House Financial Services Subcommittee Considers New Requirements For Rating Agencies – Finance and Banking

The U.S. House Financial Services Subcommittee on Investor
Protection, Entrepreneurship, and Capital Markets considered proposed legislation on nationally
recognized statistical rating organizations
(“NRSROs”).

At a hearing entitled “Bond Rating Agencies: Examining the
‘Nationally Recognized’ Statistical Rating
Organizations,” the Subcommittee considered the following:

• H.R. ____, the “NRSRO Reform Act,” which would establish
  a Credit Rating Agency Assignment Board under the SEC’s
  jurisdiction to assign NRSROs to provide credit ratings for (i)
  corporate issuers and (ii) issuers of new asset-backed
  securities;




• H.R. ____, the “Uniform Treatment of NRSROs Act,” which
  would require the Federal Reserve Board to accept credit ratings
  provided by any NRSRO registered with the SEC with respect to any
  future emergency credit facility;




• H.R. ____, the “Accurate Climate Risk Information Act,”
  which would require the SEC to implement rules obligating NRSROs to
  “adopt, integrate, and disclose” written supervisory
  policies on climate-related risks when they produce credit
  ratings;




• H.R. ____, the “Restoring NRSRO Accountability Act,”
  which would revoke the SEC Division of Corporation Finance’s
  November 2010 no-action letter which stated that, subject to
  certain conditions, an asset-backed issuer does not have to include
  credit rating information in securities filings; and




• H.R. ____, the “Transparency and Accountability of NRSROs
  Act,” which would require that the SEC identify NRSROs by
  name in any report to Congress or the public, including the annual
  inspection report under
  Section 15E of the Exchange Act.

The Subcommittee heard testimony from:

• Amy Copeland McGarrity, Chief Investment Officer, Colorado
  Public Employees’ Retirement Association, who recommended, among other things, that the SEC
  address “ratings shopping” (i.e., when issuers
  hire the NRSRO most likely to provide the issuers’ securities
  with the highest quality ratings) by requiring issuers to disclose
  all “non-chosen” NRSROs in securitized deals;




• Ian Linnell, President, Fitch Ratings, who testified that independently assigning, rather
  than hiring, an NRSRO could create new conflicts of interest by
  introducing new participants in the assignment process, and argued
  that increased transparency is how to build rating
  credibility;




• Jim Nadler, President and CEO, Kroll Bond Rating
  Agency, who argued that government assignment of ratings
  would discourage thorough research by an NRSRO because it would be
  assured business via a government panel, stating that the best way
  to protect investors is to allow open competition;




• Robert J. Rhee, Professor, University of Florida Levin
  College of Law, who expressed support for the NRSRO Reform Act as
  it includes merit-based factors in the assignment of NRSROs,
  cautioning against a “pure random lottery system” that
  could be worse than the current issuer-pay model; and




• Michael R. Bright, Chief Executive Officer, Structured
  Finance Association, who expressed concern regarding a
  government-controlled assignment system, as it would
  “perversely reduce” NRSRO competition and place potential
  political pressure on the rating agencies due to the impact of
  ratings on consumer and corporate constituents.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.