IB 

Union Calendar No. 406 

111TH CONGRESS 

2D SESSION H. R. 3890 

[Report No. 111–685, Part I] 

To amend the Securities Exchange Act of 1934 to enhance oversight of 

nationally recognized statistical rating organizations, and for other purposes. 

IN THE HOUSE OF REPRESENTATIVES 

OCTOBER 21, 2009 

Mr. KANJORSKI (for himself, Mr. CAPUANO, Ms. KILROY, Mr. CLEAVER, and 

Ms. KOSMAS) introduced the following bill; which was referred to the 

Committee on Financial Services 

DECEMBER 16, 2010 

Reported with an amendment, and referred to the Committee on the Judiciary 

for a period ending not later than December 17, 2010, for consideration 

of such provisions of the bill and amendment as fall within the jurisdiction of that committee pursuant to clause 1(k) of rule X 

[Strike out all after the enacting clause and insert the part printed in italic] 

DECEMBER 17, 2010 

Committee on the Judiciary discharged; committed to the Committee of the 

Whole House on the State of the Union and ordered to be printed 

[For text of introduced bill, see copy of bill as introduced on October 21, 2009] 


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A BILL 

To amend the Securities Exchange Act of 1934 to enhance 

oversight of nationally recognized statistical rating organizations, and for other purposes. 


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1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This title may be cited as the ‘‘Accountability and 

5 Transparency in Rating Agencies Act’’. 

6 SEC. 2. ENHANCED REGULATION OF NATIONALLY RECOG7 NIZED STATISTICAL RATING ORGANIZA8 TIONS. 

9 Section 15E of the Securities Exchange Act of 1934 

10 (15 U.S.C. 78o–7) is amended— 

11 (1) in subsection (a)— 

12 (A) in paragraph (1)(A), by striking ‘‘fur13 nish to’’ and inserting ‘‘file with’’; 

14 (B) in paragraph (2)(A), by striking ‘‘fur15 nished to’’ and inserting ‘‘filed with’’; and 

16 (C) in paragraph (2)(B)(i)(II), by striking 

17 ‘‘furnished to’’ and inserting ‘‘filed with’’; 

18 (2) in subsection (b)— 

19 (A) in paragraph (1)(A), by striking ‘‘fur20 nished’’ and inserting ‘‘filed’’ and by striking 

21 ‘‘furnishing’’ and inserting ‘‘filing’’; 

22 (B) in paragraph (1)(B), by striking ‘‘fur23 nishing’’ and inserting ‘‘filing’’; and 


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1 (C) in the first sentence of paragraph (2), 

2 by striking ‘‘furnish to’’ and inserting ‘‘file 

3 with’’; 

4 (3) in subsection (c)— 

5 (A) paragraph (2)— 

6 (i) in the second sentence by inserting 

7 ‘‘including the requirements of this section,’’ 

8 after ‘‘Notwithstanding any other provision 

9 of law,’’; and 

10 (ii) by inserting before the period at 

11 the end of the last sentence ‘‘, provided that 

12 this paragraph does not afford a defense 

13 against any action or proceeding brought by 

14 the Commission to enforce the antifraud 

15 provision of the securities laws’’; 

16 (B) by adding at the end the following new 

17 paragraph: 

18 ‘‘(3) REVIEW OF INTERNAL PROCESSES FOR DE19 TERMINING CREDIT RATINGS.— 

20 ‘‘(A) IN GENERAL.—The Commission shall 

21 examine credit ratings issued by, and the poli22 cies, procedures, and methodologies employed by, 

23 each nationally recognized statistical rating or24 ganization to review whether— 


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1 ‘‘(i) the nationally recognized statis2 tical rating organization has established 

3 and documented a system of internal con4 trols, due diligence and implementation of 

5 methodologies for determining credit rat6 ings, taking into consideration such factors 

7 as the Commission may prescribe by rule; 

8 ‘‘(ii) the nationally recognized statis9 tical rating organization adheres to such 

10 system; and 

11 ‘‘(iii) the public disclosures of the na12 tionally recognized statistical rating organi13 zation required under this section about its 

14 credit ratings, methodologies, and proce15 dures are consistent with such system. 

16 ‘‘(B) MANNER AND FREQUENCY.—The Com17 mission shall conduct reviews required by this 

18 paragraph no less frequently than annually in a 

19 manner to be determined by the Commission. 

20 ‘‘(4) PROVISION OF INFORMATION TO THE COM21 MISSION.—Each nationally recognized statistical rat22 ing organization shall make available and maintain 

23 such records and information, for such a period of 

24 time, as the Commission may prescribe, by rule, as 


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1 necessary for the Commission to conduct the reviews 

2 under paragraph (3). 

3 ‘‘(5) DISCLOSURES WITH RESPECT TO STRUC4 TURED SECURITIES.— 

5 ‘‘(A) REGULATIONS REQUIRED.—The rules 

6 and regulations prescribed by the Commission 

7 pursuant to this section with respect to nation8 ally recognized statistical rating organizations 

9 shall, with respect to the procedures and meth10 odologies by which any nationally recognized 

11 statistical rating organization determines credit 

12 ratings for structured securities— 

13 ‘‘(i) specify the information required to 

14 be disclosed to such rating organizations by 

15 the sponsor, issuers, and underwriters of 

16 such structured securities on the collateral 

17 underlying such structured securities; and 

18 ‘‘(ii) establish and implement proce19 dures to collect and disclose information 

20 about the processes used by such sponsor, 

21 issuers, and underwriters to assess the accu22 racy and integrity of their data and fraud 

23 detection. 

24 ‘‘(B) DEFINITION.—For purposes of this 

25 paragraph, the Commission shall, by rule or regVerDate Mar 15 2010 22:38 Dec 17, 2010 Jkt 099200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6203 E:\BILLS\H3890.RH H3890

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1 ulation, define the term ‘structured securities’ as 

2 appropriate in the public interest and for the 

3 protection of investors. 

4 ‘‘(6) HISTORICAL DEFAULT RATE DISCLO5 SURES.—The rules and regulations prescribed by the 

6 Commission pursuant to this section with respect to 

7 nationally recognized statistical rating organizations 

8 shall require each nationally recognized statistical 

9 rating organization to establish and maintain, on a 

10 publicly accessible Internet site, a facility to disclose, 

11 in a central database, the historical default rates of 

12 all classes of financial products rated by such organi13 zation.’’ 

14 (4) in subsection (d)— 

15 (A) in the heading, by inserting ‘‘FINE,’’ 

16 after ‘‘CENSURE,’’; 

17 (B) by striking ‘‘shall censure’’ and all that 

18 follows through ‘‘revocation’’ and inserting the 

19 following: ‘‘shall censure, fine in accordance with 

20 section 21B(a), place limitations on the activi21 ties, functions, or operations of, suspend for a 

22 period not exceeding 12 months, or revoke the 

23 registration of any nationally recognized statis24 tical rating organization (or with respect to any 

25 person who is associated, who is seeking to beVerDate Mar 15 2010 22:38 Dec 17, 2010 Jkt 099200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6203 E:\BILLS\H3890.RH H3890

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1 come associated, or, at the time of the alleged 

2 misconduct, who was associated or was seeking 

3 to become associated with a nationally recog4 nized statistical rating organization, the Com5 mission, by order, shall censure, fine in accord6 ance with section 21B(a), place limitations on 

7 the activities or functions of such person, sus8 pend for a period not exceeding 12 months, or 

9 bar such person from being associated with a na10 tionally recognized statistical rating organiza11 tion), if the Commission finds, on the record 

12 after notice and opportunity for hearing, that 

13 such censure, fine, placing of limitations, bar, 

14 suspension, or revocation’’; 

15 (C) in paragraph (2), by striking ‘‘fur16 nished to’’ and inserting ‘‘filed with’’; 

17 (D) in paragraph (4)— 

18 (i) by striking ‘‘furnish’’ and inserting 

19 ‘‘file’’; 

20 (ii) by striking ‘‘or’’ at the end; 

21 (E) in paragraph (5), by striking the period 

22 at the end and inserting a semicolon; and 

23 (F) by adding at the end the following: 

24 ‘‘(6) has failed reasonably to supervise another 

25 person who commits a violation of the securities laws, 


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1 the rules or regulations thereunder, or any rules of the 

2 Municipal Securities Rulemaking Board if such other 

3 person is subject to his or her supervision, except that 

4 no person shall be deemed to have failed reasonably 

5 to supervise any other person under this paragraph, 

6 if— 

7 ‘‘(A) there have been established procedures, 

8 and a system for applying such procedures, 

9 which would reasonably be expected to prevent 

10 and detect, insofar as practicable, any such vio11 lation by such other person, and 

12 ‘‘(B) such person has reasonably discharged 

13 the duties and obligations incumbent upon him 

14 or her by reason of such procedures and system 

15 without reasonable cause to believe that such pro16 cedures and system were not being complied 

17 with; or 

18 ‘‘(7) fails to conduct sufficient surveillance to en19 sure that credit ratings remain current and reliable, 

20 as applicable.’’; 

21 (5) in subsection (e)— 

22 (A) by striking paragraph (1); and 

23 (B) in paragraph (2), by striking ‘‘(2) 

24 COMMISSION AUTHORITY.—’’ and moving the 


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1 text of such paragraph to follow the heading of 

2 subsection (e); 

3 (6) by amending subsection (h) to read as fol4 lows: 

5 ‘‘(h) CORPORATE GOVERNANCE, ORGANIZATION, AND

6 MANAGEMENT OF CONFLICTS OF INTEREST.— 

7 ‘‘(1) BOARD OF DIRECTORS.— 

8 ‘‘(A) IN GENERAL.—Each nationally recog9 nized statistical rating organization or its ulti10 mate holding company shall have a board of di11 rectors. 

12 ‘‘(B) INDEPENDENT DIRECTORS.—At least 

1 13 ⁄3 of such board, but no less than 2 of the mem14 bers of the board of directors, shall be inde15 pendent directors. In order to be considered inde16 pendent for purposes of this subsection, a direc17 tor of a nationally recognized statistical rating 

18 organization may not, other than in his or her 

19 capacity as a member of the board of directors 

20 or any committee thereof— 

21 ‘‘(i) accept any consulting, advisory, or 

22 other compensatory fee from the nationally 

23 recognized statistical rating organization; 

24 or 


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1 ‘‘(ii) be a person associated with the 

2 nationally recognized statistical rating or3 ganization or with any affiliated company 

4 thereof. 

5 ‘‘(C) COMPENSATION AND TERM.—The com6 pensation of the independent directors shall not 

7 be linked to the business performance of the na8 tionally recognized statistical rating organiza9 tion and shall be arranged so as to ensure the 

10 independence of their judgment. The term of of11 fice of the independent directors shall be for a 

12 pre-agreed fixed period not exceeding 5 years 

13 and shall not be renewable. 

14 ‘‘(D) DUTIES.—In addition to the overall 

15 responsibility of the board of directors, the board 

16 shall oversee— 

17 ‘‘(i) the establishment, maintenance, 

18 and enforcement of policies and procedures 

19 for determining credit ratings; 

20 ‘‘(ii) the establishment, maintenance, 

21 and enforcement of policies and procedures 

22 to address, manage, and disclose any con23 flicts of interest; 

24 ‘‘(iii) the effectiveness of the internal 

25 control system with respect to policies and 


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1 procedures for determining credit ratings; 

2 and 

3 ‘‘(iv) the compensation and promotion 

4 policies and practices of the nationally rec5 ognized statistical rating organization. 

6 ‘‘(2) ORGANIZATION POLICIES AND PROCE7 DURES.—Each nationally recognized statistical rat8 ing organization shall establish, maintain, and en9 force written policies and procedures reasonably de10 signed, taking into consideration the nature of the 

11 business of the nationally recognized statistical rating 

12 organization and affiliated persons and affiliated 

13 companies thereof, to address, manage, and disclose 

14 any conflicts of interest that can arise from such busi15 ness. 

16 ‘‘(3) COMMISSION RULES.—The Commission 

17 shall issue rules to prohibit, or require the manage18 ment and disclosure of, any conflicts of interest relat19 ing to the issuance of credit ratings by a nationally 

20 recognized statistical rating organization, including 

21 rules regarding— 

22 ‘‘(A) conflicts of interest relating to the 

23 manner in which a nationally recognized statis24 tical rating organization is compensated by the 


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1 obligor, or any affiliate of the obligor, for issuing 

2 credit ratings or providing related services; 

3 ‘‘(B) conflicts of interest relating to business 

4 relationships, ownership interests, and affili5 ations of nationally recognized statistical rating 

6 organization board members with obligors, or 

7 any other financial or personal interests between 

8 a nationally recognized statistical rating organi9 zation, or any person associated with such na10 tionally recognized statistical rating organiza11 tion, and the obligor, or any affiliate of the obli12 gor; 

13 ‘‘(C) conflicts of interest relating to any af14 filiation of a nationally recognized statistical 

15 rating organization, or any person associated 

16 with such nationally recognized statistical rating 

17 organization, with any person who underwrites 

18 securities, money market instruments, or other 

19 instruments that are the subject of a credit rat20 ing; 

21 ‘‘(D) a requirement that each nationally 

22 recognized statistical rating organization disclose 

23 on such organization’s website a consolidated re24 port at the end of each fiscal year that shows— 


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1 ‘‘(i) the percent of net revenue earned 

2 by the nationally recognized statistical rat3 ing organization or an affiliate of a nation4 ally recognized statistical rating organiza5 tion, or any person associated with a na6 tionally recognized statistical rating organi7 zation, to the extent determined appropriate 

8 by the Commission, for that fiscal year for 

9 providing services and products other than 

10 credit rating services to each person who 

11 paid for a credit rating; and 

12 ‘‘(ii) the relative standing of each per13 son who paid for a credit rating that was 

14 outstanding as of the end of the fiscal year 

15 in terms of the amount of net revenue 

16 earned by the nationally recognized statis17 tical rating organization attributable to 

18 each such person and classified by the high19 est 5, 10, 25, and 50 percentiles and lowest 

20 50 and 25 percentiles; 

21 ‘‘(E) the establishment of a system of pay22 ment for credit ratings issued by each nationally 

23 recognized statistical rating organization that 

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1 nized statistical rating organization conducts ac2 curate and reliable surveillance of credit ratings 

3 over time, as applicable, and that incentives for 

4 reliable credit ratings are in place; 

5 ‘‘(F) a requirement that a nationally recog6 nized statistical rating organization disclose 

7 with the publication of a credit rating the type 

8 and number of credit ratings it has provided to 

9 the person being rated or affiliates of such per10 son, the fees it has billed for the credit rating, 

11 and the aggregate amount of net revenue earned 

12 by the nationally recognized statistical rating or13 ganization in the preceding 2 fiscal years attrib14 utable to the person being rated and its affiliates; 

15 and 

16 ‘‘(G) any other potential conflict of interest, 

17 as the Commission determines necessary or ap18 propriate in the public interest or for the protec19 tion of investors. 

20 ‘‘(4) LOOK-BACK REQUIREMENT.— 

21 ‘‘(A) REVIEW BY THE NATIONALLY RECOG22 NIZED STATISTICAL RATING ORGANIZATION.— 

23 Each nationally recognized statistical rating or24 ganization shall establish, maintain, and enforce 

25 policies and procedures reasonably designed to 


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1 ensure that, in any case in which an employee 

2 of a person subject to a credit rating of the na3 tionally recognized statistical rating organiza4 tion or the issuer, underwriter, or sponsor of a 

5 security or money market instrument subject to 

6 a credit rating of the nationally recognized sta7 tistical rating organization was employed by the 

8 nationally recognized statistical rating organiza9 tion and participated in any capacity in deter10 mining credit ratings for the person or the secu11 rities or money market instruments during the 

12 1-year period preceding the date an action was 

13 taken with respect to the credit rating, the na14 tionally recognized statistical rating organiza15 tion shall— 

16 ‘‘(i) conduct a review to determine 

17 whether any conflicts of interest of the em18 ployee influenced the credit rating; and 

19 ‘‘(ii) take action to revise the rating if 

20 appropriate, in accordance with such rules 

21 as the Commission shall prescribe. 

22 ‘‘(B) REVIEW BY COMMISSION.— 

23 ‘‘(i) IN GENERAL.—The Commission 

24 shall conduct periodic reviews of the policies 

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1 plementation of the policies at each nation2 ally recognized statistical rating organiza3 tion to ensure they are reasonably designed 

4 and implemented to most effectively elimi5 nate conflicts of interest. 

6 ‘‘(ii) TIMING OF REVIEWS.—The Com7 mission shall review the code of ethics and 

8 conflict of interest policy of each nationally 

9 recognized statistical rating organization— 

10 ‘‘(I) not less frequently than an11 nually; and 

12 ‘‘(II) whenever such policies are 

13 materially modified or amended. 

14 ‘‘(5) REPORT TO COMMISSION ON CERTAIN EM15 PLOYMENT TRANSITIONS.— 

16 ‘‘(A) REPORT REQUIRED.—Each nationally 

17 recognized statistical rating organization shall 

18 report to the Commission any case such organi19 zation knows or can reasonably be expected to 

20 know where a person associated with such orga21 nization within the previous 5 years obtains em22 ployment with any obligor, issuer, underwriter, 

23 or sponsor of a security or money market instru24 ment for which the organization issued a credit 


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1 rating during the 12-month period prior to such 

2 employment, if such employee— 

3 ‘‘(i) was a senior officer of such orga4 nization; 

5 ‘‘(ii) participated in any capacity in 

6 determining credit ratings for such obligor, 

7 issuer, underwriter, or sponsor; or 

8 ‘‘(iii) supervised an employee described 

9 in clause (ii). 

10 ‘‘(B) PUBLIC DISCLOSURE.—Upon receiving 

11 such a report, the Commission shall make such 

12 information publicly available.’’; 

13 (7) by amending subsection (j) to read as follows: 

14 ‘‘(j) DESIGNATION OF COMPLIANCE OFFICER.— 

15 ‘‘(1) IN GENERAL.—Each nationally recognized 

16 statistical rating organization shall designate an in17 dividual to serve as a compliance officer. 

18 ‘‘(2) DUTIES.—The compliance officer shall— 

19 ‘‘(A) report directly to the board of the na20 tionally recognized statistical rating organiza21 tion; 

22 ‘‘(B) review compliance with policies and 

23 procedures to manage conflicts of interest and 

24 assess the risk that the compliance (or lack of 


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1 such compliance) may compromise the integrity 

2 of the credit rating process; 

3 ‘‘(C) review compliance with the internal 

4 control system with respect to the procedures and 

5 methodologies for determining credit ratings, in6 cluding qualitative methodologies and quan7 titative inputs used in the rating process, and 

8 assess the risk that such internal control system 

9 is reasonably designed to ensure the integrity 

10 and quality of the credit rating process; 

11 ‘‘(D) in consultation with the board of the 

12 nationally recognized statistical rating organiza13 tion, resolve any conflicts of interest that may 

14 arise; 

15 ‘‘(E) be responsible for administering the 

16 policies and procedures required to be established 

17 pursuant to this section; 

18 ‘‘(F) ensure compliance with securities laws 

19 and the rules and regulations issued thereunder, 

20 including rules prescribed by the Commission 

21 pursuant to this section; and 

22 ‘‘(G) establish procedures— 

23 ‘‘(i) for the receipt, retention, and 

24 treatment of complaints regarding credit 

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1 ance with the securities laws and the poli2 cies and procedures required under this sec3 tion; 

4 ‘‘(ii) for the receipt, retention, and 

5 treatment of confidential, anonymous com6 plaints by employees, obligors, issuers, and 

7 investors; 

8 ‘‘(iii) for the remediation of non-com9 pliance issues found during compliance of10 fice reviews, the reviews required under 

11 paragraph (7), internal or external audit 

12 findings, self-reported errors, or through 

13 validated complaints; and 

14 ‘‘(iv) designed so that ratings that the 

15 nationally recognized statistical rating or16 ganization disseminates reflect consider17 ation of all information in a manner gen18 erally consistent with the nationally recog19 nized statistical rating organization’s pub20 lished rating methodology, including infor21 mation which is provided, received, or oth22 erwise obtained from obligor, issuer and 

23 non-issuer sources, such as investors, the 

24 media, and other interested or informed 

25 parties. 


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1 ‘‘(3) LIMITATIONS.—The compliance officer shall 

2 not, while serving in that capacity— 

3 ‘‘(A) determine credit ratings; 

4 ‘‘(B) participate in the establishment of the 

5 procedures and methodologies or the qualitative 

6 methodologies and quantitative inputs used to 

7 determine credit ratings; 

8 ‘‘(C) perform marketing or sales functions; 

9 or 

10 ‘‘(D) participate in establishing compensa11 tion levels, other than for employees working for 

12 the compliance officer. 

13 ‘‘(4) ANNUAL REPORTS REQUIRED.—The compli14 ance officer shall annually prepare and sign a report 

15 on the compliance of the nationally recognized statis16 tical rating organization with the securities laws and 

17 such organization’s internal policies and procedures, 

18 including its code of ethics and conflict of interest 

19 policies, in accordance with rules prescribed by the 

20 Commission. Such compliance report shall accom21 pany the financial reports of the nationally recog22 nized statistical rating organization that are required 

23 to be filed with the Commission pursuant to this sec24 tion and shall include a certification that, under pen25 alty of law, the report is accurate and complete. 


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1 ‘‘(5) COMPENSATION.—The compensation of the 

2 compliance officer shall not be linked to the business 

3 performance of the nationally recognized statistical 

4 rating organization and shall be arranged so as to en5 sure the independence of the officer’s judgment.’’; 

6 (8) in subsection (k)— 

7 (A) by striking ‘‘, on a confidential basis,’’; 

8 (B) by striking ‘‘furnish to’’ and inserting 

9 ‘‘file with’’; 

10 (C) by striking ‘‘Each nationally’’ and in11 serting the following: 

12 ‘‘(1) IN GENERAL.—Each nationally’’; and 

13 (D) by adding at the end the following new 

14 paragraph: 

15 ‘‘(2) EXCEPTION.—The Commission may treat 

16 as confidential any information provided by a na17 tionally recognized statistical rating organization 

18 under this section consistent with applicable Federal 

19 laws or Commission rules.’’; 

20 (9) in subsection (l)(2)(A)(i), by striking ‘‘fur21 nished’’ and inserting ‘‘filed’’; 

22 (10) by amending subsection (p) to read as fol23 lows: 

24 ‘‘(p) ESTABLISHMENT OF SEC OFFICE.— 


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1 ‘‘(1) IN GENERAL.—The Commission shall estab2 lish an office that administers the rules of the Com3 mission with respect to the practices of nationally rec4 ognized statistical rating organizations. 

5 ‘‘(2) STAFFING.—The office of the Commission 

6 established under this subsection shall be staffed suffi7 ciently to carry out fully the requirements of this sec8 tion. 

9 ‘‘(3) RULEMAKING AUTHORITY.—The Commis10 sion shall— 

11 ‘‘(A) establish, by rule, fines and other pen12 alties for any nationally recognized statistical 

13 rating organization that violates the applicable 

14 requirements of this title; and 

15 ‘‘(B) issue such rules as may be necessary 

16 to carry out this section with respect to nation17 ally recognized statistical rating organizations.’’; 

18 and 

19 (11) by adding after subsection (p) the following 

20 new subsections: 

21 ‘‘(q) TRANSPARENCY OF RATINGS PERFORMANCE.— 

22 ‘‘(1) RULEMAKING REQUIRED.—The Commission 

23 shall, by rule, require each nationally recognized sta24 tistical rating organization to publicly disclose infor25 mation on initial ratings and subsequent changes to 


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1 such ratings for the purpose of providing a gauge of 

2 the performance of ratings and allowing investors to 

3 compare performance of ratings by different nation4 ally recognized statistical rating organizations. 

5 ‘‘(2) CONTENT.—The rules of the Commission 

6 under this subsection shall require, at a minimum, 

7 disclosures that— 

8 ‘‘(A) are comparable among nationally rec9 ognized statistical rating organizations, so that 

10 investors can compare rating performance across 

11 rating organizations; 

12 ‘‘(B) are clear and informative for a wide 

13 range of investor sophistication; 

14 ‘‘(C) include performance information over 

15 a range of years and for a variety of classes of 

16 credit ratings, as determined by the Commission; 

17 ‘‘(D) are published and made freely avail18 able by the nationally recognized statistical rat19 ing organization, on an easily accessible portion 

20 of its website and in written form when re21 quested by investors; and 

22 ‘‘(E) each nationally recognized statistical 

23 rating organization include an attestation with 

24 any credit rating it issues affirming that no 

25 part of the rating was influenced by any other 


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1 business activities, that the rating was based 

2 solely on the merits of the instruments being 

3 rated, and that such rating was an independent 

4 evaluation of the risks and merits of the instru5 ment. 

6 ‘‘(r) CREDIT RATINGS METHODOLOGIES.— 

7 ‘‘(1) IN GENERAL.—The Commission shall pre8 scribe rules, in the public interest and for the protec9 tion of investors, that require each nationally recog10 nized statistical rating organization to establish, 

11 maintain, and enforce written procedures and meth12 odologies and an internal control system with respect 

13 to such procedures and methodologies that are reason14 ably designed to— 

15 ‘‘(A) ensure that credit ratings are deter16 mined using procedures and methodologies, in17 cluding qualitative methodologies and quan18 titative inputs that are determined in accordance 

19 with the policies and procedures of the nation20 ally recognized statistical rating organization for 

21 developing and modifying credit rating proce22 dures and methodologies; 

23 ‘‘(B) ensure that when major changes to 

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1 titative inputs, are made, that the changes are 

2 applied consistently to all credit ratings to which 

3 the changed procedures and methodologies apply 

4 and, to the extent the changes are made to credit 

5 rating surveillance procedures and methodolo6 gies, they are applied to current credit ratings 

7 within a time period to be determined by the 

8 Commission by rule, and that the reason for the 

9 change is publicly disclosed; 

10 ‘‘(C) notify persons who have access to the 

11 credit ratings of the nationally recognized statis12 tical rating organization, regardless of whether 

13 they are made readily accessible for free or a rea14 sonable fee, of the procedure or methodology, in15 cluding qualitative methodologies and quan16 titative inputs, used with respect to a particular 

17 credit rating; 

18 ‘‘(D) notify persons who have access to the 

19 credit ratings of the nationally recognized statis20 tical rating organization, regardless of whether 

21 they are made readily accessible for free or a rea22 sonable fee, when a change is made to a proce23 dure or methodology, including to qualitative 

24 methodologies and quantitative inputs, or an 

25 error is identified in a procedure or methodology 


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1 that may result in credit rating actions, and the 

2 likelihood of the change resulting in current cred3 it ratings being subject to rating actions; and 

4 ‘‘(E) use credit rating symbols that distin5 guish credit ratings for structured products from 

6 credit ratings for other products that the Com7 mission determines appropriate or necessary in 

8 the public interest and for the protection of in9 vestors. 

10 ‘‘(2) RATING CLARITY AND CONSISTENCY.— 

11 ‘‘(A) COMMISSION OBLIGATION.—Subject to 

12 subparagraphs (B) and (C), the Commission 

13 shall require, by rule, each nationally recognized 

14 statistical rating organization to establish, 

15 maintain, and enforce written policies and pro16 cedures reasonably designed— 

17 ‘‘(i) with respect to credit ratings of se18 curities and money market instruments, to 

19 assess the risk that investors in securities 

20 and money market instruments may not re21 ceive payment in accordance with the terms 

22 of such securities and instruments; 

23 ‘‘(ii) to define clearly any credit rating 

24 symbol used by that organization; and 


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1 ‘‘(iii) to apply such credit rating sym2 bol in a consistent manner for all types of 

3 securities and money market instruments. 

4 ‘‘(B) ADDITIONAL CREDIT FACTORS.—Noth5 ing in subparagraph (A)— 

6 ‘‘(i) prohibits a nationally recognized 

7 statistical rating organization from using 

8 additional credit factors that are docu9 mented and disclosed by the organization 

10 and that have a demonstrated impact on 

11 the risk an investor in a security or money 

12 market instrument will not receive repay13 ment in accordance with the terms of 

14 issuance; 

15 ‘‘(ii) prohibits a nationally recognized 

16 statistical rating organization from consid17 ering credit factors that are unique to mu18 nicipal securities; or 

19 ‘‘(iii) prohibits a nationally recognized 

20 statistical rating organization from using 

21 an additional symbol with respect to the 

22 ratings described in subparagraph (A)(i) for 

23 the purpose of distinguishing the ratings of 

24 a certain type of security or money market 


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1 instrument from ratings of any other types 

2 of securities or money market instruments. 

3 ‘‘(C) COMPLEMENTARY RATINGS.—The 

4 Commission shall not impose any requirement 

5 under subparagraph (A) that prevents nationally 

6 recognized statistical rating organizations from 

7 establishing ratings that are complementary to 

8 the ratings described in subparagraph (A)(i) and 

9 that are created to measure a discrete aspect of 

10 the security’s or instrument’s risk. 

11 ‘‘(s) TRANSPARENCY OF CREDIT RATING METHODOLO12 GIES AND INFORMATION REVIEWED.— 

13 ‘‘(1) IN GENERAL.—The Commission shall re14 quire, by rule, a nationally recognized statistical rat15 ing organization to include with the publication of 

16 each credit rating regardless of whether the credit rat17 ing is made readily accessible for free or a reasonable 

18 fee a form that discloses information about the as19 sumptions underlying the procedures and methodolo20 gies used, and the data relied on, to determine the 

21 credit rating in the format prescribed in paragraph 

22 (2) and containing the information described in 

23 paragraph (3). 

24 ‘‘(2) FORMAT.—The Commission shall prescribe 

25 a form for use under paragraph (1) that— 


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1 ‘‘(A) is designed in a user-friendly and 

2 helpful manner for investors to understand the 

3 information contained in the report; 

4 ‘‘(B) requires the nationally recognized sta5 tistical rating organization to provide the con6 tent, as required by paragraph (3), in a manner 

7 that is directly comparable across securities; and 

8 ‘‘(C) the nationally recognized statistical 

9 rating organization certifies the information on 

10 the form as true and accurate. 

11 ‘‘(3) CONTENT.—The Commission shall prescribe 

12 a form that requires a nationally recognized statis13 tical rating organization to disclose — 

14 ‘‘(A) the main assumptions included in con15 structing procedures and methodologies, includ16 ing qualitative methodologies and quantitative 

17 inputs and assumptions about the correlation of 

18 defaults across underlying assets used in rating 

19 certain structured products; 

20 ‘‘(B) the potential shortcomings of the credit 

21 ratings, and the types of risks not measured in 

22 the credit ratings that the nationally recognized 

23 statistical rating organization is not com24 menting on, such as liquidity, market, and other 

25 risks; 


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1 ‘‘(C) information on the certainty of the 

2 rating, including information on the reliability, 

3 accuracy, and quality of the data relied on in 

4 determining the ultimate credit rating and a 

5 statement on the extent to which key data inputs 

6 for the credit rating were reliable or limited, in7 cluding any limits on the reach of historical 

8 data, limits in accessibility to certain documents 

9 or other forms of information that would have 

10 better informed the credit rating, and the com11 pleteness of certain information considered; 

12 ‘‘(D) whether and to what extent third 

13 party due diligence services have been utilized, 

14 and a description of the information that such 

15 third party reviewed in conducting due diligence 

16 services; 

17 ‘‘(E) a description of relevant data about 

18 any obligor, issuer, security, or money market 

19 instrument that was used and relied on for the 

20 purpose of determining the credit rating; 

21 ‘‘(F) a statement containing an overall as22 sessment of the quality of information available 

23 and considered in producing a credit rating for 

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1 tical rating organization in rating similar obli2 gors, securities, or money market instruments; 

3 ‘‘(G) an explanation or measure of the po4 tential volatility for the credit rating, including 

5 any factors that might lead to a change in the 

6 credit rating, and the extent of the change that 

7 might be anticipated under different conditions; 

8 ‘‘(H) information on the content of the cred9 it rating, including— 

10 ‘‘(i) the expected default probability; 

11 and 

12 ‘‘(ii) the loss given default; 

13 ‘‘(I) information on the sensitivity of the 

14 rating to assumptions made by the nationally 

15 recognized statistical rating organization, in16 cluding— 

17 ‘‘(i) 5 assumptions made in the ratings 

18 process that, without accounting for any 

19 other factor, would have the greatest impact 

20 on a rating if such assumptions were prov21 en false or inaccurate; and 

22 ‘‘(ii) an analysis, using concrete exam23 ples, on how each of the 5 assumptions iden24 tified under clause (i) impacts a rating. 


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1 ‘‘(J) where applicable, how the nationally 

2 recognized statistical rating organization used 

3 servicer or remittance reports, and with what 

4 frequency, to conduct surveillance of the credit 

5 rating; and 

6 ‘‘(K) such additional information as may 

7 be required by the Commission. 

8 ‘‘(4) DUE DILIGENCE SERVICES.— 

9 ‘‘(A) CERTIFICATION REQUIRED.—In any 

10 case in which third-party due diligence services 

11 are employed by a nationally recognized statis12 tical rating organization or an issuer, under13 writer, or sponsor in connection with the 

14 issuance of a credit rating, the firm providing 

15 the due diligence services shall provide to the na16 tionally recognized statistical rating organiza17 tion written certification of such due diligence, 

18 which shall be subject to review by the Commis19 sion, and the issuer, underwriter, or sponsor 

20 shall provide any reports issued by the provider 

21 of such due diligence services to the nationally 

22 recognized statistical rating organization. 

23 ‘‘(B) FORMAT AND CONTENT.—The Commis24 sion shall establish the appropriate format and 

25 content for written certifications required under 


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1 subparagraph (A) to ensure that providers of due 

2 diligence services have conducted a thorough re3 view of data, documentation, and other relevant 

4 information necessary for the nationally recog5 nized statistical rating organization to provide 

6 an reliable rating. 

7 ‘‘(C) DISCLOSURE OF CERTIFICATION.—The 

8 Commission shall adopt rules requiring a na9 tionally recognized statistical rating organiza10 tion to disclose to persons who have access to the 

11 credit ratings of the nationally recognized statis12 tical rating organization regardless of whether 

13 they are made readily accessible for free or a rea14 sonable fee the certification described in subpara15 graph (A) with the publication of the applicable 

16 credit rating in a manner that may permit the 

17 persons to determine the adequacy and level of 

18 due diligence services provided by the third 

19 party. 

20 ‘‘(t) PROHIBITED ACTIVITIES.—Beginning 180 days 

21 from the date of enactment of the Accountability, Reli22 ability, and Transparency in Rating Agencies Act, it shall 

23 be unlawful for a nationally recognized statistical rating 

24 organization, or an affiliate of a nationally recognized sta25 tistical rating organization, or any person associated with 


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1 a nationally recognized statistical rating organization, that 

2 provides a credit rating for an issuer, underwriter, or place3 ment agent of a security to provide any non-rating service, 

4 including— 

5 ‘‘(1) risk management advisory services; 

6 ‘‘(2) advice or consultation relating to any merg7 er, sales, or disposition of assets of the issuer; 

8 ‘‘(3) ancillary assistance, advice, or consulting 

9 services unrelated to any specific credit rating 

10 issuance; and 

11 ‘‘(4) such further activities or services as the 

12 Commission may determine as necessary or appro13 priate in the public interest or for the protection of 

14 investors.’’. 

15 SEC. 3. STANDARDS FOR PRIVATE ACTIONS. 

16 (a) IN GENERAL.—Section 21D(b)(2) of the Securities 

17 Exchange Act of 1934 (15 U.S.C. 78u-4(b)(2)) is amended 

18 by inserting before the period at the end of the following: 

19 ‘‘, and in the case of an action brought under this title for 

20 money damages against a nationally recognized statistical 

21 rating organization, it shall be sufficient for purposes of 

22 pleading any required state of mind for purposes of such 

23 action that the complaint shall state with particularity 

24 facts giving rise to a strong inference that the nationally 


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1 recognized statistical rating organization knowingly or 

2 recklessly violated the securities laws’’. 

3 (b) PLEADING STANDARD.—Section 15E(m) of the Se4 curities Exchange Act of 1934 (15 U.S.C. 78o-7(m)) amend5 ed to read as follows: 

6 ‘‘(m) APPLICATION OF ENFORCEMENT PROVISIONS; 

7 PLEADING STANDARD IN PRIVATE RIGHTS OF ACTION.— 

8 Statements made by nationally recognized statistical rating 

9 organizations shall not be deemed forward looking state10 ments for purposes of section 21E. In any private right of 

11 action commenced against a nationally recognized statis12 tical rating organization under this title, the same pleading 

13 standards with respect to knowledge and recklessness shall 

14 apply to the nationally recognized statistical rating organi15 zation as would apply to any other person in the same or 

16 a similar private right of action against such person.’’. 

17 SEC. 4. ISSUER DISCLOSURE OF PRELIMINARY RATINGS. 

18 The Securities and Exchange Commission shall adopt 

19 rules under authority of the Securities Act of 1933 (15 

20 U.S.C. 77a, et seq.) to require issuers to disclose prelimi21 nary credit ratings received from nationally recognized sta22 tistical rating agencies on structured products and all forms 

23 of corporate debt. 


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1 SEC. 5. CHANGE TO DESIGNATION. 

2 The Securities Act of 1933 and the Securities Ex3 change Act of 1934 are each amended by striking ‘‘nation4 ally recognized statistical rating’’ each place it appears and 

5 inserting ‘‘nationally registered statistical rating’’. 

6 SEC. 6. TIMELINE FOR REGULATIONS. 

7 Unless otherwise specified in this Act, the Securities 

8 and Exchange Commission shall adopt rules and regula9 tions, as required by the amendments made by this Act, 

10 not later than 365 days after the date of enactment. 

11 SEC. 7. ELIMINATION OF EXEMPTION FROM FAIR DISCLO12 SURE RULE. 

13 Not later than 90 days after the date of enactment of 

14 this Act, the Securities Exchange Commission shall revise 

15 Regulation FD (17 C.F.R. 243.100) to remove from such 

16 regulation the exemption for entities whose primary busi17 ness is the issuance of credit ratings (17 C.F.R. 

18 243.100(b)(2)(iii)). 

19 SEC. 8. ADVISORY BOARD. 

20 (a) ESTABLISHMENT.—Not later than 90 days after 

21 the date of the enactment of this Act, the Securities and 

22 Exchange Commission shall establish an advisory board to 

23 be known as the Credit Ratings Agency Advisory Board (in 

24 this section referred to as ‘‘the Board’’). 

25 (b) APPOINTMENT AND TERMS OF SERVICE.—The 

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1 sion, no more than 2 of whom may be former employees 

2 of a credit rating agency. Members of the Board shall be 

3 prominent individuals of integrity and reputation who 

4 have a demonstrated commitment to the interests of inves5 tors and the public, and an understanding of the role that 

6 credit ratings play to a broad range of investors. Terms 

7 of service shall be staggered as determined by the Commis8 sion. 

9 (c) DUTIES.—The Board shall— 

10 (1) advise the Commission concerning the rules 

11 and regulations required by the amendments made by 

12 this Act; 

13 (2) insure that the Commission properly and 

14 fully executes its oversight functions and responsibil15 ities with the respect to nationally recognized statis16 tical rating organizations and individual partici17 pants; and 

18 (3) issue an annual report to Congress detailing 

19 its work and recommending any additional Congres20 sional actions necessary to aid the Commission and 

21 such additional reports from time to time as appro22 priate when it feels that the Commission is not prop23 erly executing its oversight functions. 


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1 SEC. 9. REMOVAL OF STATUTORY REFERENCES TO CREDIT 

2 RATINGS. 

3 (a) FEDERAL DEPOSIT INSURANCE ACT.—The Federal 

4 Deposit Insurance Act (12 U.S.C. 1811 et seq.) is amend5 ed— 

6 (1) in section 28(d)— 

7 (A) in the subsection heading, by striking 

8 ‘‘NOT OF INVESTMENT GRADE’’; 

9 (B) in paragraph (1), by striking ‘‘not of 

10 investment grade’’ and inserting ‘‘that does not 

11 meet standards of credit-worthiness as estab12 lished by the Corporation’’; 

13 (C) in paragraph (2), by striking ‘‘not of 

14 investment grade’’; 

15 (D) by striking paragraph (3) and redesig16 nating paragraph (4) as paragraph (3); and 

17 (E) in paragraph (3) (as so redesignated)— 

18 (i) by striking subparagraph (A) and 

19 redesignating subparagraphs (B) and (C) as 

20 subparagraphs (A) and (B), respectively; 

21 and 

22 (ii) in subparagraph (B) (as so redes23 ignated), by striking ‘‘not of investment 

24 grade’’ and inserting ‘‘that does not meet 

25 standards of credit-worthiness as established 

26 by the Corporation’’; 


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1 (2) in section 28(e)— 

2 (A) in the subsection heading, by striking 

3 ‘‘NOT OF INVESTMENT GRADE’’; 

4 (B) in paragraph (1), by striking ‘‘not of 

5 investment grade’’ and inserting ‘‘that does not 

6 meet standards of credit-worthiness as estab7 lished by the Corporation’’; and 

8 (C) in paragraphs (2) and (3), by striking 

9 ‘‘not of investment grade’’ each place that it ap10 pears and inserting ‘‘that does not meet stand11 ards of credit-worthiness established by the Cor12 poration’’; and 

13 (3) in section 7(b)(1)(E)(i), by striking ‘‘credit 

14 rating entities, and other private economic’’ and in15 sert ‘‘private economic, credit,’’. 

16 (b) FEDERAL HOUSING ENTERPRISES FINANCIAL

17 SAFETY AND SOUNDNESS ACT OF 1992.—Section 1319 of 

18 the Federal Housing Enterprises Financial Safety and 

19 Soundness Act of 1992 (12 U.S.C. 4519) is amended— 

20 (1) in the section heading, by striking ‘‘BY RAT21 ING ORGANIZATION’’; and 

22 (2) by striking ‘‘that is a nationally recognized 

23 statistical rating organization, as such term is de24 fined in section 3(a) of the Securities Exchange Act 

25 of 1934,’’. 


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1 (c) INVESTMENT COMPANY ACT OF 1940.—Section 

2 6(a)(5)(A)(iv)(I) Investment Company Act of 1940 (15 

3 U.S.C. 80a-6(a)(5)(A)(iv)(I)) is amended by striking ‘‘is 

4 rated investment grade by not less than 1 nationally recog5 nized statistical rating organization’’ and inserting ‘‘meets 

6 such standards of credit-worthiness that the Commission 

7 shall adopt’’. 

8 (d) REVISED STATUTES.—Section 5136A of title LXII 

9 of the Revised Statutes of the United States (12 U.S.C. 24a) 

10 is amended— 

11 (1) in subsection (a)(2)(E), by striking ‘‘any ap12 plicable rating’’ and inserting ‘‘standards of credit13 worthiness established by the Comptroller of the Cur14 rency’’; 

15 (2) in the heading for subsection (a)(3) by strik16 ing ‘‘RATING OR COMPARABLE REQUIREMENT’’ and 

17 inserting ‘‘REQUIREMENT’’; 

18 (3) subsection (a)(3), by amending subparagraph 

19 (A) to read as follows: 

20 ‘‘(A) IN GENERAL.—A national bank meets 

21 the requirements of this paragraph if the bank is 

22 one of the 100 largest insured banks and has not 

23 fewer than 1 issue of outstanding debt that meets 

24 standards of credit-worthiness or other criteria 

25 as the Secretary of the Treasury and the Board 


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1 of Governors of the Federal Reserve System may 

2 jointly establish.’’. 

3 (4) in the heading for subsection (f), by striking 

4 ‘‘MAINTAIN PUBLIC RATING OR’’ and inserting 

5 ‘‘MEET STANDARDS OF CREDIT-WORTHINESS’’; and 

6 (5) in subsection (f)(1), by striking ‘‘any appli7 cable rating’’ and inserting ‘‘standards of credit-wor8 thiness established by the Comptroller of the Cur9 rency’’. 

10 (e) SECURITIES EXCHANGE ACT OF 1934.—Section 

11 3(a) Securities Exchange Act of 1934 (15 U.S.C. 78a(3)(a)) 

12 is amended— 

13 (1) in paragraph (41), by striking ‘‘is rated in 

14 one of the two highest rating categories by at least one 

15 nationally recognized statistical rating organization’’ 

16 and inserting ‘‘meets standards of credit-worthiness 

17 as defined by the Commission’’; and 

18 (2) in paragraph (53)(A), by striking ‘‘is rated 

19 in 1 of the 4 highest rating categories by at least 1 

20 nationally recognized statistical rating organization’’ 

21 and inserting ‘‘meets standards of credit-worthiness 

22 as defined by the Commission’’. 

23 (f) WORLD BANK DISCUSSIONS.—Section 3(a)(6) of 

24 the amendment in the nature of a substitute to the text of 

25 H.R. 4645, as ordered reported from the Committee on 


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1 Banking, Finance and Urban Affairs on September 22, 

2 1988, as enacted into law by section 555 of Public Law 

3 100-461, (22 U.S.C. 286hh(a)(6)), is amended by striking 

4 ‘‘rating’’ and inserting ‘‘worthiness’’. 

5 (g) EFFECTIVE DATE.—The amendments made by this 

6 section shall take effect after the end of the 6-month period 

7 beginning on the date of the enactment of this Act. 

8 SEC. 10. REVIEW OF RELIANCE ON RATINGS. 

9 (a) AGENCY REVIEW.— 

10 (1) REVIEW.—Not later than 1 year after the 

11 date of the enactment of this Act, each Federal agency 

12 listed in paragraph (4) shall, to the extent applicable, 

13 review— 

14 (A) any regulation issued by such agency 

15 that requires the use of an assessment of the cred16 it-worthiness of a security or money market in17 strument, and 

18 (B) any references to or requirements in 

19 such regulations regarding credit ratings. 

20 (2) MODIFICATIONS REQUIRED.—Each such 

21 agency shall modify any such regulations identified 

22 by the review conducted under paragraph (1) to re23 move any reference to or requirement of reliance on 

24 credit ratings and to substitute in such regulations 

25 such standard of credit-worthiness as each respective 


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1 agency shall determine as appropriate for such regu2 lations. In making such determination, such agencies 

3 shall seek to establish, to the extent feasible, uniform 

4 standards of credit-worthiness for use by each such 

5 agency, taking into account the entities regulated by 

6 each such agency and the purposes for which such en7 tities would rely on such standards of credit-worthi8 ness. 

9 (3) REPORT.—Upon conclusion of the review re10 quired under paragraph (1), each Federal agency list11 ed in paragraph (4) shall transmit a report to Con12 gress containing a description of any modification of 

13 any regulation such agency made pursuant to para14 graph (2). 

15 (4) APPLICABLE AGENCIES.—The agencies re16 quired to conduct the review and report required by 

17 this subsection are— 

18 (A) the Securities and Exchange Commis19 sion; 

20 (B) the Federal Deposit Insurance Corpora21 tion; 

22 (C) the Office of Thrift Supervision; 

23 (D) the Office of the Comptroller of the Cur24 rency; 


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1 (E) the Board of Governors of the Federal 

2 Reserve; 

3 (F) the National Credit Union Administra4 tion; and 

5 (G) the Federal Housing Finance Agency. 

6 (b) GAO REVIEW OF OTHER AGENCIES.— 

7 (1) REVIEW.—The Comptroller General shall 

8 conduct a comprehensive review of the use of credit 

9 ratings by Federal agencies other than those listed in 

10 subsection (a)(3), including an analysis of the provi11 sions of law or regulation applicable to each such 

12 agency that refer to and require the use of credit rat13 ings by the agency, and the policies and practices of 

14 each agency with respect to credit ratings. 

15 (2) REPORT.—Not later than 1 year after the 

16 date of the enactment of this Act, the Comptroller 

17 General shall transmit to Congress a report on the 

18 findings of the study conducted pursuant to para19 graph (1), including recommendations for any legisla20 tion or rulemaking necessary or appropriate in order 

21 for such agencies to reduce their reliance on credit 

22 ratings. 


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1 SEC. 11. PUBLICATION OF RATING HISTORIES ON THE 

2 EDGAR SYSTEM. 

3 Not later than 180 days after the date of the enactment 

4 of this Act, the Securities and Exchange Commission shall 

5 revise its rules in section 240.17g-2(a) and (d) of title 17, 

6 Code of Federal Regulations, to require that the random 

7 sample of ratings histories of credit ratings required under 

8 such rules to be disclosed on the website of a nationally rec9 ognized statistical rating organization also be provided to 

10 the Commission in a format consistent with publication by 

11 the Commission on the EDGAR system. 

12 SEC. 12. EFFECT OF RULE 436(G). 

13 Rule 436(g), promulgated by the Securities and Ex14 change Commission under the Securities Act of 1933, shall 

15 have no force or effect. 

16 SEC. 13. STUDIES. 

17 (a) GAO STUDY.— 

18 (1) IN GENERAL.—The Comptroller General shall 

19 conduct a study of— 

20 (A) the implementation of this Act and the 

21 amendments made by this Act by the Securities 

22 and Exchange Commission; 

23 (B) the appropriateness of relying on rat24 ings for use in Federal, State, and local securi25 ties and banking regulations, including for deter26 mining capital requirements; and 


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1 (C) the effect of liability in private actions 

2 arising under the Securities Exchange Act of 

3 1934; 

4 (D) alternative means for compensating 

5 credit rating agencies that would create incen6 tives for accurate credit ratings and what, if 

7 any, statutory changes would be required to per8 mit or facilitate the use of such alternative 

9 means of compensation; and 

10 (E) alternative methodologies to assess cred11 it risk, including market-based measures. 

12 (2) REPORT.—Not later than 30 months after the 

13 date of enactment of this Act, the Comptroller General 

14 shall submit to Congress and the Securities Exchange 

15 Commission, a report containing the findings under 

16 the study required by subsection (a). 

17 (b) SEC STUDY ON ASSIGNING CREDIT RATING AGEN18 CIES ON A ROTATING BASIS.—The Securities and Exchange 

19 Commission shall undertake a study on creating a system 

20 whereby nationally recognized statistical rating organiza21 tions are assigned on a rotating basis to issuers and obligors 

22 seeking a credit rating. Not later than 1 year after the date 

23 of enactment of this Act, the Securities and Exchange Com24 mission shall transmit to Congress a report containing the 

25 findings of the study. 


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1 (c) SEC STUDY ON EFFECT OF NEW REQUIREMENTS

2 ON NRSRO REGISTRATION.—The Securities and Exchange 

3 Commission shall conduct a study on the effect of the 

4 amendments made by section 2 on credit rating agencies 

5 seeking to register as nationally recognized statistical rat6 ing organizations, including whether the new requirements 

7 in such amendments deter credit rating agencies from reg8 istering as nationally recognized statistical rating organi9 zations. Not later than 1 year after the date of enactment 

10 of this Act, the Commission shall transmit to the Committee 

11 on Financial Services of the House of Representatives and 

12 the Committee on Banking, Housing, and Urban Affairs 

13 of the Senate a report on the findings of such study. 

14 (d) STUDY OF CREDIT RATINGS OF DIFFERENT

15 CLASSES OF BONDS.— 

16 (1) STUDY.—The Securities and Exchange Com17 mission shall conduct a study of the treatment of dif18 ferent classes of bonds (municipal versus corporate) 

19 by the nationally recognized statistical rating organi20 zations. Such study shall examine— 

21 (A) whether there are fundamental dif22 ferences in the treatment of different classes of 

23 bonds by such rating organizations that cause 

24 some classes of bonds to suffer from undue dis25 crimination; 


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1 (B) if there are such differences, what are 

2 the causes of such differences and how can they 

3 be alleviated; 

4 (C) whether there are factors other than risk 

5 of loss that are appropriate for the credit ratings 

6 agencies to consider when rating bonds, and do 

7 those factors vary across different sectors 

8 (D) the types of financing arrangement 

9 used by municipal issuers 

10 (E) the differing legal and regulatory re11 gimes governing disclosures for corporate bonds 

12 and municipal bonds; 

13 (F) the extent to which retail investors 

14 could be disadvantaged by a single ratings scale; 

15 and 

16 (G) practices, policies, and methodologies by 

17 the nationally recognized statistical rating orga18 nizations with respect to rating municipal 

19 bonds. 

20 (2) REPORT.—Within 6 months after the date of 

21 enactment of this Act, the Securities and Exchange 

22 Commission shall submit a report on the results of the 

23 study required by paragraph (1) to the Committee on 

24 Financial Services of the House of Representatives 

25 and the Committee on Banking, Housing, and Urban 


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1 Development of the Senate. Such report shall include 

2 as assessment of each of the issues and subjects de3 scribed in subparagraphs (A) through (G) of para4 graph (1). 

5 (e) SEC STUDY ON MEANINGFUL MULTI DIGIT RAT6 ING SYMBOLS.— 

7 (1) STUDY.—The Securities and Exchange Com8 mission shall conduct a study on the feasibility and 

9 desirability of implementing a standardized rating 

10 system whereby ratings symbols contain multiple 

11 characters, each representing a range of default prob12 abilities and loss expectations under standardized and 

13 increasingly severe levels of market stress. The study 

14 shall optimize the definitions of the symbols to maxi15 mize their overall usefulness for users of credit rat16 ings. 

17 (2) INITIAL EXAMPLE FOR GUIDANCE.—An ex18 ample to provide initial guidance for the study is a 

19 ratings symbol consisting of three digits, each of 

20 which corresponds to default probabilities under dif21 ferent levels of market stress as follows: 

22 (A) The first digit represents the default 

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1 dition to a 5 percent decline in asset value and 

2 2 percent increase in unemployment. 

3 (B) The second digit represents the default 

4 probability under more severe market stress, 

5 characterized a 20 percent decline in asset value 

6 and 5 percent increase in unemployment. 

7 (C) The third digit represents the default 

8 probability under extreme market stress, charac9 terized by a 50 percent decline in asset value 

10 and 10 percent increase in unemployment. 

11 (3) REPORT.—Not later than 1 year after the 

12 date of the enactment of this Act, the Commission 

13 shall transmit to Congress a report of the study con14 ducted pursuant to paragraph (1), including rec15 ommendations on whether the system similar to that 

16 described in paragraph (2) should be implemented 

17 and, if so, any necessary legislation required to im18 plement such a system. 

19 (f) SEC STUDY ON RATINGS STANDARDIZATION.— 

20 (1) IN GENERAL.—The Securities and Exchange 

21 Commission shall undertake a study on the feasability 

22 and desirability of— 

23 (A) standardizing credit ratings termi24 nology, so that all credit rating agencies issue 

25 credit ratings using identical terms; 


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52 

•HR 3890 RH

1 (B) standardizing the market stress condi2 tions under which ratings are evaluated; 

3 (C) requiring a quantitative correspondence 

4 between credit ratings and a range of default 

5 probabilities and loss expectations under stand6 ardized conditions of economic stress; and 

7 (D) standardizing credit rating terminology 

8 across asset classes, so that named ratings shall 

9 correspond to a standard range of default prob10 abilities and expected losses independent of asset 

11 class and issuing entity. 

12 (2) REPORT.—Not later than 1 year after the 

13 date of enactment of this Act, the Securities and Ex14 change Commission shall transmit to Congress a re15 port containing the findings of the study and the rec16 ommendations of the Commission. 


srobinson on DSKHWCL6B1PROD with BILLS

srobinson on DSKHWCL6B1PROD with BILLS
Union Calendar No. 406 

111TH CONGRESS 

2D SESSION H. R. 3890 

[Report No. 111–685, Part I] 

A BILL 

To amend the Securities Exchange Act of 1934 to 

poses. tical rating organizations, and for other purenhance oversight of nationally recognized statisDECEMBER 17, 2010 

Committee on the Judiciary discharged; committed to the 

Union and ordered to be printed Committee of the Whole House on the State of the 


srobinson on DSKHWCL6B1PROD with BILLS