[House Report 109-546]
[From the U.S. Government Publishing Office]



109th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     109-546

======================================================================



 
            CREDIT RATING AGENCY DUOPOLY RELIEF ACT OF 2006

                                _______
                                

  July 7, 2006.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

  Mr. Oxley, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 2990]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Financial Services, to whom was referred the 
bill (H.R. 2990) to improve ratings quality by fostering 
competition, transparency, and accountability in the credit 
rating agency industry, having considered the same, report 
favorably thereon with an amendment and recommend that the bill 
as amended do pass.
  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE; REFERENCES.

  (a) Short Title.--This Act may be cited as the ``Credit Rating Agency 
Duopoly Relief Act of 2006''.
  (b) References.--Except as otherwise expressly provided, whenever in 
this Act an amendment or repeal is expressed in terms of an amendment 
to, or repeal of, a section or other provision, the reference shall be 
considered to be made to a section or other provision of the Securities 
Exchange Act of 1934 (15 U.S.C. 78a et seq.).

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 House 
Committee on Financial Services during the 108th and 109th Congresses, 
comment letters to the concept releases and proposed rules of the 
Securities and Exchange Commission, and facts otherwise disclosed and 
ascertained, the Congress finds that--
          (1) credit rating agencies are of national concern, in that, 
        among other things--
                  (A) 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 means and instrumentalities 
                of interstate commerce;
                  (B) 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;
                  (C) the foregoing transactions occur in such volume 
                as substantially to affect interstate commerce, and 
                securities markets, the national banking system, and 
                the national economy; and
                  (D) their regulation serves the compelling interest 
                of investor protection; and
          (2) the Securities and Exchange Commission--
                  (A) has, through its designation of certain credit 
                rating agencies as nationally recognized statistical 
                rating organizations, created an artificial barrier to 
                entry for new participants; and
                  (B) will, in its latest proposed rule defining 
                nationally recognized statistical rating organizations, 
                codify and strengthen this barrier.

SEC. 3. DEFINITIONS.

  Section 3(a) (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;
                  ``(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 
        or nrsro.--The term `nationally recognized statistical rating 
        organization' means a credit rating agency that--
                  ``(A) has been in business for at least three 
                consecutive years; and
                  ``(B) 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 such 
        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 such nationally 
        recognized statistical rating organization, or any employee of 
        such nationally recognized statistical rating organization.''.

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) Filing of application form.--A credit rating agency 
        that elects to be treated as a nationally recognized 
        statistical rating organization for the purposes of Federal 
        statutes, rules, and regulations may be registered by filing 
        with the Commission an application for registration in such 
        form and containing such of the following and any other 
        information and documents concerning such organization and any 
        persons associated with such organization as the Commission, by 
        rule, may prescribe as necessary or appropriate in the public 
        interest or for the protection of investors:
                  ``(A) any conflicts of interest relating to the 
                issuance of credit ratings by a nationally recognized 
                statistical rating organization;
                  ``(B) the procedures and methodologies such 
                nationally recognized statistical rating organization 
                uses in determining credit ratings;
                  ``(C) credit ratings performance measurement 
                statistics over short-term, mid-term, and long-term 
                periods of such nationally recognized statistical 
                rating organization;
                  ``(D) policies or procedures adopted and implemented 
                by such nationally recognized statistical rating 
                organization to prevent the misuse in violation of this 
                title (or the rules and regulations thereunder) of 
                material, non-public information; and
                  ``(E) the organizational structure of such nationally 
                recognized statistical rating organization.
          ``(2) Review of application.--
                  ``(A) Initial determination.--Within 90 days of the 
                date of the filing of such application (or within such 
                longer period as to which the applicant consents) the 
                Commission shall--
                          ``(i) by order grant such registration; or
                          ``(ii) institute proceedings to determine 
                        whether registration should be denied.
                  ``(B) Conduct of proceedings.--Such proceedings shall 
                include notice of the grounds for denial under 
                consideration and opportunity for hearing and shall be 
                concluded within 120 days of the date of the filing of 
                the application for registration. At the conclusion of 
                such proceedings the Commission, by order, shall grant 
                or deny such registration. The Commission may extend 
                the time for conclusion of such proceedings for up to 
                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 such registration if the Commission finds that 
                the requirements of this section are satisfied. The 
                Commission shall deny such registration if it does not 
                make such a finding or if it finds that if the 
                applicant were so registered, its registration would be 
                subject to suspension or revocation under subsection 
                (b).
          ``(3) Public availability of information.--Subject to section 
        24, the Commission, by rule, shall require a nationally 
        recognized statistical rating organization, upon the granting 
        of registration under this section, to make the information and 
        documents filed with the Commission in its application for 
        registration, or in any amendment filed under subsection (b)(1) 
        or (2), publicly available on the website or comparable readily 
        accessible means of such nationally recognized statistical 
        rating organization.
  ``(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 documents 
        provided therein become materially inaccurate, except that a 
        nationally recognized statistical rating organization is not 
        required to amend the information required to be filed under 
        subsection (a)(1)(C) by a filing under this paragraph, but 
        shall amend such information in such organization's annual 
        filing under paragraph (2) of this subsection.
          ``(2) Certification.--Not later than 90 days after the end of 
        each calendar year, each nationally recognized statistical 
        rating organization shall file with 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 continue to 
                be accurate; and
                  ``(B) listing any material changes that occurred to 
                such information or documents during the previous 
                calendar year.
  ``(c) Accountability for Ratings Procedures.--
          ``(1) Authority.--The Commission shall have the authority 
        under this Act to take action against any nationally recognized 
        statistical rating organization if such nationally recognized 
        statistical rating organization issues credit ratings in 
        contravention of those procedures, criteria, and methodologies 
        that such nationally recognized statistical rating 
        organization--
                  ``(A) includes in its application for registration 
                under this section; or
                  ``(B) makes and disseminates in reports pursuant to 
                section 17(a) or the rules and regulations thereunder.
          ``(2) Limitation.--The rules and regulations applicable to 
        nationally recognized statistical rating organizations the 
        Commission may prescribe pursuant to this Act shall be narrowly 
        tailored to meet the requirements of this Act applicable to 
        nationally recognized statistical rating organizations and 
        shall not purport to regulate the substance of credit ratings 
        or the procedures and methodologies by which such nationally 
        recognized statistical rating organizations determine 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 in the public 
interest and that such nationally recognized statistical rating 
organization, or any person associated with such nationally recognized 
statistical rating 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 paragraph (4) of section 15(b), has been 
        convicted of any offense specified in subparagraph (B) of such 
        paragraph (4) within 10 years of the commencement of the 
        proceedings under this subsection, or is enjoined from any 
        action, conduct, or practice specified in subparagraph (C) of 
        such paragraph (4);
          ``(2) has been convicted during the 10-year period preceding 
        the date of filing of any application for registration, 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; or
          ``(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.
  ``(e) Withdrawal From Registration.--A nationally recognized 
statistical rating organization registered under this section 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 filing a written notice of withdrawal with the 
Commission. If the Commission finds that any 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 of such nationally recognized statistical 
rating organization.
  ``(f) Representations.--
          ``(1) Representations of sponsorship by united states or 
        agency thereof.--It shall be unlawful for any nationally 
        recognized statistical rating organization registered under 
        this section to represent or imply in any manner whatsoever 
        that such nationally recognized statistical rating organization 
        has been designated, sponsored, recommended, or approved, or 
        that such nationally recognized statistical rating 
        organization's abilities or qualifications have in any respect 
        been passed upon, by the United States or any agency, any 
        officer, or any employee thereof.
          ``(2) Representation as nrsro of unregistered credit rating 
        agencies.--It shall be unlawful for any credit rating agency to 
        represent or imply in any manner whatsoever that such credit 
        rating agency has been designated, sponsored, recommended, or 
        approved, or that such credit rating agency's abilities or 
        qualifications have in any respect been passed upon, by the 
        United States or any agency, any officer, or any employee 
        thereof. 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 under this Act.
          ``(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 Act, if such 
        statement is true in fact and if the effect of such 
        registration is not misrepresented.
  ``(g) Prevention of Misuse of Nonpublic Information.--Each nationally 
recognized statistical rating organization shall establish, maintain, 
and enforce written policies and procedures reasonably designed, taking 
into consideration the nature of such nationally recognized statistical 
rating organization's business, to prevent the misuse in violation of 
this title, or the rules or regulations thereunder, of material, 
nonpublic information by such nationally recognized statistical rating 
organization or any person associated with such nationally recognized 
statistical rating organization. The Commission, as it deems necessary 
or appropriate in the public interest or for the protection of 
investors, shall adopt rules or regulations to require specific 
policies or procedures reasonably designed to prevent misuse in 
violation of this title (or the rules or regulations thereunder) of 
material, nonpublic information.
  ``(h) Management of Conflicts of Interest.--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 of such nationally recognized statistical rating 
organization, to address and manage the conflicts of interest that can 
arise from such business. The Commission, as it deems necessary or 
appropriate in the public interest or for the protection of investors, 
shall adopt rules or regulations to prohibit, or require the management 
or 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--
          ``(1) 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;
          ``(2) 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;
          ``(3) 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; 
        and
          ``(4) 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.
  ``(i) Prohibited Conduct.--
          ``(1) Prohibited acts and practices.--The Commission may 
        adopt rules or regulations 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) seeking payment for a credit rating that has 
                not been specifically requested by the obligor--
                          ``(i) from an obligor; or
                          ``(ii) from an affiliate of an obligor, 
                        unless--
                                  ``(I) the organization is organized 
                                under subsection (a)(1)(E) to receive 
                                fees from investors or other market 
                                participants, or a combination thereof; 
                                and
                                  ``(II) the affiliate is such an 
                                investor or participant;
                  ``(B) conditioning or threatening to condition the 
                issuance of a credit rating on the obligor's, or an 
                affiliate of the obligor's, purchase 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;
                  ``(C) lowering or threatening to lower a credit 
                rating on, or refusing to rate, securities or money 
                market instruments issued by an asset pool unless a 
                portion of the assets within such pool also is rated by 
                the nationally recognized statistical rating 
                organization;
                  ``(D) 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, pays or will pay for the 
                credit rating or any other services or products of the 
                nationally recognized statistical rating organization 
                or any person associated with such nationally 
                recognized statistical rating organization.
          ``(2) Rule of construction.--Nothing in paragraph (1), or in 
        any rules or regulations adopted thereunder, shall be construed 
        to modify, impair, or supersede the operation of any of the 
        antitrust laws. For the purposes of the preceding sentence, the 
        term `antitrust laws' has the meaning given it in the first 
        section of the Clayton Act (15 U.S.C. 12), except that such 
        term includes section 5 of the Federal Trade Commission Act (15 
        U.S.C. 45) to the extent 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, file 
with 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) Elimination of Commission Designation Process for NRSRO's.--
          ``(1) Cessation of designation.--Within 30 days after the 
        enactment of the Credit Rating Agency Duopoly Relief Act of 
        2006, the Commission shall cease to designate persons and 
        companies as nationally recognized statistical rating 
        organizations, as that term is used under rule 15c3-1 of the 
        Commission's rules (17 CFR 240.15c3-1).
          ``(2) Prohibition on reliance on no-action relief.--The no-
        action relief that the Commission has granted with respect to 
        the designation of nationally recognized statistical rating 
        organizations, as that term is used under rule 15c3-1 of the 
        Commission's rules (17 CFR 240.15c3-1), shall be void and of no 
        force or effect.
          ``(3) Notice to other agencies.--Within 30 days after the 
        date of enactment of the Credit Rating Agency Duopoly Relief 
        Act of 2006, the Commission shall give notice to the Federal 
        agencies which employ the term `nationally recognized 
        statistical rating organization' (as that term is used under 
        rule 15c3-1 of the Commission's rules (17 CFR 240.15c3-1)) in 
        their rules and regulations regarding the actions undertaken 
        pursuant to this section.
          ``(4) Review of existing regulations.--Within 180 days after 
        the date of enactment of the Credit Rating Agency Duopoly 
        Relief Act of 2006, the Commission shall review its existing 
        rules and regulations which employ the term `nationally 
        recognized statistical rating organization' or `NRSRO' and 
        promulgate new or revised rules and regulations as the 
        Commission may prescribe as necessary or appropriate in the 
        public interest or for the protection of investors.''.
  (b) Conforming Amendments to the 1934 Act.--
          (1) Section 15(b)(4)(B)(ii) (15 U.S.C. 78o(b)(4)(B)(ii)) is 
        amended by inserting ``nationally recognized statistical rating 
        organization,'' after ``transfer agent,''.
          (2) Section 15(b)(4)(C) (15 U.S.C. 78o(b)(4)(C)) is amended 
        by inserting ``nationally recognized statistical rating 
        organization,'' after ``transfer agent,''.
          (3) Section 21B(a) (15 U.S.C. 78u-2(a)) is amended by 
        inserting ``15E,'' after ``15C,''.
  (c) Other Conforming Amendments.--
          (1) Section 2(a) of the Investment Company Act of 1940 (15 
        U.S.C. 80a-2(a)) is amended by adding at the end the following 
        new paragraph:
          ``(53) The term `credit rating agency' has the same meaning 
        as given in section 3 of the Securities Exchange Act of 
        1934.''.
          (2) Section 9(a)(1) of the Investment Company Act of 1940 (15 
        U.S.C. 80a-9(a)) is amended by inserting ``credit rating 
        agency,'' after ``transfer agent,''.
          (3) Section 9(a)(2) of the Investment Company Act of 1940 (15 
        U.S.C. 80a-9(a)) is amended by inserting ``credit rating 
        agency,'' after ``transfer agent,''.
          (4) Section 202(a) of the Investment Advisers Act of 1940 (15 
        U.S.C. 80b-2(a)) is amended by adding at the end the following 
        new paragraph:
          ``(28) The term `credit rating agency' has the same meaning 
        as given in section 3 of the Securities Exchange Act of 
        1934.''.
          (5) Section 203(e)(2)(B) of the Investment Advisers Act of 
        1940 (15 U.S.C. 80b-3(e)) is amended by inserting ``credit 
        rating agency,'' after ``transfer agent,''.
          (6) Section 203(e)(4) of the Investment Advisers Act of 1940 
        (15 U.S.C. 80b-3(e)) is amended by inserting ``credit rating 
        agency,'' after ``transfer agent,''.
          (7) 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''.
          (8) Section 439 of the Higher Education Act of 1965 (20 
        U.S.C. 1087-2) is amended in subsection (r)(15)(A) 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 under the Securities Exchange Act of 1934''.
          (9) Section 601(10) 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 under the 
        Securities Exchange Act of 1934 (15 U.S.C. 78 et seq.)''.

SEC. 5. ANNUAL AND OTHER REPORTS.

  Section 17(a)(1) (15 U.S.C. 78q(a)(1)) is amended by inserting 
``nationally recognized statistical rating organization,'' after 
``registered transfer agent,''.

SEC. 6. GAO STUDY AND REPORT REGARDING CONSOLIDATION OF CREDIT RATING 
                    AGENCIES.

  (a) Study Required.--The Comptroller General of the United States 
shall conduct a study--
          (1) to identify--
                  (A) the factors that have led to the consolidation of 
                credit rating agencies;
                  (B) the present and future impact of the condition 
                described in subparagraph (A) on the securities 
                markets, both domestic and international; and
                  (C) solutions to any problems identified under 
                subparagraph (B), including ways to increase 
                competition and the number of firms capable of 
                providing credit rating services to large national and 
                multinational business organizations that are subject 
                to the securities laws;
          (2) of the problems, if any, faced by business organizations 
        that have resulted from limited competition among credit rating 
        agencies, including--
                  (A) higher costs;
                  (B) lower quality of services;
                  (C) anti-competitive practices;
                  (D) impairment of independence; and
                  (E) lack of choice; and
          (3) whether and to what extent Federal or State regulations 
        impede competition among credit rating agencies.
  (b) Consultation.--In planning and conducting the study under this 
section, the Comptroller General shall consult with--
          (1) the Securities and Exchange Commission;
          (2) the Department of Justice; and
          (3) any other public or private sector organization that the 
        Comptroller General considers appropriate.
  (c) Report Required.--Not later than 180 days 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.

SEC. 7. EFFECTIVE DATE.

  The amendments made by sections 4 and 5 shall take effect on January 
1, 2008, except as otherwise provided in paragraphs (1), (3), and (4) 
of subsection (l) of section 15E of the Securities Exchange Act of 1934 
(as added by such amendments), and except that the Securities and 
Exchange Commission is authorized to prescribe rules and regulations to 
carry out such amendments beginning on the date of enactment of this 
Act.

                   Purpose and Summary of Legislation

    H.R. 2990, the Credit Rating Agency Duopoly Relief Act, 
will bring competition, transparency, and accountability to the 
credit rating agency industry, improving ratings quality and 
enhancing investor protection. H.R. 2990 will increase 
competition by replacing the Securities and Exchange 
Commission's staff role in designating rating agencies as 
Nationally Recognized Statistical Rating Organizations (NRSROs) 
with a registration system for those agencies who want their 
ratings to be able to be used for regulatory purposes. Rating 
agencies issuing credit ratings for at least three years and 
registering with the SEC will be deemed to be NRSROs.
    H.R. 2990 will enhance transparency of the ratings industry 
by mandating that NRSROs disclose in their registration 
applications long-term, mid-term, and short-term record at 
rating securities and public companies through performance 
statistics, the methodologies it uses in deriving its ratings 
and the conflicts its business model raises and the manner in 
which it manages those conflicts, and the firm's organizational 
structure. NRSROs will also be subject to the reporting and 
recordkeeping requirements of the Securities Exchange Act of 
1934. NRSROs will also be required to implement systematic 
procedures to manage conflicts of interest and prevent the 
misuse of non-public information.
    To enhance accountability of the rating agencies and 
further investor protection, H.R. 2990 will allow the SEC to 
inspect, examine and bring enforcement actions under the 
Securities Exchange Act of 1934. NRSROs will be required to 
appoint a chief compliance officer to ensure compliance with 
the securities laws, rules, and regulations.

                  Background and Need for Legislation

    Agencies rating debt securities began to appear in the 
United States in the early twentieth century when John Moody 
started to sell to investors lists of ratings of railroad bonds 
in 1909 and utility and industrial bonds in 1910. Moody had 
based the credit rating agency upon its mid-nineteenth century 
predecessor, the mercantile rating agency, which rated 
merchants' ability to pay their financial obligations. By the 
onset of the Depression, Poor's Publishing Company (``Poor''), 
Standard Statistics Company (``Standard''), which eventually 
merged with Poor's to form Standard and Poor's (``S&P''), and 
Fitch Publishing Company (``Fitch'') had joined Moody's 
Investor Services (``Moody's'') in publishing ratings on the 
likelihood of an issuer's default on debt payments.\1\
---------------------------------------------------------------------------
    \1\ Richard Cantor and Frank Packer, The Credit Rating Industry, 
FRBNY Quarterly Review 1-2 (Summer-Fall 1994). For an in-depth history 
of the origins and family tree of the rating agencies, see Richard S. 
Wilson, Corporate Senior Securities Analysis and Evaluation of Bonds, 
Convertibles, and Preferreds, Probus Publishing Company, Chicago, 
Illinois (1987).
---------------------------------------------------------------------------
    Rating agencies typically employ a scale of ratings based 
on credit quality. S&P and Fitch use a range from categories A 
(highest) to D (lowest), and three subcategories for each major 
category (e.g., three levels of ``As'', three levels of ``Bs'', 
etc.). Investment grade securities make up the four highest 
rating categories: AAA, AA, A, and BBB. Below investment-grade 
categories range from BB to D. S&P issues ratings based only on 
the likelihood of default, while Moody's and Fitch base their 
ratings about the likelihood of default as well the amount of 
face value bondholders would likely recover in the event of a 
default.\2\
---------------------------------------------------------------------------
    \2\ Richard Johnson, An Examination of Rating Agencies' Actions 
Around the Investment-Grade Boundary, Federal Reserve Bank of Kansas 
City 5 (February 2003).
---------------------------------------------------------------------------
    Originally the major rating agencies only received revenue 
from selling lists of their ratings to investors. This changed 
due to two facts: technology and the 1970 default of Penn 
Central on $82 million in commercial paper. First, with the 
introduction of the copying machine, these ratings lists could 
be easily copied and disseminated; the agencies needed another 
source of revenue. Second, the unforeseen default of Penn 
Central, a blue chip company, compelled many investors to 
refuse to roll over their commercial paper, causing a liquidity 
crisis, and forcing a slew of other companies into default. To 
reassure investors they would meet their obligations, issuers 
themselves now actively sought credit ratings. This demand 
allowed the rating agencies to charge issuers fees for ratings 
and ultimately changed the business model of the dominant 
rating agencies.\3\
---------------------------------------------------------------------------
    \3\ Richard Cantor and Frank Packer, The Credit Rating Industry, 
FRBNY Quarterly Review 4 (Summer-Fall 1994) (``Fitch and Moody's 
started to charge corporate issuers for ratings in 1970, and Standard 
and Poor's followed suit a few years later. (Standard and Poor's 
started to charge municipal bond issuers for ratings in 1968).'')
---------------------------------------------------------------------------
    Since the 1930s, rating agencies have continued to increase 
in importance. The various company defaults during the 
Depression spurred investors to actively seek credit ratings 
and made the rating agency a financially viable service 
provider.\4\ Recently the globalization of the capital markets 
and the introduction of all sorts of debt-type products, 
including asset-backed securities and collateralized debt 
obligations have provided new markets and instruments to rate. 
Credit rating agencies are no longer solely focused on global 
organizations as they were during the first half of the 
twentieth century.\5\ Moody's and S&P dominate the 
international markets as much as the U.S. market, with Moody's 
more dominant in Asia, S&P in Latin America.\6\
---------------------------------------------------------------------------
    \4\ Frank Partnoy, The Siskel and Eberts of Financial Markets?: Two 
Thumbs Down for the Credit Rating Agencies, Wash. U.L.Q. (1999) 640.
    \5\ Isaac C. Hunt, Jr., Commissioner, Securities and Exchange 
Commission, Concerning the Roles of Credit Rating Agencies in the U.S. 
Securities Markets, Testimony before the Committee on Governmental 
Affairs, U.S. Senate (Mar. 20, 2002).
    \6\ Claire A. Hill, Regulating the Rating Agencies, Business, 
Economics and Regulatory Policy Working Paper No. 452022, 60 n.87.
---------------------------------------------------------------------------
    In addition to these market forces, regulators contributed 
to the growing influence of rating agencies. Having been caught 
off-guard by the financial institution failures during the 
Depression, regulators needed a tool to, at the least, signal 
potential defaults. Regulators began to propound ``safety-and-
soundness'' regulations using credit ratings as arbiters of 
this safety and soundness. For instance, in 1931 the Office of 
the Comptroller of the Currency (the ``OCC'') maintained that 
financial institutions' holdings of corporate debt ``had to be 
rated BBB or better by at least one rating agency'' to be 
carried at book value; if not, the debt was to be written down 
to market value and ``50 percent of the resulting book losses 
were to be charged against capital.'' \7\ A few years later, 
through a joint statement, the OCC, the Federal Deposit 
Insurance Corporation, and the Federal Reserve, prohibited 
banks from ``holding bonds not rated BBB or above by at least 
two agencies.'' \8\
---------------------------------------------------------------------------
    \7\ Richard Cantor and Frank Packer, The Credit Rating Industry, 
FRBNY Quarterly Review 6 (Summer-Fall 1994); Richard Johnson, An 
Examination of Rating Agencies' Actions Around the Investment-Grade 
Boundary, Federal Reserve Bank of Kansas City 1 (February 2003).
    \8\ Cantor and Packer, Id.
---------------------------------------------------------------------------
    Around this same time, credit ratings were being used to 
determine the amount of capital that had to be set aside for 
insurance companies' securities holdings. The National 
Association of Insurance Commissioners ``established a system 
of internal quality categories in which the top-quality 
classification corresponded to ratings of BBB and above, 
effectively establish[ing] uniformity in the definition of 
`investment grade' across bank and insurance regulators.'' \9\
---------------------------------------------------------------------------
    \9\ Id.
---------------------------------------------------------------------------
    The Securities and Exchange Commission (the ``SEC'') first 
entered the terrain of employing the credit rating as safety 
and soundness arbiter in its 1975 rulemaking on net capital 
requirements for broker-dealers. Rule 15c3-1 promulgated under 
the Securities Exchange Act of 1934 obligates broker-dealers to 
hold more capital for those bonds rated ``junk'' by ``a 
nationally recognized statistical rating organization'' 
(``NRSRO'').\10\ The SEC did not define NRSRO, but granted the 
status to the three then-and-now dominant rating agencies--S&P, 
Moody's, and Fitch--through an SEC staff's no-action letter. 
The no-action letter, addressed to a broker-dealer, stated that 
the SEC would take no action against this broker-dealer if it 
relied on the ratings of these three NRSROs in calculating its 
net capital requirements. The letter did not provide any 
elaboration on the term NRSRO, just the following sentence: 
``With respect to `nationally recognized statistical rating 
organizations,' no question will be raised by the Division when 
the following organizations are utilized for the purposes of 
applying subdivision (c)(2)(vi)(F) of Rule 15c3-1: Standard & 
Poor's Corporation (`Standard & Poor's'), Moody's Investors 
Services, Inc. (`Moody's'), and Fitch Investors Services, Inc. 
(`Fitch').''
---------------------------------------------------------------------------
    \10\ These requirements obligate broker-dealers, ``when computing 
net capital, to deduct from their net worth certain percentages of the 
market value (`haircuts') of their proprietary securities positions . . 
. The Commission determined that it was appropriate to apply a lower 
haircut to securities held by a broker-dealer that were rated 
investment grade by a credit rating agency of national repute because 
those securities typically were more liquid and less volatile in price 
than those securities that were not so highly rated.'' Isaac C. Hunt, 
Jr., Commissioner, Securities and Exchange Commission, Concerning the 
Role of Credit Rating Agencies in the U.S. Securities Markets, 
Testimony before the Committee on Governmental Affairs, U.S. Senate 
(Mar. 20, 2002).
---------------------------------------------------------------------------
    The SEC has then continued to cement the use of NRSRO in 
its rulemakings without defining the term. For example, in 
1982, as part of its Integrated Disclosure System Release, the 
SEC allowed simplified shelf registration for debt rated 
investment grade by an NRSRO and, in 1993, under Rule 3a-7 of 
the Investment Company Act of 1940, the SEC exempted from the 
definition of a mutual fund issuers of asset-backed securities 
rated investment grade by an NRSRO. The SEC also restricted the 
investments of money market mutual funds to investment grade 
securities as rated by an NRSRO in 1991 under Rule 2a-7 of the 
Investment Company Act of 1940.
    Other regulators and the private investment community have 
taken up the term (also without defining it) and ``[u]nder most 
current ratings-dependent regulations in the United States, 
ratings matter only if they are issued by an NRSRO.'' \11\
---------------------------------------------------------------------------
    \11\ Richard Cantor and Frank Packer, The Credit Rating Industry, 
FRBNY Quarterly Review 8 (Summer-Fall 1994).
---------------------------------------------------------------------------
    In the early 1990s, SEC Commissioners began to question the 
NRSRO designation.\12\ There was no clearly defined process to 
become an NRSRO. Other critics claimed the agency had not 
approved enough rating agencies as NRSROs. The pressure from 
these complaints compelled the SEC to issue a Concept Release 
in 1994 (the ``1994 Concept Release'') requesting comments 
regarding the use of the NRSRO concept to distinguish among 
debt securities, the adoption of a definition of the term 
NRSRO, the current no-action letter process with respect to 
NRSRO designation, and the SEC's regulatory oversight of 
NRSROs.
---------------------------------------------------------------------------
    \12\ See e.g., Richard Y. Roberts, Commissioner, SEC, Formal 
Regulatory Handle Needed for NRSRO Designation: Part I, PSA Regional 
Compliance Seminar (Apr. 6, 1992); Richard Y. Roberts, Commissioner, 
SEC, Formal Regulatory Handle Needed for NRSRO Designation: Part II, 
PSA Regional Compliance Seminar (Apr. 9, 1992).
---------------------------------------------------------------------------
    The SEC set out in the 1994 Concept Release what criteria 
staff considers when determining whether to grant NRSRO status. 
Note that these criteria were not unknown--they could be 
gleaned from the past NRSRO no-action letters the SEC had 
issued. Of primary importance according to the SEC is that the 
credit rating agency be ``nationally recognized,'' that is, 
considered by the financial markets as ``an issuer of credible 
ratings.'' Secondly, to assess the operational capability and 
reliability of ratings, the SEC reviews the following: the 
agency's organizational structure; the agency's financial 
resources; the size and quality of the agency's staff; the 
agency's independence; the agency's rating procedures; and the 
agency's establishment and compliance with internal procedures 
to prevent misuses of non-public information.\13\
---------------------------------------------------------------------------
    \13\ SEC Release No. 33-7085, Nationally Recognized Statistical 
Rating Organization (1994).
---------------------------------------------------------------------------
    Following this Concept Release, in 1997 the SEC issued a 
proposed rule Capital Requirements for Brokers or Dealers under 
the Securities Exchange Act of 1934 (the ``1997 Proposed 
Rule'') codifying the requirements laid out in the 1994 Concept 
Release for NRSRO designation. In comments submitted to the 
SEC, the Department of Justice (``DoJ'') objected to the 
``national recognition'' requirement, contending that ``[t]he 
adoption of such a criterion is likely to create a nearly 
insurmountable barrier to de novo entry into the market for 
NRSRO services. For this reason, the recognition requirement is 
likely to be anticompetitive and could lead to higher prices 
for securities ratings than would otherwise occur.'' \14\ The 
DoJ's incumbency concern had been noted before.\15\ Perhaps 
dissuaded by the DoJ's concerns, the SEC did not act on the 
1997 Proposed Rule.
---------------------------------------------------------------------------
    \14\ Department of Justice, Comments of the United States 
Department of Justice Before the Securities and Exchange Commission 
(March 1998).
    \15\ Richard Cantor and Frank Packer, The Credit Rating Industry, 
FRBNY Quarterly Review 8 (Summer-Fall 1994).
---------------------------------------------------------------------------
    It took the bankruptcy filings of Enron in 2001 and 
WorldCom in 2002 to resuscitate NRSRO designation discussion. 
All three then-NRSROs rated Enron at investment grade until 
four days before its bankruptcy filing in 2001 and all three 
rated WorldCom at investment grade until 42 days before its 
filing in 2002.\16\ Congress noted these failures\17\ and 
reacted by requiring the SEC to study and issue a report on 
credit rating agencies pursuant to the Sarbanes-Oxley Act, the 
corporate reform legislation passed in July 2002 in response to 
these corporate accounting scandals. The SEC released the 
``Report on the Role and Function of Credit Rating Agencies in 
the Operation of Securities Markets'' on January 24, 2003 (the 
``2003 SEC Report''), after hosting two hearings in November 
2002 where current NRSROs, institutional investors, academics, 
and other credit rating agencies testified regarding the state 
of the industry, the NRSRO designation, and alternative 
regulations.
---------------------------------------------------------------------------
    \16\ Richard Johnson, An Examination of Rating Agencies' Actions 
Around the Investment-Grade Boundary, Federal Reserve Bank of Kansas 
City 1 (February 2003).
    \17\ Congress had in other financial crises taken note of the 
rating agencies (see e.g., High-Yield Debt Market/Junk Bonds, Hearing 
before the Subcommittee on Telecommunications and Finance of the 
Committee on Energy and Commerce, U.S. House of Representatives, Serial 
No. 101-125 (March 8, 1990)), but never to such an extent as following 
the corporate scandals of the early twenty-first century. The Senate 
Governmental Affairs Committee held hearings on the Enron debacle and 
issued two reports detailing the role of the agencies in the Enron 
accounting scandal, Financial Oversight of Enron: The SEC and Private-
Sector Watchdogs (October 8, 2002) (the ``October 2002 Senate Report'') 
and Enron's Credit Rating: Enron's Bankers' Contacts with Moody's and 
Government Officials (January 3, 2003) (the ``January 2003 Senate 
Report'').
---------------------------------------------------------------------------
    The 2003 SEC Report documented the regulatory barriers to 
entry in the ratings industry, potential conflicts of interest 
and alleged anticompetitive or unfair practices at the rating 
agencies, and accountability. The SEC expressed the view that 
the agency needed more information on the rating agencies to 
complete a thorough review and announced it would be issuing a 
concept release to seek public comment on these issues. Having 
been criticized for the opaque designation process and the few 
NRSRO designated firms, the SEC's staff designated Dominion 
Bond Rating Service as an NRSRO in February 2003.
    On April 2, 2003, the Subcommittee on Capital Markets, 
Insurance and Government Sponsored Enterprises held a hearing 
on credit rating agencies. Subcommittee Chairman Richard Baker 
followed up the hearing with a letter to SEC Chairman William 
H. Donaldson laying out a series of questions, underscoring his 
concerns regarding the NRSRO designation process. The SEC 
responded with a letter on June 4, 2003, the same day the SEC 
issued the anticipated Concept Release, Rating Agencies and the 
Use of Credit Ratings under the Federal Securities Laws (the 
``2003 Concept Release''). The answers to Chairman Baker's 
questions regarding the NRSRO designation process and its anti-
competitive effects were deferred to the 2003 Concept Release's 
receiving comments from market participants. In the 2003 
Concept Release, the SEC posed 54 questions regarding credit 
rating agencies and received nearly fifty comment letters.
    The SEC never acted upon the comment letters. Disturbed by 
the lack of SEC response, in September 2004, the Subcommittee 
on Capital Markets, Insurance, and Government Sponsored 
Enterprises held its second hearing in the 108th Congress on 
credit rating agencies. Again, all the witnesses lamented the 
SEC's inaction in this arena, bemoaning the opaque NRSRO 
designation process and its anti-competitive effects.
    Pressured into action, in March 2005, the SEC not only 
designated a fifth NRSRO, A.M. Best, but also proposed a rule 
(the ``2005 Proposed Rule'') to define the term ``NRSRO'' in 
three prongs: (1) an NRSRO must issue current credit ratings 
that are publicly available on a widespread basis at no cost; 
(2) an NRSRO must be ``generally accepted'' as an issuer of 
credible and reliable ratings; and (3) an NRSRO must use 
``systematic procedures'' to ensure ratings quality, manage 
conflicts, prevent misuse of nonpublic information, and possess 
sufficient financial resources. The SEC limited its proposal 
solely to implementing this definition. SEC staff and 
Commissioners had expressed their beliefs that the SEC did not 
possess sufficient authority to regulate credit rating agencies 
without congressional action.\18\
---------------------------------------------------------------------------
    \18\ See e.g, Annette Nazareth, Director, Division of Market 
Regulation, SEC, Reforming Credit Rating Agenices: The SEC's Need for 
Statutory Authority, Testimony before the Committee on Financial 
Services Subcommittee on Capital Markets, Insurance and Government 
Sponsored Enterprises, U.S. House of Representatives (Apr. 12, 2005).
---------------------------------------------------------------------------
    Although the 2005 Proposed Rule differs from the 1997 
Proposed Rule,\19\ the ``generally accepted'' requirement 
reflects the same concept behind the national recognition 
requirement, thus provoking the same ``barrier to entry 
issues'' the DoJ had highlighted in its 1997 comment letter.
---------------------------------------------------------------------------
    \19\ A comparison of the current proposed rule with that of the 
1997 proposed rule may highlight this cautionary position. In no 
provision of the current proposal is the SEC's designation process 
mentioned. So seemingly a rating agency would not have to be designated 
by the SEC as an NRSRO, it would just need to meet the three prongs of 
the definition to capture that status: issues publicly available credit 
ratings, generally accepted by market as issuer of credible and 
reliable ratings, and has internal controls and sufficient financial 
resources. Whereas in the 1997 proposal, the definition of an NRSRO 
``means any entity that: (A) Issues ratings which are current 
assessments of the creditworthiness of obligors with respect to 
specific securities or money market instruments and that is registered 
under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) and 
(B) Is designated as an NRSRO by the Commission.'' So, within the 1997 
proposal was the actual mandate that an NRSRO be designated by the SEC. 
The 1997 proposal also discussed the no-action process a potential 
NRSRO applicant must go through.
---------------------------------------------------------------------------
    In response to concerns with the 2005 Proposed Rule, on 
June 20, 2005, Congressman Michael Fitzpatrick (R-PA) 
introduced the Credit Rating Agency Duopoly Relief Act, H.R. 
2990. The seminal provision of the bill is the replacement of 
the SEC staff's NRSRO designation process with a registration 
system of eligible credit rating agencies. No longer will 
``national recognition'' be a requirement to be an NRSRO. A 
rating agency will have to be issuing ratings for three years 
in order to register as an NRSRO.
    At the five hearings held during the 108th and 109th 
Congresses, witnesses repeatedly testified on the barrier to 
entry and the lack of competition caused by the SEC's staff 
designation. For instance, Professor Frank Partnoy testified on 
his earlier academic work that this NRSRO designation is a 
regulatory license reinforcing and creating artificial barriers 
to entry in the ratings industry.\20\
---------------------------------------------------------------------------
    \20\ Frank Partnoy, Professor of Law, University of San Diego 
School of Law, Legislative Solutions for the Rating Agency Duopoly, 
Testimony before the Committee on Financial Services Subcommittee on 
Capital Markets, Insurance and Government Sponsored Enterprises, U.S. 
House of Representatives (June 29, 2005).
---------------------------------------------------------------------------
    Although H.R. 2990 was originally introduced as a mandatory 
registration system for all credit rating agencies, the 
Manager's Amendment (adopted by the Committee on Financial 
Services on June 14, 2006) provides for a system of voluntary 
registration whereby credit rating agencies (defined as any 
person engaged who is in the business of issuing credit ratings 
through the Internet or any other readily accessible means, who 
uses either a quantitative or qualitative model to 
determineratings, and who receives fees from issuers, investors, or 
other market participants) who have issued ratings for three years may 
register with the SEC as Nationally Recognized Statistical Rating 
Organizations (defined as such a registered credit rating agency).
    Thus, only those agencies that want to be used for 
regulatory purposes as an NRSRO will register. This system of 
voluntary registration eliminates the barriers to entry caused 
by the current SEC designation process, promotes competition in 
the ratings industry, and does so using the least restrictive 
means of regulation.
    The definition does not discriminate against certain 
business models (currently all SEC staff-designated rating 
agencies have issuer-fee based business models), but instead 
allows entities with purely quantitative models and investor-
fee based models the chance to compete with the dominant 
agencies.\21\
---------------------------------------------------------------------------
    \21\ Alex J. Pollock, Resident Fellow, American Enterprise 
Institute, Legislative Solutions for the Rating Agency Duopoly, 
Testimony before the Committee on Financial Services Subcommittee on 
Capital Markets, Insurance and Government Sponsored Enterprises, U.S. 
House of Representatives (June 29, 2005); Glenn Reynolds, Chief 
Executive Officer, CreditSights, Inc. H.R. 2990, the Credit Rating 
Agency Duopoly Relief Act, Committee on Financial Services, U.S. House 
of Representatives (November 29, 2005).
---------------------------------------------------------------------------
    The Manager's Amendment retains the NRSRO moniker, 
obviating the need to amend existing statutes and regulations 
that have historically referred to and utilized the NRSRO 
label.
    H.R. 2990 also will ensure a level playing field for all 
rating agencies by authorizing the SEC to adopt rules 
prohibiting abusive industry practices that allow the dominant 
agencies to unfairly maintain their preeminence. At the 
hearings held by the Committee on Financial Services, witnesses 
testified to these abusive practices, such as issuing 
unsolicited ratings (sending an unsolicited rating with a 
bill), notching (lowering ratings on asset-backed securities 
unless the rating firm rates a substantial portion of the 
assets making up those securities), and tying (forcing rated 
companies to purchase ancillary services).\22\
---------------------------------------------------------------------------
    \22\ See e.g., Nancy Stroker, Group Managing Director, Fitch 
Ratings, Legislative Solutions for the Rating Agency Duopoly, Testimony 
before the Committee on Financial Services Subcommittee on Capital 
Markets, Insurance and Government Sponsored Enterprises, U.S. House of 
Representatives (June 29, 2005).
---------------------------------------------------------------------------
    As an additional protection for investors, NRSROs will be 
subject to reporting and recordkeeping requirements, similar to 
those for mutual funds, investment advisers, and brokers. An 
NRSRO will be required to disclose in its registration 
application not only its long, mid-term, and short-term record 
at rating securities and public companies through performance 
statistics, but also the methodologies it uses in deriving its 
ratings, the conflicts its business model raises, and the 
manner in which it manages those conflicts. In addition, the 
Manager's Amendment mandates the disclosure of the firm's 
organizational structure.
    To further increase the transparency of NRSROs, the 
Manager's Amendment directs the SEC to require NRSROs to make 
all information and documents filed with the SEC available 
electronically on the company's website or other readily 
accessible means. NRSROs must also update their SEC disclosures 
with any material information that causes previous submissions 
to become inaccurate, and within 90 days after the end of the 
calendar year, must file with the SEC a certification that the 
information and documents previously submitted remain accurate.
    Subsequent to registration, NRSROs must file, on a 
confidential basis with the SEC, audited financial statements 
and any other information relating to financial condition that 
the SEC deems appropriate. Furthermore, each NRSRO must 
establish a chief compliance officer, responsible for ensuring 
compliance with the securities laws and the rules promulgating 
pursuant to H.R. 2990.
    Moreover, NRSROs will be held accountable under the 
securities laws: The SEC will be able to inspect, examine, and 
bring enforcement actions against rating agencies under the 
1934 Act. There is no private right of action under H.R. 2990.
    A few of the currently designated rating agencies have 
claimed that Congress and the SEC must be cautious not to 
intrude into the ratings procedures and methodologies. H.R. 
2990 does not intrude into these procedures and the Manager's 
Amendment expressly affirms that the SEC may not intrude into 
the ratings procedures and methodologies.
    The Manager's Amendment promotes market stability by 
expressly stating that the voluntary regime established by this 
bill does not go into effect until January 1, 2008. 
Furthermore, it directs the SEC to assess the Commission's 
rules and regulations that utilize the NRSRO label.

                                Hearings

    The Subcommittee on Capital Markets, Insurance and 
Government Sponsored Enterprises held a hearing on credit 
rating agencies entitled ``Rating the Rating Agencies: the 
State of Transparency and Competition'' on April 2, 2003. The 
Subcommittee received testimony from the following witnesses: 
Ms. Annette Nazareth, Director, Division of Market Regulation, 
Securities and Exchange Commission; Mr. Sean J. Egan, Managing 
Director, Egan-Jones Rating Co.; Ms. Deborah A. Cunningham, 
Senior Vice President, Federated Investors; Mr. Greg Root, 
Executive Vice President, Dominion Bond Rating Service; Dr. 
Lawrence J. White, Professor of Economics, Stern School of 
Business, New York University; Mr. Stephen W. Joynt, President 
and Chief Executive Officer, Fitch, Inc.; Mr. James A. Kaitz, 
President and Chief Executive Officer, Association for 
Financial Professionals; and Mr. Raymond W. McDaniel, 
President, Moody's Investors Services, Inc. The Subcommittee 
received statements for the record from the following: Fidelity 
Investments and Standard & Poor's.
    The Subcommittee on Capital Markets, Insurance and 
Government Sponsored Enterprises held a hearing on credit 
rating agencies entitled `` The Ratings Game: Improving 
Transparency and Competition Among the Credit Rating Agencies'' 
on September 14, 2004. The Subcommittee received testimony from 
the following witnesses: Mr. Sean J. Egan, Managing Director, 
Egan-Jones Ratings Co.; Mr.James A. Kaitz, President and Chief 
Executive Officer, Association for Financial Professionals; Dr. Barron 
H. Putnam, President and Chief Economist, LACE Financial Corporation; 
and Mr. Alex J. Pollock, Resident Fellow, American Enterprise 
Institute.
    The Subcommittee on Capital Markets, Insurance and 
Government Sponsored Enterprises held a hearing on credit 
rating agencies entitled ``Reforming Credit Rating Agencies: 
The SEC's Need for Statutory Authority'' on April 12, 2005. The 
Subcommittee received testimony from the following witness: Ms. 
Annette Nazareth, Director, Division of Market Regulation, 
Securities and Exchange Commission.
    The Subcommittee on Capital Markets, Insurance and 
Government Sponsored Enterprises held a hearing on H.R. 2990, 
the Credit Rating Agency Duopoly Relief Act, and the SEC 
staff's proposed legislative framework for regulating credit 
rating agencies entitled ``Legislative Solutions for the Rating 
Agency Duopoly'' on June 29, 2005. The Subcommittee received 
testimony from the following witnesses: Mr. Frank Partnoy, 
Professor of Law, University of San Diego School of Law; Ms. 
Nancy Stroker, Group Managing Director, Fitch Ratings; Mr. Sean 
Egan, Managing Director, Egan-Jones Ratings Co.; Mr. Alex J. 
Pollock, Resident Fellow, American Enterprise Institute; Ms. 
Rita M. Bolger, Managing Director and Associate General 
Counsel, Standard and Poor's; and Mr. James A. Kaitz, President 
and Chief Executive Officer, Association for Financial 
Professionals. The Subcommittee received a statement for the 
record from the following: the Bond Market Association.
    The Subcommittee on Capital Markets, Insurance and 
Government Sponsored Enterprises held a hearing on H.R. 2990, 
the Credit Rating Agency Duopoly Relief Act, on November 29, 
2005. The Subcommittee received testimony from the following 
witnesses: Mr. Glenn Reynolds, Chief Executive Officer, 
CreditSights, Inc.; Mr. Paul Schott Stevens, President, 
Investment Company Institute; Mr. Richard Y. Roberts, Partner, 
Thelen Reid & Priest LLP, on behalf of Rapid Ratings Pty Ltd.; 
Mr. Jonathan R. Macey, Sam Harris Professor of Corporate Law, 
Corporate Finance, and Securities Law, Yale Law School; and Mr. 
Sean Egan, Managing Director, Egan-Jones Ratings Co.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
June 14, 2006, and ordered H.R. 2990, the Credit Rating Agency 
Duopoly Relief Act, favorably reported, as amended, to the 
House by a voice vote.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. A 
motion by Mr. Oxley to order the bill, as amended, reported to 
the House with a favorable recommendation was agreed to by a 
voice vote. During consideration of the bill the following 
amendments were considered:
    An amendment in the nature of a substitute by Mr. Oxley, 
No. 1, making technical and substantive changes, was AGREED TO 
by a voice vote.
    A substitute for the amendment in the nature of a 
substitute by Mr. Kanjorski, No. 1a, was NOT AGREED TO by a 
record vote of 31 ayes and 36 nays. (Record vote no. FC-21). 
The names of Members voting for and against follow:

                                              RECORD VOTE NO. FC-21
----------------------------------------------------------------------------------------------------------------
         Representative             Aye       Nay     Present     Representative      Aye       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Oxley......................  ........        X   .........  Mr. Frank (MA)...        X   ........  .........
Mr. Leach......................  ........        X   .........  Mr. Kanjorski....        X   ........  .........
Mr. Baker......................  ........        X   .........  Ms. Waters.......        X   ........  .........
Ms. Pryce (OH).................  ........  ........  .........  Mr. Sanders*.....        X   ........  .........
Mr. Bachus.....................  ........        X   .........  Mrs. Maloney.....        X   ........  .........
Mr. Castle.....................  ........        X   .........  Mr. Gutierrez....        X   ........  .........
Mr. Royce......................  ........        X   .........  Ms. Velazquez....        X   ........  .........
Mr. Lucas......................  ........        X   .........  Mr. Watt.........        X   ........  .........
Mr. Ney........................  ........        X   .........  Mr. Ackerman.....        X   ........  .........
Mrs. Kelly.....................  ........        X   .........  Ms. Hooley.......        X   ........  .........
Mr. Paul.......................  ........        X   .........  Ms. Carson.......        X   ........  .........
Mr. Gillmor....................  ........        X   .........  Mr. Sherman......        X   ........  .........
Mr. Ryun (KS)..................  ........        X   .........  Mr. Meeks (NY)...        X   ........  .........
Mr. LaTourette.................  ........        X   .........  Ms. Lee..........        X   ........  .........
Mr. Manzullo...................  ........        X   .........  Mr. Moore (KS)...        X   ........  .........
Mr. Jones (NC).................  ........        X   .........  Mr. Capuano......        X   ........  .........
Mrs. Biggert...................  ........        X   .........  Mr. Ford.........        X   ........  .........
Mr. Shays......................  ........        X   .........  Mr. Hinojosa.....        X   ........  .........
Mr. Fossella...................  ........        X   .........  Mr. Crowley......        X   ........  .........
Mr. Gary G. Miller (CA)........  ........        X   .........  Mr. Clay.........        X   ........  .........
Mr. Tiberi.....................  ........        X   .........  Mr. Israel.......        X   ........  .........
Mr. Kennedy (MN)...............  ........        X   .........  Mrs. McCarthy....        X   ........  .........
Mr. Feeney.....................  ........        X   .........  Mr. Baca.........        X   ........  .........
Mr. Hensarling.................  ........        X   .........  Mr. Matheson.....        X   ........  .........
Mr. Garrett (NJ)...............  ........        X   .........  Mr. Lynch........  ........  ........  .........
Ms. Brown-Waite (FL)...........  ........        X   .........  Mr. Miller (NC)..        X   ........  .........
Mr. Barrett (SC)...............  ........        X   .........  Mr. Scott (GA)...        X   ........  .........
Ms. Harris.....................  ........        X   .........  Mr. Davis (AL)...        X   ........  .........
Mr. Renzi......................  ........        X   .........  Mr. Al Green (TX)        X   ........  .........
Mr. Gerlach....................  ........        X   .........  Mr. Cleaver......        X   ........  .........
Mr. Pearce.....................  ........        X   .........  Ms. Bean.........  ........  ........  .........
Mr. Neugebauer.................  ........        X   .........  Ms. Wasserman            X   ........  .........
                                                                 Schultz.
Mr. Price (GA).................  ........        X   .........  Ms. Moore (WI)...        X   ........  .........
Mr. Fitzpatrick (PA)...........  ........        X   .........  .................  ........  ........  .........
Mr. Davis (KY).................  ........        X   .........  .................  ........  ........  .........
Mr. McHenry....................  ........        X   .........  .................  ........  ........  .........
Mr. Campbell...................  ........        X   .........  .................  ........  ........  .........
----------------------------------------------------------------------------------------------------------------
 Mr. Sanders is an independent, but caucuses with the Democratic Caucus.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee has held hearings and 
made findings that are reflected in this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee establishes the 
following performance related goals and objectives for this 
legislation:
    H.R. 2990, the Credit Rating Agency Duopoly Relief Act, 
will bring competition, transparency, and accountability to the 
credit rating agency industry, improving ratings quality and 
enhancing investor protection. H.R. 2990 will increase 
competition by replacing the Securities and Exchange 
Commission's staff role in designating rating agencies as 
Nationally Recognized Statistical Rating Organizations (NRSROs) 
with a registration system for those agencies who want their 
ratings to be able to be used for regulatory purposes.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                  Congressional Budget Office Estimate

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 29, 2006.
Hon. Michael G. Oxley,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2990, the Credit 
Rating Agency Duopoly Relief Act of 2006.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Gregory 
Waring (for federal costs), and Patrice Gordon and Carla-Marie 
Ulerie (for the impact on the private sector).
            Sincerely,
                                          Donald B. Marron,
                                                   Acting Director.
    Enclosure.

H.R. 2990--Credit Rating Agency Duopoly Relief Act of 2006

    H.R. 2990 would require the Securities and Exchange 
Commission (SEC) to establish a registration process for credit 
rating agencies (groups that determine credit worthiness of 
securities or money market instruments) that seek to be 
designated by the SEC as a nationally recognized statistical 
rating organization (NRSRO). Under current law, there is no 
formal registration process; SEC staff currently recognizes 
five credit rating agencies as NRSROs.
    Under the bill, SEC would impose disclosure and filing 
requirements on credit rating agencies seeking registration. 
The SEC would prohibit certain activities of registered credit 
rating agencies, including seeking payment for unsolicited 
ratings and issuing or modifying ratings on the condition of 
the customer purchasing other services from the credit rating 
agency. Based on information from the Commission and assuming 
the availability of appropriated funds, CBO estimates that 
implementing the registration and enforcement requirements of 
the bill would cost $3 million over the 2007-2011 period. 
Enacting H.R. 2990 would not affect direct spending or 
revenues.
    H.R. 2990 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA) and would impose no 
costs on state, local, or tribal governments.
    H.R. 2990 would impose a new private-sector mandate, as 
defined in UMRA, on credit rating agencies that are currently 
designated as NRSROs. The bill would redefine the term NRSRO, 
cease any further designation under the present meaning, 
eliminate the current process by which the designation is 
received, and allow registration under the new definition of 
the term. NRSROs will continue to be regulated by the SEC.
    Although credit rating agencies that chose to become NRSROs 
under this bill would be agreeing to abide by all the rules and 
processes attached to the designation, this bill would result 
in increased administrative costs to currently designated 
NRSROs who want to retain that designation. CBO estimates that 
the incremental cost would be limited to the time, money, and 
effort necessary to transfer the registration form from the 
credit rating agency to the SEC. Given that small cost per 
credit rating agency and the fact that only five such agencies 
now have the NRSRO designation, CBO estimates that costs would 
not exceed the annual threshold for private-sector mandates 
($128 million in 2006, adjusted annually for inflation).
    The CBO staff contacts for this estimate are Gregory Waring 
(for federal costs), and Patrice Gordon and Carla-Marie Ulerie 
(for the impact on the private sector). This estimate was 
approved by Peter H. Fontaine, Deputy Assistant Director for 
Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds that the 
Constitutional Authority of Congress to enact this legislation 
is provided by Article 1, section 8, clause 1 (relating to the 
general welfare of the United States) and clause 3 (relating to 
the power to regulate interstate commerce).

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act.

             Section-by-Section Analysis of the Legislation


Section 1. Short title; references

    This section provides the short title, the ``Credit Rating 
Agency Duopoly Relief Act of 2006.''

Section 2. Findings

    This section sets forth certain Congressional findings 
describing the importance of rating agencies and their ratings 
upon the financial markets. This section also sets forth the 
deleterious effects of the Securities and Exchange Commission's 
(SEC) approval of certain credit rating agencies as 
``nationally recognized,'' a designation that has created and 
strengthened a duopoly and has allowed these rating agencies to 
engage in abusive practices, such as notching and tying. The 
SEC has issued a proposed rule defining a nationally recognized 
statistical rating organization as an entity whose ratings are 
``generally accepted'' in the marketplace, which would codify 
this barrier to entry.

Section 3. Definitions

    This section amends Section 3 of the Securities Exchange 
Act of 1934 to add the following definitions. The term ``credit 
rating'' is defined as an assessment of the creditworthiness of 
an obligor as an entity or with respect to specific securities 
or money market funds. A ``credit rating agency'' is defined as 
any person engaged in the business of issuing credit ratings on 
the Internet or through another readily accessible means, for 
free or a reasonable fee; who employs either a quantitative 
and/or qualitative model to determine ratings; and who receives 
fees from issuers, investors, or other market participants. The 
term ``nationally recognized statistical rating organization'' 
or ``NRSRO'' is a credit rating agency that has been in 
business for at least three consecutive years and is registered 
under Section 15E. A ``person associated with a nationally 
recognized statistical rating organization'' is defined as any 
partner, officer, director, branch manager, or person occupying 
similar status for an NRSRO; any person directly or indirectly 
controlling or controlled by an NRSRO; and any employee of an 
NRSRO.

Section 4. Registration of nationally recognized statistical rating 
        organizations

    This section adds Section 15E to the Securities Exchange 
Act of 1934 to permit a credit rating agency that elects to be 
treated as an NRSRO to be registered with the SEC as such by 
filing an application for registration. This section directs 
the SEC to adopt a disclosure form for such registration, 
including disclosure of conflicts of interest the rating agency 
faces and the management of those conflicts; the procedures and 
methodologies the rating agency uses in determining ratings; 
statistics of ratings performance over short-, medium- and 
long-term periods; procedures in place to prevent the misuse of 
non-public information; and the credit rating agency's 
organizational structure. This section directs the SEC to grant 
registration if the aforementioned requirements are satisfied 
or institute proceedings to deny the application within 90 days 
of its filing.
    This section directs the SEC to require an NRSRO to make 
information and documents filed with the SEC, and any 
amendments thereto, publicly available on the rating agency's 
website or another readily accessible means. The SEC is also 
directed to require an NRSRO to update its disclosures with any 
material information that causes previous submissions to become 
inaccurate (except for performance statistics, which must only 
be updated once a year). An NRSRO must also file with the SEC, 
within 90 days of the end of the calendar year, a certification 
that the information and documents previously submitted remain 
accurate.
    This section provides the SEC with the authority to take 
action against any NRSRO that issues ratings in contravention 
of its stated procedures and methodologies. It also specifies 
that any rules or regulations prescribed by the SEC must be 
narrowly tailored and shall not regulate the substance of 
ratings or the procedures and methodologies used. Furthermore, 
this section permits an NRSRO to withdraw its registration, 
pursuant to terms and conditions established by the SEC, by 
filing a written notice of withdrawal.
    This section prohibits an NRSRO from representing that it 
has been sponsored, recommended, or approved by the SEC or a 
Federal agency; however, an NRSRO may state that it is, in 
fact, registered as an NRSRO. It also makes it unlawful for a 
non-registered rating agency to represent that it is an NRSRO. 
These provisions ensure that a rating agency does not mislead 
investors about its status and the SEC's role in that status.
    This section mandates that every NRSRO must have systematic 
policies and procedures in place to prevent the misuse of 
nonpublic information and to manage conflicts of interest and 
allows the SEC to adopt regulations relating to these issues. 
This section also permits the SEC to adopt regulations to 
prohibit NRSROs from acting in any way that is unfair, 
coercive, or abusive, including issuing unsolicited ratings 
(sending an unsolicited rating with a bill) or engaging in 
notching (lowering ratings on asset-backed securities unless 
the rating firm rates a substantial portion of the assets 
making up those securities) or tying (forcing rated companies 
to purchase ancillary services). The bill clarifies that the 
SEC should not prohibit NRSROs from seeking payments for 
issuing unsolicited ratings to an affiliate of an obligor if it 
is a rating agency with an investor fee-based model and if the 
affiliate is an investor and/or market participant from which 
the NRSRO receives payments. Each NRSRO is also required to 
appoint a Chief Compliance Officer to be responsible for 
administering the rating agency's policies established pursuant 
to this Act and to ensure compliance with the securities laws. 
This section also requires an NRSRO to file with the SEC its 
financial statements and any information regarding its 
financial condition that the SEC deems appropriate, at 
intervals to be determined by the SEC.
    This section also eliminates both the SEC's ability to 
designate certain credit rating agencies as ``nationally 
recognized statistical rating organizations,'' a practice the 
SEC staff has engaged in through the no-action process since 
1975, and investors' ability to rely on the SEC's designations. 
This is to make certain that there are no longer any artificial 
barriers to entry created by the SEC. The SEC is also required 
to give notice to the various Federal agencies using the term 
``nationally recognized statistical rating organization'' 
regarding the elimination of the SEC's designation process and 
the prohibition on relying on these designations. The SEC shall 
review, within 180 days of enactment of this Act, its existing 
rules and regulations that employ the term NRSRO and promulgate 
any appropriate new or revised rules as appropriate. This 
section also ensures that an NRSRO is subject to criminal and 
civil liability if it violates the federal securities laws. 
However, there is no private right of action under this 
legislation. Finally, this section makes conforming amendments 
to several Federal statutes, including the Securities Exchange 
Act of 1934 and the Investment Company Act of 1940.

Section 5. Annual and other reports

    This section directs the SEC to adopt recordkeeping and 
reporting requirements appropriate for NRSROs. The purpose of 
the recordkeeping requirement is to make certain that NRSROs 
keep appropriate records for the specific periods of time the 
SEC determines for its inspections and examination process. The 
purpose of the reporting requirements is to make certain those 
purchasing or using credit ratings understand the operations 
and methodologies of the particular NRSRO.

Section 6. GAO study and report regarding consolidation of credit 
        rating agencies

    This section directs the Comptroller General to study and 
report to the House Committee on Financial Services and the 
Senate Committee on Banking, Housing, and Urban Affairs on the 
effects of the consolidation of market power in the credit 
rating industry, including higher costs, lower quality of 
services, anti-competitive practices, impairment of 
independence, and lack of choice. This report must be presented 
within 180 days of the date of enactment of this legislation.

Section 7. Effective date

    This section identifies January 1, 2008, as the effective 
date of the registration and reporting requirements under the 
Credit Rating Agency Duopoly Relief Act, unless otherwise 
prescribed under Section 4 of this legislation. The purpose of 
this section is to ensure that all NRSROs have ample 
opportunity to file an application and the SEC has the 
necessary time to prescribe rules and regulations.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

SECURITIES EXCHANGE ACT OF 1934

           *       *       *       *       *       *       *


                  DEFINITIONS AND APPLICATION OF TITLE

  Sec. 3. (a) When used in this title, unless the context 
otherwise requires--
          (1) * * *

           *       *       *       *       *       *       *

          (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;
                  (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 or nrsro.--The term ``nationally 
        recognized statistical rating organization'' means a 
        credit rating agency that--
                  (A) has been in business for at least three 
                consecutive years; and
                  (B) 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 such 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 such nationally recognized statistical rating 
        organization, or any employee of such nationally 
        recognized statistical rating organization.

           *       *       *       *       *       *       *


           REGISTRATION AND REGULATION OF BROKERS AND DEALERS

  Sec. 15. (a) * * *
  (b)(1) * * *

           *       *       *       *       *       *       *

  (4) The Commission, by order, shall censure, place 
limitations on the activities, functions, or operations of, 
suspend for a period not exceeding twelve months, or revoke the 
registration of any broker or dealer if it finds, on the record 
after notice and opportunity for hearing, that such censure, 
placing of limitations, suspension, or revocation is in the 
public interest and that such broker or dealer, whether prior 
or subsequent to becoming such, or any person associated with 
such broker or dealer, whether prior or subsequent to becoming 
so associated--
          (A) * * *
          (B) has been convicted within ten years preceding the 
        filing of any application for registration or at any 
        time thereafter of any felony or misdemeanor or of a 
        substantially equivalent crime by a foreign court of 
        competent jurisdiction which the Commission finds--
                  (i) * * *
                  (ii) arises out of the conduct of the 
                business of a broker, dealer, municipal 
                securities dealer, government securities 
                broker, government securities dealer, 
                investment adviser, bank, insurance company, 
                fiduciary, transfer agent, nationally 
                recognized statistical rating organization, 
                foreign person performing a function 
                substantially equivalent to any of the above, 
                or entity or person required to be registered 
                under the Commodity Exchange Act (7 U.S.C. 1 et 
                seq.) or any substantially equivalent foreign 
                statute or regulation;

           *       *       *       *       *       *       *

          (C) is permanently or temporarily enjoined by order, 
        judgment, or decree of any court of competent 
        jurisdiction from acting as an investment adviser, 
        underwriter, broker, dealer, municipal securities 
        dealer, government securities broker, government 
        securities dealer, transfer agent, nationally 
        recognized statistical rating organization, foreign 
        person performing a function substantially equivalent 
        to any of the above, or entity or person required to be 
        registered under the Commodity Exchange Act or any 
        substantially equivalent foreign statute or regulation, 
        or as an affiliated person or employee of any 
        investment company, bank, insurance company, foreign 
        entity substantially equivalent to any of the above, or 
        entity or person required to be registered under the 
        Commodity Exchange Act or any substantially equivalent 
        foreign statute or regulation, or from engaging in or 
        continuing any conduct or practice in connection with 
        any such activity, or in connection with the purchase 
        or sale of any security.

           *       *       *       *       *       *       *


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

  (a) Registration Procedures.--
          (1) Filing of application form.--A credit rating 
        agency that elects to be treated as a nationally 
        recognized statistical rating organization for the 
        purposes of Federal statutes, rules, and regulations 
        may be registered by filing with the Commission an 
        application for registration in such form and 
        containing such of the following and any other 
        information and documents concerning such organization 
        and any persons associated with such organization as 
        the Commission, by rule, may prescribe as necessary or 
        appropriate in the public interest or for the 
        protection of investors:
                  (A) any conflicts of interest relating to the 
                issuance of credit ratings by a nationally 
                recognized statistical rating organization;
                  (B) the procedures and methodologies such 
                nationally recognized statistical rating 
                organization uses in determining credit 
                ratings;
                  (C) credit ratings performance measurement 
                statistics over short-term, mid-term, and long-
                term periods of such nationally recognized 
                statistical rating organization;
                  (D) policies or procedures adopted and 
                implemented by such nationally recognized 
                statistical rating organization to prevent the 
                misuse in violation of this title (or the rules 
                and regulations thereunder) of material, non-
                public information; and
                  (E) the organizational structure of such 
                nationally recognized statistical rating 
                organization.
          (2) Review of application.--
                  (A) Initial determination.--Within 90 days of 
                the date of the filing of such application (or 
                within such longer period as to which the 
                applicant consents) the Commission shall--
                          (i) by order grant such registration; 
                        or
                          (ii) institute proceedings to 
                        determine whether registration should 
                        be denied.
                  (B) Conduct of proceedings.--Such proceedings 
                shall include notice of the grounds for denial 
                under consideration and opportunity for hearing 
                and shall be concluded within 120 days of the 
                date of the filing of the application for 
                registration. At the conclusion of such 
                proceedings the Commission, by order, shall 
                grant or deny such registration. The Commission 
                may extend the time for conclusion of such 
                proceedings for up to 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 such registration if the Commission 
                finds that the requirements of this section are 
                satisfied. The Commission shall deny such 
                registration if it does not make such a finding 
                or if it finds that if the applicant were so 
                registered, its registration would be subject 
                to suspension or revocation under subsection 
                (b).
          (3) Public availability of information.--Subject to 
        section 24, the Commission, by rule, shall require a 
        nationally recognized statistical rating organization, 
        upon the granting of registration under this section, 
        to make the information and documents filed with the 
        Commission in its application for registration, or in 
        any amendment filed under subsection (b)(1) or (2), 
        publicly available on the website or comparable readily 
        accessible means of such nationally recognized 
        statistical rating organization.
  (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 documents provided therein become 
        materially inaccurate, except that a nationally 
        recognized statistical rating organization is not 
        required to amend the information required to be filed 
        under subsection (a)(1)(C) by a filing under this 
        paragraph, but shall amend such information in such 
        organization's annual filing under paragraph (2) of 
        this subsection.
          (2) Certification.--Not later than 90 days after the 
        end of each calendar year, each nationally recognized 
        statistical rating organization shall file with 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 continue to be accurate; 
                and
                  (B) listing any material changes that 
                occurred to such information or documents 
                during the previous calendar year.
  (c) Accountability for Ratings Procedures.--
          (1) Authority.--The Commission shall have the 
        authority under this Act to take action against any 
        nationally recognized statistical rating organization 
        if such nationally recognized statistical rating 
        organization issues credit ratings in contravention of 
        those procedures, criteria, and methodologies that such 
        nationally recognized statistical rating organization--
                  (A) includes in its application for 
                registration under this section; or
                  (B) makes and disseminates in reports 
                pursuant to section 17(a) or the rules and 
                regulations thereunder.
          (2) Limitation.--The rules and regulations applicable 
        to nationally recognized statistical rating 
        organizations the Commission may prescribe pursuant to 
        this Act shall be narrowly tailored to meet the 
        requirements of this Act applicable to nationally 
        recognized statistical rating organizations and shall 
        not purport to regulate the substance of credit ratings 
        or the procedures and methodologies by which such 
        nationally recognized statistical rating organizations 
        determine 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 in the public 
interest and that such nationally recognized statistical rating 
organization, or any person associated with such nationally 
recognized statistical rating 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 paragraph (4) of section 
        15(b), has been convicted of any offense specified in 
        subparagraph (B) of such paragraph (4) within 10 years 
        of the commencement of the proceedings under this 
        subsection, or is enjoined from any action, conduct, or 
        practice specified in subparagraph (C) of such 
        paragraph (4);
          (2) has been convicted during the 10-year period 
        preceding the date of filing of any application for 
        registration, 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; or
          (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.
  (e) Withdrawal From Registration.--A nationally recognized 
statistical rating organization registered under this section 
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 filing a 
written notice of withdrawal with the Commission. If the 
Commission finds that any 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 of such nationally 
recognized statistical rating organization.
  (f) Representations.--
          (1) Representations of sponsorship by united states 
        or agency thereof.--It shall be unlawful for any 
        nationally recognized statistical rating organization 
        registered under this section to represent or imply in 
        any manner whatsoever that such nationally recognized 
        statistical rating organization has been designated, 
        sponsored, recommended, or approved, or that such 
        nationally recognized statistical rating organization's 
        abilities or qualifications have in any respect been 
        passed upon, by the United States or any agency, any 
        officer, or any employee thereof.
          (2) Representation as nrsro of unregistered credit 
        rating agencies.--It shall be unlawful for any credit 
        rating agency to represent or imply in any manner 
        whatsoever that such credit rating agency has been 
        designated, sponsored, recommended, or approved, or 
        that such credit rating agency's abilities or 
        qualifications have in any respect been passed upon, by 
        the United States or any agency, any officer, or any 
        employee thereof. 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 
        under this Act.
          (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 Act, if such 
        statement is true in fact and if the effect of such 
        registration is not misrepresented.
  (g) Prevention of Misuse of Nonpublic Information.--Each 
nationally recognized statistical rating organization shall 
establish, maintain, and enforce written policies and 
procedures reasonably designed, taking into consideration the 
nature of such nationally recognized statistical rating 
organization's business, to prevent the misuse in violation of 
this title, or the rules or regulations thereunder, of 
material, nonpublic information by such nationally recognized 
statistical rating organization or any person associated with 
such nationally recognized statistical rating organization. The 
Commission, as it deems necessary or appropriate in the public 
interest or for the protection of investors, shall adopt rules 
or regulations to require specific policies or procedures 
reasonably designed to prevent misuse in violation of this 
title (or the rules or regulations thereunder) of material, 
nonpublic information.
  (h) Management of Conflicts of Interest.--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 of 
such nationally recognized statistical rating organization, to 
address and manage the conflicts of interest that can arise 
from such business. The Commission, as it deems necessary or 
appropriate in the public interest or for the protection of 
investors, shall adopt rules or regulations to prohibit, or 
require the management or 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--
          (1) 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;
          (2) 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;
          (3) 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; and
          (4) 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.
  (i) Prohibited Conduct.--
          (1) Prohibited acts and practices.--The Commission 
        may adopt rules or regulations 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) seeking payment for a credit rating that 
                has not been specifically requested by the 
                obligor--
                          (i) from an obligor; or
                          (ii) from an affiliate of an obligor, 
                        unless--
                                  (I) the organization is 
                                organized under subsection 
                                (a)(1)(E) to receive fees from 
                                investors or other market 
                                participants, or a combination 
                                thereof; and
                                  (II) the affiliate is such an 
                                investor or participant;
                  (B) conditioning or threatening to condition 
                the issuance of a credit rating on the 
                obligor's, or an affiliate of the obligor's, 
                purchase 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;
                  (C) lowering or threatening to lower a credit 
                rating on, or refusing to rate, securities or 
                money market instruments issued by an asset 
                pool unless a portion of the assets within such 
                pool also is rated by the nationally recognized 
                statistical rating organization;
                  (D) 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, 
                pays or will pay for the credit rating or any 
                other services or products of the nationally 
                recognized statistical rating organization or 
                any person associated with such nationally 
                recognized statistical rating organization.
          (2) Rule of construction.--Nothing in paragraph (1), 
        or in any rules or regulations adopted thereunder, 
        shall be construed to modify, impair, or supersede the 
        operation of any of the antitrust laws. For the 
        purposes of the preceding sentence, the term 
        ``antitrust laws'' has the meaning given it in the 
        first section of the Clayton Act (15 U.S.C. 12), except 
        that such term includes section 5 of the Federal Trade 
        Commission Act (15 U.S.C. 45) to the extent 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, file with 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) Elimination of Commission Designation Process for 
NRSRO's.--
          (1) Cessation of designation.--Within 30 days after 
        the enactment of the Credit Rating Agency Duopoly 
        Relief Act of 2006, the Commission shall cease to 
        designate persons and companies as nationally 
        recognized statistical rating organizations, as that 
        term is used under rule 15c3-1 of the Commission's 
        rules (17 CFR 240.15c3-1).
          (2) Prohibition on reliance on no-action relief.--The 
        no-action relief that the Commission has granted with 
        respect to the designation of nationally recognized 
        statistical rating organizations, as that term is used 
        under rule 15c3-1 of the Commission's rules (17 CFR 
        240.15c3-1), shall be void and of no force or effect.
          (3) Notice to other agencies.--Within 30 days after 
        the date of enactment of the Credit Rating Agency 
        Duopoly Relief Act of 2006, the Commission shall give 
        notice to the Federal agencies which employ the term 
        ``nationally recognized statistical rating 
        organization'' (as that term is used under rule 15c3-1 
        of the Commission's rules (17 CFR 240.15c3-1)) in their 
        rules and regulations regarding the actions undertaken 
        pursuant to this section.
          (4) Review of existing regulations.--Within 180 days 
        after the date of enactment of the Credit Rating Agency 
        Duopoly Relief Act of 2006, the Commission shall review 
        its existing rules and regulations which employ the 
        term ``nationally recognized statistical rating 
        organization'' or ``NRSRO'' and promulgate new or 
        revised rules and regulations as the Commission may 
        prescribe as necessary or appropriate in the public 
        interest or for the protection of investors.

           *       *       *       *       *       *       *


  ACCOUNTS AND RECORDS, EXAMINATIONS OF EXCHANGES, MEMBERS, AND OTHERS

  Sec. 17. (a)(1) Every national securities exchange, member 
thereof, broker or dealer who transacts a business in 
securities through the medium of any such member, registered 
securities association, registered broker or dealer, registered 
municipal securities dealer, registered securities information 
processor, registered transfer agent, nationally recognized 
statistical rating organization, and registered clearing agency 
and the Municipal Securities Rulemaking Board shall make and 
keep for prescribed periods such records, furnish such copies 
thereof, and make and disseminate such reports as the 
Commission, by rule, prescribes as necessary or appropriate in 
the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of this title.

           *       *       *       *       *       *       *


              CIVIL REMEDIES IN ADMINISTRATIVE PROCEEDINGS

  Sec. 21B. (a) Commission Authority To Assess Money 
Penalties.--In any proceeding instituted pursuant to sections 
15(b)(4), 15(b)(6), 15D, 15B, 15C, 15E, or 17A of this title 
against any person, the Commission or the appropriate 
regulatory agency may impose a civil penalty if it finds, on 
the record after notice and opportunity for hearing, that such 
person--
          (1) * * *

           *       *       *       *       *       *       *

                              ----------                              


INVESTMENT COMPANY ACT OF 1940

           *       *       *       *       *       *       *


                          GENERAL DEFINITIONS

  Sec. 2. (a) When used in this title, unless the context 
otherwise requires--
          (1) * * *

           *       *       *       *       *       *       *

          (53) The term ``credit rating agency'' has the same 
        meaning as given in section 3 of the Securities 
        Exchange Act of 1934.

           *       *       *       *       *       *       *


      INELIGIBILITY OF CERTAIN AFFILIATED PERSONS AND UNDERWRITERS

  Sec. 9. (a) It shall be unlawful for any of the following 
persons to serve or act in the capacity of employee, officer, 
director, member of an advisory board, investment adviser, or 
depositor of any registered investment company, or principal 
underwriter for any registered open-end company, registered 
unit investment trust, or registered face-amount certificate 
company:
          (1) any person who within 10 years has been convicted 
        of any felony or misdemeanor involving the purchase or 
        sale of any security or arising out of such person's 
        conduct as an underwriter, broker, dealer, investment 
        adviser, municipal securities dealer, government 
        securities broker, government securities dealer, bank, 
        transfer agent, credit rating agency, or entity or 
        person required to be registered under the Commodity 
        Exchange Act, or as an affiliated person, salesman, or 
        employee of any investment company, bank, insurance 
        company, or entity or person required to be registered 
        under the Commodity Exchange Act;
          (2) any person who, by reason of any misconduct, is 
        permanently or temporarily enjoined by order, judgment, 
        or decree of any court of competent jurisdiction from 
        acting as an underwriter, broker, dealer, investment 
        adviser, municipal securities dealer, government 
        securities broker, government securities dealer, bank, 
        transfer agent, credit rating agency, or entity or 
        person required to be registered under the Commodity 
        Exchange Act, or as an affiliated person, salesman, or 
        employee of any investment company, bank, insurance 
        company, or entity or person required to be registered 
        under the Commodity Exchange Act, or from engaging in 
        or continuing any conduct or practice in connection 
        with any such activity or in connection with the 
        purchase or sale of any security; or

           *       *       *       *       *       *       *

                              ----------                              


INVESTMENT ADVISERS ACT OF 1940

           *       *       *       *       *       *       *


                     TITLE II--INVESTMENT ADVISERS

                              DEFINITIONS

  Sec. 202. (a) When used in this title, unless the context 
otherwise requires, the following definitions shall apply:
          (1) * * *

           *       *       *       *       *       *       *

          (28) The term ``credit rating agency'' has the same 
        meaning as given in section 3 of the Securities 
        Exchange Act of 1934.

           *       *       *       *       *       *       *


                  REGISTRATION OF INVESTMENT ADVISERS

  Sec. 203. (a) * * *

           *       *       *       *       *       *       *

  (e) The Commission, by order, shall censure, place 
limitations on the activities, functions, or operations of, 
suspend for a period not exceeding twelve months, or revoke the 
registration of any investment adviser if it finds, on the 
record after notice and opportunity for hearing, that such 
censure, placing of limitations, suspension, or revocation is 
in the public interest and that such investment adviser, or any 
person associated with such investment adviser, whether prior 
to or subsequent to becoming so associated--
          (1) * * *
          (2) has been convicted within ten years preceding the 
        filing of any application for registration or at any 
        time thereafter of any felony or misdemeanor or of a 
        substantially equivalent crime by a foreign court of 
        competent jurisdiction which the Commission finds--
                  (A) * * *
                  (B) arises out of the conduct of the business 
                of a broker, dealer, municipal securities 
                dealer, investment adviser, bank, insurance 
                company, government securities broker, 
                government securities dealer, fiduciary, 
                transfer agent, credit rating agency, foreign 
                person performing a function substantially 
                equivalent to any of the above, or entity or 
                person required to be registered under the 
                Commodity Exchange Act or any substantially 
                equivalent statute or regulation;

           *       *       *       *       *       *       *

          (4) is permanently or temporarily enjoined by order, 
        judgment, or decree of any court of competent 
        jurisdiction, including any foreign court of competent 
        jurisdiction, from acting as an investment adviser, 
        underwriter, broker, dealer, municipal securities 
        dealer, government securities broker, government 
        securities dealer, transfer agent, credit rating 
        agency, foreign person performing a function 
        substantially equivalent to any of the above, or entity 
        or person required to be registered under the Commodity 
        Exchange Act or any substantially equivalent statute or 
        regulation, or as an affiliated person or employee of 
        any investment company, bank, insurance company, 
        foreign entity substantially equivalent to any of the 
        above, or entity or person required to be registered 
        under the Commodity Exchange Act or any substantially 
        equivalent statute or regulation, or from engaging in 
        or continuing any conduct or practice in connection 
        with any such activity, or in connection with the 
        purchase or sale of any security.

           *       *       *       *       *       *       *

                              ----------                              


   SECTION 1319 OF THE HOUSING AND COMMUNITY DEVELOPMENT ACT OF 1992

SEC. 1319. AUTHORITY TO PROVIDE FOR REVIEW OF ENTERPRISES BY RATING 
                    ORGANIZATION.

  The Director may, on such terms and conditions as the 
Director deems appropriate, contract with any entity 
[effectively recognized by the Division of Market Regulation of 
the Securities and Exchange Commission as a nationally 
recognized statistical rating organization for the purposes of 
the capital rules for broker-dealers] that is a nationally 
recognized statistical rating organization, as such term is 
defined in section 3(a) of the Securities Exchange Act of 1934, 
to conduct a review of the enterprises.
                              ----------                              


            SECTION 439 OF THE HIGHER EDUCATION ACT OF 1965

SEC. 439. STUDENT LOAN MARKETING ASSOCIATION.

  (a) * * *

           *       *       *       *       *       *       *

  (r) Safety and Soundness of Association.--
          (1) * * *

           *       *       *       *       *       *       *

          (15) Definitions.--As used in this subsection:
                  (A) The term ``nationally recognized 
                statistical rating organization'' [means any 
                entity recognized as such by the Securities and 
                Exchange Commission] means any nationally 
                recognized statistical rating organization as 
                that term is defined under the Securities 
                Exchange Act of 1934.

           *       *       *       *       *       *       *

                              ----------                              


              SECTION 601 OF TITLE 23, UNITED STATES CODE

Sec. 601. Generally applicable provisions

  (a) Definitions.--In this chapter, the following definitions 
apply:
          (1) * * *

           *       *       *       *       *       *       *

          (10) Rating agency.--The term ``rating agency'' means 
        a credit rating agency [identified by the Securities 
        and Exchange Commission as a Nationally Recognized 
        Statistical Rating Organization] registered with the 
        Securities and Exchange Commission as a nationally 
        recognized statistical rating organization as that term 
        is defined under the Securities Exchange Act of 1934 
        (15 U.S.C. 78 et seq.).

           *       *       *       *       *       *       *


                            DISSENTING VIEWS

    H.R. 2990, the Credit Rating Agency Duopoly Relief Act, 
fails in our view to sufficiently protect investors. 
Specifically, the bill would create an opportunity to issue 
credit ratings for regulatory purposes after an entity meets 
minimal and almost meaningless standards. These standards are 
akin to granting a driver's license to anyone who meets a 
residency requirement. We know, however, that every potential 
driver must pass one or more quality-assurance tests before 
getting a license. As approved by the Committee, this bill 
would reject the current system for ensuring credible and 
reliable ratings and make our capital markets less safe, 
particularly for average investors and for the regulators that 
rely on the credible ratings produced by the current system.
    In an effort to hear from the Commission regarding its 
views of the legislation, we also repeatedly requested that the 
Committee invite the Commission to testify on the bill, but we 
never received a response to our requests and the Commission 
was never invited to testify. This failure to hear from the 
nation's primary securities regulator on legislation that it 
will be required to implement is unexplainable and a poor way 
to develop public policy. The Commission has closely studied 
these issues for more than a decade, issuing regulatory 
proposals, examining answers to comprehensive concept releases, 
negotiating international codes, and interacting with industry 
participants. The Committee therefore would have been well 
advised to work closely with these experts to ensure the 
development of good public policy before moving forward with a 
markup.
    In short, because H.R. 2990 fails to achieve its stated 
goals of ensuring quality among credit rating agencies and 
because it was developed without careful consultation with the 
Commission's experts on these matters, we believe that it is 
bad policy and that it should be rejected.

                       NRSROs and Quality Ratings

    Credit rating agencies identified as nationally recognized 
statistical rating organizations (NRSROs) first came into 
existence in 1975. Specifically, the U.S. Securities and 
Exchange Commission (Commission) decided to use credit ratings 
issued by NRSROs as an indication of the creditworthiness of an 
investment in connection with determining the net capital 
requirements for broker-dealers under Rule 15c3-1 of the 
Securities Exchange Act of 1934.
    From this narrow initial usage, the term NRSRO and its 
inference of quality, credibility and reliability has 
blossomed. It has become embedded in numerous federal, state, 
and local statutes, rules, and regulations. Many private 
parties have also included references to NRSROs in the terms of 
their contracts, corporate bylaws, mutual fund prospectuses, 
and pension trust agreements. Foreign governments and 
international bodies have also used the NRSRO concept in their 
agreements and standards. Thus, any effort to reform the 
identification or regulation of NRSROs must take into account 
the effect on all of these various players in our capital 
markets. By forging ahead with a new and untested system for 
establishing NRSROs without considering matters of quality, 
H.R. 2990 turns its back on this already existing state of the 
world.
    During hearings in the last two sessions of Congress held 
in the aftermath of failures by then-existing NRSROs to predict 
in a more timely manner the downfall of Enron and WorldCom, the 
Subcommittee on Capital Markets, Insurance and Government 
Sponsored Enterprises examined questions concerning the 
Commission's role in determining which entities receive NRSRO 
status and the effect of this process on competition in the 
credit ratings industry. These hearings culminated with the 
consideration of H.R. 2990 to address these concerns.
    The Committee Report on H.R. 2990 also states that the bill 
``will bring competition, transparency, and accountability to 
the credit rating agency industry, improving ratings quality 
and enhancing investor protection''. In its present form, 
however, H.R. 2990 seems highly unlikely to accomplish its 
stated objective of ensuring accountability in the issuance of 
credit ratings because the bill abandons the current ``credible 
and reliable ratings'' standard used by the Commission staff 
when evaluating credit rating agencies for identification as 
NRSROs. It is this credible and reliable standard on which 
countless governmental units, private parties, and 
international entities have come to rely in developing their 
standards, contracts, and agreements. Abandoning this time-
proven standard would therefore likely create unnecessary chaos 
and confusion in our capital markets.

                The Bill Sacrifices Quality for Quantity

    We agree with the supporters of this legislation that 
increasing competition in the credit ratings used for 
regulatory purposes is a desirable goal, and that the current 
process used by Commission staff to identify credit rating 
agencies suitable for the NRSRO designation should be improved. 
H.R. 2990, however, seeks to make changes that will come at a 
dangerous cost. Through its voluntary registration regime, the 
bill will increase the number of NRSROs without establishing 
sufficient authority for the Commission to assure that the 
issued ratings are generally accepted, credible, reliable and 
of a consistent quality. We must achieve an appropriate 
equilibrium in these matters by balancing the desire to 
increase the quantity of NRSROs with the need to ensure that 
the ratings issued by NRSROs are of a high quality.
    Under the bill, any person ``engaged in the business of 
issuing credit ratings on the Internet or through another 
readily accessible means, for free or a reasonable fee'' and 
who employs ``either a quantitative or qualitative model, or 
both, to determine credit ratings'' and is ``receiving fees 
from either issuers, investors, or other market participants, 
or a combination thereof '' is eligible to register with the 
Commission as an NRSRO.
    In addition to the entities mentioned above that have 
incorporated the NRSRO term into laws, rules, contracts and 
other agreements, the ratings issued by NRSROs are relied upon 
by innumerable institutional and retail investors in evaluating 
credit risks and making investment decisions. Through the 
years, the Commission's identification ofcertain credit rating 
agencies as NRSROs has given the users of these ratings confidence that 
the entities have been reviewed by the Commission and determined to be 
capable of issuing consistently credible and reliable ratings. The 
bill's voluntary registration regime merely increases the number of 
credit rating agencies holding the NRSRO designation without requiring 
these firms to adequately demonstrate that they are capable of 
producing consistently high-quality ratings. As we previously 
suggested, such a regime is analogous to granting anyone a driver's 
license who lives in a state and applies for one.
    Proponents of the bill may suggest that the requirement 
that credit rating agencies seeking NRSRO status disclose past 
performance information will permit potential users to make 
informed decisions about how well a credit rating agency has 
performed in the past and how well it will do in the future. 
This argument, however, neglects the potential for ``rating 
shopping'' that may occur when entities that would not 
otherwise be able to obtain a high rating are able to do so.
    The changes put in place by this bill could also 
subsequently lead to market confusion in that the many federal, 
state, and local agencies, as well as private investors, will 
continue to rely, to their detriment, upon the NRSRO 
designation and operate under the same presumption that the 
ratings are of a high quality. Lower quality ratings could also 
harm investors who purchase the fixed-income instruments at 
prices inflated by inappropriately high ratings. Even worse, 
the proposed regulatory regime increases the risk of leaving 
investors holding debt paper of little value in the event of a 
default on an instrument previously rated by an NRSRO.
    Some investor advocates, such as the AFL-CIO, strongly 
believe that quality should be an important factor in assigning 
the NRSRO designation to any credit rating agency. We agree. In 
his written testimony before the Senate Banking Committee on 
March 7, 2006, Damon Silvers, Associate General Counsel for the 
AFL-CIO, stated, ``[t]he NRSRO concept is helpful in dealing 
with information costs to investors, government agencies, and a 
wide variety of financial market actors. Replacing it with a 
mere registration process without substantive oversight, as 
some have suggested, will be harmful to investors'' and 
``ultimately to the functioning of our credit markets.''
    Furthermore, the bill defines a credit rating agency as one 
that employs either a quantitative or qualitative methodology, 
or both. Granting NRSRO status to firms that use only a 
quantitative model could ultimately lead to less credible and 
reliable ratings because these models by definition fail to 
consider the nuances of a company that may impact its 
creditworthiness. Such models can also produce volatile ratings 
and generate false positives, as the Bond Market Association 
noted in its statement submitted for the record at the Capital 
Markets Subcommittee hearing on June 29, 2005. While there may 
be a role for quantitative-only credit ratings, we should move 
carefully in order to protect investors and give the Commission 
sufficient authority to address any concerns about such a 
model. H.R. 2990 does neither.
    Moreover, we have strong reason to believe that the 
leadership of the Commission wants to ensure the continued 
issuance of credible and reliable ratings used for regulatory 
purposes. In a written response to a follow-up question posed 
by Congressman Kanjorski after a May 3, 2006, oversight hearing 
to review the agenda of the Commission, Chairman Christopher 
Cox responded, ``You also asked whether the quality of credit 
ratings concerns me. My answer is most assuredly yes.'' We 
ought to heed these concerns.
    We have, finally, very strong apprehensions that this bill 
could allow history to repeat itself. In the wake of the 
savings and loan crisis, Congress put in place requirements 
that the capital held in portfolio by financial institutions 
must be of investment grade as determined by an NRSRO. We put 
this requirement in place because we found that a number of 
those institutions that failed did not maintain high-quality 
investments in their portfolios. This bill's failure to ensure 
that the ratings issued by NRSROs continue to be credible and 
reliable could one day create another regrettable situation 
whereby taxpayers would again need to finance a bailout.

                             Proposed Rule

    The Commission, which has the foremost expertise on issues 
related to NRSROs, is also very aware of the concerns 
surrounding credit rating agencies and continues to consider 
potential ways to foster the issuance of high-quality credit 
ratings used for regulatory purposes, including going forward 
with its March 2005 rule proposal to define the term ``NRSRO.'' 
The proposed rule would define an NRSRO as an entity that: (1) 
issues current credit ratings that are publicly available on a 
widespread basis at no cost; (2) is ``generally accepted'' as 
an issuer of credible and reliable ratings; and (3) uses 
``systemic procedures'' to ensure ratings quality, manage 
conflicts, and prevent the misuse of nonpublic information.
    The proposed definition also requires rating agencies to 
possess sufficient financial resources. H.R. 2990 imposes no 
such requirement at the time of voluntary registration. Not 
requiring some third-party examination of a minimal level of 
financial stability before granting a designation to issue 
credit ratings for regulatory purposes could lead to, among 
other things, firms agreeing to issue certain ratings that are 
unjustified so that they can receive fees to remain in 
business.
    The Committee Report states that the ``generally accepted'' 
language in the proposed rule erects a barrier to entry that 
may result in higher prices for ratings. This, it claims, is 
similar to language contained in a 1997 proposed rule for 
broker-dealer capital requirements. The Department of Justice 
submitted a comment letter in connection with this rule 
proposal questioning whether having a ``national recognition'' 
requirement would create a barrier to competition and result in 
higher prices for ratings.
    The Commission did not go forward with the 1997 proposed 
rulemaking, but the fact that it has included a similar concept 
in the 2005 NRSRO proposed rule suggests that it believes that 
a certain level of acceptance by the predominant users of the 
information is an important factor in assessing the credibility 
and reliability of ratings. This legislation should not go 
forward until we can discern how the Commission's proposedrule 
change, if adopted, would enhance competition by injecting transparency 
into the process for identifying new NRSROs.

                          Voluntary Framework

    At the time that the bill was considered by the Committee, 
we offered an amendment in the nature of a substitute that, 
among other things, would encourage the Commission and the 
current NRSROs to expeditiously complete discussions to improve 
oversight of their activities through the adoption of a 
Voluntary Framework. This framework would apply the self-
regulatory model recently adopted by the European Commission to 
NRSROs in the United States. This framework is also based on 
the code established by the International Organization of 
Securities Commissions (IOSCO Code), of which the U.S. 
Securities and Exchange Commission is a participant.
    In unrelated testimony on general oversight matters before 
the Committee in May 2006, Chairman Christopher Cox in an 
answer to a question stated that Commission staff is providing 
advice to representatives of the NRSROs regarding the 
framework's provisions. We ought to allow these parties to 
complete their discussions before moving forward with 
legislation. It is also appropriate for us to encourage the 
prompt completion of these talks.
    In our view, implementing a voluntary framework similar to 
that adopted by the European Commission would enhance market 
discipline and advance investor protection. Such a framework 
would include provisions requiring disclosure of written 
policies and procedures to address, among other things, 
conflicts of interest, the misuse of nonpublic information, 
compliance with applicable federal securities laws, ensuring 
that each NRSRO is capable of issuing independent, predictive, 
consistent and reliable ratings, and that they provide 
performance data for the immediately preceding four years. The 
ISOCO Code, which has been endorsed by all of the existing 
NRSROs in the United States, also includes an ``explain or 
comply'' provision that requires a credit rating agency to 
explain if and how its own code differs from the ISOCO Code.
    The adoption of a Voluntary Framework, unlike H.R. 2990, 
would facilitate the harmonization of international standards 
in the area of credit ratings. Heretofore, the Committee has 
regularly sought in recent years to promote international 
harmonization on a number of issues, such as those related to 
auditing regimes, accounting rules, and capital levels. The 
issue of the proper oversight system for credit ratings 
agencies in a post-Enron world is yet another area that very 
much lends itself to an international approach. Importantly, in 
his June 26, 2006, written response to a follow-up question 
from Ranking Member Frank, Chairman Cox stated that ``[t]he 
potential advantages of adopting a unified international 
regulatory arrangement in this area are clear, especially from 
the perspective of the credit ratings agencies--greater 
regulatory certainty and lower regulatory costs.''

                Amendment in the Nature of a Substitute

    During consideration of H.R. 2990 by the Committee, we 
offered an amendment in the nature of a substitute that would 
require the Commission to conclude its proposed rulemaking to 
define NRSROs within 60 days of enactment; encourage the 
participating parties to expedite discussions regarding the 
Voluntary Framework; and require annual hearings concerning 
rating agencies for five years to consider the effectiveness of 
the prior reforms and determine the need for further action. By 
urging the Commission to move forward with its proposed rule 
and the Voluntary Framework discussions, we have sought to put 
in place a globally consistent, market-based approach to rating 
agency oversight. Unlike H.R. 2990, this standard would also 
protect investors by ensuring high-quality, reliable and 
credible ratings. Moreover, the amendment would have ensured 
that Congress worked closely with the Commission on these 
sensitive matters going forward.

                               Conclusion

    In the aftermath of Enron's insolvency and WorldCom's 
bankruptcy, Congress wisely adopted standards in the Sarbanes-
Oxley Act to strengthen financial reporting, restore investor 
confidence, and assure the integrity of our capital markets. In 
an effort to promote competition among NRSROs, however, H.R. 
2990 would weaken quality-assurance standards, thereby damaging 
investor confidence and the integrity of our markets going 
forward. We find such developments highly regrettable.
    Moreover, H.R. 2990 was drafted and considered by the 
Committee without the crucial input of the primary securities 
regulator: the Securities and Exchange Commission. On 
complicated policy matters like this one, we need to give them 
a seat at the table in the development of any new statutory 
authority and standards.
    In sum, H.R. 2990 is bad public policy developed in the 
absence of assistance by the regulator most knowledgeable on 
these matters. Given the important role that NRSROs play in our 
capital markets, it is imperative that we take prudent, 
measured and well-considered steps to address legitimate 
concerns. H.R. 2990, while well-intentioned, will do more harm 
to our capital markets than it will do good. We cannot 
therefore support this bill in its present form.

                                   Barney Frank.
                                   Paul E. Kanjorski.

                                  
