[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
LEGISLATIVE SOLUTIONS FOR
THE RATING AGENCY DUOPOLY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JUNE 29, 2005
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-42
U.S. GOVERNMENT PRINTING OFFICE
26-274 WASHINGTON : 2006
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North HAROLD E. FORD, Jr., Tennessee
Carolina RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
VITO FOSSELLA, New York STEVE ISRAEL, New York
GARY G. MILLER, California CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio JOE BACA, California
MARK R. KENNEDY, Minnesota JIM MATHESON, Utah
TOM FEENEY, Florida STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina AL GREEN, Texas
KATHERINE HARRIS, Florida EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas
TOM PRICE, Georgia BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK,
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
Robert U. Foster, III, Staff Director
Subcommittee on Capital Markets, Insurance and Government Sponsored
Enterprises
RICHARD H. BAKER, Louisiana, Chairman
JIM RYUN, Kansas, Vice Chair PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York
PETER T. KING, New York DENNIS MOORE, Kansas
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
DONALD A. MANZULLO, Illinois HAROLD E. FORD, Jr., Tennessee
EDWARD R. ROYCE, California RUBEN HINOJOSA, Texas
SUE W. KELLY, New York JOSEPH CROWLEY, New York
ROBERT W. NEY, Ohio STEVE ISRAEL, New York
VITO FOSSELLA, New York, WM. LACY CLAY, Missouri
JUDY BIGGERT, Illinois CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MARK R. KENNEDY, Minnesota JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
J. GRESHAM BARRETT, South Carolina BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
TOM FEENEY, Florida NYDIA M. VELAZQUEZ, New York
JIM GERLACH, Pennsylvania MELVIN L. WATT, North Carolina
KATHERINE HARRIS, Florida ARTUR DAVIS, Alabama
JEB HENSARLING, Texas MELISSA L. BEAN, Illinois
RICK RENZI, Arizona DEBBIE WASSERMAN SCHULTZ, Florida
GEOFF DAVIS, Kentucky BARNEY FRANK, Massachusetts
MICHAEL G. FITZPATRICK,
Pennsylvania
MICHAEL G. OXLEY, Ohio
C O N T E N T S
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Page
Hearing held on:
June 29, 2005................................................ 1
Appendix:
June 29, 2005................................................ 41
WITNESSES
Wednesday, June 29, 2005
Bolger, Rita M., Managing Director and Associate General Counsel,
Standard and Poor's............................................ 15
Egan, Sean, Managing Director, Egan-Jones Ratings Co............. 11
Kaitz, James A., President and CEO, Association for Financial
Professionals.................................................. 17
Partnoy, Frank, Professor of Law, University of San Diego School
of Law......................................................... 7
Pollock, Alex J., Resident Fellow, American Enterprise Institute. 13
Stroker, Nancy, Group Managing Director, Fitch Ratings........... 9
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 42
Hinojosa, Hon. Ruben......................................... 44
Kanjorski, Hon. Paul E....................................... 45
Bolger, Rita M............................................... 47
Egan, Sean................................................... 64
Kaitz, James A............................................... 72
Partnoy, Frank............................................... 83
Pollock, Alex J.............................................. 99
Stroker, Nancy............................................... 102
Additional Material Submitted for the Record
Baker, Hon. Richard. H.:
Letter from Investment Company Institute, June 29, 2005...... 126
Kanjorski, Hon. Paul E.:
Letter from Securities and Exchange Commission, June 6, 2005. 127
The Bond Market Association, prepared statement.............. 131
LEGISLATIVE SOLUTIONS FOR
THE RATING AGENCY DUOPOLY
----------
Wednesday, June 29, 2005
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance
and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:05 a.m., in
Room 2128, Rayburn House Office Building, Hon. Richard H. Baker
[chairman of the subcommittee] Presiding.
Present: Representatives Baker, Shays, Kelly, Biggert,
Kennedy, Tiberi, Brown-Waite, Feeney, Gerlach, Hensarling,
Fitzpatrick, Kanjorski, Sherman, Hinojosa, Clay, Scott, and
Wasserman Schultz.
[10:05 a.m.]
Chairman Baker. I would like to call this meeting of the
Capital Markets Subcommittee to order. I am advised that Mr.
Kanjorski, the ranking member, is en route, and we are going to
proceed and reserve the right for Mr. Kanjorski to give his
opening statement should he not arrive at the conclusion of my
own statement.
Today, the subcommittee meets to discuss, for a change of
pace--we are not on GSEs today; we are going to be talking
about GSDs. And what is that, you ask? It is a Government
Sponsored Duopoly. Now I read over several witness's testimony
this morning and found myself almost immediately being
corrected.
I read the words "dual monopoly." Then I read "partner
monopoly." Then I read "oligopoly." I am not sure what kind of
opoly we have got this morning, but it will be the subject of
the committee's discussions and determinations over the coming
couple of hours.
Since the early 20th century, credit rating agencies have
been issuing ratings on the likelihood of issuers' default on
debt payments. As a result of the difficult corporate period we
have come through and the fact that dominant rating agencies
were not accurately predicting Enron and WorldCom's financial
condition, reforming the rating agency industry practice has
been the subject of discussion over the last several years.
The Subcommittee on Capital Markets has held a series of
hearings on credit rating agencies. And most recently in April,
Ms. Nazareth, director of the Division of Market Regulation,
testified that to conduct oversight of the industry, the SEC
needed more direct and explicit congressional authority to do
so.
The SEC also announced last March a proposal to define
nationally-recognized statistical rating organizations as firms
generally accepted in the marketplace.
Some critics have once again criticized the SEC for what
they believe to be an anticompetitive definition. In 1997, a
rule proposed to define the NRSROs; the SEC claimed that the
most important factor was the firm be nationally recognized.
That decision was not implemented in part because of a
Department of Justice objection that the requirement, be
nationally recognized, was an insurmountable barrier to entry
of new market participants. Unfortunately, not much has changed
since that proposal has failed.
Today there are over 130 agencies, rating agencies.
However, instead of allowing public companies' investors to
decide which one of those 130 to utilize, the SEC makes that
determination. Now, after three decades of uncertainty, Mr.
Fitzpatrick has introduced H.R. 2990, which would return this
decision to the markets and the choice by consumers.
Beyond the difference in retaining the SECs staff's
designation process, the SEC staff's outline contained
provisions similar to those in the Fitzpatrick bill. It
suggests mandating reporting and recordkeeping requirements for
registered firms, as well as giving inspection, examination,
and enforcement authority to the SEC.
In short, H.R. 2990 incorporates most of the SEC staff
outline without the anticompetitive system that the designation
process was to establish. I believe that competition is the
essential component of a healthy capital market.
Currently, there just isn't competition in the rating
industry. The SEC has chosen with specificity which agencies
not only are acceptable, but which shall perform this singular
duty.
NRSROs are what they are because of a grant of privilege,
not because they have earned it by competitive market choice.
Competition has always proved to the benefit of investors and
shareholders and consumers. Whether it is mutual funds,
brokerage costs, insurance premiums, or whatever sector of the
financial marketplace.
Without competition in the ratings business, operating
companies are frankly held hostage with S&P and Moody's
controlling approximately 80 percent of the market. The
question is, do they control 80 percent of the market because
they are really that good or because the SEC and the SEC staff
has merely given them that opportunity?
Compounding the problem is a lack of transparency regarding
the ratings process and the operation of the firms.
Additionally, the companies held hostage by their ratings avoid
speaking out for fear of the consequences of the rating
evaluation system.
It is my hope that free enterprise, competitive principles
will direct the committee's decision in this arena. We should
not seek to preserve a privilege. We should, however, fight to
guarantee opportunity. Then the market will make the
determination as to the winners and the losers. This is not and
never has been the role of the Federal Government.
Mr. Kanjorski.
Mr. Kanjorski. Mr. Chairman, we return this morning once
again to explore the issue of regulating credit rating
agencies. As I have noted during our past hearings, entities
like Standard & Poor's, Moody's, and Fitch have long published
their views on the credit worthiness of the issuers of debt
securities, and the significance of these opinions has greatly
expanded in recent years.
Although rating agencies received some scrutiny after the
recent surge of corporate scandals, we have not yet mandated
any substantive changes in their practices. We have, however,
since our last hearing, begun to consider potential legislative
reforms in this area.
A bill, H.R. 2990, has been introduced by my colleague from
Pennsylvania. In addition, at my request, the experts of the
Securities and Exchange Commission have put together a
conceptual legislative outline for our consideration.
While I agree with you, Mr. Chairman, that something needs
to be done in this area of the securities marketplace to
improve transparency and oversight, H.R. 2990, as introduced,
is not the solution to this problem. It would eliminate the
current nationally-recognized statistical rating organization
framework that we have had in place for three decades.
Instead of casting this accepted framework aside, we should
build on the work of the Commission in these matters. H.R. 2990
is also, as one witness will note in her testimony today,
"inconsistent with the overwhelming majority" of the
commentators in the most recent Commission concept release.
As I understand, less than 10 percent of the respondents to
this concept release supported the elimination of the NRSRO
framework. Additionally, we now have a classic quantity versus
quality debate. H.R. 2990 focuses on increasing the quantity of
raters. To protect investors, we should focus on the quality of
ratings as the Commission's conceptual legislative outline
seeks to do.
In my view, the problems encountered by investors before
Enron's downfall, WorldCom's bankruptcy, and New York City's
debt crisis, among others, were related to the quality of
ratings, not the quantity of raters.
Nevertheless, Mr. Chairman, I understand the desire to
increase competition in this field, and I am willing to explore
these matters further. Additionally, in a statement prepared
for today's hearing, the Bond Market Association notes that the
bill "could ultimately dilute the important role credit rating
agencies play in capital markets."
Mr. Chairman, I ask unanimous consent to insert this
statement into the record.
Chairman Baker. Without objection.
Mr. Kanjorski. Beyond quality issues, I am also concerned
that H.R. 2990, could cause serious disruptions in the
marketplace if enacted into law. Eliminating the recognition
process and replacing it with a registration process could
cause unintended consequences.
The NRSRO concept, after all, has become embedded in many
areas of the law. The term is used in about 8 Federal statutes,
47 Federal rules, and more than 100 State laws. It is also used
in laws related to communications, education, transportation,
in addition to banking and security statutes.
Moreover, changing the phrase could cause uncertainty and
potential turmoil for any mutual fund that relies on a strategy
of purchasing only those debt securities of investment grade as
determined by an NRSRO.
We must further be very sensitive to the First Amendment
issues posed in these debates. The courts have previously ruled
on matters such as the permissibility of registration
requirements for publishers, which the NRSROs contend that they
are. The courts have also ruled that we must be very precise in
crafting statutes that impede upon the First Amendment.
H.R. 2990 is vague, in its present construction, and needs
work to withstand judicial scrutiny. Ultimately, we need to
move deliberately in these matters. From my perspective, we
need to focus on the prior work of the Securities and Exchange
Commission. We should also put a great deal of weight on their
conceptual legislative outline as a roadmap for our work in the
months ahead.
The outline seeks to establish an effective supervisory
system to ensure that credit rating agencies operate in a
transparent manner with adequate policies and procedures. To
help us in these efforts, last week I called upon all
interested parties to examine the roadmap of proposed reforms
developed by the Commission's experts at my request, and I
request unanimous consent to insert this document into the
record.
Chairman Baker. Without objection.
Mr. Kanjorski. Today I again call upon all parties to
review this legislative outline and offer comments on it before
the end of August. In the meantime, I hope that the Commission
and the rating agencies will expedite their deliberations over
a voluntary agreement to improve transparency in the coming
months. The success of these negotiations and the effectiveness
in enforcing any final voluntary accord will help to determine
the need for a compulsory bill and the speed of legislative
action.
In conclusion, Mr. Chairman, this issue is one on which we
should focus in the 109th Congress. I commend you for your
leadership in these matters and hope that we can work together
to identify an appropriate consensus in the months ahead. Thank
you, Mr. Chairman.
Chairman Baker. I thank the gentleman.
Mr. Shays, did you have a statement?
Mr. Shays. No.
Chairman Baker. Mrs. Biggert.
Mrs. Biggert. No.
Mr. Fitzgerald. Thank you, Mr. Chairman. And I appreciate
the comments of my colleague from Pennsylvania and his
recognition that there is some requirement for reform. And I
look forward to working with my colleague from Pennsylvania in
that.
As the chairman was, in his opening comments, identifying
all of the different opolies that are referenced in your
opening statements, whether it be monopoly or oligopoly or
duopoly, clearly one of them applies. Probably duopoly is the
best description, but what it means is that there is lack of
competition. And lack of competition is not good for the
individual investor or the consumer.
As a Bucks County Commissioner, I remember the financial
hardships that the people of the 8th Congressional District of
Pennsylvania faced when Enron and WorldCom went bankruptcy. And
it is, for many of us, extremely disturbing that the two
largest nationally recognized statistical rating organizations,
Moody's and S&P, rated Enron and WorldCom at investment grade
just prior to their filing of bankruptcies.
Essentially, Moody's and S&P told the market that Enron and
WorldCom were safe investments. Credit rating agencies claim
that they are not in the business of detecting fraud, but they
are most certainly in the business of impacting the bottom line
of companies and also municipalities, school districts.
The better the credit rating, the lower the interest rate
the borrower must pay to expand its operations, construct a
road, or build a school. The credit ratings industry is
dominated by Moody's and S&P. Together, as you heard, they have
over 80 percent of the market share.
In three previous hearings, this subcommittee has received
testimony that the lack of competition in the credit rating
industry has lowered the quality of ratings, has inflated
prices, stifled innovation, and allowed conflicts of interest
to go unchecked. This duopoly cannot continue to be preserved
by an artificial barrier to entry and anticompetitive industry
practices.
Last week I introduced the Credit Rating Agency Relief Act,
H.R. 2990, that would inject greater competition, transparency,
and accountability in the credit rating agency industry through
market-based reform. My legislation would eliminate the SEC
staff's anticompetitive designation process and prohibit
anticompetitive industry practices by mandating reporting and
record keeping requirements for registered firms as well as
giving inspection, examination, and enforcement authority to
the SEC.
By eliminating the SECs staff's opaque designation process,
the bill incorporates most of the SEC staff's outline of a
regulatory framework. A minority of commentators have claimed
that any registration of this industry amounts to a violation
of First Amendment privileges. My bill does not infringe upon
those privileges.
H.R. 2990 neither bans nor restrict their First Amendment
rights in any manner. The Government has an undeniable interest
in registering rating agencies giving the credit rating
industry's substantial impact and effects on the market. My
legislation regulates the credit ratings industry through
disclosure. This is the least restrictive means of any
regulation.
Currently, all five SEC-approved agencies already
voluntarily register under the Investment Advisors Act of 1940,
and many of the complaints seem hypocritical. By encouraging
competition in the industry, prices and anticompetitive
practices will be reduced. Credit ratings quality will improve,
and firms will innovate.
H.R. 2990 addresses the basic problems of the credit
ratings industry and protects our robust marketplace and, thus,
more importantly, the individual investors.
I look forward to discussing my proposal with the
distinguished panel here today as a solution in the credit
rating industry.
Chairman Baker, I thank you for your leadership on this
issue, this vital issue, and I yield back the balance of my
time.
Chairman Baker. I thank the gentleman. Mr. Hinojosa.
Mr. Hinojosa. Chairman Baker and Ranking Member Kanjorski,
I want to express my sincere appreciation for you holding this
fourth in a series of hearings on credit rating agencies.
Chairman Baker, I want to thank you for doggedly pursuing
the reform of the definition and oversight of the agencies.
This hearing is of particular interest to me as a Member of the
Texas delegation. The Enron bankruptcy and the harm it caused
to its employees, the small businesses, the community, and the
overall perception of public trust in corporations and the
national recognized statistical rating agencies was enormous.
So this hearing is timely and needed, despite the number of
years that have passed since the Enron bankruptcy.
Ranking Member Kanjorski, I commend you for working with
the Securities and Exchange Commission to arrive at legislative
language. Hopefully, it will not only increase competition
among the credit rating agencies and make the system more
transparent, but also ensure that the legislation does not
violate the nationally recognized statistical rating
organizations' First Amendment rights to free speech.
I also believe that your actions have encouraged the
Securities and Exchange Commission to begin working with these
nationally-recognized statistical rating organizations on a
voluntary framework to establish an SEC oversight regime. In
essence, this could result in something resembling a best
practices for the NRSROs.
Additionally, the SEC has proposed a rule that would codify
the definition of an NRSRO. Some of our Members of Congress and
the SEC have suggested that legislation might be needed to give
the SEC the oversight authority to increase its regulations of
the NRSROs.
I understand that my colleague across the aisle,
Congressman Fitzpatrick, has introduced legislation to address
the current oversight of the NRSROs, and this panel of
witnesses is heavily weighted with those in support of that
legislation, with the exception of Standard and Poor's.
Mr. Chairman, I would like to hear from a more balanced
panel in the future. Chairman Baker and Ranking Member
Kanjorski, I believe that Congress should give the SEC, the
NRSROs additional time to work on a voluntary framework and to
develop and introduce any legislation needed to oversee the
NRSROs and provide the SEC whatever statutory authority it
needs to regulate them.
Having said that, Mr. Chairman, I yield back the remainder
of my time.
[The prepared statement of Hon. Ruben Hinojosa can be found
on page 44 in the appendix.]
Chairman Baker. Thank the gentleman. Ms. Brown-Waite, did
you have a statement?
Ms. Ginny Brown-Waite. No, I do not have an opening
statement. I just look forward to hearing the witnesses that we
have today.
Chairman Baker. I thank the gentlelady. Mr. Hensarling?
Mr. Hensarling. No.
Chairman Baker. Mrs. Kelly.
Mrs. Kelly. Yes, I do, Mr. Chairman.
Chairman Baker. Please proceed.
Mrs. Kelly. First I want to thank you, Chairman Baker and
Mr. Fitzpatrick, to your commitment to ensuring openness and
competition within the debt rating industry. I want to thank
all of the witnesses for being here today.
I share the committee's view that it is important that debt
rating firms provide the best possible analysis at the lowest
possible price. I believe that encouraging more firms to enter
this industry is critical, and I am glad the SEC is working
within the industry.
The nationally recognized statistical rating organizations
and the SEC have entered into a process for ensuring that high
standards and open competition are met within the industry
without disrupting the bond markets or imposing unneeded
regulation.
These talks are continuing, and I hope that Chairman Cox,
when confirmed, will be able to complete this process and
present the committee with a finished product. I have serious
concerns however, that any abrupt change to the ratings market
could adversely impact the bond markets, confuse investors, and
increase the size and scope of Government regulation.
As the BMA noted, as currently--and I am quoting, "as
currently drafted, H.R. 2990 could ultimately dilute the
important role credit rating agencies play in the capital
markets." Debt ratings are, as the courts have observed,
journalistic products protected by the First Amendment.
Mandatory regulation regimes on financial speech, however well
intentioned, harm the very freedom to make qualitative
judgments that make the debt rating process valuable.
The ability to speak freely and honestly about a debt
product without Government sanction needs to be protected by
this committee. And I will closely examine all proposals for
regulation of debt ratings agencies with that in mind. Thank
you very much, Mr. Chairman.
Chairman Baker. I thank the gentlelady. Any member, other
member have an opening statement? If not, at this time, I would
proceed to our panel of witnesses, and I would like to state
the general rules by which the committee functions, that all of
your official statements will be made part of the committee's
record.
We would request that, to the best of your ability, that
you proceed with a 5-minute clock in mind to enable members to
have the opportunity to ask questions in the course of the
hearing this morning.
And we will proceed from left to right, first with Mr.
Frank Partnoy, professor of law, University of San Diego School
of Law. Please proceed at your leisure, sir.
STATEMENT OF FRANK PARTNOY, PROFESSOR OF LAW, UNIVERSITY OF SAN
DIEGO SCHOOL OF LAW
Mr. Partnoy. Thank you, Chairman Baker and Ranking Member
Kanjorski and members of the committee. I am a law professor at
the University of San Diego, where I have spent much of the
past 8 years studying the credit rating industry and credit
ratings.
I, before teaching, worked on the derivatives desks at
Morgan Stanley and CS First Boston, where my group structured
debt instruments that received ratings from S&P and Moody's.
First, let me say that I agree with Chairman Baker and Chairman
Oxley that this legislation marks an excellent starting point
for debate. I commend Congressman Fitzpatrick for introducing
this legislation.
I also agree with much of what Ranking Member Kanjorski has
said here today, and in the recent past; there should be
bipartisan support for credit rating reform. The primary split
in opinion is between those with a vested interest in
preserving the status quo, namely S&P and Moody's, and
virtually everyone else. So with respect, I actually think this
panel is quite balanced.
I want to discuss very briefly some background I hope will
be useful to this committee. I have found in my research that
credit rating agencies pose a troubling paradox. On one hand,
credit ratings are enormously valuable and important. A
downgrade can kill a company and issuers pay big money for
ratings. Moody's alone had gross profits of more than a billion
dollars last year. And its shares are worth almost as much as
General Motors and Ford.
On the other hand, there is overwhelming evidence that
ratings are of scant informational value, particularly since
the mid 1970s, the informational value of ratings has
plummeted. You do not need to read academic studies to know
this; just recall Orange County, Enron, WorldCom and most
recently, General Motors and Ford.
The Agency's response that ratings are correlated with
actual default is misplaced because ratings can both correlated
with defaults and have no informational value. All of you and I
could publish ratings that were correlated with default
experience simply by reading the newspaper.
In my writings I have argued that this paradox, high market
value, low informational value, is best explained by
regulation. As Chairman Baker has stated, namely the rules that
depend on ratings by nationally recognized statistical ratings
organizations. It started in 1975, and during the next 3
decades, numerous regulators, especially the Commission,
established rules that depended on NRSRO ratings. Put simply,
NRSRO ratings now are important because the rules say they are.
NRSRO ratings are valuable as keys to unlock the benefits
or avoid the costs of various regulatory schemes. Yet for more
than 30 years, no one has bothered to say conclusively what the
term NRSRO means. Not even George Orwell could have imagined
such a state.
Given that the Commission has designated just five NRSROs
for regulatory purposes, it is not surprising that the industry
is so concentrated. If regulators required that the Washington
Wizards play just five basketball players, and one of the
approved players was me, even I would get a lot of playing
time. And if I played, you can be sure the others would score
most of the points, even if they weren't very good.
The Commission's proposals would not correct these
fundamental flaws. Defining NRSRO is too little too late, and
the commission is not an office of central planning; nor should
it be. It generally does not designate which companies can
issue securities to the public, and it certainly does not do so
based on ambiguous standards such as whether ratings are
"generally accepted."
Instead, the Commission requires companies to disclose
material facts and then permits market participants to make
decisions based on those facts. That is the role the Commission
should play with respect to NRSROs. Congressman Fitzpatrick's
bill is a major step in the direction of resolving the paradox
I just described.
It permits the 130-plus non-NRSRO agencies to compete with
current NRSROs. Perhaps most importantly, it encourages new
rating agencies, which could use market-based measures in
assessing companies. In my academic work, I have stressed that
market-based measures are the best alternatives to current
NRSRO ratings.
We have already heard, and some will argue, that opening
the market to competition will be disruptive and/or lead to
rate shopping. But based on my experience and available
evidence, I think the opposite is true.
When markets such as credit ratings are opened to
competition, they become more stable, indeed, because current
ratings by S&P and Moody's distort the markets; they create
incentives for dysfunctional regulatory arbitrized
transactions, which this legislation would reduce.
My further understanding is that NRSROs would be subject to
liability for Federal securities fraud and/or State law causes
of actions just like other gatekeeper firms. S&P and Moody's
claim their ratings are merely opinions and there is the free
speech argument that has already been mentioned today, which is
a clever one; it has been accepted by some courts.
But credit ratings are not really just opinions any more
than fairness opinions of investment banks, audit opinions of
accounting firms, legal opinions of attorneys, buy-sell ratings
of security analysts, or even the certification of financial
statements by CEOs and CFOs are mere opinions.
So, in sum, I commend Congressman Fitzpatrick for
introducing this legislation. I believe that this panel does
represent all of the interests except perhaps one interest that
is not here today, the millions of individual investors whose
mutual funds and pension funds are in fixed-income investments
and whose faith in S&P and Moody's has been shattered by events
of recent years.
Those people have much more to gain from this legislation
than S&P and Moody's have to lose. I thank you, and they will
thank you.
[The prepared statement of Frank Partnoy can be found on
page 83 in the appendix.]
Chairman Baker. I thank the gentleman for his statement.
Our next witness is Ms. Nancy Stroker, group managing
director, Fitch Ratings. Welcome.
STATEMENT OF NANCY STROKER, GROUP MANAGING DIRECTOR, FITCH
RATINGS
Ms. Stroker. Good morning, Chairman Baker, Ranking Member
Kanjorski, and members of the committee. My name is Nancy
Stroker, and I am a group managing director at Fitch Ratings,
responsible for overseeing the North American corporate
financial institutions and public finance ratings.
I would like to thank you for offering Fitch the
opportunity to testify today and to share with you our views on
the recently proposed Credit Rating Agency Duopoly Act and SEC
staff outline on oversight of credit rating agencies that was
delivered earlier this month.
We commend Representative Fitzpatrick and the committee for
recognizing the importance of fostering competition in the
ratings industry. We hope you will find our views constructive.
Fitch firmly believes in the power of competition, and we
fully support the objectives of the Fitzpatrick bill, providing
greater competition and transparency in the credit rating
industry.
While we have concerns about whether the Act as currently
proposed will provide either greater competition or
transparency, we believe that the Act and the debate
surrounding it will serve as a constructive first step in
fostering competition in the credit rating industry, a point
made by both Representatives Oxley and Baker at the
introduction of the bill.
In terms of addressing the issues before this committee, we
would like to make the following three points. First, any
recognition or registration system should be a transparent
process based on objective standards related to the
demonstrated reliability of ratings that are uniformly applied.
Second, any oversight regime should be designed to avoid
unnecessary burdens and interference in the decision-making
process of rating agencies. As the SEC staff has noted, any
legislation in this area must make clear that the decision-
making process of rating agencies and the content of the
ratings assigned should be beyond the scope of regulation.
And finally, we will state the obvious, but investors will
benefit from increased competition. I would like to take this
opportunity to elaborate on these three key points. Regardless
of whether or not the NRSRO system remains intact or a system
of registration is adopted, there needs to be clear and
objective standards to assess the reliability of an agency's
ratings.
Indicators of reliability, including a proven track record,
should be the key because the public interest will not be
served if the ratings of potentially dozens of agencies without
such a proven record are used in safety and soundness
regulations.
In terms of oversight, given the importance of unbiased
credit ratings in the financial markets, we believe oversight
and enforcement authority in matters such as conflict of
interest and integrity are vitally important. Furthermore, we
believe that the examination and oversight of rating agencies
should be principally focused on objective measures of the
ongoing reliability of a rating organization's rating, such as
default and transition studies.
Within this framework, any regulatory or legislative
approach should provide a narrowly tailored oversight scheme
specifically developed for rating agencies. We do not believe
that the existing regulatory schemes under the Exchange Act or
under the Investment Advisers Act are a plausible fit, as
agencies are very unique.
And finally, in terms of the increased competition and how
investors will benefit, while the NRSRO system is often cited
as a barrier to entry for new rating organizations, we believe
that the debate over the NRSRO system ignores the single most
important barrier to entry in the ratings market, and that is
the S&P and Moody's monopolies.
In Fitch's own experience, simply being recognized as an
NRSRO or being registered will not ensure an organization's
ability to compete. An organization would need to devote
significant resources in demonstrating a record of reliability
in winning the support of investors.
We are proud of our growth over the past 15 years. We now
rate over 60 percent of the bonds issued world-wide, but we
account for only 15 percent of world-wide revenue. Fitch
believes that our emergence as a global full service rating
agency has created meaningful competition in the ratings market
for the first time in years.
Fitch's challenge to the Moody's and S&P monopoly has
enhanced innovation, forced transparency in the rating process,
and improved service to investors, and created much needed
price competition.
If Congress wishes to address barriers to entry in the
ratings market and ensure competition, legislation should be
adopted that eliminates the barriers and outright prohibits
anticompetitive conduct, such as coercion, tying, and
discriminating against ratings by other rating agencies for the
purpose of preserving market share.
Fitch believes that this is an area where focused
legislation might help to protect rating agency competition.
Fitch believes that any rating agency found to be using
anticompetitive practices or unfair business practices should
be subject to a full range of appropriate sanctions.
In conclusion, we reassert our belief in competition, the
importance of focusing on objective standards that demonstrate
reliability of ratings, and the need for any legislation to be
specifically tailored to the uniqueness of the rating industry.
We also do not believe that increased regulation typically
fosters competition, and the vague standards for registration
will do little to advance a more transparent process for the
Commission.
Thank you for your consideration of our views. We would be
happy to answer any questions.
[The prepared statement of Nancy Stroker can be found on
page 102 in the appendix.]
Chairman Baker.I thank the gentlelady.
Our next witness is Mr. Sean Egan, managing director of
Egan-Jones Ratings Company. Welcome.
STATEMENT OF SEAN EGAN, MANAGING DIRECTOR, EGAN-JONES RATINGS
CO.
Mr. Egan. Thank you. We at Egan-Jones strongly support the
proposed legislation for reforming the rating industry since it
does not impair the freedom of speech defense afforded rating
firms, and it addresses the two major problems that have long
plagued the industry.
Number one, the dearth of competition and, two, the failure
of the current rating firms to provide timely, accurate ratings
for protecting investors.
Perhaps the most appealing aspect of the proposed
legislation is that it removes the SEC from the role of
recognizing rating firms, i.e., NRSRO firms, a role in which it
has failed miserably. The SEC's primary mandate is protecting
investors.
From the SEC's Web site "Who we are", the primary mission
of the SEC is to protect investors.
Within the past 3 years, we have experienced two of the
largest credit failures in U.S. History, Enron and WorldCom,
failures that resulted in the loss of hundreds of billions of
dollars, tens of thousands of jobs, and the pensions of
thousands.
After these colossal failures, one would expect that the
agency charged with recognizing rating firms would have shown
some initiative for addressing the problems so that they would
not occur again. Unfortunately, this has not been the case.
Instead, the SEC is continuing its study of the industry, a
study which began in the early 1990s, 15 years ago, and is
continuing today. While the first NRSRO firm was recognized in
1970, it is only 90 days ago that the SEC finally devised a
definition of NRSRO.
It seems obvious that a definition should have existed
before the first NRSRO was designated. Furthermore the SEC's
proposal for NRSRO requires that rating firms provide their
ratings free to the public, which effectively means that the
rating firms have to seek compensation form the Enrons and
WorldComs of the world, which, in many people's view, is a
system rife with conflict.
Yes, the SEC has recognized two new NRSROs during the past
18 months. However, neither firm warned investors about the
recent major failures, nor did they provide any significant
competition to the two partner monopoly firms, S&P and Moody's.
The SEC has indicated that it consults with major rating
firms before proposing any changes to the regulation of the
industry. Perhaps they should have consulted also with
investors who have been and continue to be hurt by the flawed
industry structure.
Conspicuously absent from the SEC's proposed definition of
NRSRO rating firms are the following requirements. One is
severing ties between the personnel of the issuers and the
dealers. The ex-chairman of Moody's should not have served as
director of WorldCom, nor should the rating firm's personnel be
tied to broker-dealers or the broker-dealer industry
association, such as the NASD.
Two, discourage insider training. The proposal addresses
the misuse of nonpublic information given to rating firms, but
does not address misuse of information generated by the rating
firms themselves, such as Moody's informing Citigroup of its
intention to downgrade Enron below investment grade before the
fact. By the way, no investigation was made of Citigroup's
trading in advance of that downgrade.
Three, take timely action. It has been over 3 years since
the failure of Enron and yet the SEC has still not made any
significant changes in the rating industry.
Regarding Egan-Jones' ratings, Kafkaesque is probably the
best description of our experience with the SEC. We have
regularly issued timely, accurate ratings and provided warning
for the Enron, Genuity, Global Crossing and WorldCom failures.
See the attachment.
Furthermore, we consistently identify improving credits.
Most of our ratings have been higher than S&P and Moody's over
the past 3 years, thereby assisting issuers in obtaining more
competitive capital. Our success has been recognized by the
Federal Reserve bank of Kansas City, which compared our ratings
and has attached the conclusion of that.
Since missing the failures of Enron in 2001, Moody's
operating revenues have more than doubled from approximately
$400 million to $814 million, and S&P's have increased from
$435 to $893, an indication of the severe lack of competition
in this area. After all of these failures, S&P's and Moody's
operating income has more than doubled.
The proposed legislation provides some hope for reform and
real competition in the ratings area. It is artfully drafted to
preserve freedom of speech protections. We continue to support
the standards of practices for participants in the credit
rating process published by the Association of Corporate
Treasurers, the Association of Financial Professionals, and the
Association in France.
Until the fundamental problems in the rating industry are
addressed, investors, employees, pensioners, and ultimately
issuers will needless be harmed. The SEC should gracefully
withdraw from this area in the interest of protecting
investors.
[The prepared statement of Sean Egan can be found on page
64 in the appendix.]
Chairman Baker. Thank you. Mrs. Biggert has requested the
right to make the next introduction. Mrs. Biggert.
Mrs. Biggert. Thank you very much, Mr. Chairman. I would
like to welcome Mr. Alex Pollock back to the committee. And Mr.
Pollock is an expert in banking and bond market matters.
I would particularly like to highlight his experience, much
of which he gained in the Windy City; that is Chicago. He
served for 12 years as president and CEO of the Federal Home
Loan Bank of Chicago, and as principal at Nolan, Norton and
Company, Chicago, and then a senior vice president of Corporate
Planning, Research and Development at Continental Bank.
In addition, he received one of his masters degrees at the
University of Chicago. In his current capacity as a resident
fellow of the American Enterprise Institute, Mr. Pollock has
dedicated much of his time to the issue that brings us here
today. So welcome Mr. Pollock.
Thank you, Mr. Chairman.
Chairman Baker. Please proceed, sir.
STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN
ENTERPRISE INSTITUTE
Mr. Pollock. Thank you, and thank you very much,
Congresswoman. Mr. Chairman, Ranking Member Kanjorski, members
of the subcommittee, I greatly appreciate the chance to testify
on this important topic today.
I spent 35 years in the banking business, dealt a lot with
credit ratings, as you can imagine, including getting ratings
for various entities. Thanks to the leadership of the chairman
and the ranking member, I have spent a good bit of time over
the last several months thinking about this issue while at the
American Enterprise Institute.
Based on all of that, it is a real pleasure to speak today
in support of H.R. 2990. This is a pro-competitive bill. It is
going to lead, if enacted, to more choice, more alternatives
for the customers, and to reliance on market discipline, which
is the best kind of discipline.
It does this by moving from a regime of designation by
regulation, by the SEC of course, to a regime of disclosure and
competition. Having had the AEI be good enough to publish a
paper of mine called "End the Government-Sponsored Cartel in
Credit Ratings," and I guess we should add, Mr. Chairman,
"cartel" to the "opolies", my view is summarized by that title.
It is my view that decisions about credit ratings and which
credit rating agencies should prosper and which not prosper,
should be made by investors, financial firms, issuers, and, in
general, the market.
I think, as do a number of others, that it would be better
not to have an NRSRO designation at all, and really have a
market solution. But we have had a problem in thinking about
that because, as has been referred to, there is a very large,
very complex interlocking web of regulations and statutes, both
at the State and Federal level, which refer to this term,
NRSRO, as Congressman Kanjorski mentioned. How to move toward a
market solution when faced with this interlocking web--or to
change the metaphor, a Gordian Knot--of regulation and rules
did puzzle me.
In my view, H.R. 2990 cuts this Gordian Knot in a quite
brilliant and creative way by keeping the abbreviation but
changing what the "R" stands for, from "recognized" to
"registered". That actually completely changes the meaning of
the term and how it would operate in the market, while leaving
in place all of this complicated set of rules that can keep on
referring to the term, but they will be referring to something
different.
I find this both on the merits and also rhetorically a very
pleasing and good solution. We ought to be moving toward a
market discipline, as I said, where market actors are asked to
make informed judgments and multiple decision-makers are acting
on credit ratings. That will include multiple regulators
because we have a lot of regulated entities using credit
ratings.
It will also include multiple pricing models in the
business so that you can have pricing models paid for by both
issuers and investors and we see what the market likes best.
I would like to mention three clarifications. One is that
there are high natural barriers to competition and barriers to
entry in the credit rating business because of its dependence
on judgment and on reputation and because of the conservative
nature of risk policies. Therefore, when we do this, this is
going to be an evolutionary transition.
In my judgment, I do not see any disruption to markets or
behavior because we are going to be going through an evolution
in the face of natural barriers.
The second is, whatever we do, we cannot hope to have no
mistakes in ratings or perfect ratings. Anybody who is dealing
with trying to anticipate the uncertainties and the risks of
the future is going to make mistakes.
I would hate to have the list of my own financial mistakes
published. We have to address that as reality. The best defense
to that reality is to have a vibrant marketplace of many
competitors, many opinions, different kinds of analysis,
different kinds of ideas for investors, and other users of
ratings to choose from. That is the best possible defense.
A third clarification is we want to make sure that the
first "R" in NRSRO doesn't inadvertently slip into changing
from "registered" to "regulated". We don't want a nationally-
regulated rating agency business. Fitch Ratings, in their
written comments, suggested that this might be a risk.
I do think that we ought to look carefully at the language
of the bill just to make sure that that does not inadvertently
happen and that we do indeed carry out what is clearly the pro-
competitive intent.
In summary, Mr. Chairman, H.R. 2990 is a very positive move
toward a pro-competitive disclosure regime, as opposed to a
regulatory designation regime. I believe this move would lead,
as competitive markets always do, along with their greater
competition, to more choice in the market for customers, better
service, lower costs and more price competition, less duopoly
profits and more innovation, the very benefits we always look
to from a competitive world.
Mr. Chairman, thank you very much again for the chance to
be here today.
[The prepared statement of Alex J. Pollock can be found on
page 99 in the appendix.]
Chairman Baker. Thank you, sir, for your statement.
Our next witness is Rita M. Bolger, managing director and
associate general counsel, Standard and Poor's. Welcome.
STATEMENT OF RITA M. BOLGER, MANAGING DIRECTOR AND ASSOCIATE
GENERAL COUNSEL, STANDARD AND POOR'S
Ms. Bolger. Mr. Chairman, Ranking Member Kanjorski, members
of the subcommittee, good morning. I am Rita Bolger, as
introduced, managing director, global regulatory affairs and
associate general counsel for Standard and Poor's, a division
of the McGraw Hill Companies.
At S&P, we are extremely proud of our well-documented track
record of providing the market with independent, objective, and
credible rating opinions. Our ratings are publicly available
without charge and our rating criteria and methodologies are
published on our Web site and elsewhere.
As a result, we are subject to the scrutiny of the
financial markets every day. On behalf of Standard and Poor's,
I am pleased that the subcommittee has granted our request to
be here. Standard and Poor's has been and remains committed to
constructive change that would eliminate unnecessary barriers
to competition in our industry.
However, we have serious concerns about H.R. 2990 and the
disruptive effect it could have on the efficient operation of
the capital markets. When the SEC asked market participants in
connection with its 2003 concept release whether it should
retain the NRSRO concept, the vast majority unequivocally said
yes.
These commenters represented that eliminating the NRSRO
concept would be disruptive to the capital markets and would be
costly and complicated to replace.
We agree. As does the Bond Market Association, an
organization that, according to their submission in connection
with this hearing, speaks for the bond industry worldwide. As
the BMA observed, the NRSRO designation serves a unique purpose
in SEC regulations for which a substitute is either not
available or not practical.
Additionally, we believe that intrusive regulatory
oversight of the sort contemplated by the bill will result in
ratings of lesser, not higher, quality because credit ratings
are opinions, as to which reasonable analysts can and do
disagree; there is no one correct way to go about forming them.
Comprehensive regulation could produce standardized
approaches and rating opinions that do not reflect the
uncompromised view of the rating committee. In addition,
intrusive regulation is likely to erect new barriers to entry
that will inhibit, rather than promote, increased competition
as it will force new entrants to bear significant regulatory
costs that they currently do not bear.
Importantly, and as has already been raised this morning,
we also believe that H.R. 2990 as written is unconstitutional
on its face. Rating agencies have consistently been afforded a
high level of First Amendment protection by numerous State and
Federal courts.
This is so because at their core, rating agencies such as
S&P perform the journalistic activities of gathering
information on matters of public concern, analyzing that
information, forming opinions about it, and broadly
disseminating those opinions to the general public. We believe
that the bill would specifically violate the First Amendment by
making it illegal for a credit rating agency to publish its
opinions without first registering with the Government,
providing mandatory disclosures about its business activities,
and obtaining approval of that registration.
No legislation could constitutionally require the licensing
of Business Week or the Wall Street Journal because they offer
their opinions as to the credit worthiness of certain entities.
Also, intrusive Government involvement in the manner and
method of generating credit ratings, such as contemplated by
the bill, would be the equivalent of unconstitutional
Government supervision of publishers from within their own
newsrooms. This direct intrusion into the editorial process is
precisely the type of governmental activity that the First
Amendment prohibits.
As discussed more fully in my statement for the record,
positive steps have been taken over the past 2 years by both
the SEC and IOSCO, the International Organization of Securities
Commissions, with input from a diverse array of market
participants. These initiatives are being implemented and
include as goals increased competition and enhanced oversight.
Based on these serious concerns about the bill, we believe
the best approach would be to allow these initiatives to move
forward. Once these initiatives have been given a chance, then
Congress would be in a better position to assess the necessity
of legislation, and it is our belief that after these
initiatives have been tested, you will conclude legislation is
not the best approach for the market.
In conclusion, on behalf of S&P, thank you again for the
opportunity to participate this morning. I would be happy to
answer any questions.
[The prepared statement of Rita M. Bolger can be found on
page 47 in the appendix.]
Chairman Baker.I thank the gentlelady for her statement.
Our next witness is Mr. James A. Kaitz, president and CEO,
Association for Financial Professionals. Welcome.
STATEMENT OF JAMES A. KAITZ, PRESIDENT AND CEO, ASSOCIATION FOR
FINANCIAL PROFESSIONALS
Mr. Kaitz. Good morning, Chairman Baker, Ranking Member
Kanjorski, and members of the committee. AFP appreciates the
opportunity to participate in today's hearings on the
legislative solutions to the many issues and concerns raised
with regard to the credit ratings market.
AFP represents more than 14,000 finance and Treasury
professionals, representing more than 5,000 organizations. Our
members are responsible for issuing short and long-term debt
and managing corporate cash and pension assets for their
organizations.
Previously, AFP has stated that the SEC's existing
recognition process has created an artificial barrier to entry
to the credit ratings market. This barrier has lead to a
concentration of market power with the recognized rating
agencies and a lack of competition and innovation in the credit
ratings market.
To remove this barrier to entry and stimulate competition,
AFP has long advocated that the commission clarify the
recognition process. Further, we believe that recognition of
credit rating agencies must be conditioned on whether an
organization can consistently produce credible and reliable
ratings based on adherence to published methodologies.
We have also urged regulators to require that rating
agencies document internal controls that protect against
conflicts of interest and anticompetitive and abusive practices
and ensure against the inappropriate use of nonpublic
information.
This past spring, the SEC issued a proposal that attempts
to address some of the concerns we have raised. However, we do
not believe that the SEC proposal would foster a truly
competitive market and fails to address the need for ongoing
oversight of the credit ratings market.
The Credit Rating Agency Duopoly Relief Act of 2005,
introduced by Representative Fitzpatrick, would require the SEC
to register credit rating agencies based on the criteria
recommended by AFP. By eliminating the ambiguous NRSRO
designation process in favor of a more transparent registration
process, the Act will foster meaningful competition in the
credit ratings market.
As such, AFP supports the legislative proposal before the
committee today.
Mr. Kaitz. In nearly 30 years since creating the NRSRO
designation, there has been no review of the ongoing
credibility and reliability of the ratings issued by the
NRSROs. Any effort to address these concerns, either through
regulation or voluntary agreement, will be entirely ineffective
without an oversight and enforcement mechanism.
AFP is pleased that the proposed legislation directs the
Commission to censure, suspend, or revoke the registration of
any registered statistical rating organization that violates
certain sections of the act or ceases to meet the registration
criteria.
If the credit ratings market is opened up to competition,
it will be incumbent on the SEC to take an active role in the
ongoing oversight of registered organizations to ensure that
they continue to merit SEC registration. We believe that the
proposed legislation gives the SEC the authority, flexibility,
and guidance needed to conduct the necessary oversight without
placing an overly restrictive legislative regime on either the
Commission or the credit ratings agencies. For the committee's
consideration, we believe there are several key areas where
additional clarification will strengthen the act.
The first area is with regard to ratings performance
measurement statistics. As AFP has consistently suggested, the
key criteria for rating agency recognition should be whether
the rating agency can consistently produce credible and
reliable ratings. We believe that it is imperative that the
applicant not simply file statistics, but also demonstrate that
its ratings are, in fact, credible and reliable.
The second area in need of clarification is the
registration requirement contained in section 4 of the
legislation. The bill requires all credit rating agencies that
meet the definition to register with the SEC, even those that
do not seek to have their ratings approved for use by regulated
portfolios. There are currently more than 130 ratings agencies,
many of which have not sought and may not seek SEC recognition
or registration.
Further, new rating agencies that are established will not
be able to file long-term ratings performance measurement
statistics required for registration, shutting out these new
market entrants.
AFP recommends that the act limit registration requirements
to those that seek approval for use by regulated portfolios or
those that the Commission determines must be registered to
protect the public interest.
We also recommended that the act explicitly direct the
Commission to develop an oversight and an examination regime
that ensures that registered statistical rating organizations
continue to issue credible and reliable ratings, that they have
and adhere to policies that protect nonpublic information and
prevent conflicts of interest and unfair and abusive practices.
Such an oversight framework is described in the Commission
staff outline of key issues for a legislative framework for the
oversight and regulation of credit rating agencies, developed
at the request of Ranking Member Kanjorski. This type of
oversight will protect capital market participants without
injecting regulators into the decision making of the rating
agencies or impinging on their First Amendment rights.
We believe that the registration process proposed in the
Credit Rating Agency Duopoly Relief Act of 2005 will minimize
barriers to entry and foster competition among existing NRSROs
and those that may be later registered. The enactment of the
bill, along with the development by the Commission of an
oversight regime that ensures that registered statistical
credit rating organizations continue to meet the registration
requirements will improve investor confidence in the rating
agencies and global capital markets.
Thank you, Mr. Chairman.
[The prepared statement of James A. Kaitz can be found on
page 72 in the appendix.]
Chairman Baker. I thank the gentleman for his statement.
I would like to start my questions with Mr. Partnoy.
As I understand the pending SEC proposal, it requires a
firm to be generally accepted in the marketplace in order to be
a first step to NRSRO designation by the SEC. In your
observation, how would one become generally accepted in the
market for some period of time, in other words, be utilized, if
you don't have the SEC designation to begin with? Is that a
workable remedy to enhance competitive opportunity?
Mr. Partnoy. No, Chairman Baker, I think that is a very
good point. It is what I would call a Catch 22. It is virtually
impossible for an agency to establish that it is generally
accepted if the NRSRO framework is in place and they are not a
designated NRSRO.
Chairman Baker. So you would have to be in the rating
business, expend the money to do the analyticals, convince
companies to pay you, do that for some period of time on a
national basis, when the companies know that it has no merit or
impact on their publicly disclosed rating standard?
Mr. Partnoy. That is absolutely right. And companies know
that loud and clear because they know about the proliferation
of regulations that virtually require that you get a rating
from an NRSRO so that you can sell it to folks who have to have
one of those ratings.
Chairman Baker. So at the moment, we are not clear how we
get additional competition in the marketplace because you have
to be generally accepted, but you can't be generally accepted
without the designation? But that is the standard by which we
gauge whether you can become one?
Mr. Partnoy. That is precisely right. And that is why it is
a Catch 22, an intractable problem. And that is one reason why
the idea of eliminating this notion of an NRSRO entirely is an
attractive one.
And that has a host of difficulties, as Mr. Pollock
mentioned, but I completely agree.
Chairman Baker. Thank you.
Mr. Egan, you have been critical this morning of rating
agency performance. Is there, in your view, any consequence to
a rating agency today that doesn't meet, let's just call it
"fiduciary obligations," in rating appropriately? Is there a
professional standard of conduct which someone holds up and
measures you and say, Oops, you didn't do your job; here is the
penalty box?
Mr. Egan. For the non--
Chairman Baker. I think you just cut yourself off.
Mr. Egan. Thank you.
Chairman Baker. Thank you.
Mr. Egan. For the non-S&P and -Moody's of the world, there
is a very tough standard. In our case, we are paid by
institutional investors. If we don't succeed in issuing timely
accurate ratings, clients will cut us off. It is just that
simple. Their concerns are a little bit different from the
issuers; issuers want the lowest cost of capital generally.
On the national recognition, though, we do have that
national recognition, have had it for a long period of time,
and we still don't know what the SEC wants for us to get--
Chairman Baker. So you are saying you are nationally
recognized with a record of accurate performance, and yet you
are still mystified by what constitutes the remaining step for
you to become nationally recognized?
Mr. Egan. That is correct. In fact, there is a study of our
recognition versus DBRS, a Canadian firm.
The SEC's prior regulation is that an NRSRO has to be
nationally recognized in the United States. We had more than
four times the recognition of DBRS; and AM Best, I think we had
five times recognition among users of credit ratings. These are
institutional investors, mutual funds. We had more than four
and five times the recognition of the other firms. We brought
this to the SEC's attention, and they said nothing.
Chairman Baker. It is your view, then, it is no longer an
inability to meet their standard? You are meeting the standard,
but you still can't get an approval?
Mr. Egan. That is correct. And what they have said is they
are going to wait until this NRSRO process plays out.
Chairman Baker. Is that like a 30-year wait?
Mr. Egan. I don't know. They won't set a time frame for it,
which is very frustrating.
Chairman Baker. Let me get to Mr. Pollock before my time
runs out.
Do you believe, given your analysis of the market
performance of S&P and Moody's in a parallel path in a free
market system, it is likely that two companies could own 80
percent of any market without some governmental grant of
privilege?
Mr. Pollock. Mr. Chairman, in my opinion, their market
position and the market power reflects Government sponsorship
through the NRSRO process, not unlike the Government
sponsorship we have often discussed in the GSE world.
Chairman Baker. I don't want not to get to Ms. Bolger. It
is my expectation we will get to another round of questions,
but with the number of members, I am going to stick to the 5-
minute rule and recognize Mr. Kanjorski.
Mr. Kanjorski. Thank you, Mr. Chairman.
Ms. Bolger, exactly why do you think that H.R. 2990
violates the First Amendment in specific?
Ms. Bolger. The proposed bill, the bill has a requirement,
in effect, for--it is a licensing regime. There is a procedure
for filing your application, documents, certain policies and
procedures, all on issues that we believe are important to the
market and to quality. But then the SEC would have the ability
to accept or deny, and there is a process for denial of that
application.
So there is some--there is a mechanism built in here for
not just notice filing of information to the SEC, but their
evaluation and, ultimately, approval. And that licensing, in
effect, requirement is not constitutionally viable.
Publishers are free, by long-standing case law, to freely
disseminate their opinions. And rating agencies are members of
the financial press, the financial press being equally
protected by case law.
Mr. Kanjorski. Thank you. To all of our witnesses, could I
request that you review the SEC staff outline and send specific
comments to the committee before the end of August? Is that a
reasonable request?
This is a very delicate area. I guess in the best of all
worlds--and I appreciate Mr. Egan's problem; I have lived with
his frustration on several hearings. Is there a possibility of
having both the recognition and the registration concept? I
mean, it seems to me that I don't want the Good Housekeeping
Seal of Approval out there to 100 different agencies who can
qualify and register and then just offer themselves up for
bidding purposes. Not that most would do that, but a few
probably would.
On past occasions I have expressed my concept of the
"bastard rule". It is my rule about why we have so many laws
and regulations. It is not that most of us need those rules or
regulations, but there are always 3 to 5 percent of
participants in any sector that go to the edge of the envelope
or beyond for greed or for value. I assume that we would have
to recognize that rule in this industry, that greed would be
particularly attractive.
So how would we avoid encouraging, recognizing, or
registering agencies that are literally up for grabs to the
highest bidder?
Mr. Kaitz. I think we recommended in our oral testimony,
sir, that, first of all, only those that would want to be in
regulated portfolios would be one alternative. And as long as
there is a process to determine credible and reliable ratings,
I think that is going to put market disciplines on those
ratings agencies or agencies shopping for the best deal.
So I think you have to distinguish between 130 and those
that would want to be in the regulated portfolios, and then
make sure that there is a criterion to ensure that credible and
reliable ratings are given over a period of time.
Mr. Kanjorski. But isn't that an after-the-fact situation?
Mr. Kaitz. No. You could look at--you could do some
correlation analysis of their methodologies and go back and see
how they did in the marketplace.
The reality is, though, you would not probably look at a
new organization that would want to be in a regulated
portfolio. They likely would be already established agencies
with a track record that the SEC could take a look at.
Mr. Kanjorski. So are we only arguing here whether or not
we have just a limited number of recognized entities and we
want to enlarge that number? Or are we just looking for a
methodology to enlarge that number?
Mr. Kaitz. I think if you put the right discipline in the
market, then you are going to get those agencies that are going
to be the major players. Also, as an organization that
represents the issuers, it is not in the issuers' best
interests to use a rating agency that is not going to be
credible, that you now have to defend before the audit
committee and the board. So our members have a fiduciary
responsibility to make sure those ratings are accurate.
Mr. Kanjorski. If we open it up by registration, what is to
prevent investment banking houses from making the decision of
where the business goes and who makes the ratings? Aren't they
doing that to some extent today?
After all, companies are doing that with the accounting
firms that they hire and the legal firms that they hire. They
are saying, you know, we are just not going to deal with this
security unless these people put their opinions in place. They
just don't open it up to the whole bar or to the whole
accounting profession.
Mr. Kaitz. Again, from our--I don't want to dominate here,
but from our perspective, that is why it is critical that there
is SEC oversight of the rating agencies and that they are
really looking at credible and reliable ratings. I think that
is the role, from AFP's perspective, that we have envisioned.
Mr. Kanjorski. Mr. Egan, didn't you suggest that the SEC
should withdraw from this field? Is that the key point of your
testimony?
Mr. Egan. Yes, I did.
Mr. Kanjorski. And who would be the regulator? Who would be
the protector of the investor and the public if they withdraw?
Mr. Egan. I think you need a board of industry participants
to be involved in the oversight.
Mr. Kanjorski. Self-regulatory?
Mr. Egan. Perhaps, but it would be broader, as it
represents some individuals.
The Bond Market Association is held up as representing the
industry; we disagree with that. In our experience, they
represent the interests of the larger rating firms and the
larger broker-dealers. The interested parties is much broader
than that.
We don't understand why the SEC has not taken action faster
than this, but obviously, there must be some pressures there or
they would have acted. So we think there should be a broad
group that is represented.
Mr. Kanjorski. Isn't it sort of underfunded? While the SEC
was given all kinds of regulatory authority, they just don't
have the personnel and money to do the job?
Mr. Egan. I find that hard to believe.
Mr. Kanjorski. Well how about the problem we have here in
Washington on unavailability of office space? You're indicating
another bureaucracy, if I understand it, or another agency or
quasi-governmental agency to do this work?
Mr. Egan. I think it could be a rotating board of industry
participants that are charged with overseeing this area until
some--or perhaps with a new SEC commissioner, there will be
some reasonable--
Mr. Kanjorski. What kind of enforcement would be available
if we have an industry board? What powers would they have?
Mr. Egan. I think, start with the recognition of ratings
firms; and that has been a bottleneck for quite some time.
There isn't any real competition. Even with these new firms,
they don't present any real competition.
As far as the oversight, I think that there has to be some
review of the anti-competitive practices that are being
undertaken by S&P and Moody's. They have been raised a number
of times; they are not addressed in the current NRSRO
designation definition, and those should be addressed.
So I think it would be this rotating advisory board that
could be both in the front end of identifying companies and on
the review process.
Mr. Kanjorski. Do you want to defend the monopolistic
practices of your organization, Ms. Bolger?
Ms. Bolger. Yes.
S&P has been on record for quite a long time as being fully
supportive of more competition in the industry. We do, though,
of course, see tremendous value in the market recognition and
acceptance portion of the NRSRO designation. It is really the
fundamental criterion to be an NRSRO and upon which--a premise
for which a lot of regulations have embedded NRSRO ratings. So
to strip that out, as the current bill does, would be--would
have, we believe, a vast effect; and we believe other people
have enunciated that view as well.
In terms of any anti-competitive practices, we just feel
that there is a tremendous amount of value out in the
marketplace. And we believe that the initiatives that are
already moving forward, both with the SEC's proposed rule,
which does enunciate criteria to judge market acceptance, which
does open up the market to geographic-specific rating agencies
and those with some industry specifics, that those initiatives
should be allowed to proceed.
I also want to mention in terms of oversight, a lot of work
has been done internationally. You may have seen the IOSCO code
of conduct that was concluded in December 2004.
I believe the rating agencies have taken that very much on
board, have been part of the process. These are global ratings
agencies, and that has been the decision after some of these
same questions have, over the last 2 years, been debated in
Europe primarily. Things like an arbitration board or just
having a few people decide has been ruled out in favor of more
of a code industry standard and self-regulation to some extent,
but knowing that credibility, if we don't abide by a code,
could certainly impact the bottom line.
Chairman Baker. The gentleman's time has expired.
Mr. Shays.
Mr. Shays. Thank you very much. I am conflicted because I
basically believe in open markets, and yet I have such a
tremendous respect for McGraw-Hill and Standard & Poor's.
So that conflict notwithstanding, Mr. Partnoy, in your
testimony you stated the philosophical approach the Commission
has suggested with respect to NRSROs is inconsistent with its
approach in other areas and, indeed, with legislation purposes,
security laws.
Could you please elaborate on this idea?
And let me just throw this out as well. Are there other
entities that the Securities and Exchange Commission approves?
In the manner in which it approves rating agencies, does the
Commission approve brokers, investment advisors, mutual funds?
Mr. Partnoy. Those are very good questions, and I think
gibe well with the ranking member's questions about how to have
registration and recognition coupled in some way.
The philosophical, the general philosophical approach is to
permit companies to register and then have the markets work on
the back end as the disciplining measure. And the
attractiveness of that is that it ideally does precisely what
the ranking member has said he would like legislation to do
because it provides a disciplining function. But it also
provides an initial screening function, so you can really have
it both ways.
And I think the U.S. Securities markets are the best in the
world for precisely this reason, that we have achieved this
balance by having oversight at the beginning in terms of who
can register, which companies can raise money, and then let the
markets do the oversight at the end. So that is what I meant by
those sentences.
And in terms of other--the second part was, with respect to
other similar kinds of areas, there aren't any explicit areas
where the SEC, for example, will say, only these entities can
come in, but there are somewhere implicitly.
Accounting firms and underwriters are given special
privileges. And to the extent there is not as much competition
as people would like in the investment banking business or in
the accounting Industry, where we see also not as much
concentration as in credit ratings, but some concentration, I
think that part of it is due to that at least implicit
requirement that you be a Big Four accounting firm or you have
a certain amount of reputational capital or that you are
registered or licensed in a certain way.
And let me just respond: This notion that licensing
financial institutions somehow is a violation of the First
Amendment is not something that--that argument shouldn't apply
uniquely to credit rating agencies. It should also apply in all
these other areas that I think your question is getting to. And
I don't think it is correct to say that, for example,
investment banking fairness opinions which are made public, or
accounting opinions, which are in every Form 10-K filing, are
subject to the same kinds of problems.
Mr. Shays. Would any of the other panelists care to
respond?
Ms. Bolger. If I could just address briefly to Mr.
Partnoy's point also, to point out that Standard & Poor's is
submitting a detailed memo on the First Amendment issues that
are raised under the bill. So that will be submitted shortly.
But there are distinctions in the case law, and I certainly
won't go into all the cites and details, but between--and
among, actually--auditors, investment advisors, and ratings
agencies, namely, based on the core function, a rating agency's
core function is the publication of rating opinions, whereas
auditors are required by regulation to publish. Rating
agencies, on the other hand, have the option; they have full
editorial control. And unlike the case law on rating agencies,
there simply is not case law that covers auditors to that
extent.
Mr. Partnoy. May I briefly say one thing?
Chairman Baker. Really quick, and then we will go to Mr.
Pollock.
Mr. Partnoy. The core function of a rating agency is not
publication. It is not publication; it is not a publishing
firm.
Moody's market capitalization is more than three times that
of the New York Times. We don't know what the S&P's value is
because they don't say publicly. But that kind of value doesn't
come from publishing; it comes from selling ratings that unlock
the keys to this regulatory compliance in the capital markets,
not from publishing.
Mr. Shays. If I have time, I want to get into the whole
issue of shopping for ratings.
But, Mr. Pollock.
Mr. Pollock. Congressman, I think there is an interesting
positive analogy of ratings and publishing. So I think we ought
to think about applying the NRSRO concept as a mental
experiment to publishing.
Suppose we said we are going to have nationally recognized
publishing companiesand a whole range of regulated entities--
banks, pension funds, mutual funds--are only allowed to use the
publications of these nationally recognized companies. I think
we would all agree that would be a pretty foolish situation.
What I like about this bill that is it moves the credit
rating sector, which is a business, which does have analogies
to publishing, into a competitive market like most, at least,
of our market economy--namely, a disclosure and competition
model, as opposed to a regulatory designation model. That seems
to me very positive.
Thank you.
Mr. Shays. Thank you, Mr. Chairman.
Chairman Baker. Gentleman yields back.
Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
Ms. Bolger, I have listened a couple of times now, and it
is a matter of great interest; and I look forward to reading
the brief on the First Amendment implications because I am
struggling a little bit with them in some respects.
How would you address the argument that the SEC, de facto,
has registered two rating agencies today through their
regulations, and to this proposed legislation, as opposed to
putting their imprimatur on two or perhaps five ratings
agencies, they may end up putting their imprimatur on 100?
So why don't the same First Amendment concerns apply to the
status quo?
Ms. Bolger. The status quo is not--rating agencies don't
have to be designated as an NRSRO, so there is not the same
level or approach. With this front door, one must have a
license before one can even speak or else it is an illegal type
of approach.
So there is a fundamental difference in the way the
existing system works and even, we believe, with the proposed
rule that the SEC has promulgated. There will certainly be, as
we understand it, more clarity around the process than the
actual criteria for designation. But we don't take a position
as to whether there is an ultimate perfect number of NRSROs or
even credible rating agencies, but we do believe it is very
important to still maintain that market acceptance factor, even
putting aside the legal First Amendment issues just from a
policy and market protection perspective.
Mr. Hensarling. Next question I have--and, first, I do have
a bias in favor of competition and open markets. And I
certainly respect and appreciate the approach of my colleague,
Mr. Fitzpatrick, on this piece of legislation, and I haven't
studied it in detail.
I have one issue that causes me a little bit of concern,
and that might be the revelation of certain methodologies
involved in ratings of various companies. I just want to know,
is there any concern in the revelation of perhaps something
that can be seen as proprietary, data that could actually prove
to be an anti-competitive measure, as opposed to a pro-
competitive measure?
I understand that transparency is quite good and seeing
one's batting average and prognosticating on what has actually
occurred, but I just wonder if there is any concern that at
some point we cross the line to revelation of proprietary today
and become more anti-competitive?
Is there anyone who would like to take a shot at that?
Mr. Egan, you look like you are going to the microphone.
Mr. Egan. I would be happy to because I think many market
participants recognize our ratings as being the most timely and
most accurate, not only domestically but internationally. We
are not concerned about any sort of technology being
distributed out into the marketplace and impeding us.
I think at the base, it is really an understanding of the
business. It is judgment. We got WorldCom right because we were
concerned about the bear market in long distance capacity. We
were concerned about Bernie Ebbers' $400 million loan from the
company. We are concerned about the deterioration in the
company. You know, if we send the technology out into the
marketplace, it is not going to hurt us very much.
The technology is not proprietary. It is the judgment.
Mr. Partnoy. I will say briefly, I believe both Moody's and
S&P describe a fair amount of their process already.
Mr. Hensarling. Another question for you, Ms. Bolger. In
your testimony, you talked about how Mr. Fitzpatrick's bill
could actually erect new barriers to competition through its
burdensome mandates. Clearly, your opinion appears to be in the
minority on this particular panel.
But could you explain in a little greater detail because I
don't think I understand your position.
Ms. Bolger. I think, fundamentally, the issue is setting up
a structure, this approval licensing regime, and the breadth of
entities that would be covered essentially, since one would
need a license in order to issue opinions. And if that is your
primary business over, I believe, 3 consecutive years, it picks
up a large group of entities, maybe intended, maybe unintended.
That is not clear.
But the cost of doing, of abiding by that type of system,
of preparing the policies, of submitting to that, and adhering
to the whole process, the 90 days here and there, could
definitely pose an issue, we believe, for newcomers to the
market.
Mr. Hensarling. But isn't it true that the vast majority of
your competitors, who don't enjoy your designation, are on
other side of this issue and believe it would be pro-
competitive?
Ms. Bolger. Well, yes, and we don't have a problem with
that whatsoever. But our position is, the aim to open the
industry up to more competition can be addressed in a way other
than this bill. We really believe, after a lot of thought, that
the bill simply doesn't work, both for legal and policy
reasons. And we would turn, as I mentioned, to some of these
other initiatives that have opening up the market in mind as
one of their goals.
Mr. Hensarling. Thank you. My time has expired.
Chairman Baker. Thank the gentleman.
Mr. Fitzpatrick.
Mr. Fitzpatrick. Thank you, Mr. Chairman. I appreciate the
time and testimony and expertise of all the panelists. We have
all found it very helpful in this process.
I agree with Mr. Egan that there are questions to be
answered, and I am perplexed as to why the SEC has not dealt
with this in a more timely fashion, just following up on that
question Mr. Hensarling asked of Ms. Bolger and her answer.
Going to Mr. Partnoy, could you explain the SEC staff
designation process and how that only adds to the duopolistic
position of Moody's and S&P?
Mr. Partnoy. Well, it is difficult to explain. It has been
a bit of a black hole because there is not much specification.
And you hear the frustrations from Mr. Egan here in trying to
get designated. And he is certainly not alone; there are many
entities that have tried.
Formally, the process works through no-action letters. So
it is an informal process, and the goal is to try to get the
SEC to write a no-action letter. But just as we, Chairman Baker
and I and others, have said, there isn't even a definition of
an NRSRO. There isn't much guidance. So I describe it as a
"black box." I don't think that anyone knows precisely what
they need to do in order to qualify.
Sorry I can't give you a better answer to that, but I just
don't think there is one.
Mr. Fitzpatrick. Mr. Pollock, you were at one time head of
the Federal Home Loan Bank of Chicago, and you have significant
experience in the financial services market.
Could you explain your comments that you believe--and we
have heard some concern here about disruption to the markets as
a result of this bill. Do you believe that there would be no--I
think you said "no disruption" to the fixed income markets,
that there is a more competitive rating agency sector?
Mr. Pollock. Congressman, that is my opinion, as I said in
my testimony. These are big markets; they are full of
sophisticated people. They will also, in my judgment, move in
an evolutionary fashion because there are natural, conservative
tendencies in anything that revolves around the question of
estimating risks and estimating future losses and
uncertainties.
I think we should be moving the market to where all
financial actors, both issuers and buyers of securities,
creditors, and all users of these ratings, are asked to
exercise their judgment, have that judgment as informed as
possible, and then let the market action decide which ratings
are successful, which pricing models they like, which ratings
models the market will prefer.
But I am convinced that all that would happen in an
evolutionary, nondisruptive way because everybody is going to
be very careful about this so that what we will see is a smooth
transition from what we have now, the Government-sponsored
cartel, to what we should have, which is a real competitive
market.
Ms. Stroker. If I can address that, as well, representing
Fitch's view. We are sort of the man in the middle here where
we are an NRSRO and yet we are not S&P or Moody's; we don't
have their market strength.
I think the big concern that we share is that the process
of getting from here to there, that it be constructive and
evolutionary. And as Congressman Kanjorski pointed out, ratings
are infused in numerous statutes--in the financial markets, in
mutual funds--and simply opening up the ability to be included
to these 140 market participants, or whatever the number is,
could be quite disruptive.
Mr. Egan. I would like to put things in perspective. You
know, you have had major failures here, billions of dollars
lost. And we are concerned because one, probably two, of the
major rating firms whose revenues operating income, by the way,
has doubled in the last couple of years, they are concerned
about moving forward because they might lose the freedom of
speech defense because they don't want to be registered under
this new scheme.
It makes no sense to me. But then again, neither does the
SEC's registration process. So you really want to put the whole
thing in perspective; people are getting hurt badly. And it has
been 15 years since the SEC has been studying this.
We have had an application in for 8 years. I am a patient
man, but this is getting absolutely ridiculous. What do we
need, another couple of Enrons to fail?
Mr. Fitzpatrick. One more question, Ms. Bolger. In your
written testimony, page 8, you liken this bill to--"throwing
the baby out with the bath water" is the analogy you use.
I am wondering, who is the baby in this particular case and
what is the bath water?
Ms. Bolger. The baby would be the test for market
recognition since that would disappear under the bill. And we
do believe, in response to some of the other statements and
questions this morning, that this is not just a matter of
terminology and changing "recognized" for "registered" or
whatever the term might end up being, because the premise, the
fundamental premise upon which States and Federal regulations
have embedded NRSRO ratings, has been market recognition.
I think that has been the SEC's key criteria for a long
time, and while, perhaps, the process is not clear--and we are
also on record as being very much in favor of a more
transparent process and a more formalized process to increase
competition and provide the quality ratings out there--it just
seems that to eliminate the market recognition or acceptance,
that is, you know, for independent credible ratings, is the
wrong way to go. We think it is just too fundamental, the
system.
Chairman Baker. I thank the gentleman and want to
compliment him on his good work in this matter.
I want to try to put in a construct that makes sense to me,
the concerns that I think Mr. Fitzpatrick is addressing with
the legislation.
As indicated earlier by Mr. Pollock, there isn't a
Government agency that says, okay, you can be a newspaper.
Under the First Amendment, not only are newspapers protected, I
am protected.
I am going to make a statement you are going to disagree
with it. I have the right to make the statement; I don't have
to be licensed to make the statement, and there are no
consequences when I make the statement. Now, if Mr. Kanjorski
and I agree and we introduce a bill, that might have
consequences, but short of that, the statement itself has no
effect.
You were arguing that you have a First Amendment privilege
as a result of your reaching and opining as to someone's
financial condition. Very similar in concept and scope to that
of a CPA, now subject to the PCAOB in multiple regulatory
levels.
At the same time, you are saying that to be designated an
NRSRO is of no consequence, but statutes make repetitive,
duplicative reference to NRSRO; hence, the reason why we didn't
change NRSRO to another acronym, but rather "registered" as
opposed to "recognized," so we didn't have to change all the
other statutes. It was a way to address the structural problems
without getting into all that legislative, legal detail.
The current system is a system which designates NRSROs as a
result of an SEC governmental determination and establishes a
status on those so designated. That is not an operative
principle distinguished from a registration process.
I have, as Exhibit Number 1, Mr. Egan, who is now an 8-year
advocate for registration "recognition," for nationally
"recognized." He can't get there. So it is a barrier in
performance of NRSRO obligations.
The very thing you say you do not wish to see occur with
the adoption of 2990, I suggest the current system, therefore,
is unconstitutional and subject to First Amendment privilege.
If we agree that you are now designated by governmental
enterprise, and I even cede to you the point that there are
First Amendment questions, I will refer you to Hudson v. New
York in 1980, in which the Court held that should there be an
overriding governmental reason and the remedy prescribed by the
Government is reasonable and properly prescribed, then there
even can be a prescription of First Amendment privilege based
upon an overwhelming necessity for governmental action, the
capital markets.
If S&P determines that an enterprise is--an issuer's
ratings should fall below BBB, no longer investment grade,
there are consequences. If an issuer wishes to go into the debt
markets to provide security investments into its firm and does
not get a rating of at least two independent enterprises, there
is a market consequence.
A newspaper writes a bad editorial; people get mad, but
there is no measurable, quantifiable market effect. When you
issue an opinion contrary to an issuer's interest, there is a
measurable, consequential effect. Therefore, preservation of a
stable capital market is clearly in the interests of this
committee and of the Federal Government, and it should have
been under the purview of the SEC. And that is what gets us to
the current moment.
The SEC has not acted; for 30 years it has not acted. And
we have a handful of individuals granted the responsibility to
engage in this enterprise conduct, which is specifically
referenced by Federal law for which there are market
consequences if they are engaged and they, the issuers, do not
meet your standards of performance.
I am a free market guy. I find this extraordinarily
troubling. You are what you are because of an act of a
governmental agency.
Now let's take a look for a moment at your owner, McGraw-
Hill. They are a publisher. They should be availing themselves
of the First Amendment privilege, which you prescribe for your
own interests since they are in the publishing business.
I went to the Internet, and strange as it seems, I found on
the Internet all of their financial disclosures, annual
operating revenues of $5.25 billion--I won't bore you with the
details. Suffice it to say, they are Sarbanes-Oxley compliant
and make all the disclosures that anyone should make in the
current market environment for a corporate governance standard
of conduct. While at the same time, S&P makes no disclosures of
financial income or resources. There is no accountability for
conduct which might not be a market standard of professional
conduct. It is a large black box into which a lot of stuff goes
and a few opinions leak out the back door.
Now, according to another First Amendment-protected source,
which shall remain named, the New York Times, alleged that 65
percent of McGraw-Hill's net operating profit was generated
from Standard & Poor's, which according to the numbers I
calculated, that is only 491 million. Mr. Egan was referencing
an $800 million figure. I don't know who is right, but between
5 and $800 million, this leads me to conclude this could
possibly be about money. I don't know. Maybe that is a too
pessimistic view.
But you then have to look at the market performance and
others have called into question market performance relating to
the last decade. The response by S&P has been, well, people
lied to us. What standard of due diligence does an analytical
person have to look at the numbers?
I read through the protocols provided to me by S&P and what
is done in order to determine an issuer's status; and there is
no reference to a requirement to look at audited statements or
to conduct an audit. It really is the best guess that one can
make, given what is commonly available in the public markets.
If one were really that good in a open competitive
marketplace--I want to make clear, if Moody's and S&P could
control 80 percent of the market in a free, open system, I
would defend that right. I defend the right of anyone to go out
and make money. It is my opinion, whether well-founded or not,
that the current circumstance is the consequence of the
governmental designation to the prejudicial effect of all those
others who wish to compete in the marketplace.
If 2990 is, on its face, defective, I need to hear
specifics other than what I consider a specious First Amendment
argument. And I know you will have briefs to forward for us to
later review, and I look forward to that.
But as to the elements of having someone register, putting
that aside, knowing that your difficulty with registration is
that you think that is an arbitrary and capricious inhibition
to market function, what is the down side of what Mr.
Fitzpatrick has established as the guiding principles for
governance of a rating agency in the market structure we have
described?
Ms. Bolger. You raised a number of very important issues--
Chairman Baker. I hope so.
Ms. Bolger. --and a number that we very much agree with in
terms of concerns.
Putting aside the First Amendment issues, pure legal
issues--again, the main policy concern we have--I would suggest
we certainly would like to discuss this with you further. It is
this whole element of market recognition. And I understand that
that is not always well articulated or perhaps enunciated.
I believe there is an effort, though, to more formally
enunciate standards, to measure it. But to take that out of a
system that has been in existence--and we would say, based on
what others have also said, it is not just Standard & Poor's;
it has really worked extremely well.
Chairman Baker. Well, then is it that keeps Mr. Egan from
getting his approval? What deficiency is there in his
application?
Ms. Bolger. I cannot speak for the SEC. And, yes, we too
have been, on occasion, frustrated with the SEC as well. We
have a proposal in for an oversight framework, which I think
has been alluded to this morning, that we have been working on
at the SEC's request and are awaiting comments from them on.
And we do hope it proceeds.
And I can go into a little more detail if you would like.
Chairman Baker. Let me rephrase it a different way.
It is, rather than being so specific to another applicant,
are there others who perform this function in the market today
whom you believe should be designated NRSROs?
Ms. Bolger. I personally--and I don't believe S&P has a
view that there is one specific entity out there because we
don't necessarily know who may have applied or--
Chairman Baker. In the general function of credit ratings,
are there other companies who perform this duty in a manner
which you think would be satisfactorily compliant with the
SEC's standards?
Ms. Bolger. Yes, I believe there probably are and probably
not just here in the United States. This is a global business.
So we also tend to look at these issues from a global
perspective.
So, yes.
Chairman Baker. So you would conclude that there are people
that should be approved, but have not been, and we don't know
why?
Ms. Bolger. Well, again, I can't speak to what the
deficiencies might be or where they might be in the queue here
and certainly, again, for what may be the situation with Egan-
Jones. But we do share the goal of opening up the market to
whomever it might be, but keeping in place some of the key
fundamental standards, making them more formal, making them
more transparent. I think to your point--
Chairman Baker. But you are arguing, with due respect,
against yourself. You are saying we need to have standards, we
need to make sure we have the right people doing this work who
are responsible in conduct, but at the same time you are
telling me we should not have governmental oversight of the
function. How is that consistent?
Ms. Bolger. The standards are ones that the SEC would
articulate for designation. We don't believe the current system
of designating, because not everyone has to be an NRSRO, raises
again the constitutional issues that we feel that the bill--
Chairman Baker. Well, stay away from the Constitution. We
are doing good here. We are getting disclosure.
We agree there are other people who are out there who
should be approved NRSROs. We don't know the reasons within the
SEC why they have not been. We are not sure who in the SEC is
making the determinations.
But moving forward, you are arguing that when we let those
people in, they should meet certain standards of conduct. And
those standards of conduct look pretty much to me, whether you
call them "registration," if you don't fit this box, you don't
get in. That is where we are now.
Ms. Bolger. Yes. Let me clarify a couple of points.
First of all, in terms of the whole NRSRO regime, we have
been in favor and on record as having market participants also
weigh in on the process, be it the initial designation or be it
some ongoing surveillance, should one continue to be an NRSRO.
I believe the SEC is looking at time frames to be an NRSRO.
In terms of the standards issue, what we are looking at--
and I believe the other rating agencies have also or are in the
process of implementing our codes of conduct. These are not
mandatory by regulation or law, but they are effectively
industry standards. And given that this is a business largely
built on credibility and reputation, one, we believe--I won't
talk for everybody, but I believe--just in our conversations,
we all feel that this is very necessary.
This code goes to the transparency of the process, it goes
to how we do our business, and it goes to a number of other
issues that are both covered by the bill as concerns and the
SEC has enunciated as policy issues. But they are not mandatory
by law, and that is why there is a distinction in approach.
Chairman Baker. Well, I have gone way beyond reasonable
time, and I should afford Mr. Kanjorski an opportunity, if he
chooses, to make another round.
Mr. Kanjorski. Just a few questions.
Chairman Baker. Mr. Kanjorski, let me conclude.
I hope I have made clear the basis on which Chairman Oxley
and I are both concerned about the current methodology. We are
strongly supportive of Mr. Fitzpatrick's approach, but we would
welcome constructive comment going forward about how we get out
of this conundrum where we have five--at most, two--controlling
80 percent of the market. It is very restrictive,
noncompetitive.
But we are not in the business of promoting nonprofessional
individuals to frivolously rate issuers and create havoc in
markets. That is not where we want to wind up. We want what you
want, respected people doing professional work for the benefit
of an active and vibrant capital market, and we think we can
enhance that opportunity.
And there are reasonable questions, we believe, on our side
of table to be resolved. And I thank you.
Mr. Kanjorski.
Ms. Bolger. Yes. And thank you, Mr. Chairman. We share your
concerns and hope to continue the dialogue.
Mr. Kanjorski. Maybe I should raise the question, Mr.
Chairman, but rather than having this panel here today, we
should have had the SEC here again today and in order to find
out how they put this scheme together, as well as why and what
they are doing about it to make it a fairer situation.
It is very difficult on my side of the aisle to argue
against H.R. 2990 or anything else in terms of total
competition, in which you, Mr. Chairman, always state you are
for. Then why should we have any designation? We could just let
the marketplace play out.
Chairman Baker. I will sign on.
Mr. Kanjorski. Well, why then are we looking for a
regulatory scheme of any sort? Let's just declare it open,
because it is my thought that ultimately we would end up with a
somewhat similar structure. Investment banking houses,
investors, and the consuming public has to have had some
insight as to where to put their money before the designation
of NRSROs, like Standard & Poor's, Moody's, Fitch, and others
existed, didn't they? Yes, sir.
Okay, what happened when they existed without this
designation? Did they occupy a large portion of the market? Did
they get that market share because of their credibility or did
they get it because they were monopolistic?
Mr. Partnoy. May I address that?
The business was significantly different. It was actually
more like a publishing business and more like the business that
Mr. Egan's company engages in. It was actually a very well
functioning market, and those same entities participated. There
was lots of competition during the 19--
Mr. Kanjorski. Why did we change it?
Mr. Partnoy. We changed it because the SEC promulgated one
rule in 1975, and then it was off to the races. And people saw
that it was easy. Instead of making a determination on their
own as a regulator as to, for example, what net capital
requirements could be, it was easy just to push that off onto
the private sector and in this peculiar way pushing it off only
onto a handful of folks.
And it really hasn't been done in other areas before, but
it was easy, and it just--it was a monster; it got out of
control. And if you look, I have written a couple of articles
on this and just shown the simple chart that shows growth in
regulations, and it goes up, up, up, up, up.
Mr. Kanjorski. What is your opinion and the rest of the
panel; should we go back to the pre-1975 world?
Mr. Partnoy. I think there is a strong argument for going
back to eliminating this concept of NRSROs entirely. I have
said there are alternatives.
For example, you could have decisions made based on the
market spreads, the credit spreads that exist in the market,
which would be a nice way of capturing all of the information
in the market, not just the information associated with credit
rating agencies. I think that is a viable alternative.
I have submitted that to the SEC. I don't think that it has
been considered adequately. It would be something on the plate
for this committee to think about.
I think it is a very difficult problem. I think that the
bill that we were talking about now is actually a nice
compromise. But going back to pre-1975, ironically, even with
all the modernization of financial markets, actually a nice way
to think about what we should try to do is go back before we
had this regulatory superstructure.
Mr. Kaitz. It might be a nice way to think about it, but it
is totally unrealistic. You have to undo legislation and
regulation and all those regulated portfolios to do away with
the NRSRO--
Mr. Kanjorski. Congress doesn't have to do anything?
Mr. Kaitz. It is embedded in insurance, mutual fund,
banking regulation. You would have to then address each one of
those separate pieces of legislation.
Mr. Kanjorski. We have created a monster. Now we have to
dress that monster?
Mr. Kaitz. I am afraid you have to. I don't think it is
realistic to just go back to 1975.
Mr. Kanjorski. Mr. Egan, would that solve your problem if
we went back to pre-1975?
Mr. Egan. The short answer is, I don't know. I know it is
not working right now. It is not working because of the odd
process for becoming an NRSRO, the fact that applicants are not
told specifically what the requirements are, what has to be
done.
Mr. Kanjorski. We are going back. We are going to throw
that out and go back to pre-1975. Would that solve your
problem?
Mr. Egan. I think there are some suggestions about spreads
and other quantitative measures. We use them internally. And,
in fact, there is a big--there is an organization called KMV
that uses equity-based information.
The problem with some of these approaches is that they have
some flaws that when you have the rating firm overlooking, you
offset those flaws. For example, spreads, if there is a spread-
based system, you get traders together and you could manipulate
the spreads.
I think the core issue--and I agree, you can't go back to
the old system because it would be too disruptive to the
market. I think what really needs to be done is, the process
has to be cleaned up. It is a mystery why the SEC is acting the
way it is, but you need somebody else to look over it, to
review the industry.
But I don't think you can go back to what was done before
because it would be too disruptive in the short run to the
market.
Mr. Kanjorski. But if I hired all of Mrs. Bolger's analysts
in a new company called Apex, I couldn't qualify for an NRSRO
rating, yet I would have all her expertise, a new entity, and a
want to go into business.
Now why shouldn't I then be able to issue opinions if I
have got the best analysts in the field, assuming Standard &
Poor's has the best in the field? Yeah, I know that you would
argue that point, but I assume that they are and I hire them in
bulk. I am a John Mack.
Mr. Egan. You would go bankrupt.
Mr. Kanjorski. I am going to the start a whole new
business.
Mr. Egan. You would go bankrupt in a short period of time
because you wouldn't have the revenues to offset expenses. The
competition will come from firms like us, that are fast,
aggressive, know what they are doing, are recognized by the
market, and don't have the size of S&P and Moody's, but have
the--
Mr. Kanjorski. So nobody in the marketplace really cares
how qualified the analysts are or how good they are; they care
about a name. If I understand what you are saying, I would go
bankrupt. There is maybe really little value to having all this
analysis and all these formulas and all these models.
Mr. Egan. It is the weight of the name in the marketplace.
Everybody knew that the auto companies were under pressure
a couple of years ago in fact. But the market moved
dramatically when S&P changed the rating--I forget whether it
was GM or Ford, just because there is so much tied into it.
Mr. Kanjorski. Only because of their name?
Mr. Egan. Correct.
Mr. Kanjorski. If Apex did it with all their analysts,
nobody would pay any attention.
Mr. Egan. It is the typical thing with a monopoly. Is
Microsoft software the very best software for an operating
system? The answer is probably no, it is not. It is just that
they have all these different tie-ins.
That is the core problem here. The term used by the Justice
Department for describing this industry is a "partner
monopoly", and it has all the problems associated with a
monopoly. It is not that S&P and Moody's are incredibly smart.
It is not that they are fast. In fact, you can show time and
time again that they are slow, and yet, at the same time, the
operating revenues are double.
Mr. Kanjorski. But it sounds to me like you want to break
up this monopoly in a little way and put a few more people into
the game to maintain the monopoly. If you are really
competitive, let's wipe them out and let everybody play the
game.
Mr. Egan. Too disruptive to the market.
Mr. Kanjorski. Mr. Pollock, I see you are smiling and being
entertained by my examination.
Mr. Pollock. I think your examination is very good,
Congressman. It raises the question that you rightly asked, how
did all of the current dominant rating agencies start? They
were all started early in the 20th century in 1910-1920 era by
entrepreneurs doing exactly what you just said, hiring some
analysts, starting to publish ratings, going around trying to
get customers, getting people to pay. Standard & Poor's was
originally the Poor's Publishing Company, I believe, and John
Moody, and I guess there was a Mr. Fitch.
Ms. Stroker. Yes.
Mr. Pollock. And they all succeeded doing exactly what you
just said. I agree that ought to be an opportunity that is open
in this sector, as it should be open in every other sector.
But as has been pointed out--and as you, yourself,
Congressman, pointed out--we have got dozens and dozens of
regulations and laws affecting thousands of regulated entities
with this term "NRSRO". That is why I thought the bill's
approach was so clever in making a move toward a disclosure
registration competitive regime that could live with the
existing complex, interacting regulations. Moving toward a more
competitive regime would allow entrepreneurs like you to try to
get into this business if you wanted to.
Mr. Kanjorski. Does anyone else want to respond?
Ms. Stroker. I would just add, I wouldn't give up on your
business plan yet. I think Fitch has demonstrated over the past
several years that we have been able to grow and compete by
offering innovative research and good criteria and price
competition and different things that the market values.
So while you might not have the NRSRO status on the first
day that you open your doors, I think others have proven the
ability to grow and be recognized without it.
Mr. Kanjorski.Isn't really the essence of one of the
problems here is where the funds come from and how the profit
is made, as opposed to on the publishing side or on the getting
paid for the analysis? If in some way we didn't have that
conflict, and the money is to be made on the publishing side,
wouldn't that release the pressures that are here? It would
probably dozens Standard & Poor's an awful lot of money. I
suspect they are not making it on the publishing side; they are
probably making it on the fee side to get in there. But maybe
that, in itself, is an inherent conflict.
Mr. Egan.It is an inherent conflict. However, that is a
secondary problem to the structure of the industry.
There is no question that the problems that existed in the
equity research side of the business, whereby Jack Grubman was
getting paid via investment banking fees and that the same
problem does exist in the rating industry. I think it makes
total sense to address the conflict problem. It is just that I
think you want to address the industry's structural problems
first, and that is a lack of competition.
In fact, it is kind of odd that on the one hand, the SEC is
fining all of those broker-dealers because they are getting
paid by investment banking fees, but at the same time, in the
latest NRSRO definition, they are locking it in that you must
get paid by the issuers, by the very fact that they are
insisting that those ratings be made free to the public. And
perhaps that is an indication of the influence of the current
market participants.
Chairman Baker. Mr. Fitzpatrick I think had a follow-up.
Mr. Fitzpatrick. Just following up on that issue of
anticompetitives leading to potential conflict. There has been
little discussion of some of the anticompetitive practices that
you have witnessed, such as offering unsolicited ratings.
I was wondering if any of the panelists have any comment on
those practices and, specifically, whether you think that they
should be prohibited?
Ms. Stroker. I would like to take that, because Fitch does
engage in unsolicited ratings, and we do it to be
procompetitive rather than anticompetitive.
In order to establish our name and reputation in the
marketplace, we have had to grow our coverage to a level that
interests investors and grabs their attention and gives us an
opportunity to comment across a wide range of credit
categories. So we feel that it has been an important tool for
us to grow. And we do it in ways and in a style that is not
meant to be abusive or coercive or any of those bad words, but
it is meant to inform investors.
Mr. Partnoy. Let me just mention one other area that has
not been covered so far that I think should be in the back of
everyone's mind, and that is structured finance.
Increasingly, institutions are using structured finance
techniques to game ratings, to take advantage of ratings. And
the ranking member was discussing what would it matter. It
often helps when a rating is wrong, paradoxically. When ratings
are wrong, that can create incentives for people to create
transactions, and there are now trillions of dollars of credit
derivatives in particular, or collateralized debt obligations,
which were essentially created just because there are
regulations that gives a ratings benefit.
And it goes back. It is the same rationale, going back to
Orange County, where there were created all of these AAA-rated
instruments that were really wolves in sheep's clothing. The
same sort of thing is happening right now in the collateralized
debt obligations market.
And if you look at the fastest growth area of the NRSROs
and where a lot of the profit is coming from, you will see that
it is from structured finance. And that is a deeply troubling
piece of this market, where institutions are trying to take
advantage of the fact that regulations depend on ratings to
have transactions that are rated inaccurately.
Mr. Kaitz. I would just suggest that if you are an issuer
that gets an unsolicited rating with no competition in the
marketplace, you have absolutely no place to go. And while it
might be pro-business for Fitch, it is certainly not viewed
that way by the issuer, who is then faced with having to
essentially give in or be coerced or have to pay for a rating,
especially if they are going to be issuing debt. So what looks
as pro-business from Fitch's perspective, is not the same from
the issuer perspective.
Chairman Baker. I would like to ask for a point of
clarification. If you are the victim of an unsolicited rating
and there is some confusion about whether you should pay or
not, is that a segue into being on a watch list?
What is the consequence of nonpayment?
Ms. Stroker. There is absolutely none. The analysts that
are opining on the creditworthiness of the issuers and the
securities they rate are blind to whether there is compensation
involved or not. So there is no consequence.
In fact, we have arrayed our ratings to see if there are
any difference between unsolicited ratings across the spectrum
and solicited ratings.
Chairman Baker. But I understand your point, that the
analyst conducting the evaluation may be blind to the revenue
situation, but somebody in management back in Fitch has got to
measure and match those things up or you are going to have a
lot of unpaid bills and nobody is watching. How does that work?
Ms. Stroker. Again, it is based on our need to have
coverage, sufficient coverage to serve investors well.
Chairman Baker. I understand the point and why it is done.
But I am just saying that as a practical matter, somebody
within an organization has to know to whom invoices were sent
and whether they are paid or not; and that has some consequence
at some point, if the issuer calls you up and says I would like
to now have a rating, and are you delinquent on an unsolicited?
Ms. Stroker. Right.
Mr. Kaitz. The unsolicited rating forces the issuer to then
engage in formal discussions. That is essentially how it works.
Chairman Baker. That is what I was trying to get at: What
is the consequence?
Mr. Kaitz. The consequences is, in most cases, having to
then engage with the rating agency.
Chairman Baker. You have no other choice. The friendly
monthly payment plan.
Mr. Egan. By the way, the Washington Post had a very good
description of that process whereby the Washington Post said
that Moody's shook down a German insurance company. They issued
an unsolicited rating. They asked for payment. They did not get
payment. And over a period of about 2 years, Moody's kept
asking. When the issuer refused, Moody's would take a negative
action. And that documents some of the negative publicity
surrounding unsolicited ratings.
Keep in mind, though, for firms such as Egan-Jones that are
not paid by the issuers, by definition all of our ratings are
unsolicited.
Mr. Fitzpatrick. Does Fitch also engage in the practice
known as notching?
Ms. Stroker. No, we don't. Just to clarify the point,
notching would be if we penalized the ratings of other ratings
service in the way we analyze a portfolio of securities.
We do not notch the ratings of S&P and Moody's
Mr. Fitzpatrick. Do other firms notch?
Ms. Stroker. Yes. S&P and Moody's notch Fitch ratings and
each others' ratings.
Mr. Kanjorski. Mr. Chairman, maybe I can direct this
inquiry at the author of H.R. 2990. Maybe using the SEC as the
enforcement mechanism for competitiveness in this field is the
wrong way to go. In most instances, I think of the SEC as an
entity that determines disclosure and transparency in corporate
life, as opposed to the enforcement of competitiveness.
I think of enforcement of competitiveness as being in the
jurisdiction of the Federal Trade Commission or the Justice
Department. Maybe that is one of the hang-ups that I have. This
bill is sort of looking to change the culture of the Securities
and Exchange Commission. Maybe they are resisting it because it
is not in their nature to worry about competition; that is not
one of their considerations. Their major consideration is to
make sure that there are rules and regulations in place for
full and adequate disclosure.
Should we look at changing the enforcement mechanism in
this situation? Maybe if the panel wants to look at that, we
should.
Mr. Egan. The primary obligation is protecting investors.
That is what they say. Job number one is protecting investors.
They have not protected investors.
Mr. Kanjorski. But they do not do it by nurturing
competition. That has never been their charge.
Mr. Egan. Perhaps not. But why not recognize some rating
firms that have succeeded in pointing out the problems with
Enron and WorldCom. They have refused to.
Mr. Kanjorski. Mr. Egan, you get a 30-second advertisement
in here regardless of how we decide.
Mr. Egan. I am sorry. If you were looking at this area for
8 years and got no response, you would feel the same way.
Mr. Kanjorski. I understand. I just want to compliment you.
Whoever is your PR firm, fire them and hire yourself.
Chairman Baker. I thank the gentleman for his observations.
And I had previously erred in not submitting for the record a
letter from the Investment Company Institute signed by Mr.
Schott, its president, relative to their position on H.R. 2990.
I would make that part of the record.
I also want to express my appreciation to you and disclose
a side bar conversation I had with Mr. Kanjorski, the content
of which is in going forward there is no rush to judgment. The
Fitzpatrick measure is a point of departure, but it is a
meaningful statement, I think, on at least our thinking of
where we might go. And we appreciate the exchange of views
presented here today. It is indeed helpful to the committee's
work in going forward.
I would just make the comment that although we will not
move precipitously or with an unwarranted proposal, we
certainly do want to move because we believe this is an area
where action is fully appropriate and necessary for the conduct
of a vibrant capital market.
And with that, I would adjourn our meeting. Thank you.
[Whereupon, at 12:10 p.m., the subcommittee was adjourned.]
A P P E N D I X
June 29, 2005
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