House Hearing Focuses on Credit Rating Agencies, June 2005

Washington, DC, June 29, 2005 - A House subcommittee hearing earlier this week addressed credit rating agencies, their regulatory oversight, and recently introduced legislation that aims to promote competition among those agencies and protect investors. Although ICI has concerns about some technical aspects of the bill, the Institute supports the goals of legislation. In a recent letter to House leaders, ICI commended legislators for focusing on this critical issue.

Background
H.R. 2990, the "Credit Rating Agency Duopoly Relief Act of 2005" was recently introduced by Rep. Michael G. Fitzpatrick (R-PA). The bill amends the Securities Exchange Act of 1934 by adding two new definitions:

"statistical rating organization" is an entity the primary business of which, for at least the most recent three consecutive years, has been the issuance of publicly available ratings, and that employs either a quantitative or qualitative model, or both, to determine its publicly available ratings, and
"nationally registered statistical rating organization," which would replace the current "nationally recognized statistical rating organization," is defined as a statistical rating organization registered or required to register pursuant to new Section 15E of the Exchange Act.

The bill would require a credit rating agency meeting the definition of a statistical rating organization to register with the SEC. In addition, it would require the SEC to adopt a disclosure form for statistical rating organizations that would include disclosure relating to conflicts of interest; the procedures and methodologies used to determine ratings; statistics of ratings performance over short- and long-term periods; and procedures to prevent the misuse of non-public information. The bill also directs the SEC to adopt certain recordkeeping and reporting requirements appropriate for a statistical rating organization.

ICI Position
On June 29, the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises held a hearing to examine legislative solutions relating to rating agencies. The Institute submitted a letter to Subcommittee Chairman Richard Baker and Ranking Member Paul Kanjorski commending the Subcommittee for holding the hearing and expressing the importance of an efficient credit rating process to investors and to the U.S. securities markets as a whole. ICI noted that it has concerns with some technical aspects of the bill, but that it looks forward to working with Congress on this issue.

Earlier in June, the Institute expressed concern with an SEC proposal that would change the system by which credit rating agencies are designated "nationally recognized statistical ratings organizations." ICI stated that the SEC's proposal could diminish the Commission's oversight of these agencies.