[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2990 Engrossed in House (EH)]
109th CONGRESS
2d Session
H. R. 2990
_______________________________________________________________________
AN ACT
To improve ratings quality by fostering competition, transparency, and
accountability in the credit rating agency industry.
109th CONGRESS
2d Session
H. R. 2990
_______________________________________________________________________
AN ACT
To improve ratings quality by fostering competition, transparency, and
accountability in the credit rating agency industry.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
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 staff designation of certain
credit rating agencies as nationally recognized
statistical rating organizations, created an artificial
barrier to entry for new participants; and
(B) would, 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 but
does not include a commercial credit reporting company;
``(B) employing either a quantitative or
qualitative model, or both, to determine credit
ratings; and
``(C) receiving fees from either issuers,
investors, or other market participants, or a
combination thereof.
``(62) Nationally recognized statistical rating
organization or nrsro.--The term `nationally recognized
statistical rating organization' means a credit rating agency
that--
``(A) has been in business as a credit rating
agency for at least the past 3 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) Furnishing 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
furnishing to 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 (as applicable) 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 furnishing 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 furnishing
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
(d).
``(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 furnished to the Commission in its application for
registration, or in any amendment furnished under subsection
(b)(1) or (2), publicly available on its website or through
another comparable readily accessible means.
``(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 furnished
under subsection (a)(1)(C) by an amendment furnished under this
paragraph, but shall amend such information in such
organization's annual amendment furnished 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 furnish to the Commission an
amendment to its registration, in such form as the Commission,
by rule, may prescribe as necessary or appropriate in the
public interest or for the protection of investors--
``(A) certifying that the information and documents
in the application for registration of such nationally
recognized statistical rating organization 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 furnishing 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 furnishing a written notice of withdrawal to 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, furnish to the Commission, at intervals determined by the
Commission, such financial statements, certified (if required by the
rules or regulations of the Commission) by an independent public
accountant, and information concerning its financial condition as the
Commission, by rule, may prescribe as necessary or appropriate in the
public interest or for the protection of investors.
``(l) Elimination of Commission Staff's 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 staff 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 staff 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 360 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--
(1) by inserting ``nationally recognized statistical rating
organization,'' after ``registered transfer agent,''; and
(2) by adding at the end the following: ``Any report a
nationally recognized statistical rating organization may be
required by Commission rules under this paragraph to make and
disseminate to the Commission shall be deemed furnished to the
Commission.''.
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.
Passed the House of Representatives July 12, 2006.
Attest:
Clerk.