Financial Crisis News Center

Key House Committee Passes Credit Agency Reform Legislation

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

The House Financial Services Committee has passed bi-partisan legislation reforming the governance and operations of credit rating agencies. The Accountability and Transparency in Rating Agencies Act, HR 3890, enhances the accountability of credit rating agencies by clarifying the ability of individuals to sue such agencies. The Exchange Act is amended to provide that, in an action for money damages against a rating agency, it is enough for pleading any required state of mind that the complaint state with particularity facts giving rise to a strong inference that the rating agency knowingly or recklessly violated the securities laws. In addition, statements made by rating agencies will not be deemed forward looking statements for purposes of the Exchange Act’s safe harbor.

Bipartisan Credit Rating Agencies Bill Approved

This story appeared in Bank Digest.

The House Financial Services Committee approved the Accountability and Transparency in Rating Agencies Act (H.R. 3890) by a vote of 49-14. The bill is intended “to curb the inappropriate and irresponsible actions of credit rating agencies which greatly contributed to our current economic problems,” according to principal sponsor Rep. Paul E. Kanjorski (D-Pa.), Chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.

CFPA and Rating Agencies Discussion Drafts Released

This story appeared in Bank Digest.

House Financial Services Committee Chairman Barney Frank, D-Mass., has circulated a discussion draft of legislation to create the Consumer Financial Protection Agency. Chairman Frank also announced yesterday that the Committee will hold a hearing on Wednesday, September 30, to discuss the Consumer Financial Protection Agency and the draft legislation. In addition, Paul E. Kanjorski, D-Pa., Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, circulated a discussion draft of legislation to create the Enhanced Accountability and Transparency in Credit Rating Agencies Act. Kanjorski also announced that the Subcommittee will hold a hearing on Wednesday, September 30, to discuss the Enhanced Accountability and Transparency in Credit Rating Agencies Act and the draft legislation.

CFPA Draft at http://www.house.gov/apps/list/press/financialsvcs_dem/discussion_draft_of_cfpa_bill_092509.pdf

Rating Agencies Draft at
http://www.house.gov/apps/list/press/financialsvcs_dem/nrsro_005b_092509.pdf

SEC Adopts New Credit Rating Agency Rules, Proposes Additional Rules

This story appeared in SEC Today

The SEC yesterday unanimously approved six initiatives aimed at strengthening the regulatory framework for nationally recognized statistical rating organizations. The SEC adopted rules to require NRSROs to provide more information about their rating histories and to allow competing credit rating agencies to offer unsolicited ratings for structured finance products by giving them access to the same data. The SEC also adopted amendments to certain rules and forms to remove a number of references to credit ratings.

In opening remarks, SEC Chair Mary Schapiro noted that investors often consider credit ratings in deciding whether to purchase or sell a security. These ratings did not serve them well over the last few years, she said. The SEC's rule adoptions and proposals are intended to improve the reliability and integrity of the ratings process. Schapiro reported that there are currently 10 NRSROs registered with the Commission. Commissioner Kathleen Casey noted that more are "waiting in the wings."

Court Says Rating Agencies Had No First Amendment Protection in Rating Asset-Backed Securities

This story appeared in Jim Hamilton's World of Securities Regulation

In a case that goes to the heart of the conflict-of-interest issue and credit ratings agencies, and with reform legislation being considered in the EU and the US Congress, a federal judge ruled that institutional investors in a structured investment vehicle containing mortgage-backed securities sufficiently alleged an actionable misstatement against the credit rating agencies and the investment bank that placed the rated notes. Important to the investors’ reasonable reliance on the alleged misleading ratings, noted that court, was the fact that, in 1975, the SEC created a special status to distinguish the most credible and reliable rating agencies, identifying them as nationally recognized statistical rating organizations (NRSROs) to help ensure the integrity of the ratings process. The structured investment vehicle collapsed amid the credit crisis and the awareness of the actual quality of the subprime mortgages that secured the notes. (Abu Dhabi Commercial Bank, et al. v. Morgan Stanley & Co., et al., SD NY, Sept 2, 2009, 08 Civ 7508.)

Government Should Not Oversee Credit Rating Agency Methods, Performance

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter.

The government should not be in the business of regulating or evaluating the methodologies of credit rating agencies, or the performance of their ratings, Treasury Assistant Secretary for Financial Institutions Michael Barr told Congress August 5.

Appearing before the Senate Banking, Housing and Urban Affairs Committee, Barr reasoned that “to do so would put the government in the position of validating private sector actors and would likely exacerbate over-reliance on ratings.”

Obama Administration Proposes Credit Rating Agency Supervision

This story appeared in Bank Digest.

A draft bill that would greatly enhance Securities and Exchange Commission supervision of credit rating agencies and impose significant investor protection requirements has been sent to Congress by the Obama administration. The proposal, part of the administration's overall effort to reform the regulation and supervision of the financial services industry, would “tighten oversight of credit rating agencies, protect investors from inappropriate rating agency practices, and bring increased transparency to the credit rating process,” according to a Treasury Department fact sheet.

SEC Approves Money Market Fund Proposals, Seeks Feedback on Floating NAV

This story appeared in SEC Today.

The SEC voted unanimously yesterday to issue proposed amendments to Investment Company Act Rule 2a-7 that would enhance the regulation of money market funds. The Commission also agreed to solicit feedback on several questions regarding the funds, including whether they should, like other types of mutual funds, effect transactions at the market-based net asset value rather than maintaining a stable $1 net asset value. Chair Mary Schapiro noted that a floating NAV might better protect investors from runs on money market funds, but asked for feedback on whether the efficiency of the $1 NAV is more beneficial to investors.

New White Paper Provides In-Depth Analysis of Financial Reform Proposal

Jim Hamilton, J.D., LL. M., CCH Principal Analyst, has authored an extensive white paper entitled, “The Obama Administration’s Proposal to Reform the U.S. Financial Regulatory System.”

From the Introduction -

“The Obama Administration has proposed to Congress the most sweeping and fundamental regulatory reform of the U.S. financial and securities markets since the New Deal. The proposal’s goals are to regulate systemic risk, enhance transparency and disclosure, delink executive compensation from excessive risk, improve investor protection, and prevent regulatory arbitrage. The Administration has set forth detailed recommendations on the regulation of hedge funds and over-the-counter derivatives, including credit default swaps, as well as draft legislation on a new resolution authority to unwind failing securities and commodities firms. The Administration also recommends major corporate governance reforms, such as shareholder advisory votes on compensation and enhanced compensation committees.”

 Download the White Paper.

Chinese Central Bank Chief Identifies Ratings Agencies and Fair Value Accounting as Driving Pro-cylicality

James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The Governor of the People’s Bank of China has identified two pro-cylical factors that worked to exacerbate the financial crisis: credit rating agencies and fair value accounting. At a meeting of G-20 central bankers, Zhou Xiaochuan said that the problems of fair value accounting have been exposed by the current crisis. Compared with the historical cost approach, he noted, fair value accounting intensifies market fluctuations. While acknowledging that the fair value approach can better reflect the real time value of assets and liabilities, he said that it also magnifies the changes in their values and increases the volatility of returns through the profit and loss account as a consequence. As a result of the massive collateralized securities they held, financial institutions registered mounting unrealized losses which actually involved no cash flow under the fair value rule. Though these losses were only meaningful in accounting, he said, such astronomical book losses distorted investors' expectations and formed a vicious cycle of tumbling prices and asset write-downs.