structured securities--
                            ``(i) specify the information required to 
                        be disclosed to such rating organizations by 
                        the sponsor, issuers, and underwriters of such 
                        structured securities on the collateral 
                        underlying such structured securities; and
                            ``(ii) establish and implement procedures 
                        to collect and disclose information about the 
                        processes used by such sponsor, issuers, and 
                        underwriters to assess the accuracy and 
                        integrity of their data and fraud detection.
                    ``(B) Definition.--For purposes of this paragraph, 
                the Commission shall, by rule or regulation, define the 
                term `structured securities' as appropriate in the 
                public interest and for the protection of investors.
            ``(6) Historical default rate disclosures.--The rules and 
        regulations prescribed by the Commission pursuant to this 
        section with respect to nationally recognized statistical 
        rating organizations shall require each nationally recognized 
        statistical rating organization to establish and maintain, on a 
        publicly accessible Internet site, a facility to disclose, in a 
        central database, the historical default rates of all classes 
        of financial products rated by such organization.''
            (4) in subsection (d)--
                    (A) in the heading, by inserting ``Fine,'' after 
                ``Censure,'';
                    (B) by striking ``shall censure'' and all that 
                follows through ``revocation'' and inserting the 
                following: ``shall censure, fine in accordance with 
                section 21B(a), 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 
                (or with respect to any person who is associated, who 
                is seeking to become associated, or, at the time of the 
                alleged misconduct, who was associated or was seeking 
                to become associated with a nationally recognized 
                statistical rating organization, the Commission, by 
                order, shall censure, fine in accordance with section 
                21B(a), place limitations on the activities or 
                functions of such person, suspend for a period not 
                exceeding 12 months, or bar such person from being 
                associated with a nationally recognized statistical 
                rating organization), if the Commission finds, on the 
                record after notice and opportunity for hearing, that 
                such censure, fine, placing of limitations, bar, 
                suspension, or revocation'';
                    (C) in paragraph (2), by striking ``furnished to'' 
                and inserting ``filed with'';
                    (D) in paragraph (4)--
                            (i) by striking ``furnish'' and inserting 
                        ``file'';
                            (ii) by striking ``or'' at the end;
                    (E) in paragraph (5), by striking the period at the 
                end and inserting a semicolon; and
                    (F) by adding at the end the following:
            ``(6) has failed reasonably to supervise another person who 
        commits a violation of the securities laws, the rules or 
        regulations thereunder, or any rules of the Municipal 
        Securities Rulemaking Board if such other person is subject to 
        his or her supervision, except that no person shall be deemed 
        to have failed reasonably to supervise any other person under 
        this paragraph, if--
                    ``(A) there have been established procedures, and a 
                system for applying such procedures, which would 
                reasonably be expected to prevent and detect, insofar 
                as practicable, any such violation by such other 
                person, and
                    ``(B) such person has reasonably discharged the 
                duties and obligations incumbent upon him or her by 
                reason of such procedures and system without reasonable 
                cause to believe that such procedures and system were 
                not being complied with; or
            ``(7) fails to conduct sufficient surveillance to ensure 
        that credit ratings remain current and reliable, as 
        applicable.'';
            (5) in subsection (e)--
                    (A) by striking paragraph (1); and
                    (B) in paragraph (2), by striking ``(2) Commission 
                authority.--'' and moving the text of such paragraph to 
                follow the heading of subsection (e);
            (6) by amending subsection (h) to read as follows:
    ``(h) Corporate Governance, Organization, and Management of 
Conflicts of Interest.--
            ``(1) Board of directors.--
                    ``(A) In general.--Each nationally recognized 
                statistical rating organization or its ultimate holding 
                company shall have a board of directors.
                    ``(B) Independent directors.--At least \1/3\ of 
                such board, but no less than 2 of the members of the 
                board of directors, shall be independent directors. In 
                order to be considered independent for purposes of this 
                subsection, a director of a nationally recognized 
                statistical rating organization may not, other than in 
                his or her capacity as a member of the board of 
                directors or any committee thereof--
                            ``(i) accept any consulting, advisory, or 
                        other compensatory fee from the nationally 
                        recognized statistical rating organization; or
                            ``(ii) be a person associated with the 
                        nationally recognized statistical rating 
                        organization or with any affiliated company 
                        thereof.
                    ``(C) Compensation and term.--The compensation of 
                the independent directors shall not be linked to the 
                business performance of the nationally recognized 
                statistical rating organization and shall be arranged 
                so as to ensure the independence of their judgment. The 
                term of office of the independent directors shall be 
                for a pre-agreed fixed period not exceeding 5 years and 
                shall not be renewable.
                    ``(D) Duties.--In addition to the overall 
                responsibility of the board of directors, the board 
                shall oversee--
                            ``(i) the establishment, maintenance, and 
                        enforcement of policies and procedures for 
                        determining credit ratings;
                            ``(ii) the establishment, maintenance, and 
                        enforcement of policies and procedures to 
                        address, manage, and disclose any conflicts of 
                        interest;
                            ``(iii) the effectiveness of the internal 
                        control system with respect to policies and 
                        procedures for determining credit ratings; and
                            ``(iv) the compensation and promotion 
                        policies and practices of the nationally 
                        recognized statistical rating organization.
            ``(2) 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 the 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.
            ``(3) Commission rules.--The Commission shall issue 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 rules regarding--
                    ``(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 business 
                relationships, ownership interests, and 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;
                    ``(C) conflicts of interest relating to any 
                affiliation of a nationally recognized statistical 
                rating organization, or any person associated with such 
                nationally recognized statistical rating organization, 
                with any person who underwrites securities, money 
                market instruments, or other instruments that are the 
                subject of a credit rating;
                    ``(D) a requirement that each nationally recognized 
                statistical rating organization disclose on such 
                organization's website a consolidated report at the end 
                of each fiscal year that shows--
                            ``(i) the percent of net revenue earned by 
                        the nationally recognized statistical rating 
                        organization or an affiliate of a nationally 
                        recognized statistical rating organization, or 
                        any person associated with a nationally 
                        recognized statistical rating organization, to 
                        the extent determined appropriate by the 
                        Commission, for that fiscal year for providing 
                        services and products other than credit rating 
                        services to each person who paid for a credit 
                        rating; and
                            ``(ii) the relative standing of each person 
                        who paid for a credit rating that was 
                        outstanding as of the end of the fiscal year in 
                        terms of the amount of net revenue earned by 
                        the nationally recognized statistical rating 
                        organization attributable to each such person 
                        and classified by the highest 5, 10, 25, and 50 
                        percentiles and lowest 50 and 25 percentiles;
                    ``(E) the establishment of a system of payment for 
                credit ratings issued by each nationally recognized 
                statistical rating organization that requires that 
                payments are structured in a manner designed to ensure 
                that the nationally recognized statistical rating 
                organization conducts accurate and reliable 
                surveillance of credit ratings over time, as 
                applicable, and that incentives for reliable credit 
                ratings are in place;
                    ``(F) a requirement that a nationally recognized 
                statistical rating organization disclose with the 
                publication of a credit rating the type and number of 
                credit ratings it has provided to the person being 
                rated or affiliates of such person, the fees it has 
                billed for the credit rating, and the aggregate amount 
                of net revenue earned by the nationally recognized 
                statistical rating organization in the preceding 2 
                fiscal years attributable to the person being rated and 
                its affiliates; and
                    ``(G) any other potential conflict of interest, as 
                the Commission determines necessary or appropriate in 
                the public interest or for the protection of investors.
            ``(4) Look-back requirement.--
                    ``(A) Review by the nationally recognized 
                statistical rating organization.--Each nationally 
                recognized statistical rating organization shall 
                establish, maintain, and enforce policies and 
                procedures reasonably designed to ensure that, in any 
                case in which an employee of a person subject to a 
                credit rating of the nationally recognized statistical 
                rating organization or the issuer, underwriter, or 
                sponsor of a security or money market instrument 
                subject to a credit rating of the nationally recognized 
                statistical rating organization was employed by the 
                nationally recognized statistical rating organization 
                and participated in any capacity in determining credit 
                ratings for the person or the securities or money 
                market instruments during the 1-year period preceding 
                the date an action was taken with respect to the credit 
                rating, the nationally recognized statistical rating 
                organization shall--
                            ``(i) conduct a review to determine whether 
                        any conflicts of interest of the 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.--
                            ``(i) In general.--The Commission shall 
                        conduct periodic reviews of the policies 
                        described in subparagraph (A) and the 
                        implementation of the policies at each 
                        nationally recognized statistical rating 
                        organization to ensure they are reasonably 
                        designed and implemented to most effectively 
                        eliminate conflicts of interest.
                            ``(ii) Timing of reviews.--The Commission 
                        shall review the code of ethics and conflict of 
                        interest policy of each nationally recognized 
                        statistical rating organization--
                                    ``(I) not less frequently than 
                                annually; and
                                    ``(II) whenever such policies are 
                                materially modified or amended.
            ``(5) Report to commission on certain employment 
        transitions.--
                    ``(A) Report required.--Each nationally recognized 
                statistical rating organization shall report to the 
                Commission any case such organization knows or can 
                reasonably be expected to know where a person 
                associated with such organization within the previous 5 
                years obtains employment with any obligor, issuer, 
                underwriter, or sponsor of a security or money market 
                instrument for which the organization issued a credit 
                rating during the 12-month period prior to such 
                employment, if such employee--
                            ``(i) was a senior officer of such 
                        organization;
                            ``(ii) participated in any capacity in 
                        determining credit ratings for such obligor, 
                        issuer, underwriter, or sponsor; or
                            ``(iii) supervised an employee described in 
                        clause (ii).
                    ``(B) Public disclosure.--Upon receiving such a 
                report, the Commission shall make such information 
                publicly available.'';
            (7) 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;
                    ``(B) review compliance with policies and 
                procedures to manage conflicts of interest and assess 
                the risk that the compliance (or lack of such 
                compliance) may compromise the integrity of the credit 
                rating process;
                    ``(C) review compliance with the internal control 
                system with respect to the procedures and methodologies 
                for determining credit ratings, including qualitative 
                methodologies and quantitative inputs used in the 
                rating process, and assess the risk that such internal 
                control system is reasonably designed to ensure the 
                integrity and quality of the credit rating process;
                    ``(D) in consultation with the board of the 
                nationally recognized statistical rating organization, 
                resolve any conflicts of interest that may arise;
                    ``(E) be responsible for administering the policies 
                and procedures required to be established pursuant to 
                this section;
                    ``(F) ensure compliance with securities laws and 
                the rules and regulations issued thereunder, including 
                rules prescribed by the Commission pursuant to this 
                section; and
                    ``(G) establish procedures--
                            ``(i) for the receipt, retention, and 
                        treatment of complaints regarding credit 
                        ratings, models, methodologies, and compliance 
                        with the securities laws and the policies and 
                        procedures required under this section;
                            ``(ii) for the receipt, retention, and 
                        treatment of confidential, anonymous complaints 
                        by employees, obligors, issuers, and investors;
                            ``(iii) for the remediation of non-
                        compliance issues found during compliance 
                        office reviews, the reviews required under 
                        paragraph (7), internal or external audit 
                        findings, self-reported errors, or through 
                        validated complaints; and
                            ``(iv) designed so that ratings that the 
                        nationally recognized statistical rating 
                        organization disseminates reflect consideration 
                        of all information in a manner generally 
                        consistent with the nationally recognized 
                        statistical rating organization's published 
                        rating methodology, including information which 
                        is provided, received, or otherwise obtained 
                        from obligor, issuer and non-issuer sources, 
                        such as investors, the media, and other 
                        interested or informed parties.
            ``(3) Limitations.--The compliance officer shall not, while 
        serving in that capacity--
                    ``(A) determine credit ratings;
                    ``(B) participate in the establishment of the 
                procedures and methodologies or the qualitative 
                methodologies and quantitative inputs used to determine 
                credit ratings;
                    ``(C) perform marketing or sales functions; or
                    ``(D) participate in establishing compensation 
                levels, other than for employees working for the 
                compliance officer.
            ``(4) 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 such organization's internal 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 filed with the 
        Commission pursuant to this section and shall include a 
        certification that, under penalty of law, the report is 
        accurate and complete.
            ``(5) Compensation.--The compensation of the compliance 
        officer shall not be linked to the business performance of the 
        nationally recognized statistical rating organization and shall 
        be arranged so as to ensure the independence of the officer's 
        judgment.'';
            (8) in subsection (k)--
                    (A) by striking ``, on a confidential basis,'';
                    (B) by striking ``furnish to'' and inserting ``file 
                with'';
                    (C) by striking ``Each nationally'' and inserting 
                the following:
            ``(1) In general.--Each nationally''; and
                    (D) by adding at the end the following new 
                paragraph:
            ``(2) Exception.--The Commission may treat as confidential 
        any information provided by a nationally recognized statistical 
        rating organization under this section consistent with 
        applicable Federal laws or Commission rules.'';
            (9) in subsection (l)(2)(A)(i), by striking ``furnished'' 
        and inserting ``filed'';
            (10) by amending subsection (p) to read as follows:
    ``(p) Establishment of SEC Office.--
            ``(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.
            ``(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.''; and
            (11) by adding after subsection (p) the following new 
        subsections:
    ``(q) Transparency of Ratings Performance.--
            ``(1) Rulemaking required.--The Commission shall, by rule, 
        require each nationally recognized statistical rating 
        organization to publicly disclose information on initial 
        ratings and subsequent changes to such ratings for the purpose 
        of providing a gauge of the performance of ratings and allowing 
        investors 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 investors 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;
                    ``(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 
                investors; and
                    ``(E) each nationally recognized statistical rating 
                organization include an attestation with any credit 
                rating it issues affirming that no part of the rating 
                was influenced by any other business activities, that 
                the rating was based solely on the merits of the 
                instruments being rated, and that such rating was an 
                independent evaluation of the risks and merits of the 
                instrument.
    ``(r) Credit Ratings Methodologies.--
            ``(1) In general.--The Commission shall prescribe rules, in 
        the public interest and for the protection of investors, that 
        require each nationally recognized statistical rating 
        organization to establish, maintain, and enforce written 
        procedures and methodologies and an internal control system 
        with respect to such procedures and methodologies that are 
        reasonably designed to--
                    ``(A) ensure that credit ratings are determined 
                using procedures and methodologies, including 
                qualitative methodologies and quantitative inputs that 
                are determined in accordance with the policies and 
                procedures of the nationally recognized statistical 
                rating organization for developing and modifying credit 
                rating procedures and methodologies;
                    ``(B) ensure that when major changes to credit 
                rating procedures and methodologies, including to 
                qualitative methodologies and quantitative inputs, are 
                made, that the changes are applied consistently to all 
                credit ratings to which the 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 publicly disclosed;
                    ``(C) notify persons who have access to the credit 
                ratings of the nationally recognized statistical rating 
                organization, regardless of whether they are made 
                readily accessible for free or a reasonable fee, of the 
                procedure or methodology, including qualitative 
                methodologies and quantitative inputs, used with 
                respect to a particular credit rating;
                    ``(D) notify persons who have access to the credit 
                ratings of the nationally recognized statistical rating 
                organization, regardless of whether they are made 
                readily accessible for free or a reasonable fee, when a 
                change is made to a procedure or methodology, including 
                to qualitative methodologies and quantitative inputs, 
                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; and
                    ``(E) use credit rating symbols that distinguish 
                credit ratings for structured products from credit 
                ratings for other products that the Commission 
                determines appropriate or necessary in the public 
                interest and for the protection of investors.
            ``(2) Rating clarity and consistency.--
                    ``(A) Commission obligation.--Subject to 
                subparagraphs (B) and (C), the Commission shall 
                require, by rule, each nationally recognized 
                statistical rating organization to establish, maintain, 
                and enforce written policies and procedures reasonably 
                designed--
                            ``(i) with respect to credit ratings of 
                        securities and money market instruments, to 
                        assess the risk that investors in securities 
                        and money market instruments may not receive 
                        payment in accordance with the terms of such 
                        securities and instruments;
                            ``(ii) to define clearly any credit rating 
                        symbol used by that organization; and
                            ``(iii) to apply such credit rating symbol 
                        in a consistent manner for all types of 
                        securities and money market instruments.
                    ``(B) Additional credit factors.--Nothing in 
                subparagraph (A)--
                            ``(i) prohibits a nationally recognized 
                        statistical rating organization from using 
                        additional credit factors that are documented 
                        and disclosed by the organization and that have 
                        a demonstrated impact on the risk an investor 
                        in a security or money market instrument will 
                        not receive repayment in accordance with the 
                        terms of issuance;
                            ``(ii) prohibits a nationally recognized 
                        statistical rating organization from 
                        considering credit factors that are unique to 
                        municipal securities; or
                            ``(iii) prohibits a nationally recognized 
                        statistical rating organization from using an 
                        additional symbol with respect to the ratings 
                        described in subparagraph (A)(i) for the 
                        purpose of distinguishing the ratings of a 
                        certain type of security or money market 
                        instrument from ratings of any other types of 
                        securities or money market instruments.
                    ``(C) Complementary ratings.--The Commission shall 
                not impose any requirement under subparagraph (A) that 
                prevents nationally recognized statistical rating 
                organizations from establishing ratings that are 
                complementary to the ratings described in subparagraph 
                (A)(i) and that are created to measure a discrete 
                aspect of the security's or instrument's risk.
    ``(s) Transparency of Credit Rating Methodologies and Information 
Reviewed.--
            ``(1) In general.--The Commission shall require, by rule, a 
        nationally recognized statistical rating organization to 
        include with the publication of each credit rating regardless 
        of whether the credit rating is made readily accessible for 
        free or a reasonable fee a form that discloses information 
        about the assumptions underlying the procedures and 
        methodologies used, and the data relied on, to determine the 
        credit rating in the format prescribed in paragraph (2) and 
        containing the information described in paragraph (3).
            ``(2) Format.--The Commission shall prescribe a form for 
        use under paragraph (1) that--
                    ``(A) is designed in a user-friendly and helpful 
                manner for investors to understand the information 
                contained in the report;
                    ``(B) requires the nationally recognized 
                statistical rating organization to provide the content, 
                as required by paragraph (3), in a manner that is 
                directly comparable across securities; and
                    ``(C) the nationally recognized statistical rating 
                organization certifies the information on the form as 
                true and accurate.
            ``(3) Content.--The Commission shall prescribe a form that 
        requires a nationally recognized statistical rating 
        organization to disclose --
                    ``(A) the main assumptions included in constructing 
                procedures and methodologies, including qualitative 
                methodologies and quantitative inputs and assumptions 
                about the correlation of defaults across underlying 
                assets used in rating certain structured products;
                    ``(B) the potential shortcomings of the credit 
                ratings, and the types of risks not measured in the 
                credit ratings that the nationally recognized 
                statistical rating organization is not commenting on, 
                such as liquidity, market, and other risks;
                    ``(C) information on the certainty of the rating, 
                including 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) a statement containing an overall assessment 
                of the quality of information available and considered 
                in producing a credit rating for a security in relation 
                to the quality of information available to the 
                nationally recognized statistical rating organization 
                in rating similar obligors, securities, or money market 
                instruments;
                    ``(G) an explanation or measure of the potential 
                volatility for the credit rating, including any factors 
                that might lead to a change in the credit rating, and 
                the extent of the change that might be anticipated 
                under different conditions;
                    ``(H) information on the content of the credit 
                rating, including--
                            ``(i) the expected default probability; and
                            ``(ii) the loss given default;
                    ``(I) information on the sensitivity of the rating 
                to assumptions made by the nationally recognized 
                statistical rating organization, including--
                            ``(i) 5 assumptions made in the ratings 
                        process that, without accounting for any other 
                        factor, would have the greatest impact on a 
                        rating if such assumptions were proven false or 
                        inaccurate; and
                            ``(ii) an analysis, using concrete 
                        examples, on how each of the 5 assumptions 
                        identified under clause (i) impacts a rating.
                    ``(J) 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
                    ``(K) such additional 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, underwriter, or sponsor in connection 
                with the issuance of a credit rating, 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, and the issuer, underwriter, or sponsor 
                shall provide any reports issued by the provider of 
                such due diligence services to the nationally 
                recognized statistical rating organization.
                    ``(B) Format and content.--The Commission 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 reliable rating.
                    ``(C) Disclosure of certification.--The Commission 
                shall adopt rules requiring a nationally recognized 
                statistical rating organization to disclose to persons 
                who have access to the credit ratings of the nationally 
                recognized statistical rating organization regardless 
                of whether they are made readily accessible for free or 
                a reasonable fee the certification described in 
                subparagraph (A) with the publication of the applicable 
                credit rating in a manner that may permit the persons 
                to determine the adequacy and level of due diligence 
                services provided by the third party.
    ``(t) Prohibited Activities.--Beginning 180 days from the date of 
enactment of the Accountability, Reliability, and Transparency in 
Rating Agencies Act, it shall be unlawful for a nationally recognized 
statistical rating organization, or an affiliate of a nationally 
recognized statistical rating organization, or any person associated 
with a nationally recognized statistical rating organization, that 
provides a credit rating for an issuer, underwriter, or placement agent 
of a security to provide any non-rating service, including--
            ``(1) risk management advisory services;
            ``(2) advice or consultation relating to any merger, sales, 
        or disposition of assets of the issuer;
            ``(3) ancillary assistance, advice, or consulting services 
        unrelated to any specific credit rating issuance; and
            ``(4) such further activities or services as the Commission 
        may determine as necessary or appropriate in the public 
        interest or for the protection of investors.''.

SEC. 3. STANDARDS FOR PRIVATE ACTIONS.

    (a) In General.--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 of the following: ``, and 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 violated the securities 
laws''.
    (b) Pleading Standard.--Section 15E(m) of the Securities Exchange 
Act of 1934 (15 U.S.C. 78o-7(m)) amended to read as follows:
    ``(m) Application of Enforcement Provisions; Pleading Standard in 
Private Rights of Action.--Statements made by nationally recognized 
statistical rating organizations shall not be deemed forward looking 
statements for purposes of section 21E. In any private right of action 
commenced against a nationally recognized statistical rating 
organization under this title, the same pleading standards with respect 
to knowledge and recklessness shall apply to the nationally recognized 
statistical rating organization as would apply to any other person in 
the same or a similar private right of action against such person.''.

SEC. 4. ISSUER DISCLOSURE OF PRELIMINARY RATINGS.

    The Securities and Exchange Commission shall adopt rules under 
authority of the Securities Act of 1933 (15 U.S.C. 77a, et seq.) to 
require issuers to disclose preliminary credit ratings received from 
nationally recognized statistical rating agencies on structured 
products and all forms of corporate debt.

SEC. 5. CHANGE TO DESIGNATION.

    The Securities Act of 1933 and the Securities Exchange Act of 1934 
are each amended by striking ``nationally recognized statistical 
rating'' each place it appears and inserting ``nationally registered 
statistical rating''.

SEC. 6. TIMELINE FOR REGULATIONS.

    Unless otherwise specified in this Act, the Securities and Exchange 
Commission shall adopt rules and regulations, as required by the 
amendments made by this Act, not later than 365 days after the date of 
enactment.

SEC. 7. ELIMINATION OF EXEMPTION FROM FAIR DISCLOSURE RULE.

    Not later than 90 days after the date of enactment of this Act, the 
Securities Exchange Commission shall revise Regulation FD (17 C.F.R. 
243.100) to remove from such regulation the exemption for entities 
whose primary business is the issuance of credit ratings (17 C.F.R. 
243.100(b)(2)(iii)).

SEC. 8. ADVISORY BOARD.

    (a) Establishment.--Not later than 90 days after the date of the 
enactment of this Act, the Securities and Exchange Commission shall 
establish an advisory board to be known as the Credit Ratings Agency 
Advisory Board (in this section referred to as ``the Board'').
    (b) Appointment and Terms of Service.--The Board shall consist of 7 
members appointed by the Commission, no more than 2 of whom may be 
former employees of a credit rating agency. Members of the Board shall 
be prominent individuals of integrity and reputation who have a 
demonstrated commitment to the interests of investors and the public, 
and an understanding of the role that credit ratings play to a broad 
range of investors. Terms of service shall be staggered as determined 
by the Commission.
    (c) Duties.--The Board shall--
            (1) advise the Commission concerning the rules and 
        regulations required by the amendments made by this Act;
            (2) insure that the Commission properly and fully executes 
        its oversight functions and responsibilities with the respect 
        to nationally recognized statistical rating organizations and 
        individual participants; and
            (3) issue an annual report to Congress detailing its work 
        and recommending any additional Congressional actions necessary 
        to aid the Commission and such additional reports from time to 
        time as appropriate when it feels that the Commission is not 
        properly executing its oversight functions.

SEC. 9. REMOVAL OF STATUTORY REFERENCES TO CREDIT RATINGS.

    (a) Federal Deposit Insurance Act.--The Federal Deposit Insurance 
Act (12 U.S.C. 1811 et seq.) is amended--
            (1) in section 28(d)--
                    (A) in the subsection heading, by striking ``Not of 
                Investment Grade'';
                    (B) in paragraph (1), by striking ``not of 
                investment grade'' and inserting ``that does not meet 
                standards of credit-worthiness as established by the 
                Corporation'';
                    (C) in paragraph (2), by striking ``not of 
                investment grade'';
                    (D) by striking paragraph (3) and redesignating 
                paragraph (4) as paragraph (3); and
                    (E) in paragraph (3) (as so redesignated)--
                            (i) by striking subparagraph (A) and 
                        redesignating subparagraphs (B) and (C) as 
                        subparagraphs (A) and (B), respectively; and
                            (ii) in subparagraph (B) (as so 
                        redesignated), by striking ``not of investment 
                        grade'' and inserting ``that does not meet 
                        standards of credit-worthiness as established 
                        by the Corporation'';
            (2) in section 28(e)--
                    (A) in the subsection heading, by striking ``Not of 
                Investment Grade'';
                    (B) in paragraph (1), by striking ``not of 
                investment grade'' and inserting ``that does not meet 
                standards of credit-worthiness as established by the 
                Corporation''; and
                    (C) in paragraphs (2) and (3), by striking ``not of 
                investment grade'' each place that it appears and 
                inserting ``that does not meet standards of credit-
                worthiness established by the Corporation''; and
            (3) in section 7(b)(1)(E)(i), by striking ``credit rating 
        entities, and other private economic'' and insert ``private 
        economic, credit,''.
    (b) Federal Housing Enterprises Financial Safety and Soundness Act 
of 1992.--Section 1319 of the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992 (12 U.S.C. 4519) is amended--
            (1) in the section heading, by striking ``by rating 
        organization''; and
            (2) by striking ``that is a nationally recognized 
        statistical rating organization, as such term is defined in 
        section 3(a) of the Securities Exchange Act of 1934,''.
    (c) Investment Company Act of 1940.--Section 6(a)(5)(A)(iv)(I) 
Investment Company Act of 1940 (15 U.S.C. 80a-6(a)(5)(A)(iv)(I)) is 
amended by striking ``is rated investment grade by not less than 1 
nationally recognized statistical rating organization'' and inserting 
``meets such standards of credit-worthiness that the Commission shall 
adopt''.
    (d) Revised Statutes.--Section 5136A of title LXII of the Revised 
Statutes of the United States (12 U.S.C. 24a) is amended--
            (1) in subsection (a)(2)(E), by striking ``any applicable 
        rating'' and inserting ``standards of credit-worthiness 
        established by the Comptroller of the Currency'';
            (2) in the heading for subsection (a)(3) by striking 
        ``Rating or Comparable Requirement'' and inserting 
        ``Requirement'';
            (3) subsection (a)(3), by amending subparagraph (A) to read 
        as follows:
                    ``(A) In general.--A national bank meets the 
                requirements of this paragraph if the bank is one of 
                the 100 largest insured banks and has not fewer than 1 
                issue of outstanding debt that meets standards of 
                credit-worthiness or other criteria as the Secretary of 
                the Treasury and the Board of Governors of the Federal 
                Reserve System may jointly establish.''.
            (4) in the heading for subsection (f), by striking 
        ``Maintain Public Rating or'' and inserting ``Meet Standards of 
        Credit-worthiness''; and
            (5) in subsection (f)(1), by striking ``any applicable 
        rating'' and inserting ``standards of credit-worthiness 
        established by the Comptroller of the Currency''.
    (e) Securities Exchange Act of 1934.--Section 3(a) Securities 
Exchange Act of 1934 (15 U.S.C. 78a(3)(a)) is amended--
            (1) in paragraph (41), by striking ``is rated in one of the 
        two highest rating categories by at least one nationally 
        recognized statistical rating organization'' and inserting 
        ``meets standards of credit-worthiness as defined by the 
        Commission''; and
            (2) in paragraph (53)(A), by striking ``is rated in 1 of 
        the 4 highest rating categories by at least 1 nationally 
        recognized statistical rating organization'' and inserting 
        ``meets standards of credit-worthiness as defined by the 
        Commission''.
    (f) World Bank Discussions.--Section 3(a)(6) of the amendment in 
the nature of a substitute to the text of H.R. 4645, as ordered 
reported from the Committee on Banking, Finance and Urban Affairs on 
September 22, 1988, as enacted into law by section 555 of Public Law 
100-461, (22 U.S.C. 286hh(a)(6)), is amended by striking ``rating'' and 
inserting ``worthiness''.
    (g) Effective Date.--The amendments made by this section shall take 
effect after the end of the 6-month period beginning on the date of the 
enactment of this Act.

SEC. 10. REVIEW OF RELIANCE ON RATINGS.

    (a) Agency Review.--
            (1) Review.--Not later than 1 year after the date of the 
        enactment of this Act, each Federal agency listed in paragraph 
        (4) shall, to the extent applicable, review--
                    (A) any regulation issued by such agency that 
                requires the use of an assessment of the credit-
                worthiness of a security or money market instrument, 
                and
                    (B) any references to or requirements in such 
                regulations regarding credit ratings.
            (2) Modifications required.--Each such agency shall modify 
        any such regulations identified by the review conducted under 
        paragraph (1) to remove any reference to or requirement of 
        reliance on credit ratings and to substitute in such 
        regulations such standard of credit-worthiness as each 
        respective agency shall determine as appropriate for such 
        regulations. In making such determination, such agencies shall 
        seek to establish, to the extent feasible, uniform standards of 
        credit-worthiness for use by each such agency, taking into 
        account the entities regulated by each such agency and the 
        purposes for which such entities would rely on such standards 
        of credit-worthiness.
            (3) Report.--Upon conclusion of the review required under 
        paragraph (1), each Federal agency listed in paragraph (4) 
        shall transmit a report to Congress containing a description of 
        any modification of any regulation such agency made pursuant to 
        paragraph (2).
            (4) Applicable agencies.--The agencies required to conduct 
        the review and report required by this subsection are--
                    (A) the Securities and Exchange Commission;
                    (B) the Federal Deposit Insurance Corporation;
                    (C) the Office of Thrift Supervision;
                    (D) the Office of the Comptroller of the Currency;
                    (E) the Board of Governors of the Federal Reserve;
                    (F) the National Credit Union Administration; and
                    (G) the Federal Housing Finance Agency.
    (b) GAO Review of Other Agencies.--
            (1) Review.--The Comptroller General shall conduct a 
        comprehensive review of the use of credit ratings by Federal 
        agencies other than those listed in subsection (a)(3), 
        including an analysis of the provisions of law or regulation 
        applicable to each such agency that refer to and require the 
        use of credit ratings by the agency, and the policies and 
        practices of each agency with respect to credit ratings.
            (2) Report.--Not later than 1 year after the date of the 
        enactment of this Act, the Comptroller General shall transmit 
        to Congress a report on the findings of the study conducted 
        pursuant to paragraph (1), including recommendations for any 
        legislation or rulemaking necessary or appropriate in order for 
        such agencies to reduce their reliance on credit ratings.

SEC. 11. PUBLICATION OF RATING HISTORIES ON THE EDGAR SYSTEM.

    Not later than 180 days after the date of the enactment of this 
Act, the Securities and Exchange Commission shall revise its rules in 
section 240.17g-2(a) and (d) of title 17, Code of Federal Regulations, 
to require that the random sample of ratings histories of credit 
ratings required under such rules to be disclosed on the website of a 
nationally recognized statistical rating organization also be provided 
to the Commission in a format consistent with publication by the 
Commission on the EDGAR system.

SEC. 12. EFFECT OF RULE 436(G).

    Rule 436(g), promulgated by the Securities and Exchange Commission 
under the Securities Act of 1933, shall have no force or effect.

SEC. 13. STUDIES.

    (a) GAO Study.--
            (1) In general.--The Comptroller General shall conduct a 
        study of--
                    (A) the implementation of this Act and the 
                amendments made by this Act by the Securities and 
                Exchange Commission;
                    (B) the appropriateness of relying on ratings for 
                use in Federal, State, and local securities and banking 
                regulations, including for determining capital 
                requirements; and
                    (C) the effect of liability in private actions 
                arising under the Securities Exchange Act of 1934;
                    (D) 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; and
                    (E) alternative methodologies to assess credit 
                risk, including market-based measures.
            (2) 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).
    (b) SEC Study on Assigning Credit Rating Agencies on a Rotating 
Basis.--The Securities and Exchange Commission shall undertake a study 
on creating a system whereby nationally recognized statistical rating 
organizations are assigned on a rotating basis to issuers and obligors 
seeking a credit rating. Not later than 1 year after the date of 
enactment of this Act, the Securities and Exchange Commission shall 
transmit to Congress a report containing the findings of the study.
    (c) SEC Study on Effect of New Requirements on NRSRO 
Registration.--The Securities and Exchange Commission shall conduct a 
study on the effect of the amendments made by section 2 on credit 
rating agencies seeking to register as nationally recognized 
statistical rating organizations, including whether the new 
requirements in such amendments deter credit rating agencies from 
registering as nationally recognized statistical rating organizations. 
Not later than 1 year after the date of enactment of this Act, the 
Commission shall transmit to the Committee on Financial Services of the 
House of Representatives and the Committee on Banking, Housing, and 
Urban Affairs of the Senate a report on the findings of such study.
    (d) Study of Credit Ratings of Different Classes of Bonds.--
            (1) Study.--The Securities and Exchange Commission shall 
        conduct a study of the treatment of different classes of bonds 
        (municipal versus corporate) by the nationally recognized 
        statistical rating organizations. Such study shall examine--
                    (A) whether there are fundamental differences in 
                the treatment of different classes of bonds by such 
                rating organizations that cause some classes of bonds 
                to suffer from undue discrimination;
                    (B) if there are such differences, what are the 
                causes of such differences and how can they be 
                alleviated;
                    (C) whether there are factors other than risk of 
                loss that are appropriate for the credit ratings 
                agencies to consider when rating bonds, and do those 
                factors vary across different sectors
                    (D) the types of financing arrangement used by 
                municipal issuers
                    (E) the differing legal and regulatory regimes 
                governing disclosures for corporate bonds and municipal 
                bonds;
                    (F) the extent to which retail investors could be 
                disadvantaged by a single ratings scale; and
                    (G) practices, policies, and methodologies by the 
                nationally recognized statistical rating organizations 
                with respect to rating municipal bonds.
            (2) Report.--Within 6 months after the date of enactment of 
        this Act, the Securities and Exchange Commission shall submit a 
        report on the results of the study required by paragraph (1) to 
        the Committee on Financial Services of the House of 
        Representatives and the Committee on Banking, Housing, and 
        Urban Development of the Senate. Such report shall include as 
        assessment of each of the issues and subjects described in 
        subparagraphs (A) through (G) of paragraph (1).
    (e) SEC Study on Meaningful Multi Digit Rating Symbols.--
            (1) Study.--The Securities and Exchange Commission shall 
        conduct a study on the feasibility and desirability of 
        implementing a standardized rating system whereby ratings 
        symbols contain multiple characters, each representing a range 
        of default probabilities and loss expectations under 
        standardized and increasingly severe levels of market stress. 
        The study shall optimize the definitions of the symbols to 
        maximize their overall usefulness for users of credit ratings.
            (2) Initial example for guidance.--An example to provide 
        initial guidance for the study is a ratings symbol consisting 
        of three digits, each of which corresponds to default 
        probabilities under different levels of market stress as 
        follows:
                    (A) The first digit represents the default 
                probability under ``normal'' market stress, 
                characterized by normal economic fluctuations in 
                addition to a 5 percent decline in asset value and 2 
                percent increase in unemployment.
                    (B) The second digit represents the default 
                probability under more severe market stress, 
                characterized a 20 percent decline in asset value and 5 
                percent increase in unemployment.
                    (C) The third digit represents the default 
                probability under extreme market stress, characterized 
                by a 50 percent decline in asset value and 10 percent 
                increase in unemployment.
            (3) Report.--Not later than 1 year after the date of the 
        enactment of this Act, the Commission shall transmit to 
        Congress a report of the study conducted pursuant to paragraph 
        (1), including recommendations on whether the system similar to 
        that described in paragraph (2) should be implemented and, if 
        so, any necessary legislation required to implement such a 
        system.
    (f) SEC Study on Ratings Standardization.--
            (1) In general.--The Securities and Exchange Commission 
        shall undertake a study on the feasability and desirability 
        of--
                    (A) standardizing credit ratings terminology, so 
                that all credit rating agencies issue credit ratings 
                using identical terms;
                    (B) standardizing the market stress conditions 
                under which ratings are evaluated;
                    (C) requiring a quantitative correspondence between 
                credit ratings and a range of default probabilities and 
                loss expectations under standardized conditions of 
                economic stress; and
                    (D) standardizing credit rating terminology across 
                asset classes, so that named ratings shall correspond 
                to a standard range of default probabilities and 
                expected losses independent of asset class and issuing 
                entity.
            (2) Report.--Not later than 1 year after the date of 
        enactment of this Act, the Securities and Exchange Commission 
        shall transmit to Congress a report containing the findings of 
        the study and the recommendations of the Commission.
                                                 Union Calendar No. 406

111th CONGRESS

   2d Session

                               H. R. 3890

                      [Report No. 111-685, Part I]

_______________________________________________________________________

                                 A BILL

 To amend the Securities Exchange Act of 1934 to enhance oversight of 
 nationally recognized statistical rating organizations, and for other 
                               purposes.

_______________________________________________________________________

                           December 17, 2010

  Committee on the Judiciary discharged; committed to the Committee of 
  the Whole House on the State of the Union and ordered to be printed