[Congressional Record (Bound Edition), Volume 152 (2006), Part 14]
[Senate]
[Pages 19107-19112]
[From the U.S. Government Publishing Office, www.gpo.gov]




                CREDIT RATING AGENCY REFORM ACT OF 2006

  Mr. McCONNELL. Mr. President, I ask unanimous consent that the Senate 
proceed to the immediate consideration of calendar No. 590, S. 3850.
  The PRESIDING OFFICER. The clerk will state the bill by title.
  The legislative clerk read as follows:

       A 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.

  There being no objection, the Senate proceeded to consider the bill.
  Mr. SARBANES. Mr. President, I support this important legislation to 
enhance competition and improve the Federal oversight of credit rating 
agencies--S. 3850, as amended, the Credit Rating Agency Reform Act of 
2006.
  I applaud Chairman Shelby for his strong leadership on this issue and 
am pleased to have worked closely with him on this legislation. The 
bill also reflects important contributions from Senators Menendez, 
Schumer, Enzi, and Sununu.
  Credit rating agencies play an important and valuable role in the 
capital markets by providing opinions to investors on the ability and 
willingness of issuers to make timely payments on debt instruments. 
These ratings can have significant impact. The Washington Post of 
November 22, 2004 wrote: ``they can, with the stroke of a pen, 
effectively add or subtract millions from a company's bottom line, 
rattle a city budget, shock the stock and bond markets and reroute 
international investment.''
  Investors trust the agencies' impartiality and rely on their ratings. 
The SEC created the designation of Nationally Recognized Statistical 
Rating Organization, NRSRO, which it currently applies to five 
agencies. Many institutional investors buy debt only if it has been 
rated by an NRSRO. A Reuters article dated February 1, 2006 stated: 
``The SEC designation gives these firms a major advantage in competing 
for business against other firms.''
  Rating agencies earn their revenues pursuant to one of two business 
models: either by receiving a fee from an issuer to give a rating to 
that issuer or by charging investors to subscribe for access to the 
ratings of issuers who do not pay the rating agency. Some NRSROs or 
their affiliates offer other products and services to the companies, 
States or other issuers they rate.
  In recent years, concerns have been raised about some aspects of the 
industry. In late 2001, the largest credit rating agencies maintained 
an investment grade rating on Enron debt after its major financial 
restatements and until 4 days before Enron's bankruptcy. As a result, 
as Business Week reported on November 29, 2004, there was a ``barrage 
of criticism . . . that raters should have uncovered the problems 
sooner at Enron, WorldCom and other corporate disasters.''
  In 2002, concerns about credit rating agencies were raised by 
Senators Bunning and Enzi and by Consumer Federation of America during 
the Senate Banking Committee hearings which led ultimately to the 
enactment of the Sarbanes-Oxley Act. Their concerns prompted the 
creation of Section 702 of that Act, which directed the SEC to conduct 
a study of credit rating agencies. The SEC issued a report and, 
subsequently, published a Concept Release and proposed a regulation to 
define the term ``NRSRO.''
  Many observers feel that more competition would benefit the markets. 
Two NRSROs, Standard & Poor's and Moody's, control 8 percent of market 
share and a third, Fitch Ratings, controls an additional 15 percent. 
Some have also called for a more transparent and shorter application 
process for recognition to obtain the NRSRO designation. Others have 
raised concerns about conflicts of interest, including those involving 
issuers paying for their ratings, NRSROs having a director who holds an 
executive position in an issuer, and NRSROs that sell other products or 
services to issuers they rate. Some have raised questions about alleged 
abusive practices involving ``tying arrangements, solicitation of 
payment for unsolicited ratings, and threats to modify ratings based on 
payment for related services.'' That is a letter from former SEC 
Chairman William Donaldson to Congressman Paul E. Kanjorski dated June 
6, 2005.
  Under Chairman Shelby's leadership, the Banking Committee has held 
hearings on credit rating agencies and received testimony from 
witnesses representing the Securities and Exchange Commission, rating 
agencies, the bond markets, the mutual fund industry, labor, academics, 
and financial professionals. Witnesses testified about a number of 
issues including the NRSRO application process, conflicts of interest, 
business practices, the appropriate

[[Page 19108]]

level of Federal regulation and commission authority.
  The legislation before the Senate addresses these issues. Under it, a 
credit rating agency can obtain the NRSRO designation unless the SEC 
determines that it lacks adequate financial and managerial resources to 
consistently produce credit ratings with integrity and to comply with 
its stated methodologies and procedures. It creates a transparent 
application process for becoming a NRSRO which requires a decision 
within a time certain. The application must describe procedures and 
methodologies used to determine ratings, conflicts of interest, the 
types of ratings intended to be issued, organization structure, and 
other matters, and must include a code of ethics, certifications from 
qualified institutional buyers that have used the ratings for at least 
3 years and other items. Most parts of the application must be 
certified annually and updated when there is a material change.
  The legislation also requires the commission to adopt rules that 
prohibit unfair, coercive and abusive business practices; prohibit or 
require the management and disclosure of any conflicts of interest; and 
require NRSROs to establish policies and procedures designed to prevent 
the misuse of nonpublic information.
  The bill does not favor a particular credit rating agency business 
model.
  Prior to its mark-up, the bill received strong support from a number 
of market participants and interested parties. Let me quote from some 
of their letters: The Bond Market Association said the bill creates ``a 
clear process using a credible standard for the designation of 
NRSRO's.''
  The Investment Company Institution said it ``brings much needed 
sunlight to credit ratings by requiring disclosure of an NRSRO's rating 
criteria, its methodologies and policies, how an NRSRO addresses 
conflicts of interest (as well as the conflicts themselves), and the 
organizational structure of an NRSRO.''
  The AFL-CIO said it will ``protect the investing public against 
conflicts of interest within the credit rating agencies . . . [and] 
encourages in a responsible manner greater competition.''
  The Association for Financial Professionals said the bill will 
``foster competition, impose accountability and provide the necessary 
SEC oversight to restore confidence in credit rating agencies and the 
ratings they issue.''
  Consumer Federation of America wrote that it will ``help ensure that 
only high quality ratings will be used for economically important 
regulatory purposes'' and praised the bill's requirements for 
``certifications by Qualified Institutional Buyers . . . and [for] 
giving the . . . SEC . . . authority to deny NRSRO status to rating 
agencies that lack the financial and managerial resources to produce 
ratings of integrity.''
  Financial Executives International said the bill ``will greatly 
enhance the accountability of rating agencies.''
  Fitch said it ``represents a significant step forward to prudently 
enhance competition in the rating agency industry.''
  Fidelity Investments said the bill ``will improve ratings quality by 
fostering transparency and accountability.''
  The Banking Committee passed this legislation without objection on a 
voice vote on August 2.
  The managers' amendment to this legislation exempts the five existing 
NRSROs from the requirement that they include certifications in the 
applications they must file to become NRSROs under the new regulatory 
framework. This amendment also clarifies the role of Federal regulation 
in the registration, licensing and qualification of NRSROs, and that 
the legislation would not regulate the substance of credit ratings or 
the procedures and methodologies that NRSROs use to determine them, 
subject to the Federal oversight required in various parts of the 
legislation.
  Once again, I commend Chairman Shelby on his leadership on this 
legislation. In doing so, I also want to acknowledge the outstanding 
work of Justin Daly on the Chairman's staff and Dean Shahinian on my 
staff.
  I support this legislation and encourage my colleagues to do so as 
well.
  Mr. McCONNELL. Mr. President, I ask unanimous consent that the 
amendment at the desk be agreed to, the bill, as amended, be read the 
third time and passed, the motion to reconsider be laid upon the table, 
and that any statements relating to the bill be printed in the Record.
  The PRESIDENT pro tempore. Without objection, it is so ordered.
  The amendment (No. 5035) was agreed to, as follows:

       On page 8, line 23, insert before the semicolon ``, except 
     as provided in subparagraph (D)''.
       On page 10, line 3, strike ``(D)'' and insert ``(E)''.
       On page 10, between lines 2 and 3, insert the following:
       ``(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.''.
       On page 14, line 15, strike ``the authority'' and insert 
     ``exclusive authority''.
       On page 15, line 11, strike ``organizations,'' and all that 
     follows through line 15 and insert the following: 
     ``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.''.
       On page 27, between lines 5 and 6, insert the following:
       ``(o) NRSROs Subject to Commission Authority.--
       ``(1) In general.--No provision of the laws of any State or 
     political subdivision thereof requiring the registration, 
     licensing, or qualification as a credit rating agency or a 
     nationally recognized statistical rating organization shall 
     apply to any nationally recognized statistical rating 
     organization or person employed by or working under the 
     control of a nationally recognized statistical rating 
     organization.
       ``(2) Limitation.--Nothing in this subsection prohibits the 
     securities commission (or any agency or office performing 
     like functions) of any State from investigating and bringing 
     an enforcement action with respect to fraud or deceit against 
     any nationally recognized statistical rating organization or 
     person associated with a nationally recognized statistical 
     rating organization.''.
       On page 27, line 6, strike ``(o)'' and insert ``(p)'',
       On page 27, strike lines 6 and 7, and insert the following:
       ``(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--''.
       On page 28, line 25, strike ``and'' and all that follows 
     through ``(B) in'' on page 29, line 1, and insert the 
     following:
       ``(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''.
       On page 33, strike lines 1 through 5.

  The bill (S. 3850), as amended, was ordered to be engrossed for a 
third reading, was read the third time, and passed, 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

[[Page 19109]]

     agreements, and other arrangements with clients are 
     negotiated and performed, by the use of the mails and other 
     means and instrumentalities of interstate commerce;
       (2) their ratings, publications, writings, analyses, and 
     reports customarily relate to the purchase and sale of 
     securities traded on securities exchanges and in interstate 
     over-the-counter markets, securities issued by companies 
     engaged in business in interstate commerce, and securities 
     issued by national banks and member banks of the Federal 
     Reserve System;
       (3) the foregoing transactions occur in such volume as 
     substantially to affect interstate commerce, the securities 
     markets, the national banking system, and the national 
     economy;
       (4) the oversight of such credit rating agencies serves the 
     compelling interest of investor protection;
       (5) the 2 largest credit rating agencies serve the vast 
     majority of the market, and additional competition is in the 
     public interest; and
       (6) the Commission has indicated that it needs statutory 
     authority to oversee the credit rating industry.

     SEC. 3. DEFINITIONS.

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

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

       (a) Amendment.--The Securities Exchange Act of 1934 is 
     amended by inserting after section 15D (15 U.S.C. 78o-6) the 
     following new section:

     ``SEC. 15E. REGISTRATION OF NATIONALLY RECOGNIZED STATISTICAL 
                   RATING ORGANIZATIONS.

       ``(a) Registration Procedures.--
       ``(1) Application for registration.--
       ``(A) In general.--A credit rating agency that elects to be 
     treated as a nationally recognized statistical rating 
     organization for purposes of this title (in this section 
     referred to as the `applicant'), shall furnish to the 
     Commission an application for registration, in such form as 
     the Commission shall require, by rule or regulation issued in 
     accordance with subsection (n), and containing the 
     information described in subparagraph (B).
       ``(B) Required information.--An application for 
     registration under this section shall contain information 
     regarding--
       ``(i) credit ratings performance measurement statistics 
     over short-term, mid-term, and long-term periods (as 
     applicable) of the applicant;
       ``(ii) the procedures and methodologies that the applicant 
     uses in determining credit ratings;
       ``(iii) policies or procedures adopted and implemented by 
     the applicant to prevent the misuse, in violation of this 
     title (or the rules and regulations hereunder), of material, 
     nonpublic information;
       ``(iv) the organizational structure of the applicant;
       ``(v) whether or not the applicant has in effect a code of 
     ethics, and if not, the reasons therefor;
       ``(vi) any conflict of interest relating to the issuance of 
     credit ratings by the applicant;
       ``(vii) the categories described in any of clauses (i) 
     through (v) of section 3(a)(62)(B) with respect to which the 
     applicant intends to apply for registration under this 
     section;
       ``(viii) on a confidential basis, a list of the 20 largest 
     issuers and subscribers that use the credit rating services 
     of the applicant, by amount of net revenues received 
     therefrom in the fiscal year immediately preceding the date 
     of submission of the application;
       ``(ix) on a confidential basis, as to each applicable 
     category of obligor described in any of clauses (i) through 
     (v) of section 3(a)(62)(B), written certifications described 
     in subparagraph (C), except as provided in subparagraph (D); 
     and
       ``(x) any other information and documents concerning the 
     applicant and any person associated with such applicant as 
     the Commission, by rule, may prescribe as necessary or 
     appropriate in the public interest or for the protection of 
     investors.
       ``(C) Written certifications.--Written certifications 
     required by subparagraph (B)(ix)--
       ``(i) shall be provided from not fewer than 10 qualified 
     institutional buyers, none of which is affiliated with the 
     applicant;
       ``(ii) may address more than one category of obligors 
     described in any of clauses (i) through (v) of section 
     3(a)(62)(B);
       ``(iii) shall include not fewer than 2 certifications for 
     each such category of obligor; and
       ``(iv) shall state that the qualified institutional buyer--

       ``(I) meets the definition of a qualified institutional 
     buyer under section 3(a)(64); and
       ``(II) has used the credit ratings of the applicant for at 
     least the 3 years immediately preceding the date of the 
     certification in the subject category or categories of 
     obligors.

       ``(D) Exemption from certification requirement.--A written 
     certification under subparagraph (B)(ix) is not required with 
     respect to any credit rating agency which has received, or 
     been the subject of, a no-action letter from the staff of the 
     Commission prior to August 2, 2006, stating that such staff 
     would not recommend enforcement action against any broker or 
     dealer that considers credit ratings issued by such credit 
     rating agency to be ratings from a nationally recognized 
     statistical rating organization.
       ``(E) Limitation on liability of qualified institutional 
     buyers.--No qualified institutional buyer shall be liable in 
     any private right of action for any opinion or statement 
     expressed in a certification made pursuant to subparagraph 
     (B)(ix).
       ``(2) Review of application.--
       ``(A) Initial determination.--Not later than 90 days after 
     the date on which the application for registration is 
     furnished to the Commission under paragraph (1) (or within 
     such longer period as to which the applicant consents) the 
     Commission shall--
       ``(i) by order, grant such registration for ratings in the 
     subject category or categories of obligors, as described in 
     clauses (i) through (v) of section 3(a)(62)(B); or
       ``(ii) institute proceedings to determine whether 
     registration should be denied.
       ``(B) Conduct of proceedings.--
       ``(i) Content.--Proceedings referred to in subparagraph 
     (A)(ii) shall--

       ``(I) include notice of the grounds for denial under 
     consideration and an opportunity for hearing; and
       ``(II) be concluded not later than 120 days after the date 
     on which the application for registration is furnished to the 
     Commission under paragraph (1).

       ``(ii) Determination.--At the conclusion of such 
     proceedings, the Commission, by order, shall grant or deny 
     such application for registration.
       ``(iii) Extension authorized.--The Commission may extend 
     the time for conclusion of such proceedings for not longer 
     than 90 days, if it finds good cause for such extension and 
     publishes its reasons for so finding, or for such longer 
     period as to which the applicant consents.
       ``(C) Grounds for decision.--The Commission shall grant 
     registration under this subsection--
       ``(i) if the Commission finds that the requirements of this 
     section are satisfied; and

[[Page 19110]]

       ``(ii) unless the Commission finds (in which case the 
     Commission shall deny such registration) that--

       ``(I) the applicant does not have adequate financial and 
     managerial resources to consistently produce credit ratings 
     with integrity and to materially comply with the procedures 
     and methodologies disclosed under paragraph (1)(B) and with 
     subsections (g), (h), (i), and (j); or
       ``(II) if the applicant were so registered, its 
     registration would be subject to suspension or revocation 
     under subsection (d).

       ``(3) Public availability of information.--Subject to 
     section 24, the Commission shall, by rule, require a 
     nationally recognized statistical rating organization, upon 
     the granting of registration under this section, to make the 
     information and documents submitted to the Commission in its 
     completed application for registration, or in any amendment 
     submitted under paragraph (1) or (2) of subsection (b), 
     publicly available on its website, or through another 
     comparable, readily accessible means, except as provided in 
     clauses (viii) and (ix) of paragraph (1)(B).
       ``(b) Update of Registration.--
       ``(1) Update.--Each nationally recognized statistical 
     rating organization shall promptly amend its application for 
     registration under this section if any information or 
     document provided therein becomes materially inaccurate, 
     except that a nationally recognized statistical rating 
     organization is not required to amend--
       ``(A) the information required to be furnished under 
     subsection (a)(1)(B)(i) by furnishing information under this 
     paragraph, but shall amend such information in the annual 
     submission of the organization under paragraph (2) of this 
     subsection; or
       ``(B) the certifications required to be provided under 
     subsection (a)(1)(B)(ix) by furnishing information under this 
     paragraph.
       ``(2) Certification.--Not later than 90 days after the end 
     of each calendar year, each nationally recognized statistical 
     rating organization shall furnish to the Commission an 
     amendment to its registration, in such form as the 
     Commission, by rule, may prescribe as necessary or 
     appropriate in the public interest or for the protection of 
     investors--
       ``(A) certifying that the information and documents in the 
     application for registration of such nationally recognized 
     statistical rating organization (other than the 
     certifications required under subsection (a)(1)(B)(ix)) 
     continue to be accurate; and
       ``(B) listing any material change that occurred to such 
     information or documents during the previous calendar year.
       ``(c) Accountability for Ratings Procedures.--
       ``(1) Authority.--The Commission shall have exclusive 
     authority to enforce the provisions of this section in 
     accordance with this title with respect to any nationally 
     recognized statistical rating organization, if such 
     nationally recognized statistical rating organization issues 
     credit ratings in material contravention of those procedures 
     relating to such nationally recognized statistical rating 
     organization, including procedures relating to the prevention 
     of misuse of nonpublic information and conflicts of interest, 
     that such nationally recognized statistical rating 
     organization--
       ``(A) includes in its application for registration under 
     subsection (a)(1)(B)(ii); or
       ``(B) makes and disseminates in reports pursuant to section 
     17(a) or the rules and regulations thereunder.
       ``(2) Limitation.--The rules and regulations that the 
     Commission may prescribe pursuant to this title, as they 
     apply to nationally recognized statistical rating 
     organizations, shall be narrowly tailored to meet the 
     requirements of this title applicable to nationally 
     recognized statistical rating organizations. Notwithstanding 
     any other provision of law, neither the Commission nor any 
     State (or political subdivision thereof) may regulate the 
     substance of credit ratings or the procedures and 
     methodologies by which any nationally recognized statistical 
     rating organization determines credit ratings.
       ``(d) Censure, Denial, or Suspension of Registration; 
     Notice and Hearing.--The Commission, by order, shall censure, 
     place limitations on the activities, functions, or operations 
     of, suspend for a period not exceeding 12 months, or revoke 
     the registration of any nationally recognized statistical 
     rating organization if the Commission finds, on the record 
     after notice and opportunity for hearing, that such censure, 
     placing of limitations, suspension, or revocation is 
     necessary for the protection of investors and in the public 
     interest and that such nationally recognized statistical 
     rating organization, or any person associated with such an 
     organization, whether prior to or subsequent to becoming so 
     associated--
       ``(1) has committed or omitted any act, or is subject to an 
     order or finding, enumerated in subparagraph (A), (D), (E), 
     (H), or (G) of section 15(b)(4), has been convicted of any 
     offense specified in section 15(b)(4)(B), or is enjoined from 
     any action, conduct, or practice specified in subparagraph 
     (C) of section 15(b)(4), during the 10-year period preceding 
     the date of commencement of the proceedings under this 
     subsection, or at any time thereafter;
       ``(2) has been convicted during the 10-year period 
     preceding the date on which an application for registration 
     is furnished to the Commission under this section, or at any 
     time thereafter, of--
       ``(A) any crime that is punishable by imprisonment for 1 or 
     more years, and that is not described in section 15(b)(4)(B); 
     or
       ``(B) a substantially equivalent crime by a foreign court 
     of competent jurisdiction;
       ``(3) is subject to any order of the Commission barring or 
     suspending the right of the person to be associated with a 
     nationally recognized statistical rating organization;
       ``(4) fails to furnish the certifications required under 
     subsection (b)(2); or
       ``(5) fails to maintain adequate financial and managerial 
     resources to consistently produce credit ratings with 
     integrity.
       ``(e) Termination of Registration.--
       ``(1) Voluntary withdrawal.--A nationally recognized 
     statistical rating organization may, upon such terms and 
     conditions as the Commission may establish as necessary in 
     the public interest or for the protection of investors, 
     withdraw from registration by furnishing a written notice of 
     withdrawal to the Commission.
       ``(2) Commission authority.--In addition to any other 
     authority of the Commission under this title, if the 
     Commission finds that a nationally recognized statistical 
     rating organization is no longer in existence or has ceased 
     to do business as a credit rating agency, the Commission, by 
     order, shall cancel the registration under this section of 
     such nationally recognized statistical rating organization.
       ``(f) Representations.--
       ``(1) Ban on representations of sponsorship by united 
     states or agency thereof.--It shall be unlawful for any 
     nationally recognized statistical rating organization to 
     represent or imply in any manner whatsoever that such 
     nationally recognized statistical rating organization has 
     been designated, sponsored, recommended, or approved, or that 
     the abilities or qualifications thereof have in any respect 
     been passed upon, by the United States or any agency, 
     officer, or employee thereof.
       ``(2) Ban on representation as nrsro of unregistered credit 
     rating agencies.--It shall be unlawful for any credit rating 
     agency that is not registered under this section as a 
     nationally recognized statistical rating organization to 
     state that such credit rating agency is a nationally 
     recognized statistical rating organization registered under 
     this title.
       ``(3) Statement of registration under securities exchange 
     act of 1934 provisions.--No provision of paragraph (1) shall 
     be construed to prohibit a statement that a nationally 
     recognized statistical rating organization is a nationally 
     recognized statistical rating organization under this title, 
     if such statement is true in fact and if the effect of such 
     registration is not misrepresented.
       ``(g) Prevention of Misuse of Nonpublic Information.--
       ``(1) Organization policies and procedures.--Each 
     nationally recognized statistical rating organization shall 
     establish, maintain, and enforce written policies and 
     procedures reasonably designed, taking into consideration the 
     nature of the business of such nationally recognized 
     statistical rating organization, to prevent the misuse in 
     violation of this title, or the rules or regulations 
     hereunder, of material, nonpublic information by such 
     nationally recognized statistical rating organization or any 
     person associated with such nationally recognized statistical 
     rating organization.
       ``(2) Commission authority.--The Commission shall issue 
     final rules in accordance with subsection (n) to require 
     specific policies or procedures that are reasonably designed 
     to prevent misuse in violation of this title (or the rules or 
     regulations hereunder) of material, nonpublic information.
       ``(h) Management of Conflicts of Interest.--
       ``(1) Organization policies and procedures.--Each 
     nationally recognized statistical rating organization shall 
     establish, maintain, and enforce written policies and 
     procedures reasonably designed, taking into consideration the 
     nature of the business of such nationally recognized 
     statistical rating organization and affiliated persons and 
     affiliated companies thereof, to address and manage any 
     conflicts of interest that can arise from such business.
       ``(2) Commission authority.--The Commission shall issue 
     final rules in accordance with subsection (n) to prohibit, or 
     require the management and disclosure of, any conflicts of 
     interest relating to the issuance of credit ratings by a 
     nationally recognized statistical rating organization, 
     including, without limitation, conflicts of interest relating 
     to--
       ``(A) the manner in which a nationally recognized 
     statistical rating organization is compensated by the 
     obligor, or any affiliate of the obligor, for issuing credit 
     ratings or providing related services;
       ``(B) the provision of consulting, advisory, or other 
     services by a nationally recognized statistical rating 
     organization, or any person associated with such nationally 
     recognized statistical rating organization, to the obligor, 
     or any affiliate of the obligor;
       ``(C) business relationships, ownership interests, or any 
     other financial or personal interests between a nationally 
     recognized statistical rating organization, or any person

[[Page 19111]]

     associated with such nationally recognized statistical rating 
     organization, and the obligor, or any affiliate of the 
     obligor;
       ``(D) any affiliation of a nationally recognized 
     statistical rating organization, or any person associated 
     with such nationally recognized statistical rating 
     organization, with any person that underwrites the securities 
     or money market instruments that are the subject of a credit 
     rating; and
       ``(E) any other potential conflict of interest, as the 
     Commission deems necessary or appropriate in the public 
     interest or for the protection of investors.
       ``(i) Prohibited Conduct.--
       ``(1) Prohibited acts and practices.--The Commission shall 
     issue final rules in accordance with subsection (n) to 
     prohibit any act or practice relating to the issuance of 
     credit ratings by a nationally recognized statistical rating 
     organization that the Commission determines to be unfair, 
     coercive, or abusive, including any act or practice relating 
     to--
       ``(A) conditioning or threatening to condition the issuance 
     of a credit rating on the purchase by the obligor or an 
     affiliate thereof of other services or products, including 
     pre-credit rating assessment products, of the nationally 
     recognized statistical rating organization or any person 
     associated with such nationally recognized statistical rating 
     organization;
       ``(B) lowering or threatening to lower a credit rating on, 
     or refusing to rate, securities or money market instruments 
     issued by an asset pool or as part of any asset-backed or 
     mortgage-backed securities transaction, unless a portion of 
     the assets within such pool or part of such transaction, as 
     applicable, also is rated by the nationally recognized 
     statistical rating organization; or
       ``(C) modifying or threatening to modify a credit rating or 
     otherwise departing from its adopted systematic procedures 
     and methodologies in determining credit ratings, based on 
     whether the obligor, or an affiliate of the obligor, 
     purchases or will purchase the credit rating or any other 
     service or product of the nationally recognized statistical 
     rating organization or any person associated with such 
     organization.
       ``(2) Rule of construction.--Nothing in paragraph (1), or 
     in any rules or regulations adopted thereunder, may be 
     construed to modify, impair, or supersede the operation of 
     any of the antitrust laws (as defined in the first section of 
     the Clayton Act, except that such term includes section 5 of 
     the Federal Trade Commission Act, to the extent that such 
     section 5 applies to unfair methods of competition).
       ``(j) Designation of Compliance Officer.--Each nationally 
     recognized statistical rating organization shall designate an 
     individual responsible for administering the policies and 
     procedures that are required to be established pursuant to 
     subsections (g) and (h), and for ensuring compliance with the 
     securities laws and the rules and regulations thereunder, 
     including those promulgated by the Commission pursuant to 
     this section.
       ``(k) Statements of Financial Condition.--Each nationally 
     recognized statistical rating organization shall, on a 
     confidential basis, furnish to the Commission, at intervals 
     determined by the Commission, such financial statements, 
     certified (if required by the rules or regulations of the 
     Commission) by an independent public accountant, and 
     information concerning its financial condition, as the 
     Commission, by rule, may prescribe as necessary or 
     appropriate in the public interest or for the protection of 
     investors.
       ``(l) Sole Method of Registration.--
       ``(1) In general.--On and after the effective date of this 
     section, a credit rating agency may only be registered as a 
     nationally recognized statistical rating organization for any 
     purpose in accordance with this section.
       ``(2) Prohibition on reliance on no-action relief.--On and 
     after the effective date of this section--
       ``(A) an entity that, before that date, received advice, 
     approval, or a no-action letter from the Commission or staff 
     thereof to be treated as a nationally recognized statistical 
     rating organization pursuant to the Commission rule at 
     section 240.15c3-1 of title 17, Code of Federal Regulations, 
     may represent itself or act as a nationally recognized 
     statistical rating organization only--
       ``(i) during Commission consideration of the application, 
     if such entity has furnished an application for registration 
     under this section; and
       ``(ii) on and after the date of approval of its application 
     for registration under this section; and
       ``(B) the advice, approval, or no-action letter described 
     in subparagraph (A) shall be void.
       ``(3) Notice to other agencies.--Not later than 30 days 
     after the date of enactment of this section, the Commission 
     shall give notice of the actions undertaken pursuant to this 
     section to each Federal agency which employs in its rules and 
     regulations the term `nationally recognized statistical 
     rating organization' (as that term is used under Commission 
     rule 15c3-1 (17 C.F.R. 240.15c3-1), as in effect on the date 
     of enactment of this section).
       ``(m) Rules of Construction.--
       ``(1) No waiver of rights, privileges, or defenses.--
     Registration under and compliance with this section does not 
     constitute a waiver of, or otherwise diminish, any right, 
     privilege, or defense that a nationally recognized 
     statistical rating organization may otherwise have under any 
     provision of State or Federal law, including any rule, 
     regulation, or order thereunder.
       ``(2) No private right of action.--Nothing in this section 
     may be construed as creating any private right of action, and 
     no report furnished by a nationally recognized statistical 
     rating organization in accordance with this section or 
     section 17 shall create a private right of action under 
     section 18 or any other provision of law.
       ``(n) Regulations.--
       ``(1) New provisions.--Such rules and regulations as are 
     required by this section or are otherwise necessary to carry 
     out this section, including the application form required 
     under subsection (a)--
       ``(A) shall be issued by the Commission in final form, not 
     later than 270 days after the date of enactment of this 
     section; and
       ``(B) shall become effective not later than 270 days after 
     the date of enactment of this section.
       ``(2) Review of existing regulations.--Not later than 270 
     days after the date of enactment of this section, the 
     Commission shall--
       ``(A) review its existing rules and regulations which 
     employ the term `nationally recognized statistical rating 
     organization' or `NRSRO'; and
       ``(B) amend or revise such rules and regulations in 
     accordance with the purposes of this section, as the 
     Commission may prescribe as necessary or appropriate in the 
     public interest or for the protection of investors.
       ``(o) NRSROs Subject To Commission Authority.--
       ``(1) In general.--No provision of the laws of any State or 
     political subdivision thereof requiring the registration, 
     licensing, or qualification as a credit rating agency or a 
     nationally recognized statistical rating organization shall 
     apply to any nationally recognized statistical rating 
     organization or person employed by or working under the 
     control of a nationally recognized statistical rating 
     organization.
       ``(2) Limitation.--Nothing in this subsection prohibits the 
     securities commission (or any agency or office performing 
     like functions) of any State from investigating and bringing 
     an enforcement action with respect to fraud or deceit against 
     any nationally recognized statistical rating organization or 
     person associated with a nationally recognized statistical 
     rating organization.
       ``(p) Applicability.--This section, other than subsection 
     (n), which shall apply on the date of enactment of this 
     section, shall apply on the earlier of--
       ``(1) the date on which regulations are issued in final 
     form under subsection (n)(1); or
       ``(2) 270 days after the date of enactment of this 
     section.''.
       (b) Conforming Amendments.--
       (1) Securities exchange act of 1934.--The Securities 
     Exchange Act of 1934 (15 U.S.C. 78 et seq.) is amended--
       (A) in section 15(b)(4) (15 U.S.C. 78o(b)(4))--
       (i) in subparagraph (B)(ii), by inserting ``nationally 
     recognized statistical rating organization,'' after 
     ``transfer agent,''; and
       (ii) in subparagraph (C), by inserting ``nationally 
     recognized statistical rating organization,'' after 
     ``transfer agent,''; and
       (B) in section 21B(a) (15 U.S.C. 78u-2(a)), by inserting 
     ``15E,'' after ``15C,''.
       (2) Investment company act of 1940.--The Investment Company 
     Act of 1940 (15 U.S.C. 80a et seq.) is amended--
       (A) in section 2(a) (15 U.S.C. 80a-2(a)), by adding at the 
     end the following new paragraph:
       ``(53) The term `credit rating agency' has the same meaning 
     as in section 3 of the Securities Exchange Act of 1934.''; 
     and
       (B) in section 9(a) (15 U.S.C. 80a-9(a))--
       (i) in paragraph (1), by inserting ``credit rating 
     agency,'' after ``transfer agent,''; and
       (ii) in paragraph (2), by inserting ``credit rating 
     agency,'' after ``transfer agent,''.
       (3) Investment advisers act of 1940.--The Investment 
     Advisers Act of 1940 (15 U.S.C. 80b et seq.) is amended--
       (A) in section 202(a) (15 U.S.C. 80b-2(a)), by adding at 
     the end the following new paragraph:
       ``(28) The term `credit rating agency' has the same meaning 
     as in section 3 of the Securities Exchange Act of 1934.'';
       (B) in section 202(a)(11) (15 U.S.C. 80b-2(a)(11)), by 
     striking ``or (F)'' and inserting the following: ``(F) any 
     nationally recognized statistical rating organization, as 
     that term is defined in section 3(a)(62) of the Securities 
     Exchange Act of 1934, unless such organization engages in 
     issuing recommendations as to purchasing, selling, or holding 
     securities or in managing assets, consisting in whole or in 
     part of securities, on behalf of others; or (G)''; and
       (C) in section 203(e) (15 U.S.C. 80b-3(e))--
       (i) in paragraph (2)(B), by inserting ``credit rating 
     agency,'' after ``transfer agent,''; and
       (ii) in paragraph (4), by inserting ``credit rating 
     agency,'' after ``transfer agent,''.
       (4) Housing and community development act of 1992.--Section 
     1319 of the Housing and Community Development Act of 1992 (12 
     U.S.C. 4519) is amended by striking ``effectively'' and all 
     that follows through ``broker-

[[Page 19112]]

     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.

  Mr. McCONNELL. Mr. President, I suggest the absence of a quorum.
  The PRESIDENT pro tempore. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. McCONNELL. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDENT pro tempore. Without objection, it is so ordered.

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