Thursday, October 29, 2009

House Committee Approves Bill to Curb Rating Agencies

Posted on the Housing Wire by Diana Golobay:

The House Financial Services Committee on Wednesday passed HR 3890, the Accountability and Transparency in Rating Agencies Act, which aims to bring greater transparency to ratings firms and curb “inappropriate and irresponsible actions.”

Credit-rating agencies (CRAs) often face blame for assigning high ratings on mortgage-backed securities (MBS) related to subprime mortgages and other ultimately toxic assets that pulled down ratings when loans performed worse than expected.

The CRA accountability and transparency legislation, passed by the Committee in a 49-14 vote, was introduced by Rep. Paul Kanjorski, D-Pa., chairman of the subcommittee on capital markets, insurance and government-sponsored enterprises.

“This legislation builds on the Administration’s proposal and takes strong steps to reduce conflicts of interest, stem market reliance on credit rating agencies, and impose a liability standard on the agencies,” Kanjorski said in a statement. “As gatekeepers to our markets, credit rating agencies must be held to higher standards. We need to incentivize them to do their jobs correctly and effectively, and there must be repercussions if they fall short.”

The bill expands on the Administration’s initial proposals by enhancing the accountability of Nationally Recognized Statistical Rating Organizations (NRSROs). The changes clarify the ability of individuals to sue NRSROs. They also clarify that the limitation on the Securities and Exchange Commission (SEC) or any state against regulating the substance of credit ratings or methodologies “does not afford a defense against civil anti-fraud actions,” according to a statement by the Committee.

The legislation adds a new duty to supervise an NRSRO’s employees and authorizes the SEC to sanction supervisors for failing to do so. Changes to the Administration’s proposals also include a requirement that each NRSRO have a board with at least one-third independent directors, who sill oversee policies and procedures designed to prevent conflicts of interest.

The bill now contains requirements designed to mitigate conflicts of interest related to the issuer-pays model for compensating NRSROs. Compliance officers at NRSROs will also gain enhanced responsibilities and accountability to address these conflicts of interest.

Investors gain access to broader information about internal operations and procedures of NRSROs under the bill. The public will also be informed more about how NRSROs receive payment.

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