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1. Cate Long wrote:

   CREDIT RATING AGENCY REFORM ACT OF 2006 — (Senate - September 22, 2006)

   Mr. McCONNELL. Mr. President, I ask unanimous consent that the Senate proceed to the immediate consideration of calendar No. 590, S . 3850 .

   The PRESIDING OFFICER. The clerk will state the bill by title.

   The legislative clerk read as follows:

   A bill (S . 3850 ) to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating agency industry.

   There being no objection, the Senate proceeded to consider the bill.

   Mr. SARBANES. Mr. President, I support this important legislation to enhance competition and improve the Federal oversight of credit rating agencies–S . 3850 , as amended, the Credit Rating Agency Reform Act of 2006.

   I applaud Chairman SHELBY for his strong leadership on this issue and am pleased to have worked closely with him on this legislation. The bill also reflects important contributions from Senators MENENDEZ, SCHUMER, ENZI, and SUNUNU.

   Credit rating agencies play an important and valuable role in the capital markets by providing opinions to investors on the ability and willingness of issuers to make timely payments on debt instruments. These ratings can have significant impact. The Washington Post of November 22, 2004 wrote: “they can, with the stroke of a pen, effectively add or subtract millions from a company’s bottom line, rattle a city budget, shock the stock and bond markets and reroute international investment.”

   Investors trust the agencies’ impartiality and rely on their ratings. The SEC created the designation of Nationally Recognized Statistical Rating Organization, NRSRO, which it currently applies to five agencies. Many institutional investors buy debt only if it has been rated by an NRSRO. A Reuters article dated February 1, 2006 stated:

   [Page: S10012] GPO’s PDF“The SEC designation gives these firms a major advantage in competing for business against other firms.”
   Rating agencies earn their revenues pursuant to one of two business models: either by receiving a fee from an issuer to give a rating to that issuer or by charging investors to subscribe for access to the ratings of issuers who do not pay the rating agency. Some NRSROs or their affiliates offer other products and services to the companies, States or other issuers they rate.

   In recent years, concerns have been raised about some aspects of the industry. In late 2001, the largest credit rating agencies maintained an investment grade rating on Enron debt after its major financial restatements and until 4 days before Enron’s bankruptcy. As a result, as Business Week reported on November 29, 2004, there was a “barrage of criticism . . . that raters should have uncovered the problems sooner at Enron, WorldCom and other corporate disasters.”

   In 2002, concerns about credit rating agencies were raised by Senators BUNNING and ENZI and by Consumer Federation of America during the Senate Banking Committee hearings which led ultimately to the enactment of the Sarbanes-Oxley Act. Their concerns prompted the creation of Section 702 of that Act, which directed the SEC to conduct a study of credit rating agencies. The SEC issued a report and, subsequently, published a Concept Release and proposed a regulation to define the term “NRSRO.”

   Many observers feel that more competition would benefit the markets. Two NRSROs, Standard & Poor’s and

   Moody’s, control 8 percent of market share and a third, Fitch Ratings, controls an additional 15 percent. Some have also called for a more transparent and shorter application process for recognition to obtain the NRSRO designation. Others have raised concerns about conflicts of interest, including those involving issuers paying for their ratings, NRSROs having a director who holds an executive position in an issuer, and NRSROs that sell other products or services to issuers they rate. Some have raised questions about alleged abusive practices involving “tying arrangements, solicitation of payment for unsolicited ratings, and threats to modify ratings based on payment for related services.” That is a letter from former SEC Chairman William Donaldson to Congressman PAUL E. KANJORSKI dated June 6, 2005.

   Under Chairman Shelby’s leadership, the Banking Committee has held hearings on credit rating agencies and received testimony from witnesses representing the Securities and Exchange Commission, rating agencies, the bond markets, the mutual fund industry, labor, academics, and financial professionals. Witnesses testified about a number of issues including the NRSRO application process, conflicts of interest, business practices, the appropriate level of Federal regulation and commission authority.

   The legislation before the Senate addresses these issues. Under it, a credit rating agency can obtain the NRSRO designation unless the SEC determines that it lacks adequate financial and managerial resources to consistently produce credit ratings with integrity and to comply with its stated methodologies and procedures. It creates a transparent application process for becoming a NRSRO which requires a decision within a time certain. The application must describe procedures and methodologies used to determine ratings, conflicts of interest, the types of ratings intended to be issued, organization structure, and other matters, and must include a code of ethics, certifications from qualified institutional buyers that have used the ratings for at least 3 years and other items. Most parts of the application must be certified annually and updated when there is a material change.

   The legislation also requires the commission to adopt rules that prohibit unfair, coercive and abusive business practices; prohibit or require the management and disclosure of any conflicts of interest; and require NRSROs to establish policies and procedures designed to prevent the misuse of nonpublic information.

   The bill does not favor a particular credit rating agency business model.

   Prior to its mark-up, the bill received strong support from a number of market participants and interested parties. Let me quote from some of their letters: The Bond Market Association said the bill creates “a clear process using a credible standard for the designation of NRSRO’s.”

   The Investment Company Institution said it “brings much needed sunlight to credit ratings by requiring disclosure of an NRSRO’s rating criteria, its methodologies and policies, how an NRSRO addresses conflicts of interest (as well as the conflicts themselves), and the organizational structure of an NRSRO.”

   The AFL-CIO said it will “protect the investing public against conflicts of interest within the credit rating agencies ….. [and] encourages in a responsible manner greater competition.”

   The Association for Financial Professionals said the bill will “foster competition, impose accountability and provide the necessary SEC oversight to restore confidence in credit rating agencies and the ratings they issue.”

   Consumer Federation of America wrote that it will “help ensure that only high quality ratings will be used for economically important regulatory purposes” and praised the bill’s requirements for “certifications by Qualified Institutional Buyers ….. and [for] giving the ….. SEC ….. authority to deny NRSRO status to rating agencies that lack the financial and managerial resources to produce ratings of integrity.”

   Financial Executives International said the bill “will greatly enhance the accountability of rating agencies.”

   Fitch said it “represents a significant step forward to prudently enhance competition in the rating agency industry.”

   Fidelity Investments said the bill “will improve ratings quality by fostering transparency and accountability.”

   The Banking Committee passed this legislation without objection on a voice vote on August 2.

   The managers’ amendment to this legislation exempts the five existing NRSROs from the requirement that they include certifications in the applications they must file to become NRSROs under the new regulatory framework. This amendment also clarifies the role of Federal regulation in the registration, licensing and qualification of NRSROs, and that the legislation would not regulate the substance of credit ratings or the procedures and methodologies that NRSROs use to determine them, subject to the Federal oversight required in various parts of the legislation.

   Once again, I commend Chairman SHELBY on his leadership on this legislation. In doing so, I also want to acknowledge the outstanding work of Justin Daly on the Chairman’s staff and Dean Shahinian on my staff.

   I support this legislation and encourage my colleagues to do so as well.

   Mr. McCONNELL. Mr. President, I ask unanimous consent that the amendment at the desk be agreed to, the bill, as amended, be read the third time and passed, the motion to reconsider be laid upon the table, and that any statements relating to the bill be printed in the RECORD.

   The PRESIDENT pro tempore. Without objection, it is so ordered.

   The amendment (No. 5035) was agreed to, as follows:

   On page 8, line 23, insert before the semicolon “, except as provided in subparagraph (D)”.

   On page 10, line 3, strike “(D)” and insert “(E)”.

   On page 10, between lines 2 and 3, insert the following:

   “(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 organization.”.

   On page 14, line 15, strike “the authority” and insert “exclusive authority”.

   On page 15, line 11, strike “organizations,” and all that follows through line 15 and insert the following: “organizations. Notwithstanding any other provision of law, 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 organization determines credit ratings.”.

   On page 27, between lines 5 and 6, insert the following:

   “(o) NRSROS SUBJECT TO COMMISSION AUTHORITY.–

   [Page: S10013] GPO’s PDF “(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 organization shall apply to any nationally recognized statistical rating organization or person employed by or working under the control of a nationally recognized 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 organization or person associated with a nationally recognized statistical rating organization.”.

   On page 27, line 6, strike “(o)” and insert “(p)”,

   On page 27, strike lines 6 and 7, and insert the following:

   “(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–”.

   On page 28, line 25, strike “and” and all that follows through “(B) in” on page 29, line 1, and insert the following:

   “(B) in section 202(a)(11) (15 U.S.C. 80b-2(a)(11)), by striking `or (F)’ and inserting the following: `(F) any nationally recognized statistical rating organization, as that term is defined in section 3(a)(62) of the Securities Exchange Act of 1934, unless such organization engages in issuing recommendations as to purchasing, selling, or holding securities or in managing assets, consisting in whole or in part of securities, on behalf of others; or (G)’; and

   “(C) in”.

   On page 33, strike lines 1 through 5.

   The bill (S . 3850 ), as amended, was ordered to be engrossed for a third reading, was read the third time, and passed, as follows:

   S . 3850

   Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

   SECTION 1. SHORT TITLE.

   This Act may be cited as the “Credit Rating Agency Reform Act of 2006”.

   SEC. 2. FINDINGS.

   Upon the basis of facts disclosed by the record and report of the Securities and Exchange Commission made pursuant to section 702 of the Sarbanes-Oxley Act of 2002 (116 Stat. 797), hearings before the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives during the 108th and 109th Congresses, comment letters to the concept releases and proposed rules of the Commission, and facts otherwise disclosed and ascertained, Congress finds that credit rating agencies are of national importance, in that, among other things–

   (1) their ratings, publications, writings, analyses, and reports are furnished and distributed, and their contracts, subscription agreements, and other arrangements with clients are negotiated and performed, by the use of the mails and other means and instrumentalities of interstate commerce;

   (2) their ratings, publications, writings, analyses, and reports customarily relate to the purchase and sale of securities traded on securities exchanges and in interstate over-the-counter markets, securities issued by companies engaged in business in interstate commerce, and securities issued by national banks and member banks of the Federal Reserve System;

   (3) the foregoing transactions occur in such volume as substantially to affect interstate commerce, the securities markets, the national banking system, and the national economy;

   (4) the oversight of such credit rating agencies serves the compelling interest of investor protection;

   (5) the 2 largest credit rating agencies serve the vast majority of the market, and additional competition is in the public interest; and

   (6) the Commission has indicated that it needs statutory authority to oversee the credit rating industry.

   SEC. 3. DEFINITIONS.

   (a) Securities Exchange Act of 1934.–Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is amended by adding at the end the following new paragraphs:

   “(60) CREDIT RATING.–The term `credit rating’ means an assessment of the creditworthiness of an obligor as an entity or with respect to specific securities or money market instruments.

   “(61) CREDIT RATING AGENCY.–The term `credit rating agency’ means any person–

   “(A) engaged in the business of issuing credit ratings on the Internet or through another readily accessible means, for free or for a reasonable fee, but does not include a commercial credit reporting company;

   “(B) employing either a quantitative or qualitative model, or both, to determine credit ratings; and

   “(C) receiving fees from either issuers, investors, or other market participants, or a combination thereof.

   “(62) NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION.–The term `nationally recognized statistical rating organization’ means a credit rating agency that–

   “(A) has been in business as a credit rating agency for at least the 3 consecutive years immediately preceding the date of its application for registration under section 15E;

   “(B) issues credit ratings certified by qualified institutional buyers, in accordance with section 15E(a)(1)(B)(ix), with respect to–

   “(i) financial institutions, brokers, or dealers;

   “(ii) insurance companies;

   “(iii) corporate issuers;

   “(iv) issuers of asset-backed securities (as that term is defined in section 1101(c) of part 229 of title 17, Code of Federal Regulations, as in effect on the date of enactment of this paragraph);

   “(v) issuers of government securities, municipal securities, or securities issued by a foreign government; or

   “(vi) a combination of one or more categories of obligors described in any of clauses (i) through (v); and

   “(C) is registered under section 15E.

   “(63) PERSON ASSOCIATED WITH A NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION.–The term `person associated with’ a nationally recognized statistical rating organization means any partner, officer, director, or branch manager of a nationally recognized 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 organization, or any employee of a nationally recognized statistical rating organization.

   “(64) QUALIFIED INSTITUTIONAL BUYER.–The term `qualified institutional buyer’ has the meaning given such term in section 230.144A(a) of title 17, Code of Federal Regulations, or any successor thereto.”.

   (b) Applicable Definitions.–As used in this Act–

   (1) the term “Commission” means the Securities and Exchange Commission; and

   (2) the term “nationally recognized statistical rating organization” has the same meaning as in section 3(a)(62) of the Securities Exchange Act of 1934, as added by this Act.

   SEC. 4. REGISTRATION OF NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS.

   (a) Amendment.–The Securities Exchange Act of 1934 is amended by inserting after section 15D (15 U.S.C. 78o-6) the following new section:

   “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 organization for purposes of this title (in this section referred to as the `applicant’), shall furnish to 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).

   “(B) REQUIRED INFORMATION.–An application for registration under this section shall contain information regarding–

   “(i) credit ratings performance measurement statistics over short-term, mid-term, and long-term periods (as applicable) of the applicant;

   “(ii) the procedures and methodologies that the applicant uses in determining credit ratings;

   “(iii) policies or procedures adopted and implemented by the applicant to prevent the misuse, in violation of this title (or the rules and regulations hereunder), of material, nonpublic information;

   “(iv) the organizational structure of the applicant;

   “(v) whether or not the applicant has in effect a code of ethics, and if not, the reasons therefor;

   “(vi) any conflict of interest relating to the issuance of credit ratings by the applicant;

   “(vii) the categories described in any of clauses (i) through (v) of section 3(a)(62)(B) with respect to which the applicant intends to apply for registration under this section;

   “(viii) on a confidential basis, a list of the 20 largest issuers and subscribers that use the credit rating services of the applicant, by amount of net revenues received therefrom in the fiscal year immediately preceding the date of submission of the application;

   “(ix) on a confidential basis, as to each applicable category of obligor described in any of clauses (i) through (v) of section 3(a)(62)(B), written certifications described in subparagraph (C), except as provided in subparagraph (D); and

   “(x) any other information and documents concerning the applicant and any person associated with such applicant as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors.

   “(C) WRITTEN CERTIFICATIONS.–Written certifications required by subparagraph (B)(ix)–

   “(i) shall be provided from not fewer than 10 qualified institutional buyers, none of which is affiliated with the applicant;

   “(ii) may address more than one category of obligors described in any of clauses (i) through (v) of section 3(a)(62)(B);

   “(iii) shall include not fewer than 2 certifications for each such category of obligor; and

   “(iv) shall state that the qualified institutional buyer–

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