House Passes Credit-Rating Agency Reform Bill

The House recently passed H.R. 2990, legislation that could increase the number of firms eligible to rate corporate and municipal bonds. Opponents of the measure warned that the bill favors quantity over quality. Nevertheless the bill passed by a vote of 255 – 166. At the moment, there is a similar bill pending in the Senate Banking Committee which plans to hold hearings on the measure prior to the summer recess.

Sponsored by Rep. Michael G. Fitzpatrick (R-PA), the bill would remove the authority of the Securities and Exchange Commission (SEC) to designate rating agencies as "nationally recognized statistical rating organizations." Instead, the SEC would register and oversee rating agencies that meet certain requirements.

Proponents of the bill say it will inject competition into the rating agency business, which is dominated by two firms—Standard & Poor’s and Moody’s Investors Service—that together have about 80 percent of the market. The SEC’s ability to designate firms as nationally recognized has created an artificially high barrier to entry for other rating agencies, Fitzpatrick has argued, because such designations were at the discretion of the SEC.

The attention on the credit rating industry would address one of the last major issues many business and consumer groups raised in response to a string of corporate scandals recently (starting with Enron) which have cost employees, investors and retirees. Many business and consumer groups have accused the major credit rating agencies of failing to adequately detect the debt problems that contributed to the downfall of Enron and other high-flying companies.

Critics of the credit-rating agencies say the firms too often just accept management’s word about a company’s financial status without any investigation. Credit rating agencies may have conflicts of interest because they are paid by the companies whose creditworthiness and debt they assess, and often sell other consulting services to those firms without adequate disclosure.

The bill approved yesterday would allow any rating agency to register with the SEC as long as it has been in business for at least three consecutive years and uses a quantitative or qualitative model for issuing ratings. Firms that choose to register would be required to make a number of new disclosures, including how they formulate their ratings, any conflicts of interest and the past performance record of their ratings. Additionally, the legislation would allow the SEC to investigate agencies and impose penalties for violations of securities laws.

This legislation comes as many business groups are seeking to undo key portions of the Sarbanes-Oxley Act. Many members of the House Financial Services Committee stated on the floor yesterday that the House must continue to address these growing concerns about the cost of compliance for American companies for all provisions of Sarbanes-Oxley.

Source: Jim Wise, NACM’s legislative representative

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