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ICI Urges Senate Committee to Approve Credit Rating Agency Legislation
Washington, DC, July 31, 2006 - The Institute recently urged members of the Senate Committee on Banking, Housing, and Urban Affairs to approve the "Credit Rating Agency Reform Act of 2006," legislation that will bring much needed transparency to the SEC’s process for designating Nationally Recognized Statistical Rating Organizations (NRSROs).
Mutual funds employ credit ratings in a variety of ways – to help make investment decisions, to define investment strategies, to communicate with their shareholders about credit risk, and to inform the process for valuing securities. Money market funds are governed by Rule 2a-7 under the Investment Company Act, which limits these funds to investing in securities either rated in the two highest short-term rating categories by an NRSRO, or determined by the fund board to be of comparable quality.
In June of this year, the Institute urged the House Financial Services Committee to approve the "Credit Rating Agency Duopoly Relief Act of 2005," legislation that contains many of the same provisions as the Senate bill.
In a recent letter to ranking members of the Senate committee, ICI states that the SEC's current NRSRO designation process stifles competition and presents barriers for new entrants to compete with currently designated NRSROs.
The Credit Rating Agency Reform Act will establish a registration process through which NRSRO applicants can acquire NRSRO designation after three consecutive years of issuing ratings, while simultaneously providing regulators the tools to oversee the integrity of an agency’s ratings. The bill also brings much needed sunlight to credit ratings by requiring disclosure of an NRSRO's rating criteria, its methodologies and policies, how an NRSRO addresses conflicts of interest (as well as the conflicts themselves), and the organizational structure of an NRSRO.