Credit Rating Agencies: New Regulations Approved By House Committee
WASHINGTON — A House committee voted Wednesday to set new rules for investment rating agencies, which lawmakers say misled investors by giving high marks to risky securities tied to subprime mortgages.
The proposal, approved 49-14, is the House Financial Services Committee's latest attempt to tighten the rules of the road for financial institutions after last year's market crisis.
A floor vote was expected as early as November as part of a broader regulation reform package, although the measure would still face scrutiny in the Senate.
The bill would allow the Securities and Exchange Commission to test the methods employed by rating agencies and sanction lax supervisors.
While the legislation does not provide for criminal sanctions against the agencies, it would make them more vulnerable to lawsuits by angry investors who feel they were misled.
"These rating agencies were falsely elevated to some godlike status that when they put a triple-A rating on something, you could take all of your mother's savings and invest it in there and you were doing the right thing," said Rep. Paul Kanjorski, D-Pa., the bill's sponsor.
Rating agencies didn't immediately embrace the legislation. Spokesmen for Standard & Poor's and Moody's Investors Service said in separate statements that their agencies were committed to working with lawmakers to increase transparency and improve investor confidence.
As part of its broader effort to clamp down on Wall Street, the committee also has voted to create a new federal agency to protect financial consumers against fraud and abuse. The panel has agreed to give regulators new powers to monitor hedge funds and regulate privately traded derivatives, the kind of complex financial instruments that nearly brought down insurance giant American International Group.
Next week, the committee is expected to pass a separate proposal by Kanjorski that would give the SEC new enforcement powers and double its budget in the next five years.
Under the latest plan, lawmakers tried to reduce potential conflicts of interest at credit rating agencies, which make money by charging fees to companies whose securities they rate.
Under the bill, the SEC could require that rating agencies handle specific conflicts in a certain way.
The bill also directs each agency to appoint to its board of directors at least two outsiders. These members couldn't have extensive ties to the rating agency, other than to sit on its board.
Kanjorski backed off from his earlier proposal to make rating agencies collectively liable for inaccuracies. The concept was aimed at eliminating conflicts of interest in the industry by encouraging agencies to police one another.
Industry executives and Republicans had slammed the idea, warning it would cause a flurry of costly lawsuits and reduce competition in an industry.
Kanjorski said Democrats were still considering the idea but that they needed more time to refine the proposal and didn't want to hold up the bill.
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ANNE FLAHERTY | 10/28/09 05:25 PM |