By a 49-14 vote, the House Financial Services Committee has passed H.R.3890, the Accountability and Transparency in Rating Agencies Act that was introduced by Rep. Paul E. Kanjorski, D-Pa.
According to Kanjorski, the legislation takes steps to reduce conflicts of interest, lessen market reliance on credit rating agencies and impose a liability standard on the agencies.
‘As gatekeepers to our markets, credit rating agencies must be held to higher standards," Kanjorski says. "We need to incentivize them to do their jobs correctly and effectively, and there must be repercussions if they fall short."
The bill clarifies the ability of individuals to sue Nationally Recognized Statistical Rating Organizations (NRSROs), and clarifies that the limitation on the Securities and Exchange Commission or any state not to regulate the substance of credit ratings or ratings methodologies does not afford a defense against civil anti-fraud actions.
As approved by the House committee, H.R.3890 requies each NRSRO to have a board with at least one-third independent directors who will oversee policies and procedures aimed at preventing conflicts of interest and improving internal controls, among other measures.
The legislation also contains numerous new requirements designed to mitigate the conflicts of interest that arise out of the issuer-pays model for compensating NRSROs.
On Tuesday, the committee and the Treasury Department released draft legislation to address the issue of systemic risk and "too big to fail" financial institutions.
That legislation creates a mechanism for monitoring and reducing the threats that systemically risky firms pose to the financial system and establishes a process for winding down large, financially troubled non-bank financial institutions.