Capital Markets

Senate Passes Credit Agency Reform Act

The Senate pushes through a bill aimed at giving the SEC more authority over S&P and Moody's.
Marie LeoneSeptember 22, 2006

The U.S. Senate passed a bill on Friday aimed at changing the way credit-rating agencies run their businesses. The Credit Rating Agency Reform Act of 2006 gives the Securities and Exchange Commission authority to regulate competition within the credit-ratings industry, as well as keep an eye on conflicts of interest.

The bill, which has to be reconciled with a similar proposal that passed in the House in July, would abolish the SEC’s authority to designate credit-rating agencies as “nationally recognized rating agencies.” Instead, a credit-rating company with three years of experience that meets certain standards would be allowed to register with the SEC as a “statistical ratings organization.”

The bill also grants the SEC new authority to inspect credit-rating agencies, although the commission would have no say over their rating methodologies.

Of the more than 130 credit-rating agencies, the SEC has granted only 5 the designation “nationally recognized statistical rating organizations” (NRSROs): A.M. Best, Dominion Bond Rating Service, Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s. Moody’s and S&P control 80 percent of the market, according to the House committee that worked on that version of the bill.

The bills are designed to curb alleged abusive practices cited by members of Congress, including the practice of sending a company unsolicited ratings with a bill; notching, which occurs when a firm lowers ratings on asset-backed securities unless the firm rates a substantial portion of the underlying assets; and tying ratings to the purchase of additional services.

S&P, which objects to the House bill, has argued that it represents an unconstitutional infringement of the company’s free speech. In recent testimony before Congress, S&P general counsel Rita Bolger said the bill represents a licensing regime that “is not constitutionally viable. Publishers are free, by longstanding case law, to freely disseminate their opinions. And rating agencies are members of the financial press, the financial press being equally protected by case law.”