House Report 109-546 - CREDIT RATING AGENCY DUOPOLY RELIEF ACT OF 2006

[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\
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\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).
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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\
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\2\ Richard Johnson, An Examination of Rating Agencies' Actions
Around the Investment-Grade Boundary, Federal Reserve Bank of Kansas
City 5 (February 2003).
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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\
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\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).'')
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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\
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\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.