Accountability and Transparency in Rating Agencies Act - (Sec. 2) Amends the Securities Exchange Act of 1934 to direct the Securities and Exchange Commission (SEC) to review credit ratings issued by each nationally recognized statistical rating organization (NRSRO) to ensure that the NRSRO has established and documented internal processes for determining credit ratings consistent with SEC rules.
Requires each NRSRO to make available and maintain such records and information as the SEC may prescribe. Requires specified NRSRO disclosures about procedures and methodologies used to determine credit ratings for structured securities.
Requires SEC rules and regulations to require each NRSRO to establish, on a publicly accessible Internet site, a facility to disclose, in a central database, the historical default rates of all classes of financial products it has rated.
Modifies SEC powers to impose fines and censure a noncompliant NRSRO, including NRSRO failure to: (1) guard against certain violations; and (2) conduct sufficient surveillance to ensure that credit ratings remain current and reliable.
Prescribes rules for NRSRO corporate governance, organization, and management of conflicts of interest.
Requires the SEC to issue specified rules governing management and disclosure of conflicts of interest regarding credit ratings issued by an NRSRO, including a one-year look-back requirement to determine whether a conflict of interest exists among employees of entities subject to credit ratings who were NRSRO employees during the one-year period preceding the rating date. Requires the SEC to conduct periodic reviews of NRSRO compliance with the look-back requirement.
Requires an NRSRO to report to the SEC any case where it can reasonably be expected to know that a former senior officer obtained employment with any issuer, underwriter, or sponsor of an instrument for which the NRSRO issued a credit rating during the 12-month period prior to such employment. Directs the SEC to make such information publicly available.
Requires each NRSRO to designate an individual to serve as a compliance officer.
Directs the SEC to: (1) establish an office that administers SEC rules governing NRSRO practices,(2) require each NRSRO to disclose publicly information on initial ratings and subsequent changes to such ratings, and (3) prescribe rules requiring each NRSRO to adopt certain credit ratings methodologies that include risk assessment and the assumptions underlying the procedures and methodologies used to determine a credit rating.
Prohibits NRSROs (or affiliates or associated persons) from engaging in specified rating services for which additional compensation is paid to an issuer, underwriter, or placement agent of a security, including: (1) risk management advisory services; (2) consulting services regarding any merger, sales, or disposition of the assets of an issuer; and (3) ancillary assistance, advice, or consulting services unrelated to any specific credit rating issuance.
(Sec. 3) Revises requirements for the pleading of particular facts about state of mind in a private action for money damages against an NRSRO with respect to securities fraud. Makes it sufficient for pleading any required state of mind that the complaint state with particularity facts giving rise to a strong inference that the NRSRO knowingly or recklessly violated the securities laws. Requires the same pleading standard with respect to knowledge and recklessness to apply to an NRSRO as would apply to any other person in the same or a similar private right of action.
(Sec. 4) Directs the SEC to require issuers to disclose preliminary credit ratings received from NRSROs on structured products and all forms of corporate debt.
(Sec. 7) Requires revision of a specified regulation requiring public disclosure by an issuer of any material nonpublic information it has disclosed to any person outside the issuer who is a broker or dealer, an investment adviser, an investment company, a holder of the issuer's securities, or any person associated or affiliated with such persons.
Directs the SEC to remove from the regulation the exemption for entities whose primary business is the issuance of credit ratings, thus subjecting credit rating issuers to the regulation's requirements and prohibitions regarding mandatory public disclosure of certain material nonpublic information.
(Sec. 8) Directs the SEC to establish a Credit Ratings Agency Advisory Board.
(Sec. 9) Makes conforming amendments to the Federal Deposit Insurance Act, the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, the Investment Company Act of 1940, the Revised Statutes of the United States, as well as the Securities Exchange Act of 1934.
(Sec. 10) Requires the SEC, the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision, Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve, the National Credit Union Administration (NCUA), and the Federal Housing Finance Agency each to review its policies, practices, and regulations to assess the creditworthiness of a security or money market instrument. Requires the Comptroller General to review the use of credit ratings by other federal agencies.
(Sec. 11) Directs the SEC to revise certain rules in order to require that the random sample of ratings histories of credit ratings required under such rules to be disclosed on an NRSRO's website also be provided to the SEC in a format consistent with SEC publication on the EDGAR system.
(Sec. 12) Nullifies Rule 436(G), promulgated under the Securities Act of 1933, which exempts NRSROs from liability for material misstatements or omissions when their credit ratings are included in securities issuer registration statements filed under that Act. (Thus subjects NRSROs to the same liability as non-NRSROs for material misstatements or omissions in securities issuer registration statements, and in effect requires securities issuers to obtain an NRSRO's written consent before including the NRSRO's credit rating in a registration statement.)
(Sec. 13) Directs the Comptroller General to study: (1) the implementation of this Act by the SEC; (2) the appropriateness of relying on ratings for use in federal, state, and local securities and banking regulations, including for determining capital requirements; (3) the effect of liability in private actions arising under the Securities Exchange Act of 1934; (4) alternative means for compensating credit rating agencies that would create incentives for accurate credit ratings and what, if any, related statutory changes would be required; and (5) alternative methodologies to assess credit risk, including market-based measures.
Directs the SEC to study: (1) whether to create a system that assigns NRSROs on a rotating basis to issuers seeking a credit rating, (2) the effect of this Act on credit rating agencies seeking to register as NRSROs; (3) the treatment of different classes of bonds (municipal versus corporate) by the NRSROs; (4) the feasibility and desirability of implementing a standardized rating system whereby ratings symbols contain multiple characters, each representing a range of default probabilities and loss expectations under standardized and increasingly severe levels of market stress; and (5) the feasibility and desirability of standardizing credit ratings terminology and the market stress conditions under which ratings are evaluated.
[Congressional Bills 111th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3890 Introduced in House (IH)]
111th CONGRESS
1st Session
H. R. 3890
To amend the Securities Exchange Act of 1934 to enhance oversight of
nationally recognized statistical rating organizations, and for other
purposes.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
October 21, 2009
Mr. Kanjorski (for himself, Mr. Capuano, Ms. Kilroy, Mr. Cleaver, and
Ms. Kosmas) introduced the following bill; which was referred to the
Committee on Financial Services
_______________________________________________________________________
A BILL
To amend the Securities Exchange Act of 1934 to enhance oversight of
nationally recognized statistical rating organizations, and for other
purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This title may be cited as the ``Accountability and Transparency in
Rating Agencies Act''.
SEC. 2. ENHANCED REGULATION OF NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATIONS.
Section 15E of the Securities Exchange Act of 1934 (15 U.S.C. 78o-
7) is amended--
(1) in subsection (a)--
(A) in paragraph (1)(A), by striking ``furnish to''
and inserting ``file with'';
(B) in paragraph (2)(A), by striking ``furnished
to'' and inserting ``filed with''; and
(C) in paragraph (2)(B)(i)(II), by striking
``furnished to'' and inserting ``filed with'';
(2) in subsection (b)--
(A) in paragraph (1)(A), by striking ``furnished''
and inserting ``filed'' and by striking ``furnishing''
and inserting ``filing'';
(B) in paragraph (1)(B), by striking ``furnishing''
and inserting ``filing''; and
(C) in the first sentence of paragraph (2), by
striking ``furnish to'' and inserting ``file with'';
(3) in subsection (c)--
(A) paragraph (2)--
(i) in the second sentence by inserting
``including the requirements of this section,''
after ``Notwithstanding any other provision of
law,''; and
(ii) by inserting before the period at the
end of the last sentence ``, provided that this
paragraph does not afford a defense against any
action or proceeding brought by the Commission
to enforce the antifraud provision of the
securities laws''; and
(B) by adding at the end the following new
paragraph:
``(3) Review of internal processes for determining credit
ratings.--
``(A) In general.--The Commission shall review
credit ratings issued by, and the policies, procedures,
and methodologies employed by, each nationally
recognized statistical rating organization to ensure
that--
``(i) the nationally recognized statistical
rating organization has established and
documented a system of internal controls, due
diligence and implementation of methodologies
for determining credit ratings, taking into
consideration such factors as the Commission
may prescribe by rule;
``(ii) the nationally recognized
statistical rating organization adheres to such
system; and
``(iii) the public disclosures of the
nationally recognized statistical rating
organization required under this section about
its ratings, methodologies, and procedures are
consistent with such system.
``(B) Manner and frequency.--The Commission shall
conduct reviews required by this paragraph no less
frequently than annually in a manner to be determined
by the Commission.
``(4) Provision of information to the commission.--Each
nationally recognized statistical rating organization shall
make available and maintain such records and information, for
such a period of time, as the Commission may prescribe, by
rule, as necessary for the Commission to conduct the reviews
under paragraph (3).'';
(4) in subsection (d)--
(A) in the heading, by inserting ``Fine,'' after
``Censure,'';
(B) by striking ``shall censure'' and all that
follows through ``revocation'' and inserting the
following: ``shall censure, fine in accordance with
section 21B(a), place limitations on the activities,
functions, or operations of, suspend for a period not
exceeding 12 months, or revoke the registration of any
nationally recognized statistical rating organization
(or with respect to any person who is associated, who
is seeking to become associated, or, at the time of the
alleged misconduct, who was associated or was seeking
to become associated with a nationally recognized
statistical rating organization, the Commission, by
order, shall censure, fine in accordance with section
21B(a), place limitations on the activities or
functions of such person, suspend for a period not
exceeding 12 months, or bar such person from being
associated with a nationally recognized statistical
rating organization), if the Commission finds, on the
record after notice and opportunity for hearing, that
such censure, fine, placing of limitations, bar,
suspension, or revocation'';
(C) in paragraph (2), by striking ``furnished to''
and inserting ``filed with'';
(D) in paragraph (4)--
(i) by striking ``furnish'' and inserting
``file''; and
(ii) by striking ``or'' at the end;
(E) in paragraph (5), by striking the period at the
end; and
(F) by adding at the end the following:
``(6) has failed reasonably to supervise another person who
commits a violation of the securities laws or any rules of the
Municipal Securities Rulemaking Board if such other person is
subject to his or her supervision, except that no person shall
be deemed to have failed reasonably to supervise any other
person under this paragraph, if--
``(A) there have been established procedures, and a
system for applying such procedures, which would
reasonably be expected to prevent and detect, insofar
as practicable, any such violation by such other
person; and
``(B) such person has reasonably discharged the
duties and obligations incumbent upon him or her by
reason of such procedures and system without reasonable
cause to believe that such procedures and system were
not being complied with; or
``(7) fails to conduct sufficient surveillance to ensure
that credit ratings remain current and reliable, as
applicable.'';
(5) in subsection (e)--
(A) by striking paragraph (1); and
(B) in paragraph (2), by striking ``(2) Commission
authority.--'' and moving the text of such paragraph to
follow the heading of subsection (e);
(6) by amending subsection (h) to read as follows:
``(h) Corporate Governance, Organization, and Management of
Conflicts of Interest.--
``(1) Board of directors.--
``(A) In general.--Each nationally recognized
statistical rating organization or its parent entity
shall have a board of directors.
``(B) Independent directors.--At least \1/3\ of
such board, but no less than 2 of the members of the
board of directors, shall be independent directors. In
order to be considered independent for purposes of this
subsection, a director of a nationally recognized
statistical rating organization may not, other than in
his or her capacity as a member of the board of
directors or any committee thereof--
``(i) accept any consulting, advisory, or
other compensatory fee from the nationally
recognized statistical rating organization; or
``(ii) be a person associated with the
nationally recognized statistical rating
organization or with any affiliated company
thereof.
``(C) Compensation and term.--The compensation of
the independent directors shall not be linked to the
business performance of the nationally recognized
statistical rating organization and shall be arranged
so as to ensure the independence of their judgment. The
term of office of the independent directors shall be
for a pre-agreed fixed period not exceeding 5 years and
shall not be renewable.
``(D) Duties.--In addition to the overall
responsibility of the board of directors, the board
shall oversee--
``(i) the establishment, maintenance, and
enforcement of policies and procedures for
determining credit ratings;
``(ii) the establishment, maintenance, and
enforcement of policies and procedures to
address, manage, and disclose any conflicts of
interest;
``(iii) the effectiveness of the internal
control system with respect to policies and
procedures for determining credit ratings; and
``(iv) the compensation and promotion
policies and practices of the nationally
recognized statistical rating organization.
``(2) Organization policies and procedures.--Each
nationally recognized statistical rating organization shall
establish, maintain, and enforce written policies and
procedures reasonably designed, taking into consideration the
nature of the business of the nationally recognized statistical
rating organization and affiliated persons and affiliated
companies thereof, to address, manage, and disclose any
conflicts of interest that can arise from such business.
``(3) Commission rules.--The Commission shall issue rules
to prohibit, or require the management and disclosure of, any
conflicts of interest relating to the issuance of credit
ratings by a nationally recognized statistical rating
organization, including--
``(A) conflicts of interest relating to the manner
in which a nationally recognized statistical rating
organization is compensated by the obligor, or any
affiliate of the obligor, for issuing credit ratings or
providing related services;
``(B) conflicts of interest relating to the
provision of consulting, advisory, or other services by
a nationally recognized statistical rating
organization, or any person associated with such
nationally recognized statistical rating organization,
to the obligor, or any affiliate of the obligor;
``(C) disclosure of conflicts of interests relating
to business relationships, ownership interests, and
affiliations of nationally recognized statistical
rating organization board members with obligors, or any
other financial or personal interests between a
nationally recognized statistical rating organization,
or any person associated with such nationally
recognized statistical rating organization, and the
obligor, or any affiliate of the obligor;
``(D) disclosure of conflicts of interests relating
to any affiliation of a nationally recognized
statistical rating organization, or any person
associated with such nationally recognized statistical
rating organization, with any person who underwrites
securities, money market instruments, or other
instruments that are the subject of a credit rating;
``(E) a requirement that each nationally recognized
statistical rating organization disclose on such
organization's website a consolidated report at the end
of each fiscal year that shows--
``(i) the percent of net revenue earned by
the nationally recognized statistical rating
organization or an affiliate of a nationally
recognized statistical rating organization, or
any person associated with a nationally
recognized statistical rating organization, to
the extent determined appropriate by the
Commission, for that fiscal year for providing
services and products other than credit rating
services to each person who paid for a credit
rating; and
``(ii) the relative standing of each person
who paid for a credit rating that was
outstanding as of the end of the fiscal year in
terms of the amount of net revenue earned by
the nationally recognized statistical rating
organization attributable to each such person
and classified by the highest 5, 10, 25, and 50
percentiles and lowest 50 and 25 percentiles;
``(F) rules providing for the establishment of a
system of payment for each nationally recognized
statistical rating organization that requires that
payments are structured in a manner designed to ensure
that the nationally recognized statistical rating
organization conducts accurate and reliable
surveillance of ratings over time, as applicable, and
that incentives for reliable ratings are in place;
``(G) a requirement that a nationally recognized
statistical rating organization disclose with the
publication of a credit rating the type and number of
credit ratings it has provided to the person being
rated or affiliates of such person, the fees it has
billed for the credit rating, and the aggregate amount
of net revenue earned by the nationally recognized
statistical rating in the preceding 2 fiscal years
attributable to the person being rated and its
affiliates; and
``(H) any other potential conflict of interest, as
the Commission determines necessary or appropriate in
the public interest or for the protection of investors.
``(4) Look-back requirement.--
``(A) Review by the nationally recognized
statistical rating organization.--Each nationally
recognized statistical rating organization shall
establish, maintain, and enforce policies and
procedures reasonably designed to ensure that, in any
case in which an employee of a person subject to a
credit rating of the nationally recognized statistical
rating organization or the issuer, underwriter, or
sponsor of a security or money market instrument
subject to a credit rating of the nationally recognized
statistical rating organization was employed by the
nationally recognized statistical rating organization
and participated in any capacity in determining credit
ratings for the person or the securities or money
market instruments during the 1-year period preceding
the date an action was taken with respect to the credit
rating, the nationally recognized statistical rating
organization shall--
``(i) conduct a review to determine whether
any conflicts of interest of the employee
influenced the credit rating; and
``(ii) take action to revise the rating if
appropriate, in accordance with such rules as
the Commission shall prescribe.
``(B) Review by commission.--
``(i) In general.--The Commission shall
conduct periodic reviews of the policies
described in subparagraph (A) and the
implementation of the policies at each
nationally recognized statistical rating
organization to ensure they are reasonably
designed and implemented to most effectively
eliminate conflicts of interest.
``(ii) Timing of reviews.--The Commission
shall review the code of ethics and conflict of
interest policy of each nationally recognized
statistical rating organization--
``(I) not less frequently than
annually; and
``(II) whenever such policies are
materially modified or amended.
``(5) Report to commission on certain employment
transitions.--
``(A) Report required.--Each nationally recognized
statistical rating organization shall report to the
Commission any case such organization knows or can
reasonably be expected to know where a former employee
of such organization obtains employment with any
issuer, underwriter, or sponsor of a security or money
market instrument for which the organization issued a
credit rating during the 12-month period prior to such
employment, if such employee--
``(i) was an officer of such organization;
``(ii) participated in any capacity in
determining credit ratings for such issuer,
underwriter, or sponsor; or
``(iii) supervised an employee described un
subparagraph (B).
``(B) Public disclosure.--Upon receiving such a
report, the Commission shall make such information
publicly available.'';
(7) by amending subsection (j) to read as follows:
``(j) Designation of Compliance Officer.--
``(1) In general.--Each nationally recognized statistical
rating organization shall designate an individual to serve as a
compliance officer.
``(2) Duties.--The compliance officer shall--
``(A) report directly to the board of the
nationally recognized statistical rating organization;
``(B) review compliance with policies and
procedures to manage conflicts of interest and assess
the risk that the compliance (or lack of such
compliance) may compromise the integrity of the credit
rating process;
``(C) review compliance with internal controls with
respect to the procedures and methodologies for
determining credit ratings, including quantitative
models and qualitative inputs used in the rating
process, and assess the risk that such compliance with
the internal controls (or lack of such compliance) may
compromise the integrity and quality of the credit
rating process;
``(D) in consultation with the board of the
nationally recognized statistical rating organization,
resolve any conflicts of interest that may arise;
``(E) be responsible for administering the policies
and procedures required to be established pursuant to
this section;
``(F) ensure compliance with securities laws and
the rules and regulations issued thereunder, including
rules prescribed by the Commission pursuant to this
section; and
``(G) shall establish procedures--
``(i) for the receipt, retention, and
treatment of complaints regarding credit
ratings, models, methodologies, and compliance
with the securities laws and the policies and
procedures required under this section;
``(ii) for the receipt, retention, and
treatment of confidential, anonymous complaints
by employees, issuers, and investors;
``(iii) for the remediation of non-
compliance issues found during compliance
office reviews, the reviews required under
paragraph (7), internal or external audit
findings, self-reported errors, or through
validated complaints; and
``(iv) designed so that ratings that the
nationally recognized statistical rating
organization disseminates reflect consideration
of all information that comes to the attention
of and is believed by the nationally recognized
statistical rating organization to be relevant,
in a manner generally consistent with the
nationally recognized statistical rating
organization's published rating methodology,
including information which is provided,
received, or otherwise obtained from issuer and
non-issuer sources, such as investors, the
media, and other interested or informed
parties.
``(3) Limitations.--The compliance officer shall not, while
serving in that capacity--
``(A) determine credit ratings;
``(B) participate in the establishment of the
procedures and methodologies or the quantitative models
and qualitative inputs used to determine credit
ratings;
``(C) perform marketing or sales functions; or
``(D) participate in establishing compensation
levels, other than for employees working for the
compliance officer.
``(4) Annual reports required.--The compliance officer
shall annually prepare and sign a report on the compliance of
the nationally recognized statistical rating organization with
the securities laws and such organization's internal policies
and procedures, including its code of ethics and conflict of
interest policies, in accordance with rules prescribed by the
Commission. Such compliance report shall accompany the
financial reports of the nationally recognized statistical
rating organization that are required to be filed with the
Commission pursuant to this section and shall include a
certification that, under penalty of law, the report is
accurate and complete.'';
(8) in subsection (k)--
(A) by striking ``, on a confidential basis,'';
(B) by striking ``Each nationally'' and inserting
the following:
``(1) In general.--Each nationally''; and
(C) by adding at the end the following new
paragraph:
``(2) Exception.--The Commission may treat as confidential
any item filed with the Commission under paragraph (1), the
publication of which the Commission determines may have a
harmful effect on a nationally recognized statistical rating
organization.'';
(9) in subsection (l)(2)(A)(i), by striking ``furnished''
and inserting ``filed'';
(10) by amending subsection (p) to read as follows:
``(p) Establishment of SEC Office.--The Commission shall establish
an office that administers the rules of the Commission with respect to
the practices of nationally recognized statistical rating organizations
in determining ratings, in the public interest and for the protection
of investors, including rules designed to ensure that credit ratings
issued by such registrants are accurate and not unduly influenced by
conflicts of interest.''; and
(11) by adding after subsection (p) the following new
subsections:
``(q) Transparency of Ratings Performance.--
``(1) Rulemaking required.--The Commission shall, by rule,
require each nationally recognized statistical rating
organization to publicly disclose information on initial
ratings and subsequent changes to such ratings for the purpose
of providing a gauge of the performance of ratings and allowing
investors to compare performance of ratings by different
nationally recognized statistical rating organizations.
``(2) Content.--The rules of the Commission under this
subsection shall require, at a minimum, disclosures that--
``(A) are comparable among nationally recognized
statistical rating organizations, so that investors can
compare rating performance across rating organizations;
``(B) are clear and informative for a wide range of
investor sophistication;
``(C) include performance information over a range
of years and for a variety of classes of credit
ratings, as determined by the Commission; and
``(D) are published and made freely available by
the nationally recognized statistical rating
organization, on an easily accessible portion of its
website and in written form when requested by
investors.
``(r) Credit Ratings Methodologies.--
``(1) In general.--The Commission shall prescribe rules, in
the public interest and for the protection of investors, that
require each nationally recognized statistical rating
organization to establish, maintain, and enforce written
procedures and methodologies that are reasonably designed to--
``(A) ensure that credit ratings are determined
using procedures and methodologies, including
quantitative models and qualitative inputs that are
determined in accordance with the policies and
procedures of the nationally recognized statistical
rating organization for developing and modifying credit
rating procedures and methodologies;
``(B) ensure that when major changes to credit
rating procedures and methodologies, including to
quantitative models and qualitative inputs, are made,
that the changes are applied consistently to all credit
ratings to which the changed procedures and
methodologies apply and, to the extent the changes are
made to credit rating surveillance procedures and
methodologies, they are applied to current credit
ratings within a time period to be determined by the
Commission by rule, and that the reason for the change
is publicly disclosed;
``(C) notify persons who have access to the credit
ratings of the nationally recognized statistical rating
organization, regardless of whether they are made
readily accessible for free or a reasonable fee, of the
version of a procedure or methodology, including
quantitative models and qualitative inputs, used with
respect to a particular credit rating;
``(D) notify persons who have access to the credit
ratings of the nationally recognized statistical rating
organization, regardless of whether they are made
readily accessible for free or a reasonable fee, when a
change is made to a procedure or methodology, including
to quantitative models and qualitative inputs, or an
error is identified in a procedure or methodology that
may result in credit rating actions, and the likelihood
of the change resulting in current credit ratings being
subject to rating actions; and
``(E) use credit rating symbols that distinguish
credit ratings for structured products from credit
ratings for other products that the Commission
determines appropriate or necessary in the public
interest and for the protection of investors.
``(2) Rating clarity and consistency.--
``(A) Commission obligation.--Subject to
subparagraphs (B) and (C), the Commission shall
require, by rule, each nationally recognized
statistical rating organization to establish, maintain,
and enforce written policies and procedures reasonably
designed--
``(i) with respect to credit ratings of
securities and money market instruments, to
assess the risk that investors in securities
and money market instruments may not receive
payment in accordance with the terms of such
securities and instruments;
``(ii) to define clearly any credit rating
symbol used by that organization; and
``(iii) to apply such credit rating symbol
in a consistent manner for all types of
securities and money market instruments.
``(B) Additional credit factors.--Nothing in
subparagraph (A)--
``(i) prohibits a nationally recognized
statistical rating organization from using
additional credit factors that are documented
and disclosed by the organization and that have
a demonstrated impact on the risk an investor
in a security or money market instrument will
not receive repayment in accordance with the
terms of issuance;
``(ii) prohibits a nationally recognized
statistical rating organization from
considering credit factors that are unique to
municipal securities that are not backed by the
issuer's full faith and credit in its
assessment of the risk an investor in a
security or money market instrument will not
receive repayment in accordance with the terms
of issuance; or
``(iii) prohibits a nationally recognized
statistical rating organization from using an
additional symbol with respect to the ratings
described in subparagraph (A)(i) for the
purpose of distinguishing the ratings of a
certain type of security or money market
instrument from ratings of any other types of
securities or money market instruments.
``(C) Complementary ratings.--The Commission shall
not impose any requirement under subparagraph (A) that
prevents nationally recognized statistical rating
organizations from establishing ratings that are
complementary to the ratings described in subparagraph
(A)(i) and that are created to measure a discrete
aspect of the security's or instrument's risk.
``(s) Transparency of Credit Rating Methodologies and Information
Reviewed.--
``(1) In general.--The Commission shall require, by rule, a
nationally recognized statistical rating organization to
include with the publication of each credit rating regardless
of whether the credit rating is made readily accessible for
free or a reasonable fee a form that discloses information
about the assumptions underlying the procedures and
methodologies used, and the data relied on, to determine the
credit rating in the format prescribed in paragraph (2) and
containing the information described in paragraph (3).
``(2) Format.--The Commission shall prescribe a form for
use under paragraph (1) that--
``(A) is designed in a user-friendly and helpful
manner for investors to understand the information
contained in the report;
``(B) requires the nationally recognized
statistical rating organization to provide the content,
as required by paragraph (3), in a manner that is
directly comparable across securities; and
``(C) the nationally recognized statistical rating
organization certifies the information on the form as
true and accurate.
``(3) Content.--The Commission shall prescribe a form that
requires a nationally recognized statistical rating
organization to disclose--
``(A) the main assumptions included in constructing
procedures and methodologies, including quantitative
models and qualitative inputs and assumptions about the
correlation of defaults across obligors used in rating
certain structured products;
``(B) the potential shortcomings of the credit
ratings, and the types of risks not measured in the
credit ratings that the registrant is not commenting
on, such as liquidity, market, and other risks;
``(C) information on the certainty of the rating,
including information on the reliability, accuracy, and
quality of the data relied on in determining the
ultimate credit rating and a statement on the extent to
which key data inputs for the credit rating were
reliable or limited, including any limits on the reach
of historical data, limits in accessibility to certain
documents or other forms of information that would have
better informed the credit rating, and the completeness
of certain information considered;
``(D) whether and to what extent third party due
diligence services have been utilized, and a
description of the information that such third party
reviewed in conducting due diligence services;
``(E) a description of relevant data about any
obligor, issuer, security, or money market instrument
that was used and relied on for the purpose of
determining the credit rating;
``(F) a statement containing an overall assessment
of the quality of information available and considered
in producing a credit rating for a security in relation
to the quality of information available to the
nationally recognized statistical rating organization
in rating similar obligors, securities, or money market
instruments;
``(G) an explanation or measure of the potential
volatility for the credit rating, including any factors
that might lead to a change in the credit rating, and
the extent of the change that might be anticipated
under different conditions;
``(H) information on the content of the credit
rating, including--
``(i) the expected default probability; and
``(ii) the loss given default;
``(I) information on the sensitivity of the rating
to assumptions made by the nationally recognized
statistical rating organization;
``(J) where applicable, how the nationally
recognized statistical rating organization used
servicer or remittance reports, and with what
frequency, to conduct surveillance of the credit
rating; and
``(K) such additional information as may be
required by the Commission.
``(4) Due diligence services.--
``(A) Certification required.--In any case in which
third-party due diligence services are employed by a
nationally recognized statistical rating organization
or an issuer or underwriter in connection with the
issuance of a credit rating, the firm providing the due
diligence services shall provide to the nationally
recognized statistical rating organization written
certification of such due diligence, which shall be
subject to review by the Commission, and the issuer or
underwriter shall provide any reports issued by the
provider of such due diligence services to the
nationally recognized statistical rating organization.
``(B) Format and content.--The Commission shall
establish the appropriate format and content for
written certifications required under subparagraph (A)
to ensure that providers of due diligence services have
conducted a thorough review of data, documentation, and
other relevant information necessary for the nationally
recognized statistical rating organization to provide
an reliable rating.
``(C) Disclosure of certification.--The Commission
shall adopt rules requiring a nationally recognized
statistical rating organization to disclose to persons
who have access to the credit ratings of the nationally
recognized statistical rating organization regardless
of whether they are made readily accessible for free or
a reasonable fee the certification described in
subparagraph (A) with the publication of the applicable
credit rating in a manner that may permit the persons
to determine the adequacy and level of due diligence
services provided by the third party.
``(t) Prohibited Activities.--
``(1) In general.--Except as provided in paragraph (2),
beginning 180 days from the date of enactment of the
Accountability, Reliability, and Transparency in Rating
Agencies Act, it shall be unlawful for a nationally recognized
statistical rating organization, or an affiliate of a
nationally recognized statistical rating organization, or any
person associated with a nationally recognized statistical
rating organization, to the extent determined appropriate by
the Commission, that provides a rating for an issuer,
underwriter, or placement agent of a security to provide to
that issuer, underwriter, or placement agent, any non-rating
service that preceded the retention of the nationally
recognized statistical rating organization by the issuer,
underwriter, or placement agent to provide a rating for the
security in question or any assistance provided after such
point for which additional compensation is paid directly or
indirectly, including--
``(A) risk management advisory services;
``(B) advice or consultation relating to any
merger, sales, or disposition of assets of the issuer;
``(C) ancillary assistance, advice, or consulting
services unrelated to any specific credit rating
issuance; and
``(D) such further activities or services as the
Commission may determine as necessary or appropriate in
the public interest or for the protection of investors.
``(2) Exemption authority.--The Commission may, on a case
by case basis, exempt any person, issuer, underwriter,
placement agent, or nationally recognized statistical rating
organization from the prohibition in subsection (t), to the
extent that such exemption is necessary or appropriate in the
public interest and is consistent with the protection of
investors, and subject to review by the Commission.''.
SEC. 3. STANDARDS FOR PRIVATE ACTIONS.
(a) In General.--Section 21D(b)(2) of the Securities Exchange Act
of 1934 (15 U.S.C. 78u-4(b)(2)) is amended by inserting before the
period at the end of the following: ``, and in the case of an action
brought under this title for money damages against a nationally
recognized statistical rating organization, it shall be sufficient for
purposes of pleading any required state of mind for purposes of such
action that the complaint shall state with particularity facts giving
rise to a strong inference that the nationally recognized statistical
rating organization knowingly or recklessly violated the securities
laws.''.
(b) Pleading Standard.--Section 15E(m) of the Securities Exchange
Act of 1934 (15 U.S.C. 78o-7(m)) amended to read as follows:
``(m) Application of Enforcement Provisions; Pleading Standard in
Private Rights of Action.--Statements made by nationally recognized
statistical rating organizations shall not be deemed forward looking
statements for purposes of section 21E. In any private right of action
commenced against a nationally recognized statistical rating
organization under this title, the same pleading standards with respect
to knowledge and recklessness shall apply to the nationally recognized
statistical rating organization as would apply to any other person in
the same or a similar private right of action against such person.''.
SEC. 4. ISSUER DISCLOSURE OF PRELIMINARY RATINGS.
The Securities and Exchange Commission shall adopt rules under
authority of the Securities Act of 1933 (15 U.S.C. 77a, et seq.) to
require issuers to disclose preliminary credit ratings received from
nationally recognized statistical rating agencies on structured
products and all forms of corporate debt.
SEC. 5. TIMELINE FOR REGULATIONS.
Unless otherwise specified in this Act, the Securities and Exchange
Commission shall adopt rules and regulations, as required by the
amendments made by this Act, not later than 365 days after the date of
enactment.
SEC. 6. FEDERAL AGENCY REVIEW OF RELIANCE ON RATINGS.
(a) Review.--Not later than 1 year after the date of the enactment
of this Act, each Federal agency and department shall, to the extent
applicable, review--
(1) any regulation issued by such agency or department that
requires the use of an assessment of the creditworthiness of a
security or money market instrument; and
(2) its policies and practices with regard to such ratings,
to determine if another measure of creditworthiness is appropriate in
order to reduce the reliance of such agency on such ratings, to the
extent permitted by law.
(b) Report.--Upon conclusion of the review required under
subsection (a), each Federal agency and department shall submit a
report to the Congress containing a description of--
(1) any modification of any regulation such agency or
department made following the review required by subsection
(a); and
(2) each regulation issued by such agency or department
that requires the use of an assessment of the creditworthiness
of a security or money market instrument that such agency or
department did not modify pursuant to subsection (a),
accompanied by an explanation of why such modification could
not be made.
SEC. 7. STUDIES AND REPORTS.
(a) GAO Study.--
(1) In general.--The Comptroller General shall conduct a
study of--
(A) the implementation of this Act and the
amendments made by this Act by the Securities and
Exchange Commission;
(B) the appropriateness of relying on ratings for
use in Federal, State, and local securities and banking
regulations, including for determining capital
requirements;
(C) the effect of liability in private actions
arising under the Securities Exchange Act of 1934; and
(D) alternative means for compensating credit
rating agencies that would create incentives for
accurate credit ratings and what, if any, statutory
changes would be required to permit or facilitate the
use of such alternative means of compensation.
(2) Report.--Not later than 30 months after the date of
enactment of this Act, the Comptroller General shall submit to
Congress and the Securities Exchange Commission, a report
containing the findings under the study required by subsection
(a).
(b) SEC Study.--The Securities and Exchange Commission shall
undertake a study on creating a system whereby nationally recognized
statistical rating organizations are assigned on a rotating basis to
issuers seeking a credit rating. Not later than 1 year after the date
of enactment of this Act, the Securities and Exchange Commission shall
transmit to Congress a report containing the findings of the study.
<all>
Introduced in House
Introduced in House
Referred to the House Committee on Financial Services.
Committee Consideration and Mark-up Session Held.
Ordered to be Reported by the Yeas and Nays: 49 - 14.
Reported (Amended) by the Committee on 111-685, Part I.
Reported (Amended) by the Committee on 111-685, Part I.
Referred sequentially to the House Committee on the Judiciary for a period ending not later than Dec. 17, 2010 for consideration of such provisions of the bill and amendment as fall within the jurisdiction of that committee pursuant to clause 1(k) of rule X.
Committee on Judiciary discharged.
Committee on Judiciary discharged.
Placed on the Union Calendar, Calendar No. 406.
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