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.
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