[Congressional Record (Bound Edition), Volume 152 (2006), Part 15]
[House]
[Pages 20132-20140]
[From the U.S. 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

[[Page 20133]]

     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
       ``(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

[[Page 20134]]

     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 
     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.

[[Page 20135]]

       ``(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-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;

[[Page 20136]]

       (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.''
  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.

[[Page 20137]]

  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 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.

[[Page 20138]]


  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 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.
  Mr. FITZPATRICK of Pennsylvania. Mr. Speaker, I would like to extend 
and revise my remarks made on September 27th regarding S. 3850, the 
Credit Rating Agency Reform Act of 2006. I submit the attached 
statement by Brian Carroll in Vol. 232 Number 186 of the Legal 
Intelligencer.

             [From the Legal Intelligencer, Sept. 26, 2005]

         Enron Scandals Spur Proposed Credit Rating Legislation

                           (By Brian Carroll)

       The regulatory legacy of Enron, WorldCom and other major 
     accounting frauds remains a work in process. Credit rating 
     agencies, such as Moody's Investor Services Inc., Fitch Inc. 
     and the Standard and Poor's Division of the McGraw-Hill 
     Companies Inc. (S&P), issued favorable credit ratings of 
     WorldCom bonds just three months before it declared 
     bankruptcy and, more disturbing, Moody's and S&P favorably 
     opined on Enron bonds four days before its bankruptcy. The 
     unexpected collapse of these issuers cost investors billions 
     of dollars. This raised the question:

[[Page 20139]]

     Why did credit rating agencies issue favorable bond ratings 
     that did not appear to accurately reflect the likelihood of 
     these bankruptcies?
       While the Sarbanes-Oxley Act of 2002 fundamentally recast 
     the statutory responsibilities of chief executive and 
     financial officers, audit committees and auditors, it took a 
     different tack when it came to credit rating agencies: 
     Section 702(b) mandated that the Securities and Exchange 
     Commission study the role of credit rating agencies in 
     securities markets. While acknowledging this study, Bucks 
     County Congressman Michael G. Fitzpatrick, R-8th District, 
     has introduced the Credit Rating Agency Duopoly Relief Act of 
     2005, aimed at increasing competition among credit rating 
     agencies while extending SEC oversight authority. This 
     article reviews the role of credit rating agencies and 
     compares the SEC's approach to credit rating agency 
     regulation with Fitzpatrick's proposed legislation.


                           CREDIT RATING FIAT

       Some credit rating agencies have enjoyed an enviable 
     position. Demand for certain agency services is statutorily 
     guaranteed--no less than dozens of federal, state and foreign 
     government statutes, including securities, banking, higher 
     education finance, and housing and community development 
     statutes, mandate creditworthiness ratings by credit rating 
     agencies that qualify as a `nationally recognized statistical 
     rating organization' (NRSRO). Innumerable private contracts, 
     such as loan and merger agreements, and more than 20 SEC 
     rules require use of NRSRO services.
       NRSRO credit ratings have significant consequences. For 
     example, Rule 2a-7 under the Investment Company Act of 1940 
     sets a minimum credit rating benchmark for certain money 
     market fund investments. An issuer's failure to meet that 
     benchmark renders the security ineligible for money market 
     investment. Many regulations set mandatory threshold credit 
     rating benchmarks. From an issuer perspective, there is 
     generally an inverse relationship between the credit rating 
     an issuer's debt instrument receives and, the rate of 
     interest the issuer will pay on the borrowing. Finally, 
     institutional and individual investors rely on credit ratings 
     in making investment decisions.
       The SEC, through its staff, controls the supply of NRSROs 
     by staff determinations of whether to issue what is called a 
     `No Action' letter, to provide assurance to a credit rating 
     agency that its ratings can be considered those of an NRSRO 
     without the SEC initiating an enforcement action. The SEC 
     staff began issuing No Action letters in 1975, as part of the 
     agency's efforts to clarify the application of its broker-
     dealer Net Capital Rule. At present, only three NRSROs have 
     staff No Action letters: Moody's, S&P and Fitch Inc., with 
     the first two capturing nearly 80 percent of the market.
       Under this process, a credit rating agency requests the SEC 
     staff conduct an informal inquiry to determine whether the 
     agency is qualified. If satisfied, the SEC staff issues a No 
     Action letter to a credit rating agency, effectively 
     designating it an NRSRO. Once the letter is issued, an NRSRO 
     registers as an adviser pursuant to the Investment Advisers 
     Act of 1940 (Advisers Act).
       According to the SEC's Report on the Role and Function of 
     Credit Rating Agencies in the Operation of the Securities 
     Markets, as required under Section 702(b) of Sarbanes-Oxley, 
     some NRSROs consider their registration as an adviser to be 
     voluntary. Similarly, other NRSROs assert that Advisers Act 
     requirements to retain and produce to the SEC certain books 
     and records are inapplicable because they operate as 
     journalist under the protection of the First Amendment.
       Some support for this position is found in Lowe v. SEC, 
     where the U.S. Supreme Court in 1985 ruled that a publisher 
     of investment materials fell within the Advisers Act 
     exclusion for publishers. In 1999's Jefferson County School 
     District No. R-1 v. Moody's Investor's Services Inc, the 10th 
     U.S. Circuit Court of Appeals held that Moody's was not 
     liable for allegedly materially false bond ratings, based in 
     part on finding that Moody's was functioning as a journalist 
     and therefore entitled to First Amendment protections. 
     Further supporting the NRSROs' argument, in 2004's Compuware 
     Corp. v. Moody's Investors Services Inc., the Eastern 
     District of Michigan held that Moody's qualified for 
     protection from discovery requests under New York's Shield 
     Law. Although the case law in this area is less than settled, 
     there is support for this position.
       In addition to potential constitutional protections, the 
     SEC has granted NRSROs relief from potential civil and SEC 
     enforcement liability. For example, Rule 436(g)(1) under the 
     Securities Act of 1933 provides that an NRSRO's credit rating 
     appearing in registration statement is not considered part of 
     the statement for purposes of, among others, Section 11 of 
     the Securities Act, a strict liability provision applicable 
     to experts who participate in preparing a security's 
     registration statement. Violations of this section are 
     commonly alleged in shareholder class action suits. In 
     another vein, SEC Regulation Fair Disclosure excludes credit 
     rating agencies from prohibitions on receiving non-public 
     information from issuers. Although this section covers all 
     credit rating agencies, it most commonly would benefit 
     agencies retained by issuers, i.e. NRSROs.
       The SEC has wrestled with the issue of how to define an 
     NRSRO. As early as 1994, the SEC issued a concept release 
     requesting comments on a wide range of NRSRO issues, 
     including how they should be defined. In 1997, the SEC issued 
     a proposed rule that would have defined NRSRO, which was not 
     adopted. In January 2003, the SEC submitted its Section 
     702(b) report to Congress. In April 2003, the SEC issued 
     another concept release calling for comments on, among other 
     things, how to define an NRSRO. In 2005, the SEC issued 
     another proposed rule reviewing the SEC approach to the 
     issue. It is currently pending.
       The current proposed rule would define an NRSRO as a credit 
     rating agency that issues publicly available credit ratings 
     (meaning at no cost) and is generally accepted by financial 
     markets as credible and reliable. Some comments on the 
     proposed rule question whether requiring only free public 
     credit ratings would discourage investors, as opposed to the 
     issuer of the security, from paying for credit rating 
     services. More importantly, the SEC recognizes that some view 
     the `generally accepted' requirement as creating a `chicken 
     and egg' barrier to entry where an agency has to first obtain 
     NRSRO-like status before meeting the SEC's definition of an 
     NRSRO.
       Given the applicable case law, limitations of the Advisers 
     Act and the No Action letter process, the SEC has 
     questionable authority to conduct any follow-up oversight of 
     NRSROs, such as requiring them to maintain certain books and 
     records, conducting examinations or, when appropriate, 
     instituting enforcement actions. On this issue, former SEC 
     director, division of market regulation, and current 
     Commissioner Annette L. Nazareth testified before Congress 
     that without taking a formal position, `[the] Commission 
     believes that to conduct a rigorous program of NRSRO 
     oversight, more explicit regulatory authority from Congress 
     is necessary.'


                      PROPOSED FEDERAL LEGISLATION

       On June 28, Fitzpatrick addressed the House of 
     Representatives in support of his bill by arguing that two 
     NRSROs currently dominate the ratings market, with SEC 
     approval, which creates `an uncompetitive marketplace, 
     stifles competition from other rating agencies, lowers the 
     quality of ratings and allows conflicts of interest to go 
     unchecked.' Consistent with this rationale, his Credit Rating 
     Agency Duopoly Relief Act of 2005, H.R. 2990, is designed to 
     achieve two primary objectives: decrease regulatory barriers 
     to credit rating agencies qualifying as an SEC approved 
     statistical rating organization, a new designation to replace 
     NRSRO; and increase SEC statutory authority to oversee 
     approved credit rating agencies.
       Under H.R. 2990, a credit rating agency must meet only two 
     requirements to be considered a statistical rating 
     organization and eligible to register with the SEC. First, 
     under the new definition of statistical rating organization, 
     an agency must have been in the business of primarily issuing 
     publicly available ratings at least for the most recent three 
     consecutive years. Here, `publicly available' is defined as 
     certain ratings disseminated via the Internet for free or a 
     fee. This provision permits both issuer and investor financed 
     ratings to qualify.
       Second, H.R. 2990 requires that an agency employ either a 
     quantitative or qualitative model in determining its publicly 
     available ratings. This provision permits agencies that rely 
     on purely analytic measures for determining a credit rating, 
     as opposed to interviews with the issuer's senior management. 
     Notably, there is no `generally accepted by the financial 
     markets' component to this definition, eliminating the 
     `chicken and egg' barrier.
       Fitzpatrick's bill would amend Section 15 of the Exchange 
     Act by creating a public registration procedure for becoming 
     a statistical rating organization. As part of the procedure, 
     an eligible agency must disclose how it handles potential 
     conflicts of interest and misuse of non-public information, 
     as well its methodologies for determining credit ratings. If 
     denied, the agency could appeal the SEC's decision to the 
     circuit courts.
       Under H.R. 2990, a registered statistical rating 
     organization must also maintain policies and procedures aimed 
     at preventing conflicts of interest, anticompetitive 
     practices and misuse of nonpublic information. Recent events 
     underscore the importance of these continuing requirements. 
     For example, the report describes one anti-competitive 
     practice known as notching--refusing to rate or lowering the 
     rating of some securities unless the issuer permits the 
     agency to rate other securities. Also, the report notes 
     concerns over agency pressure on issuers to purchase other 
     agency services, presumably to stay in its good graces. 
     Finally, in SEC v. Marano, et al, the SEC alleged that 
     employees of S&P's Financial Rating Services violated Section 
     10(b) of the Exchange Act and Rule 10b-5 by engaging in 
     insider trading on material nonpublic information obtained 
     through employment at S&P.
       Perhaps most important, Fitzpatrick's bill would provide 
     the SEC with statutory authority under the Exchange Act to 
     require statistical rating organizations to maintain certain 
     books and records, conduct examinations and, when 
     appropriate, institute enforcement actions against the SRO 
     itself.

[[Page 20140]]

     This type of SEC oversight already applies to brokers, 
     dealers, municipal securities dealers, transfer agents and 
     clearing agents under existing provisions of the Exchange 
     Act. Consistent with this requirement to register under the 
     Exchange Act, H.R. 2990 prohibits a statistical rating 
     organization from registering as investment adviser and 
     reliance on existing No Action letters concerning NRSROs.


                               CONCLUSION

       In light of the history of this issue, H.R. 2990 would, if 
     enacted, go a long way toward strengthening the SEC's 
     authority to oversee this key area of our securities 
     regulation scheme while reducing the SEC's role in deciding 
     who is qualified to perform credit ratings. With this 
     legislation, the SEC would be in a better position to 
     challenge industry assertions of constitutional protection. 
     Some of these legal questions may be resolved sooner, for a 
     recent newspaper article reports that New York Attorney 
     General Eliot Spitzer has subpoenaed credit rating documents 
     from Moody's as part of an investigation into insurance 
     industry practices.
       Brian Carroll is a CPA and Special Counsel to the U.S. 
     Securities and Exchange Commission in the Philadelphia 
     District Office. The U.S. Securities and Exchange Commission 
     disclaims responsibility for any private publication or 
     statement of any Commission employee or Commissioner. This 
     article expresses the author's view and does not necessarily 
     reflect those of the Commission, the Commissioners or other 
     members of the staff.

  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.

                          ____________________