Risk & Compliance

Senate to Vote on Credit Rating Agency Bill

Following a similar action in the House last month, the Senate Banking Committee pushes a credit rating agency reform bill through to the full Senate.
Tim Reason and Marie LeoneAugust 3, 2006

Legislative efforts to radically alter the competitive landscape for credit rating agencies continue to wend their way through Congress with few modifications. On Tuesday, the Senate Banking Committee passed a markup of the Credit Rating Agency Reform Act bill. This follows the movement of a similar bill that moved from committee to the House of Representatives in July.

The Senate bill will move to the full Senate when lawmakers return from their summer recess on September 5, noted a committee spokesman.

The mark-up changes were minor, essentially providing more detail to the definition of a credit rating agency and clarifying the Securities and Exchange Commission’s oversight role regarding the misuse of nonpublic information and conflicts of interest.

“Today’s action is the next critical step following the House of Representatives passage of its version of the bill to address the lack of competition in the credit ratings market,” said Jim Kaitz, President and CEO of the Association for Finance Professionals, which has been lobbying heavily for the legislation.

On July 12, the House of Representatives approved its version of the bill — dubbed the Credit Rating Agency Duopoly Relief Act of 2006. Aimed squarely at the industry behemoths, Moody’s and Standard and Poor’s, the House bill seeks to abolish the Securities and Exchange Commission’s ability to designate credit rating agencies as NRSROs, or “nationally recognized statistics rating organizations.”

Instead, that bill creates a system in which a credit rating agency with three years experience that meets certain standards would be allowed to register with the SEC as a “statistical ratings organization.” The House 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 Securities and Exchange Commission has granted only five the designation of NRSROs: A.M. Best, Dominion Bond Rating Service, Fitch Ratings, Moody’s Investors Service, and Standard and Poor’s. Moody’s and S&P control 80 percent of the market, according to the House committee that moved the bill out to a full House vote.

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 long-standing 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.”

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