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[House Report 112-196]
[From the U.S. Government Publishing Office]

112th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    112-196

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

 
             ASSET-BACKED MARKET STABILIZATION ACT OF 2011

                                _______
                                

August 12, 2011.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

         Mr. Bachus, from the Committee on Financial Services, 
                        submitted the following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 1539]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 1539) to repeal section 939G of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act and to restore 
Securities and Exchange Commission Rule 436(g) repealed by such 
section, having considered the same, report favorably thereon 
without amendment and recommend that the bill do pass.

                          Purpose and Summary

    H.R. 1539, the ``Asset-Backed Market Stabilization Act of 
2011,'' repeals Section 939G of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Public Law 111-203), which 
in turn repealed Securities and Exchange Commission (SEC) Rule 
436(g). SEC Rule 436(g) provided that a credit rating from a 
Nationally Recognized Statistical Rating Organization (NRSRO) 
assigned to a public offering registered under the Securities 
Act of 1933 was not considered an expert-certified part of the 
registration statement or prospectus, as defined by Sections 7 
and 11 of the '33 Act. Repeal of Rule 436(g) prompted severe 
dislocation in the trillion dollar asset-backed securities 
market, requiring SEC intervention to ensure that the market 
remained open and functioning. By restoring Rule 436(g), H.R. 
1539 provides certainty to the vitally important securitization 
market, which increases the availability and affordability of 
credit to businesses, consumers, students, and homeowners in 
the United States.

                  Background and Need for Legislation

    On July 22, 2010, the day the repeal of Rule 436(g) went 
into effect under the Dodd-Frank Act, the NRSROs refused to 
consent to including their ratings in prospectuses. Because SEC 
rules require that ratings be included in prospectuses, issuers 
of asset-backed securities had no choice but to postpone their 
offerings, which disrupted the securitization market for assets 
other than residential and commercial mortgages. In response, 
the SEC immediately issued a six-month no-action letter 
providing relief for registered offerings of asset-backed 
securities; on November 23, 2010, the SEC extended the no-
action letter indefinitely.
    The risk of greater liability as a result of subjecting 
NRSROs to Section 11 could undermine competition if credit 
rating agencies decide that they are unable to bear the risk of 
liability and thus exit the ratings business. Similarly, credit 
rating agencies contemplating entering the ratings business 
might reconsider this decision because of the increased risk of 
legal liability. This could have the effect of undermining the 
goals and purposes of the Credit Rating Agency Reform Act of 
2006, which was to increase competition and break the Standard 
& Poor's and Moody's ratings duopoly. The mere threat of 
liability may particularly affect smaller, less-established 
rating agencies that may find it more difficult to negotiate 
for indemnification or bear the risk of additional liability.
    Importantly, H.R. 1539 does nothing to remove the new 
credit rating agency liability standards added by Section 933 
of the Dodd-Frank Act. Section 933 changed the pleading 
standards for a private action brought against credit rating 
agencies under the Securities Exchange Act of 1934. For 
securities fraud lawsuits, it is now sufficient for a plaintiff 
to allege that a credit rating agency ``knowingly or recklessly 
failed to conduct a reasonable investigation'' of facts about 
the rated debt offering, or knowingly or recklessly failed to 
obtain reasonable verification that such an investigation was 
performed by a source independent of the issuer or underwriter.
    At a March 16, 2011 hearing of the Subcommittee on Capital 
Markets and Government Sponsored Enterprises, Tom Deutsch, 
Executive Director of the American Securitization Forum, 
explained how Section 939G of the Dodd-Frank Act temporarily 
shut down portions of the securitization market, and described 
how ``the absence of a properly functioning securitization 
market, and the funding and liquidity this market has 
historically provided, adversely impacts consumers, businesses, 
financial markets and the broader economy.'' Mr. Deutsch also 
stated that ``an act by Congress to repeal [Section 939G] would 
provide the most straightforward and effective way to remove a 
key barrier that remains to resuming the normal flow of credit 
in America.'' In an April 28, 2011 letter to Chairman Bachus, 
Ford Motor Company stated, ``We recognize that the provision 
repealing 436g of the Securities Act created an unintended 
consequence in the asset-back securities markets. [H.R. 1539] 
addresses the unintended consequence of the Dodd-Frank Act by 
allowing the inclusion of these ratings, which are material and 
need to be disclosed.''
    In order to ensure that the asset-backed securitization 
market continues to operate and provide credit to businesses, 
students, consumers, and homeowners, Representative Steve 
Stivers introduced H.R. 1539 on April 14, 2011.

                                Hearings

    On March 16, 2011, the Subcommittee on Capital Markets and 
Government Sponsored Enterprises held a hearing entitled 
``Legislative Proposals to Promote Job Creation, Capital 
Formation, and Market Certainty,'' to consider H.R. 1539 and 
four other bills.
    Witnesses included:
           Mr. Kenneth A. Bertsch, President and CEO, 
        Society of Corporate Secretaries & Governance 
        Professionals
           Mr. Tom Deutsch, Executive Director, 
        American Securitization Forum
           Ms. Pam Hendrickson, Chief Operating 
        Officer, The Riverside Company
           Mr. Damon Silvers, Policy Director and 
        Special Counsel, AFL-CIO
           Mr. David Weild, Senior Advisor, Grant 
        Thornton, LLP
           Mr. Luke Zubrod, Director, Chatham Financial

                        Committee Consideration

    The Subcommittee on Capital Markets and Government 
Sponsored Enterprises met in open session on May 3 and 4, 2011, 
and ordered H.R. 1539 favorably reported to the full Committee 
by a record vote of 18 yeas and 14 nays (Record vote no. CM-
29).
    The Committee on Financial Services met in open session on 
July 20, 2011 and ordered H.R. 1539 favorably reported to the 
House by a record vote of 31 yeas and 19 nays (Record vote no. 
FC-50).

                            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 Chairman Bachus to report the bill, as amended, to 
the House with a favorable recommendation was agreed to by a 
record vote of 31 yeas and 19 nays (Record vote no. FC-50). The 
names of Members voting for and against follow:

                                              RECORD VOTE NO. FC-50
----------------------------------------------------------------------------------------------------------------
         Representative             Aye       Nay     Present     Representative      Aye       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Bachus.....................        X   ........  .........  Mr. Frank (MA)...  ........        X   .........
Mr. Hensarling.................  ........  ........  .........  Ms. Waters.......  ........  ........  .........
Mr. King (NY)..................        X   ........  .........  Mrs. Maloney.....  ........        X   .........
Mr. Royce......................        X   ........  .........  Mr. Gutierrez....  ........  ........  .........
Mr. Lucas......................        X   ........  .........  Ms. Velazquez....  ........        X   .........
Mr. Paul.......................        X   ........  .........  Mr. Watt.........  ........  ........  .........
Mr. Manzullo...................        X   ........  .........  Mr. Ackerman.....  ........        X   .........
Mr. Jones......................        X   ........  .........  Mr. Sherman......  ........        X   .........
Mrs. Biggert...................        X   ........  .........  Mr. Meeks........  ........        X   .........
Mr. Gary G. Miller (CA)........        X   ........  .........  Mr. Capuano......  ........  ........  .........
Mrs. Capito....................        X   ........  .........  Mr. Hinojosa.....  ........        X   .........
Mr. Garrett....................        X   ........  .........  Mr. Clay.........  ........        X   .........
Mr. Neugebauer.................        X   ........  .........  Mrs. McCarthy      ........        X   .........
                                                                 (NY).
Mr. McHenry....................        X   ........  .........  Mr. Baca.........  ........        X   .........
Mr. Campbell...................        X   ........  .........  Mr. Lynch........  ........  ........  .........
Mrs. Bachmann..................  ........  ........  .........  Mr. Miller (NC)..  ........        X   .........
Mr. McCotter...................        X   ........  .........  Mr. David Scott    ........        X   .........
                                                                 (GA).
Mr. McCarthy (CA)..............  ........  ........  .........  Mr. Al Green (TX)  ........        X   .........
Mr. Pearce.....................        X   ........  .........  Mr. Cleaver......  ........  ........  .........
Mr. Posey......................        X   ........  .........  Ms. Moore........  ........  ........  .........
Mr. Fitzpatrick................        X   ........  .........  Mr. Ellison......  ........  ........  .........
Mr. Westmoreland...............        X   ........  .........  Mr. Perlmutter...  ........        X   .........
Mr. Luetkemeyer................        X   ........  .........  Mr. Donnelly.....  ........        X   .........
Mr. Huizenga...................        X   ........  .........  Mr. Carson.......  ........        X   .........
Mr. Duffy......................        X   ........  .........  Mr. Himes........  ........        X   .........
Ms. Hayworth...................        X   ........  .........  Mr. Peters.......  ........        X   .........
Mr. Renacci....................        X   ........  .........  Mr. Carney.......  ........        X   .........
Mr. Hurt.......................        X   ........  .........
Mr. Dold.......................        X   ........  .........
Mr. Schweikert.................        X   ........  .........
Mr. Grimm......................        X   ........  .........
Mr. Canseco....................        X   ........  .........
Mr. Stivers....................        X   ........  .........
Mr. Fincher....................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

    During the Committee consideration of H.R. 1539, the 
following amendment was considered:
    1. An amendment offered by Mr. Ackerman, no. 1, to require 
the Securities and Exchange Commission to prohibit the 
inclusion of ratings provided by a NRSRO in a prospectus or 
other offering material provided by an issuer, was not agreed 
to by voice vote.

                      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:
    The objective for H.R. 1539 is to restore SEC Rule 436(g) 
which was repealed by section 939G of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Public Law 111-203). 
SEC Rule 436(g) provided that a credit rating from a Nationally 
Recognized Statistical Rating Organization (NRSRO) assigned to 
a public offering registered under the Securities Act of 1933 
was not considered an expert-certified part of the registration 
statement or prospectus, as defined by Sections 7 and 11 of the 
'33 Act. Repeal of Rule 436(g) prompted severe dislocation in 
the trillion dollar asset-backed securities market, requiring 
SEC intervention to ensure that the market remained open and 
functioning. By restoring Rule 436(g), H.R. 1539 provides 
certainty to the vitally important securitization market, which 
increases the availability and affordability of credit to 
businesses, consumers, students, and homeowners in the United 
States.

   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 Estimates

    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:

                                                    August 8, 2011.
Hon. Spencer Bachus,
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. 1539, the Asset-
Backed Market Stabilization Act of 2011.
    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. 1539--Asset-Backed Market Stabilization Act of 2011

    H.R. 1539 would reinstate a rule developed by the 
Securities and Exchange Commission (SEC) that exempts ratings 
provided by certain credit rating agencies, known as nationally 
recognized statistical rating organizations or NRSROs, from 
being considered part of the registration statement for new 
issuances of asset-backed securities (ABS). That rule was 
repealed by the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. Under current law, registration statements for 
ABS must include the assignment of a rating by one or more 
rating agencies. In reinstating the rule, the bill would exempt 
NRSROs from liability if the information provided in the 
offering statement is found to be untrue.
    Based on information from the SEC, CBO estimates that 
implementing H.R. 1539 would not significantly affect spending 
subject to appropriation because the SEC has already taken 
steps to limit enforcement of the requirement that ratings be 
included in registration statements for new issuances of ABS. 
Enacting H.R. 1539 would not affect direct spending or 
revenues; therefore, pay-as-you-go procedures do not apply.
    H.R. 1539 would impose a mandate, as defined in the 
Unfunded Mandates Reform Act, on both public and private 
investors by protecting NRSROs from liability if the ratings 
information provided in an offering statement for a security is 
found to be untrue. Under current law, investors have a right 
to seek compensation if they are harmed by a material omission 
or misstatement that is provided by an NRSRO and included in an 
offering statement. However, industry sources indicate that 
NRSROs do not allow their ratings to appear in offering 
statements, and the SEC has limited enforcement of the 
requirement on issuers to include such ratings. Consequently, 
under current law, no entity would have grounds to sue an 
NRSRO, and CBO estimates that the mandate would impose no costs 
on intergovernmental or private-sector entities.
    The CBO staff contact for this estimate is Susan Willie 
(for federal costs), Elizabeth Cove Delisle (for 
intergovernmental mandates) and Paige Piper/Bach and Sam Wice 
(for private-sector mandates). The estimate was 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

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  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 the section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    H.R. 1539 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 provides a short title to the bill by citing 
it as the ``Asset-Backed Market Stabilization Act of 2011.''

Section 2. Restoration of rule relating to a certain exemption for 
        rating agencies

    This section repeals Section 939G of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (P.L. 111-203), and 
provides that the regulation repealed by such section is 
restored or revived as if such section had not been enacted.

         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 and 
existing law in which no change is proposed is shown in roman):

DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT

           *       *       *       *       *       *       *

 TITLE IX--INVESTOR PROTECTIONS AND IMPROVEMENTS TO THE REGULATION OF 
SECURITIES

           *       *       *       *       *       *       *

Subtitle C--Improvements to the Regulation of Credit Rating Agencies

           *       *       *       *       *       *       *

[SEC. 939G. 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.]

           *       *       *       *       *       *       *

                             MINORITY VIEWS

    The credit rating agencies repeated glaring inaccuracies 
were one of the leading causes of the financial crash. The Wall 
Street Reform and Consumer Protection Act provided several 
reforms to the ratings industry, including a repeal of a 
Securities and Exchange Commission rule that provided rating 
agencies an exemption from liability for misstatements and 
omissions under Section 11 of the Securities Act of 1933 when 
their ratings appeared in the prospectus of a security 
offering. If ratings appear in a prospectus, investors today 
can hold rating agencies accountable to the same standards that 
apply to other experts, such as auditors, giving opinions in 
the legal documents of security offerings. H.R. 1539 restores 
that exemption, which both makes it harder for a purchaser of a 
mis-rated security to get into court and requires the purchaser 
to meet a much higher standard to prevail--for example, blatant 
misstatements would not be sufficient. We believe that reducing 
the increased liability the Act imposes on rating agencies is a 
grave error.

                                   Barney Frank.
                                   Emanuel Cleaver.
                                   Maxine Waters.
                                   Luis V. Gutierrez.
                                   Joe Donnelly.
                                   Gary L. Ackerman.
                                   Melvin L. Watt.
                                   Wm. Lacy Clay.
                                   Stephen F. Lynch.
                                   Carolyn B. Maloney.
                                   Andre Carson.
                                   Gary C. Peters.
                                   Ruben Hinojosa.
                                   Michael E. Capuano.
                                   Brad Miller.
                                   Gregory W. Meeks.
                                   Keith Ellison.
                                   Carolyn McCarthy.

                                  
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