[Congressional Record Volume 152, Number 123 (Wednesday, September 27, 2006)]
[House]
[Pages H7565-H7571]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
CREDIT RATING AGENCY REFORM ACT OF 2006
Mr. OXLEY. Mr. Speaker, I move to suspend the rules and pass the
Senate bill (S. 3850) to improve ratings quality for the protection of
investors and in the public interest by fostering accountability,
transparency, and competition in the credit rating agency industry.
The Clerk read as follows:
S. 3850
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Credit Rating Agency Reform
Act of 2006''.
SEC. 2. FINDINGS.
Upon the basis of facts disclosed by the record and report
of the Securities and Exchange Commission made pursuant to
section 702 of the Sarbanes-Oxley Act of 2002 (116 Stat.
797), hearings before the Committee on Banking, Housing, and
Urban Affairs of the Senate and the Committee on Financial
Services of the House of Representatives during the 108th and
109th Congresses, comment letters to the concept releases and
proposed rules of the Commission, and facts otherwise
disclosed and ascertained, Congress finds that credit rating
agencies are of national importance, in that, among other
things--
(1) their ratings, publications, writings, analyses, and
reports are furnished and distributed, and their contracts,
subscription agreements, and other arrangements with clients
are negotiated and performed, by the use of the mails and
other means and instrumentalities of interstate commerce;
(2) their ratings, publications, writings, analyses, and
reports customarily relate to the purchase and sale of
securities traded on securities exchanges and in interstate
over-the-counter markets, securities issued by companies
engaged in business in interstate commerce, and securities
issued by national banks and member banks of the Federal
Reserve System;
(3) the foregoing transactions occur in such volume as
substantially to affect interstate commerce, the securities
markets, the national banking system, and the national
economy;
(4) the oversight of such credit rating agencies serves the
compelling interest of investor protection;
(5) the 2 largest credit rating agencies serve the vast
majority of the market, and additional competition is in the
public interest; and
(6) the Commission has indicated that it needs statutory
authority to oversee the credit rating industry.
SEC. 3. DEFINITIONS.
(a) Securities Exchange Act of 1934.--Section 3(a) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is amended
by adding at the end the following new paragraphs:
``(60) Credit rating.--The term `credit rating' means an
assessment of the creditworthiness of an obligor as an entity
or with respect to specific securities or money market
instruments.
``(61) Credit rating agency.--The term `credit rating
agency' means any person--
``(A) engaged in the business of issuing credit ratings on
the Internet or through another readily accessible means, for
free or for a reasonable fee, but does not include a
commercial credit reporting company;
``(B) employing either a quantitative or qualitative model,
or both, to determine credit ratings; and
``(C) receiving fees from either issuers, investors, or
other market participants, or a combination thereof.
``(62) Nationally recognized statistical rating
organization.--The term `nationally recognized statistical
rating organization' means a credit rating agency that--
``(A) has been in business as a credit rating agency for at
least the 3 consecutive years immediately preceding the date
of its application for registration under section 15E;
``(B) issues credit ratings certified by qualified
institutional buyers, in accordance with section
15E(a)(1)(B)(ix), with respect to--
``(i) financial institutions, brokers, or dealers;
``(ii) insurance companies;
``(iii) corporate issuers;
``(iv) issuers of asset-backed securities (as that term is
defined in section 1101(c) of part 229 of title 17, Code of
Federal Regulations, as in effect on the date of enactment of
this paragraph);
``(v) issuers of government securities, municipal
securities, or securities issued by a foreign government; or
``(vi) a combination of one or more categories of obligors
described in any of clauses (i) through (v); and
``(C) is registered under section 15E.
``(63) Person associated with a nationally recognized
statistical rating organization.--The term `person associated
with' a nationally recognized statistical rating organization
means any partner, officer, director, or branch manager of a
nationally recognized statistical rating organization (or any
person occupying a similar status or performing similar
functions), any person directly or indirectly controlling,
controlled by, or under common control with a nationally
recognized statistical rating organization, or any employee
of a nationally recognized statistical rating organization.
``(64) Qualified institutional buyer.--The term `qualified
institutional buyer' has the meaning given such term in
section 230.144A(a) of title 17, Code of Federal Regulations,
or any successor thereto.''.
(b) Applicable Definitions.--As used in this Act--
(1) the term ``Commission'' means the Securities and
Exchange Commission; and
(2) the term ``nationally recognized statistical rating
organization'' has the same meaning as in section 3(a)(62) of
the Securities Exchange Act of 1934, as added by this Act.
SEC. 4. REGISTRATION OF NATIONALLY RECOGNIZED STATISTICAL
RATING ORGANIZATIONS.
(a) Amendment.--The Securities Exchange Act of 1934 is
amended by inserting after section 15D (15 U.S.C. 78o-6) the
following new section:
``SEC. 15E. REGISTRATION OF NATIONALLY RECOGNIZED STATISTICAL
RATING ORGANIZATIONS.
``(a) Registration Procedures.--
``(1) Application for registration.--
``(A) In general.--A credit rating agency that elects to be
treated as a nationally recognized statistical rating
organization for purposes of this title (in this section
referred to as the `applicant'), shall furnish to the
Commission an application for registration, in such form as
the Commission shall require, by rule or regulation issued in
accordance with subsection (n), and containing the
information described in subparagraph (B).
``(B) Required information.--An application for
registration under this section shall contain information
regarding--
``(i) credit ratings performance measurement statistics
over short-term, mid-term, and long-term periods (as
applicable) of the applicant;
``(ii) the procedures and methodologies that the applicant
uses in determining credit ratings;
``(iii) policies or procedures adopted and implemented by
the applicant to prevent the misuse, in violation of this
title (or the rules and regulations hereunder), of material,
nonpublic information;
``(iv) the organizational structure of the applicant;
``(v) whether or not the applicant has in effect a code of
ethics, and if not, the reasons therefor;
``(vi) any conflict of interest relating to the issuance of
credit ratings by the applicant;
``(vii) the categories described in any of clauses (i)
through (v) of section 3(a)(62)(B) with respect to which the
applicant intends to apply for registration under this
section;
``(viii) on a confidential basis, a list of the 20 largest
issuers and subscribers that use the credit rating services
of the applicant, by amount of net revenues received
therefrom in the fiscal year immediately preceding the date
of submission of the application;
[[Page H7566]]
``(ix) on a confidential basis, as to each applicable
category of obligor described in any of clauses (i) through
(v) of section 3(a)(62)(B), written certifications described
in subparagraph (C), except as provided in subparagraph (D);
and
``(x) any other information and documents concerning the
applicant and any person associated with such applicant as
the Commission, by rule, may prescribe as necessary or
appropriate in the public interest or for the protection of
investors.
``(C) Written certifications.--Written certifications
required by subparagraph (B)(ix)--
``(i) shall be provided from not fewer than 10 qualified
institutional buyers, none of which is affiliated with the
applicant;
``(ii) may address more than one category of obligors
described in any of clauses (i) through (v) of section
3(a)(62)(B);
``(iii) shall include not fewer than 2 certifications for
each such category of obligor; and
``(iv) shall state that the qualified institutional buyer--
``(I) meets the definition of a qualified institutional
buyer under section 3(a)(64); and
``(II) has used the credit ratings of the applicant for at
least the 3 years immediately preceding the date of the
certification in the subject category or categories of
obligors.
``(D) Exemption from certification requirement.--A written
certification under subparagraph (B)(ix) is not required with
respect to any credit rating agency which has received, or
been the subject of, a no-action letter from the staff of the
Commission prior to August 2, 2006, stating that such staff
would not recommend enforcement action against any broker or
dealer that considers credit ratings issued by such credit
rating agency to be ratings from a nationally recognized
statistical rating organization.
``(E) Limitation on liability of qualified institutional
buyers.--No qualified institutional buyer shall be liable in
any private right of action for any opinion or statement
expressed in a certification made pursuant to subparagraph
(B)(ix).
``(2) Review of application.--
``(A) Initial determination.--Not later than 90 days after
the date on which the application for registration is
furnished to the Commission under paragraph (1) (or within
such longer period as to which the applicant consents) the
Commission shall--
``(i) by order, grant such registration for ratings in the
subject category or categories of obligors, as described in
clauses (i) through (v) of section 3(a)(62)(B); or
``(ii) institute proceedings to determine whether
registration should be denied.
``(B) Conduct of proceedings.--
``(i) Content.--Proceedings referred to in subparagraph
(A)(ii) shall--
``(I) include notice of the grounds for denial under
consideration and an opportunity for hearing; and
``(II) be concluded not later than 120 days after the date
on which the application for registration is furnished to the
Commission under paragraph (1).
``(ii) Determination.--At the conclusion of such
proceedings, the Commission, by order, shall grant or deny
such application for registration.
``(iii) Extension authorized.--The Commission may extend
the time for conclusion of such proceedings for not longer
than 90 days, if it finds good cause for such extension and
publishes its reasons for so finding, or for such longer
period as to which the applicant consents.
``(C) Grounds for decision.--The Commission shall grant
registration under this subsection--
``(i) if the Commission finds that the requirements of this
section are satisfied; and
``(ii) unless the Commission finds (in which case the
Commission shall deny such registration) that--
``(I) the applicant does not have adequate financial and
managerial resources to consistently produce credit ratings
with integrity and to materially comply with the procedures
and methodologies disclosed under paragraph (1)(B) and with
subsections (g), (h), (i), and (j); or
``(II) if the applicant were so registered, its
registration would be subject to suspension or revocation
under subsection (d).
``(3) Public availability of information.--Subject to
section 24, the Commission shall, by rule, require a
nationally recognized statistical rating organization, upon
the granting of registration under this section, to make the
information and documents submitted to the Commission in its
completed application for registration, or in any amendment
submitted under paragraph (1) or (2) of subsection (b),
publicly available on its website, or through another
comparable, readily accessible means, except as provided in
clauses (viii) and (ix) of paragraph (1)(B).
``(b) Update of Registration.--
``(1) Update.--Each nationally recognized statistical
rating organization shall promptly amend its application for
registration under this section if any information or
document provided therein becomes materially inaccurate,
except that a nationally recognized statistical rating
organization is not required to amend--
``(A) the information required to be furnished under
subsection (a)(1)(B)(i) by furnishing information under this
paragraph, but shall amend such information in the annual
submission of the organization under paragraph (2) of this
subsection; or
``(B) the certifications required to be provided under
subsection (a)(1)(B)(ix) by furnishing information under this
paragraph.
``(2) Certification.--Not later than 90 days after the end
of each calendar year, each nationally recognized statistical
rating organization shall furnish to the Commission an
amendment to its registration, in such form as the
Commission, by rule, may prescribe as necessary or
appropriate in the public interest or for the protection of
investors--
``(A) certifying that the information and documents in the
application for registration of such nationally recognized
statistical rating organization (other than the
certifications required under subsection (a)(1)(B)(ix))
continue to be accurate; and
``(B) listing any material change that occurred to such
information or documents during the previous calendar year.
``(c) Accountability for Ratings Procedures.--
``(1) Authority.--The Commission shall have exclusive
authority to enforce the provisions of this section in
accordance with this title with respect to any nationally
recognized statistical rating organization, if such
nationally recognized statistical rating organization issues
credit ratings in material contravention of those procedures
relating to such nationally recognized statistical rating
organization, including procedures relating to the prevention
of misuse of nonpublic information and conflicts of interest,
that such nationally recognized statistical rating
organization--
``(A) includes in its application for registration under
subsection (a)(1)(B)(ii); or
``(B) makes and disseminates in reports pursuant to section
17(a) or the rules and regulations thereunder.
``(2) Limitation.--The rules and regulations that the
Commission may prescribe pursuant to this title, as they
apply to nationally recognized statistical rating
organizations, shall be narrowly tailored to meet the
requirements of this title applicable to nationally
recognized statistical rating organizations. Notwithstanding
any other provision of law, neither the Commission nor any
State (or political subdivision thereof) may regulate the
substance of credit ratings or the procedures and
methodologies by which any nationally recognized statistical
rating organization determines credit ratings.
``(d) Censure, Denial, or Suspension of Registration;
Notice and Hearing.--The Commission, by order, shall censure,
place limitations on the activities, functions, or operations
of, suspend for a period not exceeding 12 months, or revoke
the registration of any nationally recognized statistical
rating organization if the Commission finds, on the record
after notice and opportunity for hearing, that such censure,
placing of limitations, suspension, or revocation is
necessary for the protection of investors and in the public
interest and that such nationally recognized statistical
rating organization, or any person associated with such an
organization, whether prior to or subsequent to becoming so
associated--
``(1) has committed or omitted any act, or is subject to an
order or finding, enumerated in subparagraph (A), (D), (E),
(H), or (G) of section 15(b)(4), has been convicted of any
offense specified in section 15(b)(4)(B), or is enjoined from
any action, conduct, or practice specified in subparagraph
(C) of section 15(b)(4), during the 10-year period preceding
the date of commencement of the proceedings under this
subsection, or at any time thereafter;
``(2) has been convicted during the 10-year period
preceding the date on which an application for registration
is furnished to the Commission under this section, or at any
time thereafter, of--
``(A) any crime that is punishable by imprisonment for 1 or
more years, and that is not described in section 15(b)(4)(B);
or
``(B) a substantially equivalent crime by a foreign court
of competent jurisdiction;
``(3) is subject to any order of the Commission barring or
suspending the right of the person to be associated with a
nationally recognized statistical rating organization;
``(4) fails to furnish the certifications required under
subsection (b)(2); or
``(5) fails to maintain adequate financial and managerial
resources to consistently produce credit ratings with
integrity.
``(e) Termination of Registration.--
``(1) Voluntary withdrawal.--A nationally recognized
statistical rating organization may, upon such terms and
conditions as the Commission may establish as necessary in
the public interest or for the protection of investors,
withdraw from registration by furnishing a written notice of
withdrawal to the Commission.
``(2) Commission authority.--In addition to any other
authority of the Commission under this title, if the
Commission finds that a nationally recognized statistical
rating organization is no longer in existence or has ceased
to do business as a credit rating agency, the Commission, by
order, shall cancel the registration under this section of
such nationally recognized statistical rating organization.
``(f) Representations.--
``(1) Ban on representations of sponsorship by united
states or agency thereof.--It shall be unlawful for any
nationally recognized statistical rating organization to
represent or imply in any manner whatsoever that such
nationally recognized statistical rating organization has
been designated, sponsored, recommended, or approved, or that
the abilities or qualifications thereof have in any respect
been passed upon, by the
[[Page H7567]]
United States or any agency, officer, or employee thereof.
``(2) Ban on representation as nrsro of unregistered credit
rating agencies.--It shall be unlawful for any credit rating
agency that is not registered under this section as a
nationally recognized statistical rating organization to
state that such credit rating agency is a nationally
recognized statistical rating organization registered under
this title.
``(3) Statement of registration under securities exchange
act of 1934 provisions.--No provision of paragraph (1) shall
be construed to prohibit a statement that a nationally
recognized statistical rating organization is a nationally
recognized statistical rating organization under this title,
if such statement is true in fact and if the effect of such
registration is not misrepresented.
``(g) Prevention of Misuse of Nonpublic Information.--
``(1) Organization policies and procedures.--Each
nationally recognized statistical rating organization shall
establish, maintain, and enforce written policies and
procedures reasonably designed, taking into consideration the
nature of the business of such nationally recognized
statistical rating organization, to prevent the misuse in
violation of this title, or the rules or regulations
hereunder, of material, nonpublic information by such
nationally recognized statistical rating organization or any
person associated with such nationally recognized statistical
rating organization.
``(2) Commission authority.--The Commission shall issue
final rules in accordance with subsection (n) to require
specific policies or procedures that are reasonably designed
to prevent misuse in violation of this title (or the rules or
regulations hereunder) of material, nonpublic information.
``(h) Management of Conflicts of Interest.--
``(1) Organization policies and procedures.--Each
nationally recognized statistical rating organization shall
establish, maintain, and enforce written policies and
procedures reasonably designed, taking into consideration the
nature of the business of such nationally recognized
statistical rating organization and affiliated persons and
affiliated companies thereof, to address and manage any
conflicts of interest that can arise from such business.
``(2) Commission authority.--The Commission shall issue
final rules in accordance with subsection (n) to prohibit, or
require the management and disclosure of, any conflicts of
interest relating to the issuance of credit ratings by a
nationally recognized statistical rating organization,
including, without limitation, conflicts of interest relating
to--
``(A) the manner in which a nationally recognized
statistical rating organization is compensated by the
obligor, or any affiliate of the obligor, for issuing credit
ratings or providing related services;
``(B) the provision of consulting, advisory, or other
services by a nationally recognized statistical rating
organization, or any person associated with such nationally
recognized statistical rating organization, to the obligor,
or any affiliate of the obligor;
``(C) business relationships, ownership interests, or any
other financial or personal interests between a nationally
recognized statistical rating organization, or any person
associated with such nationally recognized statistical rating
organization, and the obligor, or any affiliate of the
obligor;
``(D) any affiliation of a nationally recognized
statistical rating organization, or any person associated
with such nationally recognized statistical rating
organization, with any person that underwrites the securities
or money market instruments that are the subject of a credit
rating; and
``(E) any other potential conflict of interest, as the
Commission deems necessary or appropriate in the public
interest or for the protection of investors.
``(i) Prohibited Conduct.--
``(1) Prohibited acts and practices.--The Commission shall
issue final rules in accordance with subsection (n) to
prohibit any act or practice relating to the issuance of
credit ratings by a nationally recognized statistical rating
organization that the Commission determines to be unfair,
coercive, or abusive, including any act or practice relating
to--
``(A) conditioning or threatening to condition the issuance
of a credit rating on the purchase by the obligor or an
affiliate thereof of other services or products, including
pre-credit rating assessment products, of the nationally
recognized statistical rating organization or any person
associated with such nationally recognized statistical rating
organization;
``(B) lowering or threatening to lower a credit rating on,
or refusing to rate, securities or money market instruments
issued by an asset pool or as part of any asset-backed or
mortgage-backed securities transaction, unless a portion of
the assets within such pool or part of such transaction, as
applicable, also is rated by the nationally recognized
statistical rating organization; or
``(C) modifying or threatening to modify a credit rating or
otherwise departing from its adopted systematic procedures
and methodologies in determining credit ratings, based on
whether the obligor, or an affiliate of the obligor,
purchases or will purchase the credit rating or any other
service or product of the nationally recognized statistical
rating organization or any person associated with such
organization.
``(2) Rule of construction.--Nothing in paragraph (1), or
in any rules or regulations adopted thereunder, may be
construed to modify, impair, or supersede the operation of
any of the antitrust laws (as defined in the first section of
the Clayton Act, except that such term includes section 5 of
the Federal Trade Commission Act, to the extent that such
section 5 applies to unfair methods of competition).
``(j) Designation of Compliance Officer.--Each nationally
recognized statistical rating organization shall designate an
individual responsible for administering the policies and
procedures that are required to be established pursuant to
subsections (g) and (h), and for ensuring compliance with the
securities laws and the rules and regulations thereunder,
including those promulgated by the Commission pursuant to
this section.
``(k) Statements of Financial Condition.--Each nationally
recognized statistical rating organization shall, on a
confidential basis, furnish to the Commission, at intervals
determined by the Commission, such financial statements,
certified (if required by the rules or regulations of the
Commission) by an independent public accountant, and
information concerning its financial condition, as the
Commission, by rule, may prescribe as necessary or
appropriate in the public interest or for the protection of
investors.
``(l) Sole Method of Registration.--
``(1) In general.--On and after the effective date of this
section, a credit rating agency may only be registered as a
nationally recognized statistical rating organization for any
purpose in accordance with this section.
``(2) Prohibition on reliance on no-action relief.--On and
after the effective date of this section--
``(A) an entity that, before that date, received advice,
approval, or a no-action letter from the Commission or staff
thereof to be treated as a nationally recognized statistical
rating organization pursuant to the Commission rule at
section 240.15c3-1 of title 17, Code of Federal Regulations,
may represent itself or act as a nationally recognized
statistical rating organization only--
``(i) during Commission consideration of the application,
if such entity has furnished an application for registration
under this section; and
``(ii) on and after the date of approval of its application
for registration under this section; and
``(B) the advice, approval, or no-action letter described
in subparagraph (A) shall be void.
``(3) Notice to other agencies.--Not later than 30 days
after the date of enactment of this section, the Commission
shall give notice of the actions undertaken pursuant to this
section to each Federal agency which employs in its rules and
regulations the term `nationally recognized statistical
rating organization' (as that term is used under Commission
rule 15c3-1 (17 C.F.R. 240.15c3-1), as in effect on the date
of enactment of this section).
``(m) Rules of Construction.--
``(1) No waiver of rights, privileges, or defenses.--
Registration under and compliance with this section does not
constitute a waiver of, or otherwise diminish, any right,
privilege, or defense that a nationally recognized
statistical rating organization may otherwise have under any
provision of State or Federal law, including any rule,
regulation, or order thereunder.
``(2) No private right of action.--Nothing in this section
may be construed as creating any private right of action, and
no report furnished by a nationally recognized statistical
rating organization in accordance with this section or
section 17 shall create a private right of action under
section 18 or any other provision of law.
``(n) Regulations.--
``(1) New provisions.--Such rules and regulations as are
required by this section or are otherwise necessary to carry
out this section, including the application form required
under subsection (a)--
``(A) shall be issued by the Commission in final form, not
later than 270 days after the date of enactment of this
section; and
``(B) shall become effective not later than 270 days after
the date of enactment of this section.
``(2) Review of existing regulations.--Not later than 270
days after the date of enactment of this section, the
Commission shall--
``(A) review its existing rules and regulations which
employ the term `nationally recognized statistical rating
organization' or `NRSRO'; and
``(B) amend or revise such rules and regulations in
accordance with the purposes of this section, as the
Commission may prescribe as necessary or appropriate in the
public interest or for the protection of investors.
``(o) NRSROs Subject To Commission Authority.--
``(1) In general.--No provision of the laws of any State or
political subdivision thereof requiring the registration,
licensing, or qualification as a credit rating agency or a
nationally recognized statistical rating organization shall
apply to any nationally recognized statistical rating
organization or person employed by or working under the
control of a nationally recognized statistical rating
organization.
``(2) Limitation.--Nothing in this subsection prohibits the
securities commission (or any agency or office performing
like functions) of any State from investigating
[[Page H7568]]
and bringing an enforcement action with respect to fraud or
deceit against any nationally recognized statistical rating
organization or person associated with a nationally
recognized statistical rating organization.
``(p) Applicability.--This section, other than subsection
(n), which shall apply on the date of enactment of this
section, shall apply on the earlier of--
``(1) the date on which regulations are issued in final
form under subsection (n)(1); or
``(2) 270 days after the date of enactment of this
section.''.
(b) Conforming Amendments.--
(1) Securities exchange act of 1934.--The Securities
Exchange Act of 1934 (15 U.S.C. 78 et seq.) is amended--
(A) in section 15(b)(4) (15 U.S.C. 78o(b)(4))--
(i) in subparagraph (B)(ii), by inserting ``nationally
recognized statistical rating organization,'' after
``transfer agent,''; and
(ii) in subparagraph (C), by inserting ``nationally
recognized statistical rating organization,'' after
``transfer agent,''; and
(B) in section 21B(a) (15 U.S.C. 78u-2(a)), by inserting
``15E,'' after ``15C,''.
(2) Investment company act of 1940.--The Investment Company
Act of 1940 (15 U.S.C. 80a et seq.) is amended--
(A) in section 2(a) (15 U.S.C. 80a-2(a)), by adding at the
end the following new paragraph:
``(53) The term `credit rating agency' has the same meaning
as in section 3 of the Securities Exchange Act of 1934.'';
and
(B) in section 9(a) (15 U.S.C. 80a-9(a))--
(i) in paragraph (1), by inserting ``credit rating
agency,'' after ``transfer agent,''; and
(ii) in paragraph (2), by inserting ``credit rating
agency,'' after ``transfer agent,''.
(3) Investment advisers act of 1940.--The Investment
Advisers Act of 1940 (15 U.S.C. 80b et seq.) is amended--
(A) in section 202(a) (15 U.S.C. 80b-2(a)), by adding at
the end the following new paragraph:
``(28) The term `credit rating agency' has the same meaning
as in section 3 of the Securities Exchange Act of 1934.'';
(B) in section 202(a)(11) (15 U.S.C. 80b-2(a)(11)), by
striking ``or (F)'' and inserting the following: ``(F) any
nationally recognized statistical rating organization, as
that term is defined in section 3(a)(62) of the Securities
Exchange Act of 1934, unless such organization engages in
issuing recommendations as to purchasing, selling, or holding
securities or in managing assets, consisting in whole or in
part of securities, on behalf of others; or (G)''; and
(C) in section 203(e) (15 U.S.C. 80b-3(e))--
(i) in paragraph (2)(B), by inserting ``credit rating
agency,'' after ``transfer agent,''; and
(ii) in paragraph (4), by inserting ``credit rating
agency,'' after ``transfer agent,''.
(4) Housing and community development act of 1992.--Section
1319 of the Housing and Community Development Act of 1992 (12
U.S.C. 4519) is amended by striking ``effectively'' and all
that follows through ``broker-dealers'' and inserting ``that
is a nationally recognized statistical rating organization,
as such term is defined in section 3(a) of the Securities
Exchange Act of 1934''.
(5) Higher education act of 1965.--Section 439(r)(15)(A) of
the Higher Education Act of 1965 (20 U.S.C. 1087-2(r)(15)(A))
is amended by striking ``means any entity recognized as such
by the Securities and Exchange Commission'' and inserting
``means any nationally recognized statistical rating
organization, as that term is defined in section 3(a) of the
Securities Exchange Act of 1934''.
(6) Title 23.--Section 181(11) of title 23, United States
Code, is amended by striking ``identified by the Securities
and Exchange Commission as a nationally recognized
statistical rating organization'' and inserting ``registered
with the Securities and Exchange Commission as a nationally
recognized statistical rating organization, as that term is
defined in section 3(a) of the Securities Exchange Act of
1934''.
SEC. 5. ANNUAL AND OTHER REPORTS.
Section 17(a)(1) of the Securities Exchange Act of 1934 (15
U.S.C. 78q(a)(1)) is amended--
(1) by inserting ``nationally recognized statistical rating
organization,'' after ``registered transfer agent,''; and
(2) by adding at the end the following: ``Any report that a
nationally recognized statistical rating organization is
required by Commission rules under this paragraph to make and
disseminate to the Commission shall be deemed furnished to
the Commission.''.
SEC. 6. COMMISSION ANNUAL REPORT.
The Commission shall submit an annual report to the
Committee on Banking, Housing, and Urban Affairs of the
Senate and the Committee on Financial Services of the House
of Representatives that, with respect to the year to which
the report relates--
(1) identifies applicants for registration under section
15E of the Securities Exchange Act of 1934, as added by this
Act;
(2) specifies the number of and actions taken on such
applications; and
(3) specifies the views of the Commission on the state of
competition, transparency, and conflicts of interest among
nationally recognized statistical rating organizations.
SEC. 7. GAO STUDY AND REPORT REGARDING NATIONALLY RECOGNIZED
STATISTICAL RATING ORGANIZATIONS.
(a) Study Required.--The Comptroller General of the United
States shall conduct a study--
(1) to determine the impact of this Act and the amendments
made by this Act on--
(A) the quality of credit ratings issued by nationally
recognized statistical ratings organizations;
(B) the financial markets;
(C) competition among credit rating agencies;
(D) the incidence of inappropriate conflicts of interest
and sales practices by nationally recognized statistical
rating organizations;
(E) the process for registering as a nationally recognized
statistical rating organization; and
(F) such other matters relevant to the implementation of
this Act and the amendments made by this Act, as the
Comptroller General deems necessary to bring to the attention
of the Congress;
(2) to identify problems, if any, that have resulted from
the implementation of this Act and the amendments made by
this Act; and
(3) to recommend solutions, including any legislative or
regulatory solutions, to any problems identified under
paragraphs (1) and (2).
(b) Report Required.--Not earlier than 3 years nor later
than 4 years after the date of enactment of this Act, the
Comptroller General shall submit a report on the results of
the study required by this section to the Committee on
Banking, Housing, and Urban Affairs of the Senate and the
Committee on Financial Services of the House of
Representatives.
The SPEAKER pro tempore. Pursuant to the rule, the gentleman from
Ohio (Mr. Oxley) and the gentleman from Pennsylvania (Mr. Kanjorski)
each will control 20 minutes.
The Chair recognizes the gentleman from Ohio.
General Leave
Mr. OXLEY. Mr. Speaker, I ask unanimous consent that all Members may
have 5 legislative days within which to revise and extend their remarks
on this legislation and to insert extraneous material thereon.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Ohio?
There was no objection.
Mr. OXLEY. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, 4 years ago Congress passed the Sarbanes-Oxley Act to
rectify the troubling accounting and reporting issue exposed by the
largest corporate scandals in U.S. history. This landmark legislation
strengthened the role of auditors, boards of directors, and audit
committees, and in doing so stabilized America's capital markets. By
enhancing the transparency and accountability of our public companies,
Sarbanes-Oxley sought to fortify the pillars upon which our securities
laws stand.
Within the many sweeping reforms implemented by the act was a
provision, little noticed at the time, which required the SEC to
examine credit rating agencies. Four years, one SEC report, over seven
House and Senate hearings, and countless committee hours later, I stand
before my colleagues in support of final action to bring much needed
competition to the credit rating agencies.
S. 3850, the Credit Rating Agency Reform Act, closely follows and
makes minor additions to H.R. 2990, the Credit Rating Agency Duopoly
Relief Act, which was introduced by Congressman Michael Fitzpatrick in
June 2005, and passed the House on July 12 of this year. Like Mr.
Fitzpatrick's bill, S. 3850 levels the playing field in the ratings
industry by replacing an SEC designation process that benefits a
privileged few with a voluntary registration system available to all.
Credit ratings are vital to our capital markets, providing investors
with an evaluation of the creditworthiness of the debt issued by
America's corporations and municipalities. High-profile mistakes made
by prominent rating agencies, including missteps in the rating of Enron
and WorldCom, highlight an industry in drastic need of increased
competition and improved transparency.
As it now stands, the SEC designates rating agencies as nationally
recognized statistical ratings organizations, or NRSROs, through an
opaque process that provides applicants little guidance on the
substance and procedure by which they will be evaluated. Currently,
only five rating agencies are designated as NRSROs by the SEC.
Understandably, many more aspire to attain that designation, as NRSRO
status confers a significant competitive advantage. However, new
applicants languish for years without an up-or-down vote in admission
into this elite club. In fact, the Department of Justice commented upon
the SEC designation process in 1998, calling it a ``nearly
insurmountable barrier to entry.''
[[Page H7569]]
The SEC's opaque designation process has created an artificial
government-sponsored barrier to entry that has stifled competition and
helped the top two rating agencies, Moody's and Standard & Poor's,
garner an 80 percent market share, clearly a duopoly. Without true
competition in this industry, fees have skyrocketed and ratings quality
has deteriorated. Ultimately, individual investors will benefit from a
voluntary registration system that produces cheaper, more accurate
ratings.
In the many years that I, Capital Markets Subcommittee Chairman
Richard Baker, and the rest of the Financial Services Committee have
studied and deliberated over credit ratings, we have heard from
countless parties, including the SEC, industry, academia, and the
rating agencies themselves about the conflicts of interest that pervade
the industry. Ratings firms have expanded into new areas which, many
commentators have suggested, further compromise their objectivity. In
addition, it has been alleged that leading rating agencies engage in
certain abusive practices, to the detriment of smaller market players.
S. 3850 closes the door on this behavior by requiring disclosure of
conflict of interest and prohibiting abusive practices.
I want to commend the leading credit rating agencies, Moody's and
Standard & Poor's, for lending support for this measure despite their
initial opposition. Taking the handoff from Congressman Fitzpatrick and
H.R. 2990, S. 3850 provides a strong framework for advancing the credit
rating industry for the 21st century.
As for Senator Sarbanes and me, the bill provides a logical follow-up
to the Sarbanes-Oxley Act and our efforts to restore integrity to the
capital markets.
I reserve the balance of my time.
Mr. KANJORSKI. Mr. Speaker, I yield myself such time as I may
consume.
Mr. Speaker, I rise in support of S. 3850, the Credit Rating Agency
Reform Act. This investor protection bill will create a new regulatory
system for identifying and overseeing the nationally recognized
agencies that issue credit ratings.
A robust free market for trading debt securities relies on an
independent assessment of financial strength provided by credit rating
agencies like Moody's, Fitch, and Standard & Poor's. Sound financial
regulation also depends on the work of these raters.
Since the Securities and Exchange Commission created the concept of
nationally recognized statistical rating organizations in 1970, the
term, with its inference to credible and reliable ratings, has become
embedded in nearly 10 Federal statutes, about 100 Federal regulations,
approximately 200 State laws, and around 50 State rules. Many private
parties have also included references to national recognized agencies
in the terms of their contracts, corporate bylaws, and pension trust
agreements. Foreign governments and international bodies have used the
concept in their accords and codes, too.
In considering any bill to modify the process for identifying and
overseeing nationally recognized agencies, we must therefore keep in
mind the need to maintain the integrity of ratings. It is this credible
and reliable standard on which investors and regulators rely. We should
not lightly abandon this benchmark.
The critics of the present designation system have also long raised
legitimate concerns about competition. In any legislative effort to
increase the quantity of raters, I have long advocated that we should
refrain from sacrificing the quality of their ratings. Unlike the bill
the House considered earlier this year, S. 3850 has found the right
equilibrium on these matters. It balances the desire to increase the
quantity of approved agencies with the need to ensure quality ratings.
S. 3850 is a considerably better legislative product than H.R. 2990
in several significant ways:
First, unlike H.R. 2990, the bill before us would allow the
commission to reject an application for registration as a nationally
recognized agency if the entity lacks sufficient financial and
managerial resources. This major improvement helps to ensure consistent
high quality ratings.
Second, unlike H.R. 2990, the bill before us would require applicants
for national recognition to provide to the commission written
certifications from at least 10 of their institutional customers and a
list of their 20 largest issuers and subscribers by the amount of net
revenues received in the previous year. These important adjustments
help guarantee that ratings used for regulatory purposes are accepted
and used in the market.
Finally, unlike H.R. 2990, the bill before us would instruct the
commission to issue rules on conflicts of interest and the misuse of
nonpublic information. This helpful change advances investor
protection.
Now that we are nearing the end of the legislative process, I want to
clarify the legislative record on two specific provisions contained in
S. 3850.
First, in the manager's amendment to S. 3850, the Senate added a
preemption that gives exclusive oversight authority to the Securities
and Exchange Commission to register, license, or qualify as a
nationally recognized agency except in cases of fraud.
This preemption, based on existing language in the Investment
Advisers Act, should be viewed narrowly as limiting a State's authority
to regulate the day-to-day activities of credit rating agencies. It
should not be taken to apply to typical State governmental functions in
which States, their localities, and their agencies are users of credit
ratings. Accordingly, States will continue to have the ability to
continue to oversee their departments, programs, and political
subdivisions with respect to debt issuance conditions, contract
specifications, and investment standards for governmental funds, such
as pension portfolios and financial reserves.
The preemption also should not be taken to apply to the regulation of
insurers and bank solvency standards and generic business licensing
requirements normally applied to entities performing business within a
State.
{time} 1715
Finally, while many States often currently use the ``nationally
recognized'' designation as their standard for defining rating
agencies, this legislation should not be read as compelling them to do
so for all purposes going forward.
Second, S. 3850 gives clear authority to the Commission to reject
those applicants for national recognition who lack adequate financial
and managerial resources to produce credit ratings with consistent
integrity. The bill also explicitly details a number of requirements
for an application and authorizes the Commission to add additional
conditions via the rulemaking process. Accordingly, it is my
expectation that the Commission will expeditiously complete a
rulemaking to require the production of documents related to the
financial and managerial resources for any and all applications.
In conclusion, Mr. Speaker, Congress wisely adopted standards in the
Sarbanes-Oxley Act to strengthen financial reporting and assure the
integrity of our capital markets in the wake of the bankruptcies of
Enron and WorldCom. Although many observers criticized the ``nationally
recognized'' agencies for their failure to identify these insolvencies
more expeditiously, we could not decide at that time how best to
proceed on improving the oversight of the credit rating agencies. Four
years later, however, we have reached a consensus and determined the
best way to address these prior shortcomings. Because this consensus
will protect the quality of credit ratings, I encourage my colleagues
to support S. 3850.
Mr. Speaker, I reserve the balance of my time.
Mr. OXLEY. Mr. Speaker, I recognize the gentleman from Pennsylvania
(Mr. Fitzpatrick), the author of the legislation, for 4 minutes.
Mr. FITZPATRICK of Pennsylvania. Mr. Speaker, in the wake of the
Enron and WorldCom scandals, it is vital that Congress bring
competition, transparency and accountability to the credit rating
industry. Thanks to the leadership of House Financial Services
Committee Chairman Mike Oxley and Capital Markets Subcommittee Chairman
Richard Baker, our quest to reform the credit rating industry is
becoming a reality.
It is extremely disturbing that the two largest NRSROs, S&P and
Moody's, rated Enron at investment grade just prior to its bankruptcy
filing. Essentially, S&P and Moody's told
[[Page H7570]]
the market that Enron was a safe investment; and Enron was not their
only blunder. S&P and Moody's also rated WorldCom and Orange County at
investment grade just prior to their bankruptcy filings. But what other
options were out there?
There are over 130 credit ratings agencies in the financial market.
However, only five are currently designated as NRSROs by the Securities
and Exchange Commission. This label is the root of the problem. To
receive the elusive SEC distinction, companies must be ``nationally
recognized'' or, that is, their ratings must be widely used and
generally accepted in the financial markets.
This artificial barrier to entry has created a chicken-and-the-egg
situation for non-NRSRO credit rating agencies trying to enter this
industry, thus fostering a duopoly. S&P and Moody's have over 80
percent of the market share, and they rate more than 99 percent of the
debt and preferred stock issues in the United States. As a result, they
are raking in record fees.
This lack of competition in the credit rating industry has lowered
the quality of ratings, inflated prices, stifled innovation, and
allowed anti-competitive industry practices and conflicts of interest
to go unchecked.
On June 20, 2005, I introduced the Credit Rating Agency Duopoly
Relief Act. On July 12, 2006, the House passed H.R. 2990 with a
bipartisan vote. Last Friday, the Senate passed bipartisan and broadly
endorsed legislation, the Credit Rating Agency Reform Act, S. 3850, by
unanimous consent.
I am extremely pleased that S. 3850 took the legislation, H.R. 2990,
as its base text. Like H.R. 2990, Senate bill S. 3850 would eliminate
the SEC staff's anti-competitive NRSRO process.
Mr. Speaker, in the wake of a seminal failure by S&P and Moody's in
the Enron and WorldCom scandals, we must ensure integrity in the credit
ratings process. This bill will reduce prices and anti-competitive
practices. It will improve credit ratings quality and spur innovation.
This view is broadly endorsed by the Investment Company Institute,
Association for Financial Professionals, the Bond Market Association,
the Financial Executives International, Financial Services Roundtable,
Standards & Poor's, Moody's Corporation, Fitch Ratings, Fidelity
Investments, and Consumer Federation of America.
Today's passage of this important reform legislation demonstrates
Congress' commitment to protecting the individual investor by creating
a more accountable, transparent and competitive market in our financial
services industry.
This would not have been possible without the exemplary work by the
staff of the Financial Services Committee, especially Bob Foster,
Kristen Jaconi, Frank Tillotson, Josh Wilsusen, Alex Urrea, Marisol
Garibay, and Tom Duncan, and the staff in the Senate Banking Committee,
especially Justin Daly. Thanks for your diligence.
Again, I thank Chairman Oxley and Chairman Baker for their
leadership. This artificial barrier of entry that fostered the duopoly
and allowed the warning signs of Enron and WorldCom to go unnoticed had
to be broken. Thank you for supporting our legislative efforts.
Chairman Oxley, it has been a pleasure to work with you. Your
bipartisanship and knowledge of the issues are envied, admired, and
they need to be replicated. I wish you and your wife, Pat, many future
successes and endeavors. You will be greatly missed.
Mr. Speaker, I strongly urge a ``yes'' vote on S. 3850 to kill the
duopoly and ensure integrity in the credit rating industry.
Mr. KANJORSKI. Mr. Speaker, I reserve the balance of my time.
Mr. OXLEY. Mr. Speaker, I am pleased to recognize the gentlewoman
from Florida (Ms. Ginny Brown-Waite) for 1 minute.
Ms. GINNY BROWN-WAITE of Florida. Mr. Speaker, when companies like
WorldCom and Enron continued to enjoy high-rated bonds just days before
they declared bankruptcy, something was wrong with the system. Congress
has taken great strides in ensuring that the corporate scandals these
companies precipitated will not happen again, and improving the
agencies that rate them is yet another important step.
I was not in Congress when the Enron and WorldCom scandals erupted,
but I still regularly hear from constituents who lost a great deal of
their retirement packages because of these criminals.
Listen up America. If Congress cannot improve investor confidence in
other corporations, many more constituents will have difficulty
planning for their retirement as well. Let's kill the duopoly, and that
is what this bill does.
I thank Mr. Fitzpatrick for his leadership on credit rating agency
reform. Without his hard work, we could not go home to our districts
with the confidence that we are doing what we can to protect our
constituents' hard-earned savings.
I urge members to support S. 3850 to help ensure that the credit
rating agencies are working as they should, providing reliable
evaluations of corporations on which so many retirees rely.
Mr. KANJORSKI. Mr. Speaker, I reserve the balance of my time.
Mr. OXLEY. Mr. Speaker, I recognize the gentleman from Georgia (Mr.
Price) for 2 minutes.
Mr. PRICE of Georgia. Mr. Speaker, I want to congratulate the
chairman and Mr. Baker for their work on this and appreciate their
leadership; and I thank the gentleman from Pennsylvania (Mr.
Fitzpatrick) for his leadership on this issue. I truly tell our
colleagues and folks all across this Nation that the State of
Pennsylvania and the citizens all across this Nation are fortunate to
have your leadership.
This bill addresses credit ratings or judging the financial
worthiness of companies, and credit ratings play a real and significant
role in our economy. Investors rely on these ratings to determine risks
of default of companies, both large and small, as well as governmental
entities. Currently, these ratings are often the determining factor as
to whether companies and, hence, jobs will expand, or whether local
governments are able to finance major municipal improvement projects.
The current process fails to provide a reasonably clear path for
potential new rating agencies; and this bill addresses the fundamental,
long-standing and widely recognized problems related to the operation
and function of credit rating agencies.
Applicants seeking to become rating agencies will be required to make
disclosures on rating performance, how they assist folks that they come
in contact with; procedures and methodologies used to determine
ratings, that is transparency; policies and procedures to prevent the
misuse of nonpublic information, security; organizational structure; a
code of ethics; a long list of subscribers and issuers; conflicts of
interest; and the type of ratings that the applicant intends to use. In
other words, accountability.
This reforms the current opaque process of the SEC approval of
certain rating agencies as ``nationally recognized'' rating
organizations. It doesn't favor a particular credit rating agency
business model and thus encourages quantitative firms and subscriber-
based models to compete with the qualitative issuer-paid structures of
the current dominant firms.
Mr. Speaker, these are all extremely important advances and
improvements for our entire economy, and I encourage the adoption of S.
3850.
Mr. OXLEY. Mr. Speaker, I recognize the chairman of the Capital
Markets Insurance Subcommittee, the gentleman from Louisiana (Mr.
Baker), for 2 minutes.
Mr. BAKER. Mr. Speaker, I congratulate the chairman on his good work
on what is truly an important piece of reform legislation in the world
of finance. This has immeasurable impact on any number of businesses
and individuals' financial interests.
I certainly want to continue to compliment Mr. Fitzpatrick on his
good work with H.R. 2990, a previously passed House bill, which in
essence is incorporated into the version sent back to us from the
Senate with the good additions provided by Senator Sarbanes. So this
has been a bipartisan and bicameral effort which I think presents
itself before the House today and also provides for exemplary reforms.
Credit rating agencies are unique entities. Currently, there is no
mechanism by which a corporation may become a credit rating agency.
There is
[[Page H7571]]
little oversight once one is designated; and if they fail to meet their
fiduciary duties, there is not clear methodology by which one would be
decommissioned.
The underlying bill makes strategic and important changes with regard
to these provisions establishing a registration process through the
SEC. The additions which Mr. Sarbanes suggested be included in the
legislation are important, providing additional accounting and
financial screens through which a corporation must pass in order to
achieve this designation.
There is also another important reform not yet mentioned in the
debate, and that goes to the previous practice of rating agencies
engaging in unsolicited ratings. It is not a bad business model: You
simply pick out the company you wish to charge, you rate them, and send
them the bill for services later. It presents a corporation with a very
difficult dilemma in that, under our securities law, if a corporation
chooses to enter the public markets and issue debt, you must have two
favorable ratings from credit rating agencies.
For these reasons, this bill eliminates those unsolicited ratings,
provides stability in the overall rating process, and I believe will
serve our capital markets well in good fashion going forward.
I again compliment Chairman Oxley and Mr. Fitzpatrick for their
leadership and good work.
Mr. KANJORSKI. Mr. Speaker, I have no other requests for time, and I
yield back the balance of my time.
Mr. OXLEY. Mr. Speaker, in closing, I want to pay special tribute to
our friend from Pennsylvania (Mr. Fitzpatrick). It is rare in this
House that a freshman has been able to pass major legislation as we
have before us today, and it is a real tribute to his leadership and
hard work and the cooperation on both sides of the aisle that we were
able to get this bipartisan and bicameral bill finished.
We had a most impressive and informative field hearing in the City of
Brotherly Love last November, and it really did set the template and
the opportunity for the committee to move forward with this
legislation.
It is particularly poignant because it is a natural after passage of
Sarbanes-Oxley, and I know Senator Sarbanes and I both appreciate the
work and the leadership that Mr. Fitzpatrick has provided for us and
for Chairman Baker to move that legislation through his subcommittee.
I want to thank all involved, including the staffers that Mr.
Fitzpatrick mentioned. This has been a labor of love, and it will be
one that will have enormous implications for our capital markets down
the road.
Mr. Speaker, I yield back the balance of my time.
The SPEAKER pro tempore. The question is on the motion offered by the
gentleman from Ohio (Mr. Oxley) that the House suspend the rules and
pass the Senate bill, S. 3850.
The question was taken; and (two-thirds having voted in favor
thereof) the rules were suspended and the Senate bill was passed.
A motion to reconsider was laid on the table.
____________________