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111th Congress                                            Rept. 111-685
                        HOUSE OF REPRESENTATIVES
 2d Session                                                      Part 1

======================================================================



 
         ACCOUNTABILITY AND TRANSPARENCY IN RATING AGENCIES ACT

                                _______
                                

               December 16, 2010.--Ordered to be printed

                                _______
                                

 Mr. Frank of Massachusetts, from the Committee on Financial Services, 
                        submitted the following

                              R E P O R T

                             together with

                    ADDITIONAL AND DISSENTING VIEWS

                        [To accompany H.R. 3890]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 3890) to amend the Securities Exchange Act of 
1934 to enhance oversight of nationally recognized statistical 
rating organizations, and for other purposes, having considered 
the same, report favorably thereon with an amendment and 
recommend that the bill as amended do pass.

                                CONTENTS

                                                                   Page
Amendment........................................................     2
Purpose and Summary..............................................    14
Background and Need for Legislation..............................    14
Hearings.........................................................    22
Committee Consideration..........................................    22
Committee Votes..................................................    24
Committee Oversight Findings.....................................    26
Performance Goals and Objectives.................................    26
New Budget Authority, Entitlement Authority, and Tax Expenditures    26
Committee Cost Estimate..........................................    26
Congressional Budget Office Estimate.............................    26
Federal Mandates Statement.......................................    29
Advisory Committee Statement.....................................    29
Constitutional Authority Statement...............................    29
Applicability to Legislative Branch..............................    29
Earmark Identification...........................................    29
Section-by-Section Analysis of the Legislation...................    30
Changes in Existing Law Made by the Bill, as Reported............    38
Additional and Dissenting Views..................................    65

                               Amendment

    The amendment is as follows:
    Strike all after the enacting clause and insert the 
following:

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'';
                  (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 examine 
                credit ratings issued by, and the policies, procedures, 
                and methodologies employed by, each nationally 
                recognized statistical rating organization to review 
                whether--
                          ``(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 credit 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).
          ``(5) Disclosures with respect to structured securities.--
                  ``(A) Regulations required.--The rules and 
                regulations prescribed by the Commission pursuant to 
                this section with respect to nationally recognized 
                statistical rating organizations shall, with respect to 
                the procedures and methodologies by which any 
                nationally recognized statistical rating organization 
                determines credit ratings for structured securities--
                          ``(i) specify the information required to be 
                        disclosed to such rating organizations by the 
                        sponsor, issuers, and underwriters of such 
                        structured securities on the collateral 
                        underlying such structured securities; and
                          ``(ii) establish and implement procedures to 
                        collect and disclose information about the 
                        processes used by such sponsor, issuers, and 
                        underwriters to assess the accuracy and 
                        integrity of their data and fraud detection.
                  ``(B) Definition.--For purposes of this paragraph, 
                the Commission shall, by rule or regulation, define the 
                term `structured securities' as appropriate in the 
                public interest and for the protection of investors.
          ``(6) Historical default rate disclosures.--The rules and 
        regulations prescribed by the Commission pursuant to this 
        section with respect to nationally recognized statistical 
        rating organizations shall require each nationally recognized 
        statistical rating organization to establish and maintain, on a 
        publicly accessible Internet site, a facility to disclose, in a 
        central database, the historical default rates of all classes 
        of financial products rated by such organization.''
          (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'';
                          (ii) by striking ``or'' at the end;
                  (E) in paragraph (5), by striking the period at the 
                end and inserting a semicolon; 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, the rules or 
        regulations thereunder, 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 ultimate holding 
                company 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 rules regarding--
                  ``(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 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;
                  ``(C) conflicts of interest 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;
                  ``(D) 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;
                  ``(E) the establishment of a system of payment for 
                credit ratings issued by 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 credit ratings over time, as 
                applicable, and that incentives for reliable credit 
                ratings are in place;
                  ``(F) 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 organization in the preceding 2 
                fiscal years attributable to the person being rated and 
                its affiliates; and
                  ``(G) 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 person 
                associated with such organization within the previous 5 
                years obtains employment with any obligor, 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 a senior officer of such 
                        organization;
                          ``(ii) participated in any capacity in 
                        determining credit ratings for such obligor, 
                        issuer, underwriter, or sponsor; or
                          ``(iii) supervised an employee described in 
                        clause (ii).
                  ``(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 the internal control 
                system with respect to the procedures and methodologies 
                for determining credit ratings, including qualitative 
                methodologies and quantitative inputs used in the 
                rating process, and assess the risk that such internal 
                control system is reasonably designed to ensure 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) 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, obligors, 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 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 obligor, 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 qualitative 
                methodologies and quantitative 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.
          ``(5) Compensation.--The compensation of the compliance 
        officer 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 the officer's 
        judgment.'';
          (8) in subsection (k)--
                  (A) by striking ``, on a confidential basis,'';
                  (B) by striking ``furnish to'' and inserting ``file 
                with'';
                  (C) by striking ``Each nationally'' and inserting the 
                following:
          ``(1) In general.--Each nationally''; and
                  (D) by adding at the end the following new paragraph:
          ``(2) Exception.--The Commission may treat as confidential 
        any information provided by a nationally recognized statistical 
        rating organization under this section consistent with 
        applicable Federal laws or Commission rules.'';
          (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.--
          ``(1) In general.--The Commission shall establish an office 
        that administers the rules of the Commission with respect to 
        the practices of nationally recognized statistical rating 
        organizations.
          ``(2) Staffing.--The office of the Commission established 
        under this subsection shall be staffed sufficiently to carry 
        out fully the requirements of this section.
          ``(3) Rulemaking authority.--The Commission shall--
                  ``(A) establish, by rule, fines and other penalties 
                for any nationally recognized statistical rating 
                organization that violates the applicable requirements 
                of this title; and
                  ``(B) issue such rules as may be necessary to carry 
                out this section with respect to nationally recognized 
                statistical rating organizations.''; 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;
                  ``(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; and
                  ``(E) each nationally recognized statistical rating 
                organization include an attestation with any credit 
                rating it issues affirming that no part of the rating 
                was influenced by any other business activities, that 
                the rating was based solely on the merits of the 
                instruments being rated, and that such rating was an 
                independent evaluation of the risks and merits of the 
                instrument.
  ``(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 and an internal control system 
        with respect to such procedures and methodologies that are 
        reasonably designed to--
                  ``(A) ensure that credit ratings are determined using 
                procedures and methodologies, including qualitative 
                methodologies and quantitative 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 qualitative 
                methodologies and quantitative 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 
                procedure or methodology, including qualitative 
                methodologies and quantitative 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 qualitative methodologies and quantitative 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; 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 qualitative 
                methodologies and quantitative inputs and assumptions 
                about the correlation of defaults across underlying 
                assets 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 nationally recognized 
                statistical rating organization 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, including--
                          ``(i) 5 assumptions made in the ratings 
                        process that, without accounting for any other 
                        factor, would have the greatest impact on a 
                        rating if such assumptions were proven false or 
                        inaccurate; and
                          ``(ii) an analysis, using concrete examples, 
                        on how each of the 5 assumptions identified 
                        under clause (i) impacts a rating.
                  ``(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, underwriter, or sponsor 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, underwriter, or sponsor 
                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.--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, that 
provides a credit rating for an issuer, underwriter, or placement agent 
of a security to provide any non-rating service, including--
          ``(1) risk management advisory services;
          ``(2) advice or consultation relating to any merger, sales, 
        or disposition of assets of the issuer;
          ``(3) ancillary assistance, advice, or consulting services 
        unrelated to any specific credit rating issuance; and
          ``(4) such further activities or services as the Commission 
        may determine as necessary or appropriate in the public 
        interest or for the protection of investors.''.

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. CHANGE TO DESIGNATION.

  The Securities Act of 1933 and the Securities Exchange Act of 1934 
are each amended by striking ``nationally recognized statistical 
rating'' each place it appears and inserting ``nationally registered 
statistical rating''.

SEC. 6. 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. 7. ELIMINATION OF EXEMPTION FROM FAIR DISCLOSURE RULE.

  Not later than 90 days after the date of enactment of this Act, the 
Securities Exchange Commission shall revise Regulation FD (17 C.F.R. 
243.100) to remove from such regulation the exemption for entities 
whose primary business is the issuance of credit ratings (17 C.F.R. 
243.100(b)(2)(iii)).

SEC. 8. ADVISORY BOARD.

  (a) Establishment.--Not later than 90 days after the date of the 
enactment of this Act, the Securities and Exchange Commission shall 
establish an advisory board to be known as the Credit Ratings Agency 
Advisory Board (in this section referred to as ``the Board'').
  (b) Appointment and Terms of Service.--The Board shall consist of 7 
members appointed by the Commission, no more than 2 of whom may be 
former employees of a credit rating agency. Members of the Board shall 
be prominent individuals of integrity and reputation who have a 
demonstrated commitment to the interests of investors and the public, 
and an understanding of the role that credit ratings play to a broad 
range of investors. Terms of service shall be staggered as determined 
by the Commission.
  (c) Duties.--The Board shall--
          (1) advise the Commission concerning the rules and 
        regulations required by the amendments made by this Act;
          (2) insure that the Commission properly and fully executes 
        its oversight functions and responsibilities with the respect 
        to nationally recognized statistical rating organizations and 
        individual participants; and
          (3) issue an annual report to Congress detailing its work and 
        recommending any additional Congressional actions necessary to 
        aid the Commission and such additional reports from time to 
        time as appropriate when it feels that the Commission is not 
        properly executing its oversight functions.

SEC. 9. REMOVAL OF STATUTORY REFERENCES TO CREDIT RATINGS.

  (a) Federal Deposit Insurance Act.--The Federal Deposit Insurance Act 
(12 U.S.C. 1811 et seq.) is amended--
          (1) in section 28(d)--
                  (A) in the subsection heading, by striking ``Not of 
                Investment Grade'';
                  (B) in paragraph (1), by striking ``not of investment 
                grade'' and inserting ``that does not meet standards of 
                credit-worthiness as established by the Corporation'';
                  (C) in paragraph (2), by striking ``not of investment 
                grade'';
                  (D) by striking paragraph (3) and redesignating 
                paragraph (4) as paragraph (3); and
                  (E) in paragraph (3) (as so redesignated)--
                          (i) by striking subparagraph (A) and 
                        redesignating subparagraphs (B) and (C) as 
                        subparagraphs (A) and (B), respectively; and
                          (ii) in subparagraph (B) (as so 
                        redesignated), by striking ``not of investment 
                        grade'' and inserting ``that does not meet 
                        standards of credit-worthiness as established 
                        by the Corporation'';
          (2) in section 28(e)--
                  (A) in the subsection heading, by striking ``Not of 
                Investment Grade'';
                  (B) in paragraph (1), by striking ``not of investment 
                grade'' and inserting ``that does not meet standards of 
                credit-worthiness as established by the Corporation''; 
                and
                  (C) in paragraphs (2) and (3), by striking ``not of 
                investment grade'' each place that it appears and 
                inserting ``that does not meet standards of credit-
                worthiness established by the Corporation''; and
          (3) in section 7(b)(1)(E)(i), by striking ``credit rating 
        entities, and other private economic'' and insert ``private 
        economic, credit,''.
  (b) Federal Housing Enterprises Financial Safety and Soundness Act of 
1992.--Section 1319 of the Federal Housing Enterprises Financial Safety 
and Soundness Act of 1992 (12 U.S.C. 4519) is amended--
          (1) in the section heading, by striking ``BY RATING 
        ORGANIZATION''; and
          (2) by striking ``that is a nationally recognized statistical 
        rating organization, as such term is defined in section 3(a) of 
        the Securities Exchange Act of 1934,''.
  (c) Investment Company Act of 1940.--Section 6(a)(5)(A)(iv)(I) 
Investment Company Act of 1940 (15 U.S.C. 80a-6(a)(5)(A)(iv)(I)) is 
amended by striking ``is rated investment grade by not less than 1 
nationally recognized statistical rating organization'' and inserting 
``meets such standards of credit-worthiness that the Commission shall 
adopt''.
  (d) Revised Statutes.--Section 5136A of title LXII of the Revised 
Statutes of the United States (12 U.S.C. 24a) is amended--
          (1) in subsection (a)(2)(E), by striking ``any applicable 
        rating'' and inserting ``standards of credit-worthiness 
        established by the Comptroller of the Currency'';
          (2) in the heading for subsection (a)(3) by striking ``Rating 
        or Comparable Requirement'' and inserting ``Requirement'';
          (3) subsection (a)(3), by amending subparagraph (A) to read 
        as follows:
                  ``(A) In general.--A national bank meets the 
                requirements of this paragraph if the bank is one of 
                the 100 largest insured banks and has not fewer than 1 
                issue of outstanding debt that meets standards of 
                credit-worthiness or other criteria as the Secretary of 
                the Treasury and the Board of Governors of the Federal 
                Reserve System may jointly establish.''.
          (4) in the heading for subsection (f), by striking ``Maintain 
        Public Rating or'' and inserting ``Meet Standards of Credit-
        worthiness''; and
          (5) in subsection (f)(1), by striking ``any applicable 
        rating'' and inserting ``standards of credit-worthiness 
        established by the Comptroller of the Currency''.
  (e) Securities Exchange Act of 1934.--Section 3(a) Securities 
Exchange Act of 1934 (15 U.S.C. 78a(3)(a)) is amended--
          (1) in paragraph (41), by striking ``is rated in one of the 
        two highest rating categories by at least one nationally 
        recognized statistical rating organization'' and inserting 
        ``meets standards of credit-worthiness as defined by the 
        Commission''; and
          (2) in paragraph (53)(A), by striking ``is rated in 1 of the 
        4 highest rating categories by at least 1 nationally recognized 
        statistical rating organization'' and inserting ``meets 
        standards of credit-worthiness as defined by the Commission''.
  (f) World Bank Discussions.--Section 3(a)(6) of the amendment in the 
nature of a substitute to the text of H.R. 4645, as ordered reported 
from the Committee on Banking, Finance and Urban Affairs on September 
22, 1988, as enacted into law by section 555 of Public Law 100-461, (22 
U.S.C. 286hh(a)(6)), is amended by striking ``rating'' and inserting 
``worthiness''.
  (g) Effective Date.--The amendments made by this section shall take 
effect after the end of the 6-month period beginning on the date of the 
enactment of this Act.

SEC. 10. REVIEW OF RELIANCE ON RATINGS.

  (a) Agency Review.--
          (1) Review.--Not later than 1 year after the date of the 
        enactment of this Act, each Federal agency listed in paragraph 
        (4) shall, to the extent applicable, review--
                  (A) any regulation issued by such agency that 
                requires the use of an assessment of the credit-
                worthiness of a security or money market instrument, 
                and
                  (B) any references to or requirements in such 
                regulations regarding credit ratings.
          (2) Modifications required.--Each such agency shall modify 
        any such regulations identified by the review conducted under 
        paragraph (1) to remove any reference to or requirement of 
        reliance on credit ratings and to substitute in such 
        regulations such standard of credit-worthiness as each 
        respective agency shall determine as appropriate for such 
        regulations. In making such determination, such agencies shall 
        seek to establish, to the extent feasible, uniform standards of 
        credit-worthiness for use by each such agency, taking into 
        account the entities regulated by each such agency and the 
        purposes for which such entities would rely on such standards 
        of credit-worthiness.
          (3) Report.--Upon conclusion of the review required under 
        paragraph (1), each Federal agency listed in paragraph (4) 
        shall transmit a report to Congress containing a description of 
        any modification of any regulation such agency made pursuant to 
        paragraph (2).
          (4) Applicable agencies.--The agencies required to conduct 
        the review and report required by this subsection are--
                  (A) the Securities and Exchange Commission;
                  (B) the Federal Deposit Insurance Corporation;
                  (C) the Office of Thrift Supervision;
                  (D) the Office of the Comptroller of the Currency;
                  (E) the Board of Governors of the Federal Reserve;
                  (F) the National Credit Union Administration; and
                  (G) the Federal Housing Finance Agency.
  (b) GAO Review of Other Agencies.--
          (1) Review.--The Comptroller General shall conduct a 
        comprehensive review of the use of credit ratings by Federal 
        agencies other than those listed in subsection (a)(3), 
        including an analysis of the provisions of law or regulation 
        applicable to each such agency that refer to and require the 
        use of credit ratings by the agency, and the policies and 
        practices of each agency with respect to credit ratings.
          (2) Report.--Not later than 1 year after the date of the 
        enactment of this Act, the Comptroller General shall transmit 
        to Congress a report on the findings of the study conducted 
        pursuant to paragraph (1), including recommendations for any 
        legislation or rulemaking necessary or appropriate in order for 
        such agencies to reduce their reliance on credit ratings.

SEC. 11. PUBLICATION OF RATING HISTORIES ON THE EDGAR SYSTEM.

  Not later than 180 days after the date of the enactment of this Act, 
the Securities and Exchange Commission shall revise its rules in 
section 240.17g-2(a) and (d) of title 17, Code of Federal Regulations, 
to require that the random sample of ratings histories of credit 
ratings required under such rules to be disclosed on the website of a 
nationally recognized statistical rating organization also be provided 
to the Commission in a format consistent with publication by the 
Commission on the EDGAR system.

SEC. 12. EFFECT OF RULE 436(G).

  Rule 436(g), promulgated by the Securities and Exchange Commission 
under the Securities Act of 1933, shall have no force or effect.

SEC. 13. STUDIES.

  (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; and
                  (C) the effect of liability in private actions 
                arising under the Securities Exchange Act of 1934;
                  (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; and
                  (E) alternative methodologies to assess credit risk, 
                including market-based measures.
          (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 on Assigning Credit Rating Agencies on a Rotating 
Basis.--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 and obligors 
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.
  (c) SEC Study on Effect of New Requirements on NRSRO Registration.--
The Securities and Exchange Commission shall conduct a study on the 
effect of the amendments made by section 2 on credit rating agencies 
seeking to register as nationally recognized statistical rating 
organizations, including whether the new requirements in such 
amendments deter credit rating agencies from registering as nationally 
recognized statistical rating organizations. Not later than 1 year 
after the date of enactment of this Act, the Commission shall transmit 
to the Committee on Financial Services of the House of Representatives 
and the Committee on Banking, Housing, and Urban Affairs of the Senate 
a report on the findings of such study.
  (d) Study of Credit Ratings of Different Classes of Bonds.--
          (1) Study.--The Securities and Exchange Commission shall 
        conduct a study of the treatment of different classes of bonds 
        (municipal versus corporate) by the nationally recognized 
        statistical rating organizations. Such study shall examine--
                  (A) whether there are fundamental differences in the 
                treatment of different classes of bonds by such rating 
                organizations that cause some classes of bonds to 
                suffer from undue discrimination;
                  (B) if there are such differences, what are the 
                causes of such differences and how can they be 
                alleviated;
                  (C) whether there are factors other than risk of loss 
                that are appropriate for the credit ratings agencies to 
                consider when rating bonds, and do those factors vary 
                across different sectors
                  (D) the types of financing arrangement used by 
                municipal issuers
                  (E) the differing legal and regulatory regimes 
                governing disclosures for corporate bonds and municipal 
                bonds;
                  (F) the extent to which retail investors could be 
                disadvantaged by a single ratings scale; and
                  (G) practices, policies, and methodologies by the 
                nationally recognized statistical rating organizations 
                with respect to rating municipal bonds.
          (2) Report.--Within 6 months after the date of enactment of 
        this Act, the Securities and Exchange Commission shall submit a 
        report on the results of the study required by paragraph (1) to 
        the Committee on Financial Services of the House of 
        Representatives and the Committee on Banking, Housing, and 
        Urban Development of the Senate. Such report shall include as 
        assessment of each of the issues and subjects described in 
        subparagraphs (A) through (G) of paragraph (1).
  (e) SEC Study on Meaningful Multi Digit Rating Symbols.--
          (1) Study.--The Securities and Exchange Commission shall 
        conduct a study on 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. 
        The study shall optimize the definitions of the symbols to 
        maximize their overall usefulness for users of credit ratings.
          (2) Initial example for guidance.--An example to provide 
        initial guidance for the study is a ratings symbol consisting 
        of three digits, each of which corresponds to default 
        probabilities under different levels of market stress as 
        follows:
                  (A) The first digit represents the default 
                probability under ``normal'' market stress, 
                characterized by normal economic fluctuations in 
                addition to a 5 percent decline in asset value and 2 
                percent increase in unemployment.
                  (B) The second digit represents the default 
                probability under more severe market stress, 
                characterized a 20 percent decline in asset value and 5 
                percent increase in unemployment.
                  (C) The third digit represents the default 
                probability under extreme market stress, characterized 
                by a 50 percent decline in asset value and 10 percent 
                increase in unemployment.
          (3) Report.--Not later than 1 year after the date of the 
        enactment of this Act, the Commission shall transmit to 
        Congress a report of the study conducted pursuant to paragraph 
        (1), including recommendations on whether the system similar to 
        that described in paragraph (2) should be implemented and, if 
        so, any necessary legislation required to implement such a 
        system.
  (f) SEC Study on Ratings Standardization.--
          (1) In general.--The Securities and Exchange Commission shall 
        undertake a study on the feasability and desirability of--
                  (A) standardizing credit ratings terminology, so that 
                all credit rating agencies issue credit ratings using 
                identical terms;
                  (B) standardizing the market stress conditions under 
                which ratings are evaluated;
                  (C) requiring a quantitative correspondence between 
                credit ratings and a range of default probabilities and 
                loss expectations under standardized conditions of 
                economic stress; and
                  (D) standardizing credit rating terminology across 
                asset classes, so that named ratings shall correspond 
                to a standard range of default probabilities and 
                expected losses independent of asset class and issuing 
                entity.
          (2) Report.--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 and the recommendations of the Commission.

                          Purpose and Summary

    H.R. 3890, the Accountability and Transparency in Rating 
Agencies Act, brings comprehensive reform to the oversight and 
operations of the credit rating industry. The financial crisis 
exposed numerous problems with the credit rating agency 
industry, including how ratings are used by investors and 
regulators, as well as growing concerns about a lack of 
transparency and accountability in the industry, the 
reliability of ratings, conflicts of interest, and the 
provision of non-rating services, such as consulting, by credit 
rating agencies.
    In response, H.R. 3890 gives broader powers to the U.S. 
Securities and Exchange Commission (SEC) to regulate nationally 
recognized statistical rating organizations (NRSROs). The bill 
also creates a new regime of enhanced corporate governance for 
NRSROs and addresses concerns about the integrity of the 
procedures and methodologies underlying credit ratings. 
Additionally, the legislation increases the information 
available to the public and investors by requiring a variety of 
disclosures by NRSROs.
    Moreover, H.R. 3890 enhances accountability by clarifying 
and reforming aspects of the liability of NRSROs under the 
securities laws. The bill addresses the immense reliance by 
federal regulators on credit ratings and fosters more 
independent analysis by investors and users of credit ratings, 
too. Finally, the legislation commissions a number of studies 
to further investigate enhancements and reform of the industry.

                  Background and Need for Legislation


                                OVERVIEW

    Credit rating agencies have assumed a central role in the 
global capital markets. They provide independent assessments of 
the creditworthiness of debt instruments, including municipal 
and corporate bonds, money market instruments, and structured 
finance debt products like mortgage-backed securities and 
collateralized debt obligations (CDOs). Investors, creditors 
and counterparties have come to rely on these credit ratings in 
their investment decisions not only as an assessment of an 
issuer's likelihood of default or the expected loss of an 
obligor, but as a benchmark for investment appropriateness 
given portfolio and business guidelines and for private 
contractual agreements.
    Three players--Moody's Investor Services, Standard & 
Poor's, and Fitch Ratings--dominate the credit ratings 
marketplace. Together, they are responsible for more than 97 
percent of the ratings of outstanding securities across all 
categories reported to the SEC.\1\ The dominant players have 
issuer-pay business models where the issuer of securities makes 
the payment for ratings services. An alternative model, the 
subscriber-pay model, has re-emerged in recent years.\2\ The 
subscriber-pay model generates fees from users of ratings, 
mostly investors, who subscribe to their services. Agencies 
using the issuer-pay model have access to the issuer's non-
public information, including access to management for 
discussions. Conversely, agencies using the subscriber-pay 
model do not have access to non-public information or 
management. Instead, they rely only on publicly available 
information when issue ratings.
---------------------------------------------------------------------------
    \1\U.S. Securities and Exchange Commission, Annual Report on 
Nationally Recognized Statistical Rating Organizations, September 2009, 
showing that Moody's, Fitch, and Standard & Poor's collectively account 
for 3,039,264 of 3,123,748 (97.3 percent) ratings reported to the SEC 
on form NRSRO for 2008.
    \2\``Historically, rating agencies were financed solely by 
subscriber fees paid by investors and other users of credit ratings. By 
the mid-1970s, however, the largest rating agencies began charging 
issuers for ratings, due to difficulties in limiting access to ratings 
information to subscribers, as well as to the demand for more 
comprehensive and resource-intensive analysis of issuers.'' U.S. 
Securities and Exchange Commission, Report on the Role and Function of 
Credit Rating Agencies in the Operation of the Securities Markets, 
January 24, 2003. ``Fitch and Moody's started to charge corporate 
issuers for ratings in 1970, and Standard and Poor's followed suit a 
few years later.'' Also, Richard Cantor & Frank Packer, The Credit 
Rating Industry, Federal Reserve Bank of New York Q. 1 (1994).
---------------------------------------------------------------------------
    Though the dominant credit rating agencies have been under 
fire for some years, the financial crisis exacerbated 
investors' loss of confidence in the agencies and the ratings 
they produce. In recent years, the elevated ratings of 
residential mortgage-backed securities (RMBS) and CDO 
structures and the magnitude and rapidity of subsequent 
downgrades erased prior confidence in the work of the dominant 
credit rating agencies and drove an erosion of the capital 
markets. Moreover, this lack of investor confidence in ratings 
contributed to the credit crunch and stifled access to capital 
for borrowers. As a result, the complex structured finance 
market largely shut down. In the wake of the crisis, users of 
credit ratings have intensified their demands for greater 
oversight and internal controls, accountability and accuracy of 
the credit rating agencies.

                          EVOLUTION OF NRSROS

    In 1975, the SEC established the concept of an NRSRO to 
help broker-dealers calculate margin requirements under the 
newly established Net Capital Rule.\3\ Securities with a higher 
or ``investment grade rating'' from an NRSRO received a lower 
``haircut'' for capital treatment under the rule as they were 
deemed to be lower-risk investments. The requirement that the 
credit rating agency be ``nationally recognized'' was designed 
to ensure that the ratings employed were credible and 
reasonably relied upon by the marketplace.
---------------------------------------------------------------------------
    \3\17 C.F.R. 240.15c3-1, Adoption of Uniform Net Capital Rule and 
an Alternative Net Capital Requirement for Certain Brokers and Dealers, 
Release No. 34-11497 (June 26, 1975) and 40 Federal Register 29,795 
(July 16, 1975).
---------------------------------------------------------------------------
    Though the SEC recognized the three dominant credit rating 
agencies (Standard & Poor's, Moody's, and Fitch) as NRSROs at 
the time, it neither established a formal process for making 
such recognitions nor created an oversight system for NRSROs. 
Prior to the formal process created in the Credit Rating Agency 
Reform Act of 2006, eight additional firms received designation 
as NRSROs, but many of these firms subsequently merged with or 
were acquired by another NRSRO.
    Congress formalized the process for NRSRO approval and 
oversight of the credit rating agencies in the Credit Rating 
Agency Reform Act of 2006.\4\ The law sought to promote 
competition in the credit rating industry by replacing the 
SEC's no-action letter approach for approving NRSROs with a 
clear set of application criteria and a formal process for 
evaluating NRSRO applicants. The law also authorized the SEC to 
conduct oversight of NRSROs and to issue regulations to prevent 
or manage NRSROs' conflicts of interest.
---------------------------------------------------------------------------
    \4\P.L. 109-291.
---------------------------------------------------------------------------
    In 2007, nine credit rating agencies formally registered 
under the new SEC guidelines, and today there are ten NRSROs 
registered with the SEC.\5\ All but three of these firms 
operate predominantly under an issuer-pay model. The three that 
are predominantly subscriber-pay are Egan-Jones, LACE and 
Realpoint.
---------------------------------------------------------------------------
    \5\The ten NRSROs include A.M. Best Company, Inc.; DBRS Ltd.; 
Fitch, Inc.; Japan Credit Rating Agency, Ltd.; Moody's Investors 
Service, Inc.; Rating and Investment Information, Inc.; Standard & 
Poor's Ratings Services; Egan-Jones Rating Company; LACE Financial 
Corp.; and Realpoint LLC.
---------------------------------------------------------------------------
    Since inception, the NRSRO term has become embedded in 
approximately a dozen federal statutes, about 100 federal 
regulations, roughly 200 state laws, and many state rules. For 
example, Federal laws with references to NRSROs include the 
Federal Deposit Insurance Act, the Securities Exchange Act of 
1934, the Employee Retirement Income Security Act of 1974, and 
the Internal Revenue Code of 1986. Foreign governments and 
international bodies also reference credit ratings and credit 
rating agencies in their accords and codes. NRSRO ratings are 
also used as credit quality measures for the debt securities 
held by money market funds and pension plans, as well as in 
many private agreements.

          THE FINANCIAL CRISIS AND THE NEED FOR FURTHER REFORM

    In recent years, the dominant credit rating agencies have 
faced a chorus of growing criticism that reached a crescendo in 
the recent financial crisis. Despite the increased SEC 
authority post-2006, many have renewed their criticism of the 
timeliness and accuracy of credit ratings, especially regarding 
structured finance products and certain industries like bond 
insurers. These calls heightened the scrutiny that NRSROs have 
long attracted for their failures to foresee significant credit 
problems, despite their access to non-public information (in 
the case of issuer-pay NRSROs).
    Earlier in this decade, for example, the dominant credit 
rating agencies all issued investment grade credit ratings for 
bonds issued by WorldCom just three months before the company 
declared bankruptcy. Moody's and Standard & Poor's also both 
gave investment grade ratings to Enron's debt and structured 
products until just days before that firm imploded. More 
recently, the rating agencies were slow to revise high ratings 
given to large, distressed institutions like Lehman Brothers 
and American International Group, and ``maintained AAA ratings 
on thousands of nearly worthless subprime-related 
securities.''\6\ The escalation in size of the capital markets, 
rapid growth of new and complex products, increased liquidity 
in the markets, and over-reliance on credit ratings exposed the 
vulnerabilities in the current regulatory regime of NRSROs.
---------------------------------------------------------------------------
    \6\Jerome S. Fons and Frank Partnoy, Rated F for Failure, New York 
Times, March 16, 2009.
---------------------------------------------------------------------------

                       ROLE OF STRUCTURED FINANCE

    The financial crisis has shed light on the NRSROs' 
methodologies and internal controls and further differentiated 
the understanding between single issuer ratings (for example, 
corporate and municipal bonds) and structured finance ratings. 
Single issuer methodology has over time remained relatively 
static at the NRSROs, while the bull credit markets' structured 
finance ratings methodology has proven quite fluid. According 
to some critics of structured finance ratings, NRSROs were 
``learning-by-doing.''\7\
---------------------------------------------------------------------------
    \7\Joshua Rosner, Toward an Understanding: NRSRO Failings in 
Structured Ratings and Discreet Recommendations to Address Agency 
Conflicts, Journal of Structured Finance (2009).
---------------------------------------------------------------------------
    The structured finance market--predominantly CDOs, subprime 
RMBS, and synthetic structured deals--also revealed the NRSROs' 
vulnerabilities in delivering accurate ratings, transparency, 
timeliness of downgrades, adequate (if any) due diligence, and 
inherent conflicts of interest. Rather than relying on 
empirical data, for these newer, more complex products NRSROs 
relied on statistically derived assumptions that failed 
investors in a fast moving marketplace.
    Moreover, the SEC staff in August 2007 initiated a review 
of the three largest NRSROs to examine their roles in the 
subprime mortgage crisis. The report observed:

          The Commission staff found that these rating agencies 
        struggled significantly with the increase in the number 
        and complexity of subprime residential mortgage-backed 
        securities (``RMBS'') and collateralized debt 
        obligations (``CDOs'') deals since 2002. The 
        examinations uncovered that the procedures for rating 
        RMBS and CDOs were not well documented. Furthermore, 
        significant aspects of the rating process were not 
        always disclosed or even documented by the firms and 
        issues were identified in the management of conflicts 
        of interest.\8\
---------------------------------------------------------------------------
    \8\U.S. Securities and Exchange Commission, Annual Report on 
Nationally Recognized Statistical Rating Organizations, September 2009.

    According to the SEC, the financial crisis also revealed an 
---------------------------------------------------------------------------
inconsistency in the ratings across debt products:

          Rating agencies may employ different scales for 
        different regions, sectors, jurisdictions or types of 
        securities. For example, the rating scale a credit 
        rating agency employs to assign short term obligations 
        may differ from the rating scale it uses for long term 
        obligations. Ratings are described by the credit rating 
        agencies as intended to reflect only credit risk, not 
        other valuations factors such as liquidity or currency 
        risk.''\9\
---------------------------------------------------------------------------
    \9\Ibid.

    Thus, a municipal bond rated AAA did not have the same risk 
profile as a corporate bond rated AAA, or a similarly rated 
commercial mortgage-backed securities or CDOs. Furthermore, in 
the summer of 2007, a review of the distribution of AAA ratings 
across asset classes revealed a bias towards top quality 
ratings for structured credit; 27 sovereign bonds, 67 corporate 
bonds, 160 municipal bonds, 6,822 CDOs and 8,070 RMBS all 
received AAA, the highest quality rating.\10\
---------------------------------------------------------------------------
    \10\Josh Rosner, Graham-Fisher and Co. Weekly Report, July 26, 
2007.
---------------------------------------------------------------------------
    The credit rating agencies played a significant role in the 
run-up of the structured market, as both advisors and 
validators, even when they had access to less than complete 
information for analysis. Conflicts of interest additionally 
were rife in the structured finance market as the NRSROs played 
a central role in the iterative process of rating structured 
finance transactions. Often, the NRSROs actively advised the 
structured finance deal originators on how to achieve optimum 
ratings, while the NRSROs' fees remained dependent on receipt 
of such rating. Even when not acting as advisors, the NRSROs' 
ratings validated a pool of assets due to the structural 
elements of the transaction (for example, the appropriate level 
of subordination commensurate with an identified rating 
outcome), not the integrity of the underlying loans. Hence, the 
NRSROs could deliver a high quality rating without conducting 
adequate analysis.

                      GROWING RELIANCE ON RATINGS

    Many over time have come to rely on credit rating agencies. 
References to credit rating agencies, credit ratings, and 
NRSROs appear in Federal and State statutes, agency rules and 
regulations, as well as private contractual agreements and 
investment guidelines. Credit rating agencies also hold quasi-
regulatory powers, and regulators presently widely depend on 
their work to monitor and access risk.
    Users of NRSRO credit ratings also include regulators and 
investors around the world, too. For example, ``the Basel II 
framework, which has been implemented by members of the 
European Union, relies on the ratings of credit rating agencies 
recognized as External Credit Assessment Institutions (ECAI) 
(for example, Moody's, S&P;, Fitch, and DBRS) in order to 
calculate bank capital requirements within its standardized 
approach for credit risk measurement.''\11\
---------------------------------------------------------------------------
    \11\U.S. Securities and Exchange Commission, Annual Report on 
Nationally Recognized Statistical Rating Organizations, September 2009.
---------------------------------------------------------------------------
    Additionally, bank loan agreements and private contractual 
agreements often have what is known as ``ratings triggers'' 
whereby a credit rating downgrade of a counterparty or creditor 
could result in the posting of collateral or additional margin 
to shore up positions or exposure. Moreover, money managers--
including endowments and pension funds--often view a highly 
rated security as safer, especially in complex products like 
mortgage-backed securities and synthetic CDOs where independent 
credit analysis is difficult for most.
    The SEC has recently taken steps to reduce the reliance on 
ratings in the capital markets. In July 2008, the SEC proposed 
amendments to existing rules that rely on credit ratings.\12\ 
These rules sought to promote independent analysis in making 
investment decisions. The proposals also responded to 
recommendations issued by the President's Working Group on 
Financial Markets, the Financial Stability Forum, and the 
Technical Committee of the International Organization of 
Securities Commissions. In October 2009, the SEC adopted final 
rules that eliminated certain references to ratings by NRSROs 
in rules and forms under the Securities Exchange Act of 1934 
and in rules under the Investment Company Act of 1940.\13\
---------------------------------------------------------------------------
    \12\73 Federal Register 40,124 (2008).
    \13\74 Federal Register 52,358 (2009). In this rulemaking, the SEC 
also deferred consideration of action and reopened the comment period 
on other proposed amendments to remove NRSRO ratings references in 
rules under the Securities Act of 1933, the Securities Exchange Act of 
1934, the Investment Company Act of 1940, and the Investment Advisers 
Act of 1940.
---------------------------------------------------------------------------
    Despite these regulatory actions, investor reliance on 
credit ratings has continued, and during the financial crisis, 
investors suffered immense losses as previously highly rated 
instruments soured, driving further concerns that many ratings 
were based upon unsatisfactory credit analysis. Quality and 
reliability of ratings is a chief concern for investors and 
users of ratings.

                             ACCOUNTABILITY

    As noted above, both institutional and individual investors 
have relied on credit ratings to help determine whether to 
invest in a debt instrument. This massive public reliance was 
frustrated as the economy deteriorated beginning in 2007. As 
foreclosures mounted and the value of RMBS and other asset-
backed securities deteriorated, credit rating agencies were 
forced to reevaluate their models and methodologies. They were 
also forced to downgrade many securities they had previously 
endorsed with high ratings. The flimsiness of these ratings 
reverberated throughout retail and institutional accounts as 
the value of securities eroded.
    This turmoil has exposed the unreliability of credit rating 
agencies. Many of the users of ratings have therefore mounted 
criticisms that the rating agencies should be held accountable, 
in addition to the issuers and underwriters who are often sued 
for investment losses.
    Credit rating agencies are subject to liability under a 
variety of legal theories. Credit rating agencies, like other 
market participants, are subject to liability under the broad 
anti-fraud proscription contained in the SEC's Rule 10b-5. 
Litigants have additionally alleged other theories under 
Federal securities law. Rating agencies also can be held liable 
under many state ``blue sky'' laws, which sometimes have lower 
pleading standards or offer broader liability than federal 
securities laws.\14\ Further, credit rating agencies can be 
sued under a variety of common law and other non-securities law 
claims.\15\
---------------------------------------------------------------------------
    \14\See, e.g., In re Nat'l Century Fin. Enters., Inc., Inv. Litig., 
580 F. Supp. 2d 630, 649- 50 (S.D. Ohio 2008) (Finding rating agency 
liable under Ohio blue sky law, which provides for secondary liability 
for aiding and abetting where plaintiffs have not alleged scienter).
    \15\Id. (rating agency can be sued for common law fraud and state 
negligent misrepresentation laws).
---------------------------------------------------------------------------
    The Credit Rating Agency Reform Act of 2006, where the 
formal registration process for NRSROs was created, included a 
prohibition on private rights of action with regard to new 
section 15E of the Securities Exchange Act of 1934. In the wake 
of the financial crisis, many have called upon Congress to 
remove this prohibition.
    As with many securities fraud lawsuits, very few cases make 
it to trial. This could be for a variety of reasons, including 
inadequate facts in the pleading, or settlement before trial. 
The current scienter standard for bringing suit against an 
NRSRO has been established through case law as ``knowing or 
reckless knowledge''.

                  USES OF THE FIRST AMENDMENT DEFENSE

    Credit rating agencies have moreover long asserted that 
they cannot be held liable for the content of their ratings 
because credit ratings are protected speech under the First 
Amendment of the U.S. Constitution. Here, the credit rating 
agencies generally make two claims: First, they claim that 
ratings ``focus upon matters of public concern'' triggering the 
``actual malice'' test.\16\ This test requires the difficult 
showing that the credit rating agency knew that its rating was 
false or issued it with reckless disregard for whether it was 
false or not.\17\ Second, credit rating agencies claim that 
ratings are non-falsifiable opinions, like newspaper 
editorials. Such opinions are protected from liability,\18\ and 
a number of courts have applied this protection to ratings.\19\
---------------------------------------------------------------------------
    \16\376 U.S. 254, 280 (1964). See, e.g., In re Enron Corp. Sec., 
Derv., and ``ERISA'' Litig., 511 F. Supp. 2d 742, 825 (S.D. Tx 2005) 
(holding that the actual malice standard applies when ratings of Enron 
Corp. were challenged as negligent).
    \17\New York Times Co. v. Sullivan, 376 U.S. 254, 280 (1964).
    \18\Milkovich v. Lorain Journal Co., 497 U.S. 1, 20 (1990).
    \19\See, e.g., Jefferson County Sch. Dist. No. R-1 v. Moody's 
Investor's Servs., 175 F.3d 848, 856 (10th Cir. 1999) (ratings are non-
falsifiable opinions).
---------------------------------------------------------------------------
    But this protection is far from universally accepted. Some 
courts accept the free speech immunity only with 
reservation,\20\ and many others reject it altogether.\21\ And 
``courts have suggested that credit rating agency activities 
associated with the structuring of a transaction, as contrasted 
with merely rating the transaction after issuance, are too 
dissimilar from ordinary journalistic activity to merit the 
legal protection awarded to journalists.''\22\
---------------------------------------------------------------------------
    \20\See, e.g., In re Enron, 511 F. Supp 2d 742 at 825 (``This Court 
has previously indicated that there is no blanket First Amendment 
protection for published credit ratings; one must examine any 
underlying facts, the circumstances under which the statements were 
made (context), the nature of the content, and the language of the 
statements to determine whether they are protected by the First 
Amendment. . . . the First Amendment protection for credit rating 
agencies as members of the `financial press' performing `traditional 
journalistic functions' is not universally accepted. . . .'').
    \21\See, e.g., Commercial Fin. Servs., Inc. v. Arthur Andersen LLP, 
94 P.3d 106 (Okla. Civ. App. 2004) (rejecting First Amendment defense 
and reversing a ruling that dismissed rating agencies from action 
alleging a too-favorable rating); LaSalle Nat'l Bank v. Duff & Phelps 
Credit Rating Co., 951 F.Supp. 1071 (S.D.N.Y. 1996) (rejecting First 
Amendment defense and denying rating agency's motion to dismiss claims 
based on its allegedly too-favorable rating).
    \22\Kenneth C. Kettering, Securitization and Its Discontents: The 
Dynamics of Financial Product Development, 29 Cardozo Law Review 1553, 
1690-91 (2008).
---------------------------------------------------------------------------
    Most recently, a Federal district court rejected a motion 
to dismiss brought by credit rating agencies based on First 
Amendment defenses, holding that free speech immunity does not 
apply ``where a rating agency has disseminated their ratings to 
a select group of investors rather than to the public at 
large.''\23\ The court also found that the ratings at issue 
were not protected as opinions, holding that an opinion is not 
protected unless the speaker genuinely and reasonably believes 
it or it has a basis in fact.\24\ Here, the plaintiff investors 
had pled sufficient facts to show that the defendants knew that 
the credit ratings were false, and the judge moved the case to 
trial.\25\ This decision was particularly noteworthy because it 
is ``one of the first decisions to reject the defense in the 
context of ratings of mortgage backed securities.''\26\
---------------------------------------------------------------------------
    \23\Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc., 2009 WL 
2828018, 9 (S.D.N.Y. Sept. 2, 2009).
    \24\Id. at 10.
    \25\Id. at 11.
    \26\John P. Stigi, New York Federal District Court Rejects Credit 
Rating Agencies' First Amendment Defense, Martindale.com Legal Library 
at http://www.martindale.com/banking-law/article_Sheppard-Mullin-
Richter-Hampton-LLP_809518.htm (last visited November 17, 2009).
---------------------------------------------------------------------------

                              COMPENSATION

    In the mid-1970s, the market leading NRSROs shifted from a 
subscriber-pay to an issuer-pay approach. The issuer-pay model 
has garnered criticism as it is deemed to create conflicts of 
interest for the NRSROs: chiefly, that raters are encouraged to 
lower their standards to attract the business of issuers 
seeking high-quality ratings. In structured finance, it was not 
uncommon that an NRSRO could be paid more for a better rating 
outcome. This challenge is aggravated by the practice of 
``ratings shopping'' by which an issuer solicits preliminary 
ratings from several NRSROs, but contracts with the NRSRO that 
produces the most favorable rating. Since the preliminary 
rating may not be released to the public, investors are unaware 
of the outcome of credit analysis conducted by other NRSROs.
    The credit rating agencies, especially the issuer-pay 
model, have come under harsh criticism for inherent conflicts 
of interest. Under the model, the issuer of a bond (corporate, 
municipal or structured product) pays the credit rating agency 
to rate the bond upon its issuance. The issuer pays subsequent 
fees in the maintenance of a current rating. The credit rating 
agency reviews public information (mostly from SEC filings) and 
non-public proprietary information (such as discussions with 
management including the review of forecasts), as provided by 
the issuer, to help determine the rating. The credit rating is 
then made available to the public, free of charge, through the 
credit rating agency website. There is an additional fee for 
institutional investors and anyone other than the issuer to see 
the full ratings report and analysis behind the rating.
    When obtaining a rating, an issuer's interest lies in 
having the highest possible rating rather than the most 
accurate or reliable rating. A higher rating will result in 
greater access to capital and a lower cost of funds for the 
borrower. Because the credit rating agency's revenue depends 
upon the issuer in the issuer-pay model, critics have argued 
that the credit rating agency's interest lies in higher rather 
than reliable ratings, which would better serve the investor.
    Some credit rating agencies use a subscriber-pay business 
model. As described above, the top three credit rating agencies 
used this model until the 1970s. Under the subscriber-pay 
model, the credit rating agency uses only public information to 
issue an unsolicited rating on an investment vehicle. Potential 
institutional investors then purchase the rating and underlying 
reports, but they are not made publicly available. 
Institutional investors subscribe to a ratings newsletter, 
usually focused on a certain class of fixed-income securities.
    While the subscriber-pay model can mitigate a number of 
conflicts of interest in the payment for the credit rating, the 
rating itself can be less robust because the credit rating 
agency only has access to public information. If all ratings 
were performed under this model, there is a strong chance that 
small issuers or less frequent issuers (e.g., municipalities) 
could have difficulty in finding users to pay for their rating. 
The result would be that such debt offerings would not get a 
rating and therefore either not be issued, or the issuer would 
have increased borrowing costs. Municipalities generally seek a 
rating because it brings down their borrowing costs in issuing 
debt.
    Additional alternatives that have been raised during debate 
on credit rating agency reform include creating a utility model 
and establishing a random assignment model. Under the utility 
model, an independent payment intermediary would stand between 
the issuer and the credit rating agency. Issuers seeking a 
rating would pay the intermediary who would assign a credit 
rating agency to the task and pay the agency a set fee for 
performing the rating.
    One concern with the utility model is that if the 
intermediary is a government agency or has government officials 
involved in the assignment, then the rating itself would have 
an implied government seal of approval. Such an approval could 
create an implied government guarantee. There are also 
questions about how fees would be set and if an appropriate 
level of analysis would be done for complex instruments if 
there is not an equivalent fee for the amount of work required.
    The random assignment model is similar to the utility 
model, whereby a panel would randomly assign a request for a 
rating to a credit rating agency. Issuers would pay into a pool 
and fees would be deducted from the pool for each rating. A 
concern with this alternative is that all credit rating 
agencies do not perform all types of ratings (for example, some 
credit rating agencies focus on instruments while others may 
focus on sectors).
    There could be a situation where a credit rating agency 
without the expertise to perform a certain rating is assigned 
that rating; alternatively if the panel takes expertise into 
account, the panel may be left with only one or two options 
which would defeat the benefits of random assignment because 
issuers seeking those specific ratings would know which credit 
rating agency would be assigned to perform the rating. 
Additionally, the market may still demand ratings from those 
credit rating agencies with which they feel most comfortable 
and could continue to do so outside the random selection 
process.
    Without a good substitute for the issuer-pay model, 
regulators have sought to mitigate the conflicts of interest 
arising out of that business arrangement by requiring more and 
greater disclosures on how credit rating agencies are paid.

                                Hearings

    The Financial Services Committee's Subcommittee on Capital 
Markets, Insurance, and Government Sponsored Enterprises has 
examined the issue of credit rating agencies on several 
occasions in recent years. For example, the Capital Markets 
Subcommittee held a hearing entitled The Role of Credit Rating 
Agencies in the Structured Finance Market on September 27, 
2007. This hearing examined questions related to assessing the 
credit quality of complex financial instruments, reviewing the 
role of NRSROs in developing new debt products, and 
understanding the conflicts of interest of NRSROs, especially 
related to their income sources. The hearing also explored the 
transparency of NRSRO criteria for evaluating structured 
products, the implementation of the Credit Rating Agency Reform 
Act of 2006, and the timeliness of recent decisions by NRSROs 
to downgrade the ratings of many mortgage-backed securities and 
CDOs.
    The following witnesses testified at the September 2007 
hearing:
           H. Sean Mathis, Managing Director, Miller 
        Mathis
           J. Kyle Bass, Managing Partner, Hayman 
        Capital
           Mark Adelson, Adelson-Jacob Consulting
           Michael Kanef, Group Managing Director, 
        Asset Finance Group, Moody's Investors Services
           Vickie Tillman, Executive Vice President, 
        Credit Rating Services, Standard & Poor's
           Joseph Mason, Professor, LeBow School of 
        Business, Drexel University
    The Capital Markets Subcommittee held a subsequent hearing 
entitled Approaches to Improving Credit Rating Agency 
Regulation on May 19, 2009. At the hearing, the Subcommittee 
received testimony from a variety of witnesses with experience 
in credit ratings, investment management, and First Amendment 
law. The witnesses addressed credit rating agency regulation 
and ways to improve accountability. In particular, the rating 
agency witnesses expressed their desire to assist the 
Committee's efforts and their support for enhanced oversight, 
but also opposition to significantly increased liability. The 
following witnesses testified:
           Mr. Robert Auwaerter, Principal and Head of 
        the Fixed Income Group, Vanguard
           Mr. Robert Dobilas, President and Chief 
        Executive Officer, RealPoint LLC
           Mr. Eugene Volokh, Gary T. Schwartz 
        Professor of Law, UCLA School of Law
           Mr. Stephen W. Joynt, President and Chief 
        Executive Officer, Fitch, Inc.
           Mr. Alex J. Pollock, Resident Fellow, 
        American Enterprise Institute
           Mr. Gregory Smith, General Counsel, Colorado 
        Public Employees' Retirement Association
    The Capital Markets Subcommittee held another hearing 
entitled Reforming Credit Rating Agencies on September 30, 
2009. At the hearing, the Subcommittee received testimony 
regarding a legislative discussion draft released on September 
25, 2009, by Capital Markets Subcommittee Chairman Paul E. 
Kanjorski. The discussion draft was designed to enhance the 
oversight, accountability, and transparency of NRSROs, and, 
with certain amendments, it formed the basis of the bill 
ultimately reported out of the Committee. The following 
individuals participated at the hearing:
           Mr. Daniel M. Gallagher, Co-Acting Director, 
        Division of Trading and Markets, U.S. Securities and 
        Exchange Commission
           Mr. Raymond McDaniel, Chairman and Chief 
        Executive Officer, Moody's Corporation
           Mr. Devan Sharma, President, Standard & 
        Poor's
           Mr. Stephen W. Joynt, President and Chief 
        Executive Officer, Fitch Inc.
           Mr. Robert Dobilas, President and Chief 
        Executive Officer, RealPoint LLC
           Mr. James H. Gellert, President and Chief 
        Executive Officer, Rapid Ratings International Inc.
           Mr. Kurt Schacht, Managing Director, CFA 
        Institute Centre for Financial Integrity

                        Committee Consideration

    The Committee on Financial Services met in open session on 
October 27, 2009, and on October 28, 2009, ordered H.R. 3890, 
Accountability and Transparency in Rating Agencies Act, as 
amended, favorably reported to the House by a record vote of 49 
yeas and 14 nays.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. A 
motion by Mr. Frank to report the bill, as amended, to the 
House with a favorable recommendation was agreed to by a record 
vote of 49 yeas and 14 nays (Record vote no. FC-79). The names 
of Members voting for and against follow:

                                              RECORD VOTE NO. FC-79
----------------------------------------------------------------------------------------------------------------
         Representative             Aye       Nay     Present     Representative      Aye       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Frank......................        X   ........  .........  Mr. Bachus.......        X   ........  .........
Mr. Kanjorski..................        X   ........  .........  Mr. Castle.......        X   ........  .........
Ms. Waters.....................  ........  ........  .........  Mr. King (NY)....        X   ........  .........
Mrs. Maloney...................        X   ........  .........  Mr. Royce........  ........        X   .........
Mr. Gutierrez..................        X   ........  .........  Mr. Lucas........  ........        X   .........
Ms. Velazquez..................        X   ........  .........  Mr. Paul.........  ........  ........  .........
Mr. Watt.......................        X   ........  .........  Mr. Manzullo.....  ........        X   .........
Mr. Ackerman...................        X   ........  .........  Mr. Jones........        X   ........  .........
Mr. Sherman....................        X   ........  .........  Mrs. Biggert.....        X   ........  .........
Mr. Meeks......................  ........  ........  .........  Mr. Miller (CA)..  ........        X   .........
Mr. Moore (KS).................        X   ........  .........  Mrs. Capito......        X   ........  .........
Mr. Capuano....................        X   ........  .........  Mr. Hensarling...  ........        X   .........
Mr. Hinojosa...................        X   ........  .........  Mr. Garrett (NJ).  ........        X   .........
Mr. Clay.......................        X   ........  .........  Mr. Barrett (SC).  ........  ........  .........
Mrs. McCarthy..................        X   ........  .........  Mr. Gerlach......  ........        X   .........
Mr. Baca.......................  ........  ........  .........  Mr. Neugebauer...  ........        X   .........
Mr. Lynch......................  ........  ........  .........  Mr. Price (GA)...  ........  ........  .........
Mr. Miller (NC)................        X   ........  .........  Mr. McHenry......  ........  ........  .........
Mr. Scott......................        X   ........  .........  Mr. Campbell.....        X   ........  .........
Mr. Green......................        X   ........  .........  Mr. Putnam.......  ........        X   .........
Mr. Cleaver....................        X   ........  .........  Mrs. Bachmann....  ........        X   .........
Ms. Bean.......................        X   ........  .........  Mr. Marchant.....        X   ........  .........
Ms. Moore (WI).................        X   ........  .........  Mr. McCotter.....        X   ........  .........
Mr. Hodes......................        X   ........  .........  Mr. McCarthy.....  ........        X   .........
Mr. Ellison....................        X   ........  .........  Mr. Posey........        X   ........  .........
Mr. Klein......................        X   ........  .........  Ms. Jenkins......  ........        X   .........
Mr. Wilson.....................        X   ........  .........  Mr. Lee..........  ........        X   .........
Mr. Perlmutter.................        X   ........  .........  Mr. Paulsen......  ........        X   .........
Mr. Donnelly...................        X   ........  .........  Mr. Lance........        X   ........  .........
Mr. Foster.....................        X   ........  .........
Mr. Carson.....................        X   ........  .........
Ms. Speier.....................        X   ........  .........
Mr. Childers...................        X   ........  .........
Mr. Minnick....................        X   ........  .........
Mr. Adler......................        X   ........  .........
Ms. Kilroy.....................        X   ........  .........
Mr. Driehaus...................        X   ........  .........
Ms. Kosmas.....................        X   ........  .........
Mr. Grayson....................        X   ........  .........
Mr. Himes......................        X   ........  .........
Mr. Peters.....................        X   ........  .........
Mr. Maffei.....................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

    The following amendments were also considered by the 
Committee:
    An amendment by Mr. Kanjorski (and Mr. Frank), no. 1, 
managers amendment, was agreed to by voice vote.
    An amendment by Mr. McHenry, no. 2, disclosures with 
respect to structured securities, was agreed to by voice vote.
    An amendment by Mr. Ackerman, no. 3, providing symbols 
conformity to state law requirements, was offered and 
withdrawn.
    An amendment by Mr. Bachus, no. 4, striking differentiating 
rating symbols, was not agreed to by voice vote.
    An amendment by Ms. Waters, no. 5, regarding compensation 
of compliance officer, was agreed to by voice vote.
    An amendment by Mr. Bachus, no. 6, regarding change to 
designation, was agreed to by voice vote.
    An amendment by Mr. Donnelly, no. 7, regarding Commission 
staffing and rulemaking authority, was agreed to by voice vote.
    An amendment by Mr. McCarthy (CA), no. 8, regarding a SEC 
study of market barriers, was agreed to by voice vote.
    An amendment by Mr. Hensarling, no. 9, regarding a study of 
credit ratings, was agreed to by voice vote.
    An amendment by Ms. Speier, no. 10, regarding elimination 
of exemption from fair disclosure rule, was agreed to by voice 
vote.
    An amendment by Mr. Garrett, no. 11, regarding pleading 
standard, was not agreed to by voice vote.
    An amendment by Ms. Speier, no. 12, regarding a prohibition 
on conflicts, was agreed to by voice vote.
    An amendment by Mr. Frank (and Mr. Garrett and Mr. Bachus), 
no. 13, regarding removal of statutory references to credit 
ratings, was agreed to by voice vote.
    An amendment by Ms. Kilroy, no. 14, regarding publication 
of rating histories on the EDGAR system, was agreed to by voice 
vote.
    An amendment by Ms. Kilroy, no. 15, regarding alternative 
methodologies to assess credit risk, was agreed to by voice 
vote.
    An amendment by Ms. Kilroy, no. 16, regarding independent 
directors, was not agreed to by voice vote.
    An amendment by Ms. Kilroy, no. 17, regarding the effect of 
Rules 436(g), was agreed to by voice vote.
    An amendment by Mr. Meeks, no. 18, regarding assumptions 
made in the rating process, was agreed to, as modified, by 
voice vote.
    Amendments by Mr. Foster, no. 19, regarding study on 
meaningful multi digit rating symbols and a study on ratings 
standardization and considered en bloc, were agreed to, as 
modified, by voice vote.
    An amendment by Mr. Foster (and Mr. Lynch), no. 20, 
regarding an advisory board, was agreed to by voice vote.
    An amendment by Mr. Sherman (and Mr. Lynch), no. 21, 
regarding initial credit rating assignments, was offered and 
withdrawn.
    An amendment by Mr. Lynch, no. 22, regarding statistical 
credit rating organization attestation, was agreed to by voice 
vote.
    An amendment by Mr. Sherman, no. 23, regarding requirement 
of contracts for credit ratings, was offered and withdrawn.
    An amendment by Ms. Speier, no. 24, regarding requirement 
of contracts for credit ratings, was agreed to by voice vote.
    An amendment by Mr. Sherman, no. 25, regarding requirement 
of contracts for credit ratings and the duty of care, was 
offered and withdrawn.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee has held hearings and 
made findings that are reflected in this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee establishes the 
following performance related goals and objectives for this 
legislation:
    H.R. 3890 generally aims to improve and enhance the 
regulatory framework for nationally recognized statistical 
rating organizations, or NRSROs. H.R. 3890 specifically expands 
the oversight authority of the U.S. Securities and Exchange 
Commission over NRSROs, strengthens NRSRO corporate governance, 
and increases the transparency of NRSRO ratings with the goal 
to further protect investors. The bill also aims to reduce the 
reliance on credit ratings for investors, regulators and other 
users of credit ratings.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                  Congressional Budget Office Estimate

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                                  December 3, 2009.
Hon. Barney Frank,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman:  The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3890, the 
Accountability and Transparency in Rating Agencies Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

H.R. 3896--Accountability and Transparency in Rating Agencies Act

    Summary: H.R. 3890 would expand recordkeeping and reporting 
requirements on credit rating agencies that are registered with 
the Securities and Exchange Commission (SEC). The bill also 
would require three federal bank regulators to establish 
uniform standards of creditworthiness. Finally, H.R. 3890 would 
require the SEC and the Government Accountability Office (GAO) 
to prepare several reports for the Congress related to the 
credit rating industry.
    CBO estimates that implementing H.R. 3890 would cost $33 
million over the 2010-2014 period, assuming appropriation of 
the necessary amounts. Further, enacting the bill could 
increase revenues because additional civil penalties could be 
imposed for violations of new regulations. CBO expects that any 
increase would not be significant because of the small number 
of violations that would probably occur. Enacting H.R. 3890 
would not have a significant effect on direct spending.
    H.R. 3890 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA) and would impose no 
costs on state, local, or tribal governments.
    H.R. 3890 would impose private-sector mandates, as defined 
in UMRA, on credit rating agencies that are registered with the 
SEC and on issuers of certain securities. Based on information 
from industry sources, CBO estimates the aggregate cost to 
comply with the mandates in the bill would fall below the 
annual threshold for private-sector mandates established in 
UMRA ($139 million in 2009, adjusted annually for inflation).
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 3890 is shown in the following table. 
The costs of this legislation fall within budget function 370 
(commerce and housing credit).

----------------------------------------------------------------------------------------------------------------
                                                                 By fiscal year, in millions of dollars--
                                                         -------------------------------------------------------
                                                            2010     2011     2012     2013     2014   2010-2014
----------------------------------------------------------------------------------------------------------------
                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATION

Estimated Authorization Level...........................        3        7        8        8        8        34
Estimated Outlays.......................................        3        6        8        8        8        33
----------------------------------------------------------------------------------------------------------------

    Basis of estimate: For this estimate, CBO assumes that H.R. 
3890 will be enacted early in calendar year 2010, that the 
necessary amounts will be appropriated near the start of each 
fiscal year, and that spending will follow historical patterns 
for the SEC.

Spending subject to appropriation

    Under current law, credit rating agencies that are 
registered with the SEC, known as nationally recognized 
statistical rating organizations (NRSROs), are required to 
follow certain recordkeeping and disclosure rules. H.R. 3890 
would expand those rules and require the SEC to examine each 
NRSRO at least annually. The bill also would require the SEC 
and GAO to prepare several studies and reports for the Congress 
related to the credit rating industry.
    Based on information from the SEC, CBO estimates that the 
agency would need to add 35 employees by fiscal year 2011 to 
undertake the additional examination and oversight activities 
required under the bill. Assuming appropriation of the 
necessary amounts, CBO estimates that implementing H.R. 3890 
would increase spending by $33 million over the 2010-2014 
period. That amount would cover the cost of salaries and 
benefits, overhead, preparing reports, and upgrading 
information technology systems.
    H.R. 3890 also would require the SEC and the Department of 
the Treasury to develop new standards of creditworthiness to be 
used when examining certain entities and transactions. CBO 
estimates that implementing this provision would have an 
insignificant effect on spending subject to appropriation.

Direct spending and revenues

    H.R. 3890 would require three federal bank regulators--the 
Federal Reserve, the Office of the Comptroller of the Currency 
(OCC), and the Federal Deposit Insurance Corporation (FDIC)--to 
develop new standards of creditworthiness to be used when 
examining regulated entities. Any increase in costs to the OCC 
and FDIC to develop those standards would be recovered through 
increased fees and insurance premiums, therefore, CBO estimates 
that these provisions would have no significant effect on 
direct spending over the 2010-2019 period.
    Net spending by the Federal Reserve is recorded in the 
federal budget as a change in revenue. Based on information 
from the Federal Reserve, CBO expects that the new regulatory 
activities would have no significant effect on the Federal 
Reserve's workload or budget and thus would have no significant 
impact on the federal budget.
    Enacting H.R. 3890 also could affect revenues because 
additional civil penalties could be imposed for violations of 
new regulations, but we expect that any such increases would 
not be significant because of the relatively small number of 
violations likely to occur.
    Estimated impact on State, local, and tribal governments: 
H.R. 3890 contains no intergovernmental mandates as defined in 
UMRA and would impose no costs on state, local, or tribal 
governments.
    Estimated impact on the private sector: H.R. 3890 would 
impose private-sector mandates, as defined in UMRA, on credit 
rating agencies that are identified as NRSROs and registered 
with the SEC. The bill would require NRSROs to comply with 
several requirements to be established by the SEC with respect 
to:
           Disclosures to clients and to the public,
           Information to be submitted to the SEC,
           Policies that address conflicts of interest,
           Duties for compliance officers,
           Supervising employees and tracking employee 
        transitions, and
           Services provided that are unrelated to 
        credit-rating services.
    The bill also would impose disclosure requirements on 
issuers of certain financial products and corporate debt. Such 
issuers would be required to disclose to the public any 
preliminary credit ratings on their products received from 
NRSROs. In addition, issuers of structured securities would be 
required to provide certain information to NRSROs.
    According to the SEC, there are currently 10 NRSROs, and 
many of the requirements under the bill involve information 
that is readily available or make only incremental changes to 
current business practices and regulations. Based on 
information from the SEC and industry sources, CBO estimates 
that the incremental cost for credit-rating agencies and 
issuers to comply with the requirements established under the 
bill would fall below the annual threshold for private-sector 
mandates established in UMRA ($139 million in 2009, adjusted 
annually for inflation).
    Estimate prepared by: Federal Costs: Susan Willie; Impact 
on State, Local, and Tribal Governments: Elizabeth Cove 
Delisle; Impact on the Private Sector: Brian Prest and Paige 
Piper/Bach.
    Estimate approved by: Theresa Gullo, Deputy Assistant 
Director for Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    Section 8 of this legislation directs the establishment by 
the SEC of an advisory committee as defined by section 3 of the 
Federal Advisory Committee Act: the Credit Ratings Agency 
Advisory Board. The Committee finds pursuant to section 5 of 
the Federal Advisory Committee Act that none of the functions 
of the proposed advisory committee are being or could be 
performed by one or more agencies or by an advisory committee 
already in existence, or by enlarging the mandate of an 
existing advisory committee. The Committee also determines that 
the Credit Ratings Agency Advisory Board has a clearly defined 
purpose, fairly balanced membership, and meets all of the other 
requirements of section 5(b) of the Federal Advisory Committee 
Act.

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds that the 
Constitutional Authority of Congress to enact this legislation 
is provided by Article 1, section 8, clause 1 (relating to the 
general welfare of the United States) and clause 3 (relating to 
the power to regulate interstate commerce).

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    H.R. 3890 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section establishes the short title of the bill as the 
``Accountability and Transparency in Rating Agencies Act''.

Section 2. Enhanced regulation of nationally recognized statistical 
        rating organizations

    This section of the bill makes numerous amendments to 
Section 15E of the Securities Exchange Act of 1934, the 
relevant section of Federal securities laws concerning the 
regulation of nationally recognized statistical rating 
organizations (NRSROs).
            Amendments to Exchange Act section 15E(a) on registration 
                    procedures and section 15E(b) on update of 
                    registration
    Paragraphs 1 and 2 of this section use the word ``file'' 
(and variations thereof) to replace the word ``furnish'' (and 
variations thereof). Thus, documents required as part of the 
NRSRO registration process, or NRSRO reports, shall now be 
``filed'' with the U.S. Securities and Exchange Commission 
(SEC), rather than ``furnished'' to it.
    Information that is ``furnished'' to the SEC is subject to 
a lower standard of accuracy and liability than information 
``filed'' with the SEC; for instance, Section 18 of the 
Exchange Act provides for liability for misleading statements 
only in documents ``filed'' with the SEC.
            Amendments to Exchange Act section 15E(c) on accountability 
                    for ratings procedures
    Numerous changes are made to Section 15E(c) of the Exchange 
Act. First, the legislation adds a clarification that current 
Section 15E(c)(2), which bars the SEC and any State from 
regulating the substance of credit ratings or the procedures 
and methodologies used to determine ratings, does not afford a 
defense against anti-fraud actions brought by the SEC.
    Next, the bill adds a requirement for the SEC to review the 
ratings and internal policies, procedures and methodologies of 
an NRSRO to ensure that the NRSRO has established and 
documented a system of internal controls, due diligence, and 
implementation of ratings methodology; the NRSRO follows such 
system; and the NRSRO's disclosures are consistent with such 
system.
    In this section, it is not intended that NRSROs will 
conduct due diligence on an instrument in the same manner and 
legal sense as underwriters of securities. It is also not 
intended for the SEC to prescribe in any way the quantitative 
and qualitative methodologies an NRSRO employs to determine 
credit ratings. Rather, it is intended that the SEC review the 
controls around these quantitative and qualitative 
methodologies that are designed, for example, to ensure that a 
credit analyst adheres to the NRSRO's quantitative and 
qualitative methodologies when performing the analysis that 
leads to a credit rating.
    The SEC must conduct reviews of internal processes for 
determining ratings at least once a year. NRSROs must also 
maintain records and make them available to the SEC as it deems 
necessary to conduct the reviews.
    Additionally, this section requires the SEC to issue new 
rules regarding NRSRO procedures and methodologies for rating 
structured securities. These new rules must (1) specify the 
information that must be disclosed to the NRSRO by the 
originators, issuers, and underwriters of the structured 
security on the security's underlying collateral, and (2) 
create procedures to collect and disclose information about the 
processes used by such originators, issuers and underwriters to 
assess the accuracy of their data and fraud detection. The SEC 
will define ``structured security'' in order to implement the 
section.
    The requirement that the SEC specify the information 
required to be disclosed to NRSROs is intended to remove 
potential information barriers. The NRSROs will be free to 
determine whether and how to incorporate this information into 
their quantitative and qualitative methodologies for 
determining credit ratings.
    The legislation also creates a new requirement that NRSROs 
provide, on a publicly accessible Internet site, the historical 
default rates of each class of financial product that they 
rate.
            Amendments to Exchange Act Section 15E(d) on censure, fine, 
                    denial, or suspension of registration; notice and 
                    hearing
    The legislation amends Exchange Act Section 15E(d) to 
clarify that the SEC may impose fines on NRSROs for violations 
of the law. The changes also clarify that the SEC may take 
action not only against the NRSRO itself, but also against the 
individuals who are associated with the NRSRO, were formerly 
associated with the NRSRO at the time of the alleged 
misconduct, or are seeking to become associated with the NRSRO.
    The bill adds two new activities that give rise to SEC 
sanction: The first is a failure to reasonably supervise NRSRO 
employees. The failure to supervise is based on employees' 
compliance with the securities laws (including rules and 
regulations) and the rules of the Municipal Securities 
Rulemaking Board. The bill also creates a safe harbor for 
supervisors who establish procedures for compliance and have no 
reason to believe that the procedures were not being followed. 
The second activity is the failure to conduct sufficient 
surveillance to ensure that its credit ratings remain current 
and reliable.
            Amendments to Exchange Act Section 15E(e) on termination of 
                    registration
    These provisions eliminate an NRSRO's ability to 
voluntarily withdraw its registration as an NRSRO.
            Amendments to Exchange Act Section 15E(h) on corporate 
                    governance, organization, and management of 
                    conflicts of interest
    The bill makes numerous changes to Section 15E(h) of the 
Exchange Act. The legislation alters the title to ``Management 
of Conflicts of Interest'' to ``Corporate Governance, 
Organization, and Management of Conflicts of Interest'' to 
reflect the substantive amendments made by the bill.
    Each NRSRO, or its parent entity, must now have a board of 
directors with at least one-third independent directors. The 
compensation for independent directors cannot be linked to the 
performance of the NRSRO, and the terms for independent 
directors must be non-renewable and not exceed 5 years.
    The amended subsection (h) also mandates several areas the 
board must oversee: (1) the establishment, maintenance and 
enforcement of processes for determining ratings; (2) the 
establishment, maintenance and enforcement of policies 
addressing conflicts of interest; (3) the effectiveness of the 
internal control system with respect to policies and procedures 
for determining credit ratings; and (4) the compensation and 
promotion policies and practices of the NRSRO.
    Each NRSRO must also establish, maintain and enforce 
written policies and procedures to address, manage and disclose 
conflicts of interest, consistent with SEC rulemakings required 
under both current and amended subsection (h).
    These SEC rulemakings, in the amended subsection (h), 
prohibit, or require the management and disclosure of, any 
conflicts of interest relating to the issuance of credit 
ratings by an NRSRO. The amended section maintains several 
rules required under current law, including rules concerning:
     Conflicts arising from how the NRSRO is paid for 
ratings; and
     Conflicts arising from any affiliations of NRSROs 
with any person that underwrites investment vehicles that are 
the subject of a credit rating.
    Amended section (h) also includes several new rules 
concerning conflicts of interest:
     Conflicts relating to the business relationships, 
ownership interests, any affiliations of NRSRO board members 
with obligors, and other financial or personal interests of the 
NRSRO board members or the NRSRO with a rating obligor or 
obligor affiliate (the amended law amplifies the current rule 
to include the affiliations of NRSRO board members with 
obligors);
     Disclosure of information about (1) the net 
revenue of the NRSRO attributable to each entity that paid for 
a credit rating, and (2) the relative standing of such entities 
in terms of net revenue earned by the NRSRO attributable to 
each such entity;
     Establishment of a performance-based payment 
system for ratings to incentivize accurate and reliable 
issuance and surveillance of credit ratings; and
     Disclosure with each rating of the fees associated 
with the rating and information about the number and type of 
ratings provided for the entity being rated and its affiliates, 
and the revenue earned by the NRSRO in the preceding two fiscal 
years attributable to the person being rated or its affiliates.
    Also, the amended section (h) maintains that the SEC must 
issue rules regarding any other potential conflict of interest, 
as it deems necessary or appropriate in the public interest or 
for the protection of investors.
    The amended subsection (h) further imposes a new 
requirement for NRSROs to conduct a one-year look-back review 
when an NRSRO employee goes to work for an obligor or 
underwriter of a security or money market instrument subject to 
a rating by that NRSRO. If the employee participated in any 
capacity in determining the rating of the issuer during the 
year before the NRSRO took a ratings action, the NRSRO must 
conduct a review to determine whether any conflicts of interest 
of the employee influenced the rating, and if appropriate, 
revise the rating. This new paragraph further requires the SEC 
to conduct periodic reviews of an NRSRO's policies and 
procedures for conducting the look-back reviews and their 
implementation.
    Amended subsection (h) also requires periodic SEC reviews 
of an NRSRO's code of ethics and conflict of interest 
procedures. These reviews must occur at least once annually and 
whenever such policies are materially modified or amended.
    Additionally, NRSROs must now report to the SEC when 
certain employees of the NRSRO go to work for an entity that 
the NRSRO has rated in the previous twelve months. The SEC 
shall make such reports publicly available.
            Amendments to Exchange Act section 15E(j) on designation of 
                    compliance officer
    The law's existing NRSRO compliance officer requirements 
are expanded and modified. The compliance officer will report 
directly to the board of directors and review specific aspects 
of internal control and conflict of interest policies. For 
instance, the compliance officer must establish procedures 
designed to ensure that ratings take into account all 
information obtained by the NRSRO to help determine that 
rating. The compliance officer must also establish procedures 
for receiving complaints about conflicts of interest, including 
anonymous complaints by employees, issuers and investors.
    The bill prohibits a compliance officer from determining 
credit ratings, performing marketing or sales functions, or 
participating in the establishment of rating models and 
methodologies and employee compensation levels (other than for 
employees working for the compliance office). These amendments 
require the compliance officer to annually prepare and certify 
a report on the compliance of the NRSRO with the securities 
laws and the NRSRO's internal policies and procedures. Finally, 
the compensation of the compliance officer must be arranged to 
ensure the officer's independence, and may not be linked to the 
NRSRO's business performance.
            Amendments to Exchange Act section 15E(k) on statements of 
                    financial condition
    This section amends the current law to provide that when 
NRSROs provide financial information to the SEC, it is no 
longer on a confidential basis. However, the SEC may treat as 
confidential any information provided under this section 
consistent with Federal law and SEC rules.
            Amendments to Exchange Act section 15E(p) on establishment 
                    SEC Office
    This bill expands the rulemaking authority of the SEC 
regarding NRSROs. It requires the SEC to establish an office 
with sufficient staff to coordinate NRSRO regulation. Also, the 
legislation instructs the SEC to issue rules (1) providing for 
fines and other penalties for NRSRO violations of the law, and 
(2) as necessary to carry out the new NRSRO regulatory regime.
            New Exchange Act section 15E(q) on transparency of ratings 
                    performance
    This section adds a new subsection (q) to Section 15E. This 
new subsection requires the SEC to write rules mandating NRSROs 
to publicly disclose information to allow investors to better 
gauge the performance of ratings and, thus, the NRSROs. This 
requirement applies to both initial ratings and subsequent 
changes to ratings. It is intended that this applies to 
existing ratings and not merely new issues. The form of 
disclosure must be comparable among NRSROs, so investors can 
compare ratings performance across NRSROs. The information 
presented must also be clear and informative for a wide range 
of investor sophistication, describe long-term performance for 
a variety of classes of ratings, and be published and made 
easily accessible. Each NRSRO rating further must include an 
attestation that the rating was not influenced by other 
business activities, was based solely on the merits of the 
instruments being rated, and that the rating was an independent 
evaluation of the risks and merits of the instrument.
            New Exchange Act section 15E(r) on credit ratings 
                    methodologies
    This section adds to a new subsection (r) to Section 15E of 
the Exchange Act to require the SEC to issue rules to ensure 
that NRSROs establish, maintain and enforce written procedures 
and methodologies designed to ensure that credit ratings are 
determined based on the NRSRO's procedures and methodologies. 
These rules must also ensure that changes to rating procedures 
and methodologies are consistently applied and that users of 
credit ratings are notified of a change of procedure or 
methodology in a timely fashion.
    Also, the SEC must adopt ratings symbols that distinguish 
between structured finance products, like mortgage-backed 
securities and collateralized debt obligations, and non-
structured products, like corporate and municipal bonds.
    The SEC shall also require each NRSRO to establish, 
maintain and enforce written policies and procedures designed 
to produce credit ratings that reflect the risk of non-
repayment, and to ensure that ratings symbols are clearly 
defined and consistent for all types of securities and money 
market instruments. These rules shall not prohibit an NRSRO 
from using additional factors to determine a rating (such as 
credit factors that are unique to municipal securities) or an 
additional symbol to distinguish ratings for difference types 
of securities.
    While additional credit factors may be considered by the 
NRSROs, nothing in the bill should be interpreted as 
inconsistent with the general intent that uniform ratings 
methodologies be adopted across different types of securities 
and reflect the risk of non-repayment.
            New Exchange Act section 15E(s) on transparency of credit 
                    rating methodologies and information reviewed
    This section adds to Exchange Act Section 15E a new 
subsection (s) to require NRSROs to provide information to help 
investors better understand ratings, using a form established 
by the SEC. This includes information about:
           the assumptions and information used in 
        developing ratings procedures and methodology;
           potential shortcomings of the ratings, 
        including what types of risks the rating does not take 
        into account;
           how certain the rating is, including the 
        reliability and quality of information used in making 
        the rating;
           whether third-party due diligence services 
        were used, in the instance of rating a structured 
        product;
           what information about any obligor, issuer, 
        security, or money market instrument was used to 
        determine the rating;
           the overall quality of the rating;
           the volatility of the rating;
           the content of the rating;
           the sensitivity of the rating to assumptions 
        made by the NRSRO; and
           how the NRSRO used servicer and remittance 
        reports for ratings surveillance (where applicable).
    The NRSRO must also certify that the information provided 
on the form is true and accurate. Additionally, the form will 
be made public to provide optimal transparency to investors and 
users of credit ratings.
    To further support the quality of ratings for structured 
finance products, especially mortgage-backed securities, this 
new subsection requires third-party firms that provide due 
diligence, for example on pools of loans, to certify their work 
to the NRSRO. This change ensures that the due diligence firm 
will execute a thorough review of data, documentation, and 
other relevant information necessary for the NRSRO to provide a 
reliable rating. The SEC will establish the appropriate format 
for this certification, but it is not intended that the SEC 
will determine what is considered an appropriate level of due 
diligence. The NRSRO must disclose the certification to those 
who have access to its ratings.
            New Exchange Act section 15E(t) on prohibited activities
    To bolster efforts to mitigate conflicts of interest, a new 
subsection (t) bars NRSROs from providing risk management 
advisory services; advice or consultation relating to any 
merger, sale, or disposition of assets of an issuer; ancillary 
assistance, advice or consulting unrelated to a credit rating; 
and other activities as defined by the SEC. This subsection 
takes effect 180 days after the bill is enacted.

Section 3. Standards for private actions

    Section 3 clarifies that the scienter requirement for cases 
brought against NRSROs is ``knowing or reckless'' violation of 
the anti-fraud provisions of the securities laws.
    The bill also amends Section 15E(m) of the Exchange Act by 
deleting the rules of construction instituted by the Credit 
Rating Agency Reform Act of 2006. It now provides that 
statements made by NRSROs shall not be deemed forward-looking 
statements for purposes of the safe-harbor in Section 21E of 
the Exchange Act.
    The legislation further requires that the scienter 
requirement of ``knowing or reckless knowledge'' be applied to 
NRSROs in the same manner as it is applied to other defendants 
in the same or similar lawsuits under the securities laws.

Section 4. Issuer disclosure of preliminary ratings

    To address the concern of ``ratings shopping'' by issuers, 
this section instructs the SEC to adopt rules that require 
issuers to disclose the preliminary credit ratings they receive 
from an NRSRO on structured finance products and all forms of 
corporate debt.

Section 5. Change to designation

    This section amends the Securities Act of 1933 and the 
Exchange Act to change all references of ``nationally 
recognized statistical rating'' to ``nationally registered 
statistical rating.''

Section 6. Timeline for regulations

    Unless otherwise provided in the bill, the SEC must issue 
final rules and regulations to implement the bill within 365 
days of enactment.

Section 7. Elimination of exemption from Fair Disclosure Rule

    This section requires the SEC, within 90 days of enactment, 
to eliminate the exemption in Regulation Fair Disclosure, 
commonly known as Reg FD, for NRSROs.

Section 8. Advisory board

    This section requires the SEC, within 90 days of this 
bill's enactment, to establish the Credit Ratings Agency 
Advisory Board. The Board will have seven members appointed by 
the SEC, no more than two of whom may be former employees of a 
credit rating agency. Members of the Board must display 
integrity and an understanding of the role of credit rating 
agencies in the marketplace. The Board shall advise the SEC 
regarding the rules and regulations required by this bill; 
ensure that the SEC properly exercises its NRSRO oversight 
functions; and issue an annual report to Congress detailing 
this work and any recommendations.

Section 9. Removal of statutory references to credit ratings

    In order to reduce reliance on NRSROs, this bill amends 
several statutes to remove references to credit ratings, credit 
rating agencies and NRSROs. The affected laws include the 
Federal Deposit Insurance Act; the Federal Housing Enterprises 
Financial Safety and Soundness Act; the Investment Company Act 
of 1940; Section 5136A of title LXII of the Revised Statutes of 
the United States; the Securities Exchange Act of 1934; and 
Section 3(a)(6) of the amendment in the nature of a substitute 
to the text of H.R. 4645, as ordered reported from the 
Committee on Banking, Finance and Urban Affairs on September 
22, 1988, as enacted into law by Section 555 of Public Law 100-
461. These amendments shall take effect six months after 
enactment.

Section 10. Review of reliance on ratings, rating agencies, and NRSROs

    This section requires certain Federal agencies to review 
their regulations, policies and practices that reference credit 
ratings, credit rating agencies, and NRSROs. After identifying 
where the agency relies on or makes these references, the 
agencies shall modify their regulations by striking these 
references and substituting a standard of creditworthiness to 
be established by the agencies. The relevant agencies, all of 
which are under the jurisdiction of the House Committee on 
Financial Services, are the SEC, the Federal Deposit Insurance 
Corporation, the Office of Thrift Supervision, the Office of 
the Comptroller of the Currency, the Board of Governors of the 
Federal Reserve System, the National Credit Union 
Administration, and the Federal Housing Finance Authority.
    Where feasible, the agencies should seek to develop uniform 
standards of creditworthiness to ensure a level playing field 
for evaluating counterparties, creditors, securities and 
financial products. This is most critical for banking 
institutions as they set standards. Agencies must complete this 
review within one year of enactment and report modifications to 
Congress.
    This section also requires the Government Accountability 
Office (GAO) within one year of enactment to conduct a 
comprehensive review of the use of and reliance on credit 
ratings by Federal agencies in laws and regulations. The GAO 
shall make recommendations for modifying legislation or 
rulemaking in order for these agencies to reduce their reliance 
on ratings.

Section 11. Publication of rating histories on the EDGAR System

    Within 180 days of enactment, the SEC must revise its rules 
in Section 240.17g-2(a) and (d) of Title 17, Code of Federal 
Regulations, to require that the random sample of ratings 
histories of credit ratings currently required to be disclosed 
on NRSRO websites must also be provided to the SEC for 
publication on the EDGAR system.

Section 12. Effect of Rule 436(g)

    This bill nullifies Rule 436(g) promulgated under the 
Securities Act of 1933. This rule currently provides an 
exemption for credit ratings provided by NRSROs from being 
considered a part of the registration statement prepared or 
certified by a person under the ``expert liability'' regime of 
Section 7 and Section 11 of the Securities Act of 1933.\27\ It 
does not apply to ratings provided by credit rating agencies 
that are not NRSROs.
---------------------------------------------------------------------------
    \27\Section 7 of the Securities Act requires issuers to obtain the 
written consent of persons, whose profession gives their statements 
authority, who are named as having prepared or certified a report or 
valuation in connection with the registration statement. 15 U.S.C. 77g. 
Section 11 of the Securities Act holds these persons liable if sections 
made under their authority contain material misstatements or omissions. 
15 U.S.C. 77k.
---------------------------------------------------------------------------

Section 13. Studies

    Finally, this bill orders a number of studies, including:
           A study by the Comptroller General of the 
        implementation of this Act, the effect of liability in 
        private actions arising under the Exchange Act, 
        alternative compensation structures, and alternative 
        methodologies for assessing credit risk (this study 
        shall be submitted to Congress within 30 months of 
        enactment);
           A study by the SEC on creating a system 
        whereby NRSROs are assigned on a rotating basis to 
        issuers (this study shall be transmitted to Congress 
        within one year of enactment);
           A study by the SEC of the effect of the 
        amendments made in section 2 of this bill on the 
        registration process for NRSROs, and whether the new 
        requirements of this bill will be a barrier to 
        registering as an NRSRO (this study shall be 
        transmitted to the House Committee on Financial 
        Services and the Senate Committee on Banking, Housing 
        and Urban Affairs within one year of enactment);
           A study by the SEC of the treatment of 
        different classes of bonds (municipal versus corporate) 
        by the NRSROs, including (1) where there are 
        fundamental differences in the treatment of different 
        classes of bonds by rating organizations that cause 
        some classes of bonds to suffer from undue 
        discrimination; (2) if there are such differences, what 
        causes them and how can they be alleviated; (3) whether 
        there are factors other than risk of loss that are 
        appropriate for the credit rating agencies to consider 
        when rating bonds, and do those factors vary across 
        sectors; (4) the types of financing arrangement used by 
        municipal issuers; (5) the differing legal and 
        regulatory regimes governing disclosures for corporate 
        and municipal bonds; (6) the extent to which retail 
        investors would be disadvantaged by a single ratings 
        scale; and (7) practices, policies, and methodologies 
        by the NRSRO with respect to municipal bonds (this 
        study shall be submitted to the House Committee on 
        Financial Services and the Senate Committee on Banking, 
        Housing and Urban Affairs within six months of 
        enactment);
           A study by the SEC of a standardized rating 
        symbol system whereby rating symbols contain multiple 
        characters, each letter representing a range of default 
        probabilities and loss expectations (this study shall 
        be transmitted to Congress within one year of 
        enactment); and
           A study by the SEC of the feasibility and 
        desirability of ratings standardization (this study 
        shall be transmitted to Congress within one year of 
        enactment).

         Changes in Existing Law Made by the Bill, as Reported

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

                    SECURITIES EXCHANGE ACT OF 1934


TITLE I--REGULATION OF SECURITIES EXCHANGES

           *       *       *       *       *       *       *



                  DEFINITIONS AND APPLICATION OF TITLE

  Sec. 3. (a) When used in this title, unless the context 
otherwise requires--
          (1) * * *

           *       *       *       *       *       *       *

          (41) The term ``mortgage related security'' means a 
        security that [is rated in one of the two highest 
        rating categories by at least one nationally recognized 
        statistical rating organization] meets standards of 
        credit-worthiness as defined by the Commission, and 
        either:
                  (A) * * *

           *       *       *       *       *       *       *

          (53)(A) The term ``small business related security'' 
        means a security that [is rated in 1 of the 4 highest 
        rating categories by at least 1 nationally recognized 
        statistical rating organization] meets standards of 
        credit-worthiness as defined by the Commission, and 
        either--
                  (i) * * *

           *       *       *       *       *       *       *

          (62) Nationally recognized statistical rating 
        organization.--The term ``[nationally recognized 
        statistical rating] nationally registered statistical 
        rating organization'' means a credit rating agency 
        that--
                  (A) * * *

           *       *       *       *       *       *       *

          (63) Person associated with a nationally recognized 
        statistical rating organization.--The term ``person 
        associated with'' a [nationally recognized statistical 
        rating] nationally registered statistical rating 
        organization means any partner, officer, director, or 
        branch manager of a [nationally recognized statistical 
        rating] nationally registered statistical rating 
        organization (or any person occupying a similar status 
        or performing similar functions), any person directly 
        or indirectly controlling, controlled by, or under 
        common control with a [nationally recognized 
        statistical rating] nationally registered statistical 
        rating organization, or any employee of a [nationally 
        recognized statistical rating] nationally registered 
        statistical rating organization.

           *       *       *       *       *       *       *


           REGISTRATION AND REGULATION OF BROKERS AND DEALERS

  Sec. 15. (a) * * *
  (b)(1) * * *

           *       *       *       *       *       *       *

  (4) The Commission, by order, shall censure, place 
limitations on the activities, functions, or operations of, 
suspend for a period not exceeding twelve months, or revoke the 
registration of any broker or dealer if it finds, on the record 
after notice and opportunity for hearing, that such censure, 
placing of limitations, suspension, or revocation is in the 
public interest and that such broker or dealer, whether prior 
or subsequent to becoming such, or any person associated with 
such broker or dealer, whether prior or subsequent to becoming 
so associated--
          (A) * * *
          (B) has been convicted within ten years preceding the 
        filing of any application for registration or at any 
        time thereafter of any felony or misdemeanor or of a 
        substantially equivalent crime by a foreign court of 
        competent jurisdiction which the Commission finds--
                  (i) * * *
                  (ii) arises out of the conduct of the 
                business of a broker, dealer, municipal 
                securities dealer, government securities 
                broker, government securities dealer, 
                investment adviser, bank, insurance company, 
                fiduciary, transfer agent, [nationally 
                recognized statistical rating] nationally 
                registered statistical rating organization, 
                foreign person performing a function 
                substantially equivalent to any of the above, 
                or entity or person required to be registered 
                under the Commodity Exchange Act (7 U.S.C. 1 et 
                seq.) or any substantially equivalent foreign 
                statute or regulation;

           *       *       *       *       *       *       *

          (C) is permanently or temporarily enjoined by order, 
        judgment, or decree of any court of competent 
        jurisdiction from acting as an investment adviser, 
        underwriter, broker, dealer, municipal securities 
        dealer, government securities broker, government 
        securities dealer, transfer agent, [nationally 
        recognized statistical rating] nationally registered 
        statistical rating organization, foreign person 
        performing a function substantially equivalent to any 
        of the above, or entity or person required to be 
        registered under the Commodity Exchange Act or any 
        substantially equivalent foreign statute or regulation, 
        or as an affiliated person or employee of any 
        investment company, bank, insurance company, foreign 
        entity substantially equivalent to any of the above, or 
        entity or person required to be registered under the 
        Commodity Exchange Act or any substantially equivalent 
        foreign statute or regulation, or from engaging in or 
        continuing any conduct or practice in connection with 
        any such activity, or in connection with the purchase 
        or sale of any security.

           *       *       *       *       *       *       *


SEC. 15E. REGISTRATION OF NATIONALLY RECOGNIZED STATISTICAL RATING 
                    ORGANIZATIONS.

  (a) Registration Procedures.--
          (1) Application for registration.--
                  (A) In general.--A credit rating agency that 
                elects to be treated as a [nationally 
                recognized statistical rating] nationally 
                registered statistical rating organization for 
                purposes of this title (in this section 
                referred to as the ``applicant''), shall 
                [furnish to] file with the Commission an 
                application for registration, in such form as 
                the Commission shall require, by rule or 
                regulation issued in accordance with subsection 
                (n), and containing the information described 
                in subparagraph (B).

           *       *       *       *       *       *       *

          (2) Review of application.--
                  (A) Initial determination.--Not later than 90 
                days after the date on which the application 
                for registration is [furnished to] filed with 
                the Commission under paragraph (1) (or within 
                such longer period as to which the applicant 
                consents) the Commission shall--
                          (i) * * *

           *       *       *       *       *       *       *

                  (B) Conduct of proceedings.--
                          (i) Content.--Proceedings referred to 
                        in subparagraph (A)(ii) shall--
                                  (I) * * *
                                  (II) be concluded not later 
                                than 120 days after the date on 
                                which the application for 
                                registration is [furnished to] 
                                filed with the Commission under 
                                paragraph (1).

           *       *       *       *       *       *       *

                  (D) Exemption from certification 
                requirement.--A written certification under 
                subparagraph (B)(ix) is not required with 
                respect to any credit rating agency which has 
                received, or been the subject of, a no-action 
                letter from the staff of the Commission prior 
                to August 2, 2006, stating that such staff 
                would not recommend enforcement action against 
                any broker or dealer that considers credit 
                ratings issued by such credit rating agency to 
                be ratings from a [nationally recognized 
                statistical rating] nationally registered 
                statistical rating organization.

           *       *       *       *       *       *       *

          (3) Public availability of information.--Subject to 
        section 24, the Commission shall, by rule, require a 
        [nationally recognized statistical rating] nationally 
        registered statistical rating organization, upon the 
        granting of registration under this section, to make 
        the information and documents submitted to the 
        Commission in its completed application for 
        registration, or in any amendment submitted under 
        paragraph (1) or (2) of subsection (b), publicly 
        available on its website, or through another 
        comparable, readily accessible means, except as 
        provided in clauses (viii) and (ix) of paragraph 
        (1)(B).
  (b) Update of Registration.--
          (1) Update.--Each [nationally recognized statistical 
        rating] nationally registered statistical rating 
        organization shall promptly amend its application for 
        registration under this section if any information or 
        document provided therein becomes materially 
        inaccurate, except that a [nationally recognized 
        statistical rating] nationally registered statistical 
        rating organization is not required to amend--
                  (A) the information required to be 
                [furnished] filed under subsection (a)(1)(B)(i) 
                by [furnishing] filing information under this 
                paragraph, but shall amend such information in 
                the annual submission of the organization under 
                paragraph (2) of this subsection; or
                  (B) the certifications required to be 
                provided under subsection (a)(1)(B)(ix) by 
                [furnishing] filing information under this 
                paragraph.
          (2) Certification.--Not later than 90 days after the 
        end of each calendar year, each [nationally recognized 
        statistical rating] nationally registered statistical 
        rating organization shall [furnish to] file with the 
        Commission an amendment to its registration, in such 
        form as the Commission, by rule, may prescribe as 
        necessary or appropriate in the public interest or for 
        the protection of investors--
                  (A) certifying that the information and 
                documents in the application for registration 
                of such [nationally recognized statistical 
                rating] nationally registered statistical 
                rating organization (other than the 
                certifications required under subsection 
                (a)(1)(B)(ix)) continue to be accurate; and

           *       *       *       *       *       *       *

  (c) Accountability for Ratings Procedures.--
          (1) Authority.--The Commission shall have exclusive 
        authority to enforce the provisions of this section in 
        accordance with this title with respect to any 
        [nationally recognized statistical rating] nationally 
        registered statistical rating organization, if such 
        [nationally recognized statistical rating] nationally 
        registered statistical rating organization issues 
        credit ratings in material contravention of those 
        procedures relating to such [nationally recognized 
        statistical rating] nationally registered statistical 
        rating organization, including procedures relating to 
        the prevention of misuse of nonpublic information and 
        conflicts of interest, that such [nationally recognized 
        statistical rating] nationally registered statistical 
        rating organization--
                  (A) * * *

           *       *       *       *       *       *       *

          (2) Limitation.--The rules and regulations that the 
        Commission may prescribe pursuant to this title, as 
        they apply to [nationally recognized statistical 
        rating] nationally registered statistical rating 
        organizations, shall be narrowly tailored to meet the 
        requirements of this title applicable to [nationally 
        recognized statistical rating] nationally registered 
        statistical rating organizations. Notwithstanding any 
        other provision of law, including the requirements of 
        this section, neither the Commission nor any State (or 
        political subdivision thereof) may regulate the 
        substance of credit ratings or the procedures and 
        methodologies by which any [nationally recognized 
        statistical rating] nationally registered statistical 
        rating organization determines credit ratings, 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.
          (3) Review of internal processes for determining 
        credit ratings.--
                  (A) In general.--The Commission shall examine 
                credit ratings issued by, and the policies, 
                procedures, and methodologies employed by, each 
                nationally recognized statistical rating 
                organization to review whether--
                          (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 credit 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).
          (5) Disclosures with respect to structured 
        securities.--
                  (A) Regulations required.--The rules and 
                regulations prescribed by the Commission 
                pursuant to this section with respect to 
                nationally recognized statistical rating 
                organizations shall, with respect to the 
                procedures and methodologies by which any 
                nationally recognized statistical rating 
                organization determines credit ratings for 
                structured securities--
                          (i) specify the information required 
                        to be disclosed to such rating 
                        organizations by the sponsor, issuers, 
                        and underwriters of such structured 
                        securities on the collateral underlying 
                        such structured securities; and
                          (ii) establish and implement 
                        procedures to collect and disclose 
                        information about the processes used by 
                        such sponsor, issuers, and underwriters 
                        to assess the accuracy and integrity of 
                        their data and fraud detection.
                  (B) Definition.--For purposes of this 
                paragraph, the Commission shall, by rule or 
                regulation, define the term ``structured 
                securities'' as appropriate in the public 
                interest and for the protection of investors.
          (6) Historical default rate disclosures.--The rules 
        and regulations prescribed by the Commission pursuant 
        to this section with respect to nationally recognized 
        statistical rating organizations shall require each 
        nationally recognized statistical rating organization 
        to establish and maintain, on a publicly accessible 
        Internet site, a facility to disclose, in a central 
        database, the historical default rates of all classes 
        of financial products rated by such organization.
  (d) Censure, Fine, Denial, or Suspension of Registration; 
Notice and Hearing.--The Commission, by order, [shall censure, 
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 if the Commission finds, on the record after 
notice and opportunity for hearing, that such censure, placing 
of limitations, suspension, or revocation] 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 registered 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 is necessary for the protection 
of investors and in the public interest and that such 
nationally recognized statistical rating organization, or any 
person associated with such an organization, whether prior to 
or subsequent to becoming so associated--
          (1) * * *
          (2) has been convicted during the 10-year period 
        preceding the date on which an application for 
        registration is [furnished to] filed with the 
        Commission under this section, or at any time 
        thereafter, of--
                  (A) * * *

           *       *       *       *       *       *       *

          (3) is subject to any order of the Commission barring 
        or suspending the right of the person to be associated 
        with a [nationally recognized statistical rating] 
        nationally registered statistical rating organization;
          (4) fails to [furnish] file the certifications 
        required under subsection (b)(2); [or]
          (5) fails to maintain adequate financial and 
        managerial resources to consistently produce credit 
        ratings with integrity[.];
          (6) has failed reasonably to supervise another person 
        who commits a violation of the securities laws, the 
        rules or regulations thereunder, 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.
  (e) Termination of Registration.--
          [(1) Voluntary withdrawal.--A nationally recognized 
        statistical rating organization may, upon such terms 
        and conditions as the Commission may establish as 
        necessary in the public interest or for the protection 
        of investors, withdraw from registration by furnishing 
        a written notice of withdrawal to the Commission.
          [(2) Commission authority.--]In addition to any other 
        authority of the Commission under this title, if the 
        Commission finds that a [nationally recognized 
        statistical rating] nationally registered statistical 
        rating organization is no longer in existence or has 
        ceased to do business as a credit rating agency, the 
        Commission, by order, shall cancel the registration 
        under this section of such [nationally recognized 
        statistical rating] nationally registered statistical 
        rating organization.
  (f) Representations.--
          (1) Ban on representations of sponsorship by united 
        states or agency thereof.--It shall be unlawful for any 
        [nationally recognized statistical rating] nationally 
        registered statistical rating organization to represent 
        or imply in any manner whatsoever that such [nationally 
        recognized statistical rating] nationally registered 
        statistical rating organization has been designated, 
        sponsored, recommended, or approved, or that the 
        abilities or qualifications thereof have in any respect 
        been passed upon, by the United States or any agency, 
        officer, or employee thereof.
          (2) Ban on representation as nrsro of unregistered 
        credit rating agencies.--It shall be unlawful for any 
        credit rating agency that is not registered under this 
        section as a [nationally recognized statistical rating] 
        nationally registered statistical rating organization 
        to state that such credit rating agency is a 
        [nationally recognized statistical rating] nationally 
        registered statistical rating organization registered 
        under this title.
          (3) Statement of registration under securities 
        exchange act of 1934 provisions.--No provision of 
        paragraph (1) shall be construed to prohibit a 
        statement that a [nationally recognized statistical 
        rating] nationally registered statistical rating 
        organization is a [nationally recognized statistical 
        rating] nationally registered statistical rating 
        organization under this title, if such statement is 
        true in fact and if the effect of such registration is 
        not misrepresented.
  (g) Prevention of Misuse of Nonpublic Information.--
          (1) Organization policies and procedures.--Each 
        [nationally recognized statistical rating] nationally 
        registered statistical rating organization shall 
        establish, maintain, and enforce written policies and 
        procedures reasonably designed, taking into 
        consideration the nature of the business of such 
        [nationally recognized statistical rating] nationally 
        registered statistical rating organization, to prevent 
        the misuse in violation of this title, or the rules or 
        regulations hereunder, of material, nonpublic 
        information by such [nationally recognized statistical 
        rating] nationally registered statistical rating 
        organization or any person associated with such 
        [nationally recognized statistical rating] nationally 
        registered statistical rating organization.

           *       *       *       *       *       *       *

  [(h) Management of Conflicts of Interest.--
          [(1) 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 such 
        nationally recognized statistical rating organization 
        and affiliated persons and affiliated companies 
        thereof, to address and manage any conflicts of 
        interest that can arise from such business.
          [(2) Commission authority.--The Commission shall 
        issue final rules in accordance with subsection (n) 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, without limitation, 
        conflicts of interest relating to--
                  [(A) 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) 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) business relationships, ownership 
                interests, 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) any affiliation of a nationally 
                recognized statistical rating organization, or 
                any person associated with such nationally 
                recognized statistical rating organization, 
                with any person that underwrites the securities 
                or money market instruments that are the 
                subject of a credit rating; and
                  [(E) any other potential conflict of 
                interest, as the Commission deems necessary or 
                appropriate in the public interest or for the 
                protection of investors.]
  (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 ultimate 
                holding company 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 
        rules regarding--
                  (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 
                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;
                  (C) conflicts of interest 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;
                  (D) 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;
                  (E) the establishment of a system of payment 
                for credit ratings issued by 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 
                credit ratings over time, as applicable, and 
                that incentives for reliable credit ratings are 
                in place;
                  (F) 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 organization in 
                the preceding 2 fiscal years attributable to 
                the person being rated and its affiliates; and
                  (G) 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 person associated with 
                such organization within the previous 5 years 
                obtains employment with any obligor, 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 a senior officer of such 
                        organization;
                          (ii) participated in any capacity in 
                        determining credit ratings for such 
                        obligor, issuer, underwriter, or 
                        sponsor; or
                          (iii) supervised an employee 
                        described in clause (ii).
                  (B) Public disclosure.--Upon receiving such a 
                report, the Commission shall make such 
                information publicly available.
  (i) Prohibited Conduct.--
          (1) Prohibited acts and practices.--The Commission 
        shall issue final rules in accordance with subsection 
        (n) to prohibit any act or practice relating to the 
        issuance of credit ratings by a [nationally recognized 
        statistical rating] nationally registered statistical 
        rating organization that the Commission determines to 
        be unfair, coercive, or abusive, including any act or 
        practice relating to--
                  (A) conditioning or threatening to condition 
                the issuance of a credit rating on the purchase 
                by the obligor or an affiliate thereof of other 
                services or products, including pre-credit 
                rating assessment products, of the [nationally 
                recognized statistical rating] nationally 
                registered statistical rating organization or 
                any person associated with such [nationally 
                recognized statistical rating] nationally 
                registered statistical rating organization;
                  (B) lowering or threatening to lower a credit 
                rating on, or refusing to rate, securities or 
                money market instruments issued by an asset 
                pool or as part of any asset-backed or 
                mortgage-backed securities transaction, unless 
                a portion of the assets within such pool or 
                part of such transaction, as applicable, also 
                is rated by the [nationally recognized 
                statistical rating] nationally registered 
                statistical rating organization; or
                  (C) modifying or threatening to modify a 
                credit rating or otherwise departing from its 
                adopted systematic procedures and methodologies 
                in determining credit ratings, based on whether 
                the obligor, or an affiliate of the obligor, 
                purchases or will purchase the credit rating or 
                any other service or product of the [nationally 
                recognized statistical rating] nationally 
                registered statistical rating organization or 
                any person associated with such organization.

           *       *       *       *       *       *       *

  [(j) Designation of Compliance Officer.--Each nationally 
recognized statistical rating organization shall designate an 
individual responsible for administering the policies and 
procedures that are required to be established pursuant to 
subsections (g) and (h), and for ensuring compliance with the 
securities laws and the rules and regulations thereunder, 
including those promulgated by the Commission pursuant to this 
section.]
  (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 the internal 
                control system with respect to the procedures 
                and methodologies for determining credit 
                ratings, including quantitative methodologies 
                and quantitative inputs used in the rating 
                process, and assess the risk that such internal 
                control system is reasonably designed to ensure 
                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) 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, obligors, 
                        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 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 obligor, 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 qualitative 
                methodologies and quantitative 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.
          (5) Compensation.--The compensation of the compliance 
        officer 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 the officer's judgment.
  (k) Statements of Financial Condition.--[Each nationally 
recognized statistical rating]
          (1) In general.--Each nationally registered 
        statistical rating organization shall[, on a 
        confidential basis, furnish to] file with the 
        Commission, at intervals determined by the Commission, 
        such financial statements, certified (if required by 
        the rules or regulations of the Commission) by an 
        independent public accountant, and information 
        concerning its financial condition, as the Commission, 
        by rule, may prescribe as necessary or appropriate in 
        the public interest or for the protection of investors.
          (2) Exception.--The Commission may treat as 
        confidential any information provided by a nationally 
        recognized statistical rating organization under this 
        section consistent with applicable Federal laws or 
        Commission rules.
  (l) Sole Method of Registration.--
          (1) In general.--On and after the effective date of 
        this section, a credit rating agency may only be 
        registered as a [nationally recognized statistical 
        rating] nationally registered statistical rating 
        organization for any purpose in accordance with this 
        section.
          (2) Prohibition on reliance on no-action relief.--On 
        and after the effective date of this section--
                  (A) an entity that, before that date, 
                received advice, approval, or a no-action 
                letter from the Commission or staff thereof to 
                be treated as a [nationally recognized 
                statistical rating] nationally registered 
                statistical rating organization pursuant to the 
                Commission rule at section 240.15c3-1 of title 
                17, Code of Federal Regulations, may represent 
                itself or act as a [nationally recognized 
                statistical rating] nationally registered 
                statistical rating organization only--
                          (i) during Commission consideration 
                        of the application, if such entity has 
                        [furnished] filed an application for 
                        registration under this section; and

           *       *       *       *       *       *       *

          (3) Notice to other agencies.--Not later than 30 days 
        after the date of enactment of this section, the 
        Commission shall give notice of the actions undertaken 
        pursuant to this section to each Federal agency which 
        employs in its rules and regulations the term 
        ``[nationally recognized statistical rating] nationally 
        registered statistical rating organization'' (as that 
        term is used under Commission rule 15c3-1 (17 C.F.R. 
        240.15c3-1), as in effect on the date of enactment of 
        this section).
  [(m) Rules of Construction.--
          [(1) No waiver of rights, privileges, or defenses.--
        Registration under and compliance with this section 
        does not constitute a waiver of, or otherwise diminish, 
        any right, privilege, or defense that a nationally 
        recognized statistical rating organization may 
        otherwise have under any provision of State or Federal 
        law, including any rule, regulation, or order 
        thereunder.
          [(2) No private right of action.--Nothing in this 
        section may be construed as creating any private right 
        of action, and no report furnished by a nationally 
        recognized statistical rating organization in 
        accordance with this section or section 17 shall create 
        a private right of action under section 18 or any other 
        provision of law.]
  (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.
  (n) Regulations.--
          (1) * * *
          (2) Review of existing regulations.--Not later than 
        270 days after the date of enactment of this section, 
        the Commission shall--
                  (A) review its existing rules and regulations 
                which employ the term ``[nationally recognized 
                statistical rating] nationally registered 
                statistical rating organization'' or ``NRSRO''; 
                and

           *       *       *       *       *       *       *

  (o) NRSROs Subject to Commission Authority.--
          (1) In general.--No provision of the laws of any 
        State or political subdivision thereof requiring the 
        registration, licensing, or qualification as a credit 
        rating agency or a [nationally recognized statistical 
        rating] nationally registered statistical rating 
        organization shall apply to any [nationally recognized 
        statistical rating] nationally registered statistical 
        rating organization or person employed by or working 
        under the control of a [nationally recognized 
        statistical rating] nationally registered statistical 
        rating organization.
          (2) Limitation.--Nothing in this subsection prohibits 
        the securities commission (or any agency or office 
        performing like functions) of any State from 
        investigating and bringing an enforcement action with 
        respect to fraud or deceit against any [nationally 
        recognized statistical rating] nationally registered 
        statistical rating organization or person associated 
        with a [nationally recognized statistical rating] 
        nationally registered statistical rating organization.
  [(p) Applicability.--This section, other than subsection (n), 
which shall apply on the date of enactment of this section, 
shall apply on the earlier of--
          [(1) the date on which regulations are issued in 
        final form under subsection (n)(1); or
          [(2) 270 days after the date of enactment of this 
        section.]
  (p) Establishment of SEC Office.--
          (1) In general.--The Commission shall establish an 
        office that administers the rules of the Commission 
        with respect to the practices of nationally recognized 
        statistical rating organizations.
          (2) Staffing.--The office of the Commission 
        established under this subsection shall be staffed 
        sufficiently to carry out fully the requirements of 
        this section.
          (3) Rulemaking authority.--The Commission shall--
                  (A) establish, by rule, fines and other 
                penalties for any nationally recognized 
                statistical rating organization that violates 
                the applicable requirements of this title; and
                  (B) issue such rules as may be necessary to 
                carry out this section with respect to 
                nationally recognized statistical rating 
                organizations.
  (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;
                  (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; and
                  (E) each nationally recognized statistical 
                rating organization include an attestation with 
                any credit rating it issues affirming that no 
                part of the rating was influenced by any other 
                business activities, that the rating was based 
                solely on the merits of the instruments being 
                rated, and that such rating was an independent 
                evaluation of the risks and merits of the 
                instrument.
  (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 and an 
        internal control system with respect to such procedures 
        and methodologies that are reasonably designed to--
                  (A) ensure that credit ratings are determined 
                using procedures and methodologies, including 
                qualitative methodologies and quantitative 
                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 qualitative methodologies and quantitative 
                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 procedure or 
                methodology, including qualitative 
                methodologies and quantitative 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 
                qualitative methodologies and quantitative 
                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; 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 qualitative methodologies and 
                quantitative inputs and assumptions about the 
                correlation of defaults across underlying 
                assets 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 nationally 
                recognized statistical rating organization 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, 
                including--
                          (i) 5 assumptions made in the ratings 
                        process that, without accounting for 
                        any other factor, would have the 
                        greatest impact on a rating if such 
                        assumptions were proven false or 
                        inaccurate; and
                          (ii) an analysis, using concrete 
                        examples, on how each of the 5 
                        assumptions identified under clause (i) 
                        impacts a rating.
                  (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, underwriter, 
                or sponsor 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, underwriter, or 
                sponsor 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.--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, that provides a 
credit rating for an issuer, underwriter, or placement agent of 
a security to provide any non-rating service, including--
          (1) risk management advisory services;
          (2) advice or consultation relating to any merger, 
        sales, or disposition of assets of the issuer;
          (3) ancillary assistance, advice, or consulting 
        services unrelated to any specific credit rating 
        issuance; and
          (4) such further activities or services as the 
        Commission may determine as necessary or appropriate in 
        the public interest or for the protection of investors.

           *       *       *       *       *       *       *


  ACCOUNTS AND RECORDS, EXAMINATIONS OF EXCHANGES, MEMBERS, AND OTHERS

  Sec. 17. (a)(1) Every national securities exchange, member 
thereof, broker or dealer who transacts a business in 
securities through the medium of any such member, registered 
securities association, registered broker or dealer, registered 
municipal securities dealer, registered securities information 
processor, registered transfer agent, [nationally recognized 
statistical rating] nationally registered statistical rating 
organization, and registered clearing agency and the Municipal 
Securities Rulemaking Board shall make and keep for prescribed 
periods such records, furnish such copies thereof, and make and 
disseminate such reports as the Commission, by rule, prescribes 
as necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the 
purposes of this title. Any report that a [nationally 
recognized statistical rating] nationally registered 
statistical rating organization is required by Commission rules 
under this paragraph to make and disseminate to the Commission 
shall be deemed furnished to the Commission.

           *       *       *       *       *       *       *


SEC. 21D. PRIVATE SECURITIES LITIGATION.

  (a) * * *
  (b) Requirements for Securities Fraud Actions.--
          (1) * * *
          (2) Required state of mind.--In any private action 
        arising under this title in which the plaintiff may 
        recover money damages only on proof that the defendant 
        acted with a particular state of mind, the complaint 
        shall, with respect to each act or omission alleged to 
        violate this title, state with particularity facts 
        giving rise to a strong inference that the defendant 
        acted with the required state of mind, 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 registered statistical rating 
        organization knowingly or recklessly violated the 
        securities laws..

           *       *       *       *       *       *       *

                              ----------                              


                     FEDERAL DEPOSIT INSURANCE ACT



           *       *       *       *       *       *       *
  Sec. 7. (a) * * *
  (b) Assessments.--
          (1) Risk-based assessment system.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (E) Information concerning risk of loss and 
                economic conditions.--
                          (i) Sources of information.--For 
                        purposes of determining risk of losses 
                        at insured depository institutions and 
                        economic conditions generally affecting 
                        depository institutions, the 
                        Corporation shall collect information, 
                        as appropriate, from all sources the 
                        Board of Directors considers 
                        appropriate, such as reports of 
                        condition, inspection reports, and 
                        other information from all Federal 
                        banking agencies, any information 
                        available from State bank supervisors, 
                        State insurance and securities 
                        regulators, the Securities and Exchange 
                        Commission (including information 
                        described in section 35), the Secretary 
                        of the Treasury, the Commodity Futures 
                        Trading Commission, the Farm Credit 
                        Administration, the Federal Trade 
                        Commission, any Federal reserve bank or 
                        Federal home loan bank, and other 
                        regulators of financial institutions, 
                        and any information available from 
                        [credit rating entities, and other 
                        private economic] private economic, 
                        credit, or business analysts.

           *       *       *       *       *       *       *


SEC. 28. ACTIVITIES OF SAVINGS ASSOCIATIONS.

  (a) * * *

           *       *       *       *       *       *       *

  (d) Corporate Debt Securities [Not of Investment Grade].--
          (1) In general.--No savings association may, directly 
        or through a subsidiary, acquire or retain any 
        corporate debt security [not of investment grade] that 
        does not meet standards of credit-worthiness as 
        established by the Corporation.
          (2) Exception for securities held by qualified 
        affiliate.--Paragraph (1) shall not apply with respect 
        to any corporate debt security [not of investment 
        grade] which is acquired and retained by any qualified 
        affiliate of a savings association.
          [(3) Transition rule.--
                  [(A) In general.--The Corporation shall 
                require any savings association or any 
                subsidiary of any savings association to divest 
                any corporate debt security not of investment 
                grade the retention of which is not permissible 
                under paragraph (1) as quickly as can be 
                prudently done, and in any event not later than 
                July 1, 1994.
                  [(B) Treatment of noncompliance during 
                divestment.--With respect to any corporate debt 
                security not of investment grade held by any 
                savings association or subsidiary on the date 
                of enactment of the Financial Institutions 
                Reform, Recovery, and Enforcement Act of 1989, 
                the savings association or subsidiary shall be 
                deemed not to be in violation of the 
                prohibition in paragraph (1) on retaining such 
                investment so long as the association or 
                subsidiary complies with any applicable 
                requirement established by the Corporation 
                pursuant to subparagraph (A) for divesting such 
                securities.]
          [(4)] (3) Definitions.--For purposes of this 
        section--
                  [(A) Investment grade.--Any corporate debt 
                security is not of ``investment grade'' unless 
                that security, when acquired by the savings 
                association or subsidiary, was rated in one of 
                the 4 highest rating categories by at least one 
                nationally recognized statistical rating 
                organization.]
                  [(B)] (A) Qualified affiliate.--The term 
                ``qualified affiliate'' means--
                          (i) * * *

           *       *       *       *       *       *       *

                  [(C)] (B) Certain securities not included.--
                The term ``corporate debt security [not of 
                investment grade] that does not meet standards 
                of credit-worthiness as established by the 
                Corporation'' does not include any obligation 
                issued or guaranteed by a corporation that may 
                be held by a Federal savings association 
                without limitation as to percentage of assets 
                under subparagraph (D), (E), or (F) of section 
                5(c)(1) of the Home Owners' Loan Act.
  (e) Transfer of Corporate Debt Security [Not of Investment 
Grade] in Exchange for a Qualified Note.--
          (1) Acquisition of note.--Notwithstanding subsections 
        (a), (b), and (c) of section 5 of the Home Owners' Loan 
        Act and any other provision of Federal or State law 
        governing extensions of credit by savings associations, 
        any insured savings association, and any subsidiary of 
        any insured savings association, that, on the date of 
        the enactment of the Financial Institutions Reform, 
        Recovery, and Enforcement Act of 1989, holds any 
        corporate debt security [not of investment grade] that 
        does not meet standards of credit-worthiness as 
        established by the Corporation may acquire a qualified 
        note in exchange for the transfer of such security to--
                  (A) * * *

           *       *       *       *       *       *       *

        if the conditions of paragraph (2) are met.
          (2) Conditions for exchange of security for qualified 
        note.--The conditions of this paragraph are met if--
                  (A) * * *
                  (B) the company to which the corporate debt 
                security [not of investment grade] that does 
                not meet standards of credit-worthiness 
                established by the Corporation is transferred 
                is not a bank holding company, an insured 
                savings association, or a direct or indirect 
                subsidiary of such holding company or insured 
                savings association;
                  (C) before the end of the 90-day period 
                beginning on the date of the enactment of the 
                Financial Institutions Reform, Recovery, and 
                Enforcement Act of 1989, the insured savings 
                association notifies the Director of the Office 
                of Thrift Supervision of such association's 
                intention to transfer the corporate debt 
                security [not of investment grade] that does 
                not meet standards of credit-worthiness 
                established by the Corporation to the savings 
                and loan holding company or the subsidiary of 
                such holding company;
                  (D) the transfer of the corporate debt 
                security [not of investment grade] that does 
                not meet standards of credit-worthiness 
                established by the Corporation is completed--
                          (i) * * *

           *       *       *       *       *       *       *

                  (E) the insured savings association receives 
                in exchange for the corporate debt security 
                [not of investment grade] that does not meet 
                standards of credit-worthiness established by 
                the Corporation the fair market value of such 
                security;
                  (F) the Director of the Office of Thrift 
                Supervision has--
                          (i) * * *
                          (ii) determined that the transfer 
                        represents a complete and effective 
                        divestiture of the corporate debt 
                        security [not of investment grade] that 
                        does not meet standards of credit-
                        worthiness established by the 
                        Corporation and is in compliance with 
                        the provisions of this subsection; and
                  (G) any gain on the sale of the corporate 
                debt security [not of investment grade] that 
                does not meet standards of credit-worthiness 
                established by the Corporation is recognized, 
                and included for applicable regulatory capital 
                requirements, by the insured savings 
                association only at such time and to the extent 
                that the insured savings association receives 
                payment of principal on the note in cash in 
                excess of the fair market value of the 
                transferred corporate debt security not of 
                investment grade as carried on the accounts of 
                the insured savings association immediately 
                prior to the transfer.
          (3) Qualified note defined.--The term ``qualified 
        note'' means any note that--
                  (A) is at all times fully secured by the 
                corporate debt security [not of investment 
                grade] that does not meet standards of credit-
                worthiness established by the Corporation 
                transferred in exchange for the note, or by 
                other collateral of at least equivalent value 
                that is acceptable to the Director of the 
                Office of Thrift Supervision;
                  (B) contains provisions acceptable to the 
                Director of the Office of Thrift Supervision 
                that would--
                          (i) * * *
                          (ii) allow the sale of the corporate 
                        debt security [not of investment grade] 
                        that does not meet standards of credit-
                        worthiness established by the 
                        Corporation if the proceeds of the sale 
                        are reinvested in assets of equivalent 
                        value;

           *       *       *       *       *       *       *

                              ----------                              


 FEDERAL HOUSING ENTERPRISES FINANCIAL SAFETY AND SOUNDNESS ACT OF 1992

TITLE XIII--GOVERNMENT SPONSORED ENTERPRISES

           *       *       *       *       *       *       *


         Subtitle A--Supervision and Regulation of Enterprises

PART 1--FINANCIAL SAFETY AND SOUNDNESS REGULATOR

           *       *       *       *       *       *       *


SEC. 1319. AUTHORITY TO PROVIDE FOR REVIEW OF REGULATED ENTITIES.

  The Director may, on such terms and conditions as the 
Director deems appropriate, contract with any entity [that is a 
nationally recognized statistical rating organization, as such 
term is defined in section 3(a) of the Securities Exchange Act 
of 1934,] to conduct a review of the regulated entities.

           *       *       *       *       *       *       *

                              ----------                              


                     INVESTMENT COMPANY ACT OF 1940

TITLE I--INVESTMENT COMPANIES

           *       *       *       *       *       *       *


                               EXEMPTIONS

  Sec. 6. (a) The following investment companies are exempt 
from the provisions of this title:
          (1) * * *

           *       *       *       *       *       *       *

          (5)(A) Any company that is not engaged in the 
        business of issuing redeemable securities, the 
        operations of which are subject to regulation by the 
        State in which the company is organized under a statute 
        governing entities that provide financial or managerial 
        assistance to enterprises doing business, or proposing 
        to do business, in that State if--
                  (i) * * *

           *       *       *       *       *       *       *

                  (iv) the company does not purchase any 
                security issued by an investment company or by 
                any company that would be an investment company 
                except for the exclusions from the definition 
                of the term ``investment company'' under 
                paragraph (1) or (7) of section 3(c), other 
                than--
                          (I) any debt security that [is rated 
                        investment grade by not less than 1 
                        nationally recognized statistical 
                        rating organization] meets such 
                        standards of credit-worthiness that the 
                        Commission shall adopt; or

           *       *       *       *       *       *       *

                              ----------                              


   SECTION 5136A OF TITLE LXII OF THE REVISED STATUTES OF THE UNITED 
                                 STATES

SEC. 5136A. FINANCIAL SUBSIDIARIES OF NATIONAL BANKS.

  (a) Authorization To Conduct in Subsidiaries Certain 
Activities That are Financial in Nature.--
          (1) * * *
          (2) Conditions and requirements.--A national bank may 
        control a financial subsidiary, or hold an interest in 
        a financial subsidiary, only if--
                  (A) * * *

           *       *       *       *       *       *       *

                  (E) except as provided in paragraph (4), the 
                national bank meets [any applicable rating] 
                standards of credit-worthiness established by 
                the Comptroller of the Currency or other 
                requirement set forth in paragraph (3); and

           *       *       *       *       *       *       *

          (3) [Rating or comparable requirement] Requirement.--
                  [(A) In general.--A national bank meets the 
                requirements of this paragraph if--
                          [(i) the bank is 1 of the 50 largest 
                        insured banks and has not fewer than 1 
                        issue of outstanding eligible debt that 
                        is currently rated within the 3 highest 
                        investment grade rating categories by a 
                        nationally recognized statistical 
                        rating organization; or
                          [(ii) the bank is 1 of the second 50 
                        largest insured banks and meets the 
                        criteria set forth in clause (i) or 
                        such other criteria as the Secretary of 
                        the Treasury and the Board of Governors 
                        of the Federal Reserve System may 
                        jointly establish by regulation and 
                        determine to be comparable to and 
                        consistent with the purposes of the 
                        rating required in clause (i).]
                  (A) In general.--A national bank meets the 
                requirements of this paragraph if the bank is 
                one of the 100 largest insured banks and has 
                not fewer than 1 issue of outstanding debt that 
                meets standards of credit-worthiness or other 
                criteria as the Secretary of the Treasury and 
                the Board of Governors of the Federal Reserve 
                System may jointly establish.

           *       *       *       *       *       *       *

  (f) Failure To [Maintain Public Rating or] Meet Standards of 
Credit-worthiness or Meet Applicable Criteria.--
          (1) In general.--A national bank that does not 
        continue to meet [any applicable rating] standards of 
        credit-worthiness established by the Comptroller of the 
        Currency or other requirement of subsection (a)(2)(E) 
        after acquiring or establishing a financial subsidiary 
        shall not, directly or through a subsidiary, purchase 
        or acquire any additional equity capital of any 
        financial subsidiary until the bank meets such 
        requirements.

           *       *       *       *       *       *       *

                              ----------                              


                         ACT OF OCTOBER 1, 1988

(H.R. 4645, as ordered reported from the Committee on Banking, Finance 
   and Urban Affairs on September 22, 1988, and enacted into law by 
                   section 555 of Public Law 100-461)

 An Act Providing for participation by the United States in a capital 
    stock increase ot the International Bank for Reconstruction and 
 Development and a replenishment of the African Development Fund, and 
for other purposes.

           *       *       *       *       *       *       *


SEC. 3. POLICY BASED LENDING FOR DEBT REDUCTION.

  (a) Criteria.--The Secretary of the Treasury shall instruct 
the United States Executive Director of the International Bank 
for Reconstruction and Development to initiate discussions with 
other directors of such bank and to advocate and support the 
facilitation of voluntary market-based programs for the 
reduction of sovereign debt and the promotion of sustainable 
economic development, which, if implemented, would--
          (1) * * *

           *       *       *       *       *       *       *

          (6) involve such bank in lending for purposes of debt 
        reduction and conversion only where such involvement 
        would not lower the credit [rating] -worthiness of such 
        bank;

           *       *       *       *       *       *       *


                            ADDITIONAL VIEWS

    The recent global financial crisis exposed serious 
deficiencies in the performance of the Nationally Recognized 
Statistical Ratings Organizations (NRSROs). As a result, for 
the second time this decade, the Financial Services Committee 
has favorably reported legislation to the House that will 
significantly reform the credit rating agency industry.
    Credit ratings--which are assessments of the risk that a 
specific debt instrument will default--should be one component 
of an investor's analysis in deciding whether to buy that debt 
instrument for their portfolio, however, these ratings should 
not be the only component of the analysis. Investors must be 
incentivized to perform their own due diligence and risk 
assessments rather than placing blind faith in the ratings 
assigned by the NRSROs. H.R. 3890, the Accountability and 
Transparency in Rating Agencies Act, appropriately subjects 
rating agencies to enhanced scrutiny as a way of promoting 
greater transparency and accountability to the capital markets.
    Committee Republicans believe that the blind reliance on 
ratings supplied by the major credit rating agencies undermines 
market discipline and discourages investor due diligence. 
Chairman Frank joined an amendment offered by Representatives 
Garrett and Bachus during the markup of H.R. 3890 that would 
(1) remove references to ratings from Federal statutes within 
the jurisdiction of the Financial Services Committee, (2) 
direct the Federal financial regulatory agencies within the 
Committee's jurisdiction to remove references to ratings from 
Federal regulations and (3) have the GAO study the use of 
ratings by all other Federal agencies and report to Congress 
within one year on the need for modifications. This amendment 
promotes independent investor analysis, removes the government 
``Good Housekeeping'' seal of approval, increases competition 
among rating agencies and lessens the reliance on ratings by 
investors.
    While H.R. 3890 includes many constructive reforms, 
Committee Republicans have significant concerns regarding the 
adoption of an amendment offered by Representative Kilroy 
during the markup that would create a new standard of liability 
for NRSROs by repealing Securities and Exchange Commission Rule 
436(g). Rule 436(g) currently exempts NRSROs from liability 
under sections 7 and 11 of the Securities Act of 1933, which 
govern security registration statements and create civil 
penalties for inclusion of false information within such 
statements. By repealing this exemption, the amendment would 
subject NRSROs to unlimited potential civil litigation. The 
inclusion of the Kilroy amendment presents a significant 
barrier to continued Republican support for the legislation if 
it is not amended or removed from the bill prior to being 
considered by the House.
    Furthermore, a repeal of Rule 436(g) would likely result in 
the removal of ratings from offering statements, as well as 
more homogenized ratings among the various NRSROs. Homogenized 
ratings would mean a narrower range of opinions being available 
to the market--precisely the opposite of what investors need to 
properly use ratings in their investment evaluations. Repealing 
Rule 436(g) also raises Constitutional concerns. According to 
federal precedent governing opinions protected by the First 
Amendment, credit rating agencies are subject to liability for 
their ratings if they issue false statements knowingly or 
recklessly, but not for mere negligence. By eliminating the 
protection offered by Rule 436(g), the Kilroy amendment would 
subject NRSROs to liability for mere negligence--a consequence 
that Committee Republicans reject.
    Additionally, an amendment offered and withdrawn by 
Representative Sherman during the markup would also give 
Committee Republicans significant concern if the Majority 
attempts to add this troubling provision to the legislation as 
the process moves forward. The amendment would require NRSROs, 
when contracting to provide a credit rating, to extend a ``duty 
of care'' to investors in the debt instrument they are rating. 
Imposition of this new and undefined ``duty of care'' would 
have a chilling effect on the ratings industry to the detriment 
of investors. The amendment also would not provide NRSROs with 
any notice as to the number of parties that may make a claim 
against them. This proposal has the potential to expose NRSROs 
to unknown civil liability and a virtually unlimited number of 
claims. The Sherman amendment may increase the cost of capital 
for issuers of debt securities, prompt current NRSROs to leave 
the business, and discourage new entrants, in contravention of 
one of the central goals of the 2006 Credit Rating Agency 
Reform Act. Committee Republicans strongly oppose inclusion of 
the Sherman amendment in the final version of this legislation.
    Credit rating agency reform should not be treated as an 
opportunity to create new, burdensome, and costly liability 
standards that result in a windfall for the trial bar while 
doing little to benefit investors. Regulation by litigation is 
not reform. Instead, reforms should reduce or eliminate 
barriers to entry by new market participants, provide the SEC 
with the regulatory authority it requires to effectively 
examine and discipline NRSROs, require rating agencies to 
disclose all relevant information used to create the rating, 
and ensure that the Federal government does not place a stamp 
of approval on the rating agencies' work product that 
undermines market discipline. A bill that achieves those 
objectives without promoting needless litigation will enjoy our 
support on the House floor.

                                   Spencer Bachus.
                                   Randy Neugebauer.
                                   Adam H. Putnam.
                                   Judy Biggert.

                            DISSENTING VIEWS

    We agree that the credit rating agencies and the ratings 
process are in need of significant reform. The thrust of this 
reform should center on three key elements: (1) Reducing 
investor reliance on ratings; (2) Encouraging investor due 
diligence; and (3) Increasing competition between credit rating 
agencies. While H.R. 3890, the Accountability and Transparency 
in Rating Agencies Act, makes some significant steps in that 
regard, it unfortunately includes several provisions that will 
exacerbate the current problems within the industry and make it 
more difficult for investors to receive useful information.
Frank-Garrett-Bachus NRSRO Reference Removal Amendment
    One specific provision we fully support and believe will 
accomplish the two objectives laid out above is an amendment by 
Chairman Frank, Rep. Scott Garrett and Ranking Member Spencer 
Bachus added during the Committee consideration of the bill 
that will remove all Nationally Recognized Statistical Rating 
Organization (NRSRO) references from all statutes under the 
committee's jurisdiction. The amendment also directs the 
regulators to review all of the regulations under their purview 
and remove those designations as well.
    Credit ratings are only one piece of the puzzle in 
determining creditworthiness. Investors must be encouraged to 
do their proper due diligence in evaluating issuer credit 
quality. By removing the NRSRO reference from statute and 
regulation, we further delink the government from the rating 
and reduce the investor perception that the government endorses 
the rating. We believe this amendment is a significant step 
forward and one that will lead to a more constructive ratings 
process in the future.
Section 15E(m) of the Securities Exchange Act of 1934 (15 U.S.C. 780-
        7(m))
    As reported by the Committee, this section of the bill 
would repeal two important provisions of the Credit Rating 
Agency Reform Act of 2006 that ensure there is no waiver of 
rights for credit rating agencies seeking designation as a 
nationally registered statistical rating organization. These 
provisions do not make NRSROs immune from private suit, nor do 
they create any new defenses. Repeal of these recently enacted 
provisions may well have an unintended consequence that may 
prove detrimental to the markets and investors. Repeal of 
current section (m) will likely lead to fewer credit rating 
agencies participating or remaining as NRSROs, thus reducing 
competition and depriving investors of greater choice in the 
ratings opinions they use.
Section 9, Effect of Rule 436(g)
    Section 9 of the Act repeals SEC Rule 436(g), which 
encourages the disclosure of ratings by providing NRSROs with 
an exemption from liability under Section 7 and Section 11 of 
the Securities Act of 1933 when their ratings are included as 
part of the registration statements filed under that Act. 
Without the exemption, issuers would have to obtain the consent 
of an NRSRO before including those ratings. Obtaining such 
consent could increase dramatically the time and cost involved 
with raising capital, and thus make it more difficult for 
issuers to do so. Moreover, some NRSROs may refuse consent, 
with the result being less information available to investors 
as they evaluate securities in a registration statement. 
Alternatively, NRSROs might scale back the scope of their 
coverage, with the most profound impact felt by newer and 
smaller issuers, including those in emerging sectors critical 
to the future growth of our markets and economy.
    The reasoning behind Rule 436(g)--to encourage greater 
availability of NRSRO rating opinions--is as sound today as it 
was when first adopted in 1982 and as beneficial to investors 
who want and need as much information as possible regarding a 
security offering. Moreover, many market participants who 
commented on the rule at the time the rule was proposed were 
concerned that requiring consent and subjecting NRSROs to 
Section 11 liability could affect their independence, and thus 
the quality of their ratings, by making them more active 
``participants'' in the offering. In addition, expanding the 
potential for litigation against NRSROs would create incentives 
for NRSROs to narrow the scope of their rating analysis in 
order, again, to minimize the areas for liability based on 
after-the-fact second-guessing.
    Ratings would thus become more backward-looking and, as a 
consequence, less geared towards their primary purpose: an 
assessment of likely credit quality on a going forward basis. 
Finally, as noted by the SEC when it proposed the Rule, NRSROs 
remain subject to liability under the antifraud provisions of 
the securities laws. NRSROs are also subject to regulation by 
the Commission under the Credit Rating Agency Reform Act of 
2006. These accountability measures--and others to which NRSROs 
are currently subject, or would be subject under other 
provisions of H.R. 3890--serve to provide investors with 
necessary, substantive protections. Increased liability would 
discourage new entrants into the ratings industry, thus 
undermining the important goal of increasing competition.
Conclusion
    In the aftermath of the financial crisis, we must ensure 
that we put in place a framework of rating debt and equities 
that reduces investor reliance on ratings, encourages investor 
due diligence, and increases competition between credit rating 
agencies. Because of the changes in liability and the opposite 
effect those changes will have on our stated goals as well as 
the negative consequences the provisions will have on investors 
and the marketplace, we are unable to support the legislation 
in its current form.

                                   Scott Garrett.
                                   Erik Paulsen.
                                   Ed Royce.
                                   Jeb Hensarling.
                                   Randy Neugebauer.
                                   Ron Paul.