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[Congressional Bills 111th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3890 Introduced in House (IH)]

111th CONGRESS
  1st Session
                                H. R. 3890

 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

_______________________________________________________________________

                                 A BILL

 
 To amend the Securities Exchange Act of 1934 to enhance oversight of 
 nationally recognized statistical rating organizations, and for other 
                               purposes.

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

SECTION 1. SHORT TITLE.

    This title may be cited as the ``Accountability and Transparency in 
Rating Agencies Act''.

SEC. 2. ENHANCED REGULATION OF NATIONALLY RECOGNIZED STATISTICAL RATING 
              ORGANIZATIONS.

    Section 15E of the Securities Exchange Act of 1934 (15 U.S.C. 78o-
7) is amended--
            (1) in subsection (a)--
                    (A) in paragraph (1)(A), by striking ``furnish to'' 
                and inserting ``file with'';
                    (B) in paragraph (2)(A), by striking ``furnished 
                to'' and inserting ``filed with''; and
                    (C) in paragraph (2)(B)(i)(II), by striking 
                ``furnished to'' and inserting ``filed with'';
            (2) in subsection (b)--
                    (A) in paragraph (1)(A), by striking ``furnished'' 
                and inserting ``filed'' and by striking ``furnishing'' 
                and inserting ``filing'';
                    (B) in paragraph (1)(B), by striking ``furnishing'' 
                and inserting ``filing''; and
                    (C) in the first sentence of paragraph (2), by 
                striking ``furnish to'' and inserting ``file with'';
            (3) in subsection (c)--
                    (A) paragraph (2)--
                            (i) in the second sentence by inserting 
                        ``including the requirements of this section,'' 
                        after ``Notwithstanding any other provision of 
                        law,''; and
                            (ii) by inserting before the period at the 
                        end of the last sentence ``, provided that this 
                        paragraph does not afford a defense against any 
                        action or proceeding brought by the Commission 
                        to enforce the antifraud provision of the 
                        securities laws''; and
                    (B) by adding at the end the following new 
                paragraph:
            ``(3) Review of internal processes for determining credit 
        ratings.--
                    ``(A) In general.--The Commission shall review 
                credit ratings issued by, and the policies, procedures, 
                and methodologies employed by, each nationally 
                recognized statistical rating organization to ensure 
                that--
                            ``(i) the nationally recognized statistical 
                        rating organization has established and 
                        documented a system of internal controls, due 
                        diligence and implementation of methodologies 
                        for determining credit ratings, taking into 
                        consideration such factors as the Commission 
                        may prescribe by rule;
                            ``(ii) the nationally recognized 
                        statistical rating organization adheres to such 
                        system; and
                            ``(iii) the public disclosures of the 
                        nationally recognized statistical rating 
                        organization required under this section about 
                        its ratings, methodologies, and procedures are 
                        consistent with such system.
                    ``(B) Manner and frequency.--The Commission shall 
                conduct reviews required by this paragraph no less 
                frequently than annually in a manner to be determined 
                by the Commission.
            ``(4) Provision of information to the commission.--Each 
        nationally recognized statistical rating organization shall 
        make available and maintain such records and information, for 
        such a period of time, as the Commission may prescribe, by 
        rule, as necessary for the Commission to conduct the reviews 
        under paragraph (3).'';
            (4) in subsection (d)--
                    (A) in the heading, by inserting ``Fine,'' after 
                ``Censure,'';
                    (B) by striking ``shall censure'' and all that 
                follows through ``revocation'' and inserting the 
                following: ``shall censure, fine in accordance with 
                section 21B(a), place limitations on the activities, 
                functions, or operations of, suspend for a period not 
                exceeding 12 months, or revoke the registration of any 
                nationally recognized statistical rating organization 
                (or with respect to any person who is associated, who 
                is seeking to become associated, or, at the time of the 
                alleged misconduct, who was associated or was seeking 
                to become associated with a nationally recognized 
                statistical rating organization, the Commission, by 
                order, shall censure, fine in accordance with section 
                21B(a), place limitations on the activities or 
                functions of such person, suspend for a period not 
                exceeding 12 months, or bar such person from being 
                associated with a nationally recognized statistical 
                rating organization), if the Commission finds, on the 
                record after notice and opportunity for hearing, that 
                such censure, fine, placing of limitations, bar, 
                suspension, or revocation'';
                    (C) in paragraph (2), by striking ``furnished to'' 
                and inserting ``filed with'';
                    (D) in paragraph (4)--
                            (i) by striking ``furnish'' and inserting 
                        ``file''; and
                            (ii) by striking ``or'' at the end;
                    (E) in paragraph (5), by striking the period at the 
                end; and
                    (F) by adding at the end the following:
            ``(6) has failed reasonably to supervise another person who 
        commits a violation of the securities laws or any rules of the 
        Municipal Securities Rulemaking Board if such other person is 
        subject to his or her supervision, except that no person shall 
        be deemed to have failed reasonably to supervise any other 
        person under this paragraph, if--
                    ``(A) there have been established procedures, and a 
                system for applying such procedures, which would 
                reasonably be expected to prevent and detect, insofar 
                as practicable, any such violation by such other 
                person; and
                    ``(B) such person has reasonably discharged the 
                duties and obligations incumbent upon him or her by 
                reason of such procedures and system without reasonable 
                cause to believe that such procedures and system were 
                not being complied with; or
            ``(7) fails to conduct sufficient surveillance to ensure 
        that credit ratings remain current and reliable, as 
        applicable.'';
            (5) in subsection (e)--
                    (A) by striking paragraph (1); and
                    (B) in paragraph (2), by striking ``(2) Commission 
                authority.--'' and moving the text of such paragraph to 
                follow the heading of subsection (e);
            (6) by amending subsection (h) to read as follows:
    ``(h) Corporate Governance, Organization, and Management of 
Conflicts of Interest.--
            ``(1) Board of directors.--
                    ``(A) In general.--Each nationally recognized 
                statistical rating organization or its parent entity 
                shall have a board of directors.
                    ``(B) Independent directors.--At least \1/3\ of 
                such board, but no less than 2 of the members of the 
                board of directors, shall be independent directors. In 
                order to be considered independent for purposes of this 
                subsection, a director of a nationally recognized 
                statistical rating organization may not, other than in 
                his or her capacity as a member of the board of 
                directors or any committee thereof--
                            ``(i) accept any consulting, advisory, or 
                        other compensatory fee from the nationally 
                        recognized statistical rating organization; or
                            ``(ii) be a person associated with the 
                        nationally recognized statistical rating 
                        organization or with any affiliated company 
                        thereof.
                    ``(C) Compensation and term.--The compensation of 
                the independent directors shall not be linked to the 
                business performance of the nationally recognized 
                statistical rating organization and shall be arranged 
                so as to ensure the independence of their judgment. The 
                term of office of the independent directors shall be 
                for a pre-agreed fixed period not exceeding 5 years and 
                shall not be renewable.
                    ``(D) Duties.--In addition to the overall 
                responsibility of the board of directors, the board 
                shall oversee--
                            ``(i) the establishment, maintenance, and 
                        enforcement of policies and procedures for 
                        determining credit ratings;
                            ``(ii) the establishment, maintenance, and 
                        enforcement of policies and procedures to 
                        address, manage, and disclose any conflicts of 
                        interest;
                            ``(iii) the effectiveness of the internal 
                        control system with respect to policies and 
                        procedures for determining credit ratings; and
                            ``(iv) the compensation and promotion 
                        policies and practices of the nationally 
                        recognized statistical rating organization.
            ``(2) Organization policies and procedures.--Each 
        nationally recognized statistical rating organization shall 
        establish, maintain, and enforce written policies and 
        procedures reasonably designed, taking into consideration the 
        nature of the business of the nationally recognized statistical 
        rating organization and affiliated persons and affiliated 
        companies thereof, to address, manage, and disclose any 
        conflicts of interest that can arise from such business.
            ``(3) Commission rules.--The Commission shall issue rules 
        to prohibit, or require the management and disclosure of, any 
        conflicts of interest relating to the issuance of credit 
        ratings by a nationally recognized statistical rating 
        organization, including--
                    ``(A) conflicts of interest relating to the manner 
                in which a nationally recognized statistical rating 
                organization is compensated by the obligor, or any 
                affiliate of the obligor, for issuing credit ratings or 
                providing related services;
                    ``(B) conflicts of interest relating to the 
                provision of consulting, advisory, or other services by 
                a nationally recognized statistical rating 
                organization, or any person associated with such 
                nationally recognized statistical rating organization, 
                to the obligor, or any affiliate of the obligor;
                    ``(C) disclosure of conflicts of interests relating 
                to business relationships, ownership interests, and 
                affiliations of nationally recognized statistical 
                rating organization board members with obligors, or any 
                other financial or personal interests between a 
                nationally recognized statistical rating organization, 
                or any person associated with such nationally 
                recognized statistical rating organization, and the 
                obligor, or any affiliate of the obligor;
                    ``(D) disclosure of conflicts of interests relating 
                to any affiliation of a nationally recognized 
                statistical rating organization, or any person 
                associated with such nationally recognized statistical 
                rating organization, with any person who underwrites 
                securities, money market instruments, or other 
                instruments that are the subject of a credit rating;
                    ``(E) a requirement that each nationally recognized 
                statistical rating organization disclose on such 
                organization's website a consolidated report at the end 
                of each fiscal year that shows--
                            ``(i) the percent of net revenue earned by 
                        the nationally recognized statistical rating 
                        organization or an affiliate of a nationally 
                        recognized statistical rating organization, or 
                        any person associated with a nationally 
                        recognized statistical rating organization, to 
                        the extent determined appropriate by the 
                        Commission, for that fiscal year for providing 
                        services and products other than credit rating 
                        services to each person who paid for a credit 
                        rating; and
                            ``(ii) the relative standing of each person 
                        who paid for a credit rating that was 
                        outstanding as of the end of the fiscal year in 
                        terms of the amount of net revenue earned by 
                        the nationally recognized statistical rating 
                        organization attributable to each such person 
                        and classified by the highest 5, 10, 25, and 50 
                        percentiles and lowest 50 and 25 percentiles;
                    ``(F) rules providing for the establishment of a 
                system of payment for each nationally recognized 
                statistical rating organization that requires that 
                payments are structured in a manner designed to ensure 
                that the nationally recognized statistical rating 
                organization conducts accurate and reliable 
                surveillance of ratings over time, as applicable, and 
                that incentives for reliable ratings are in place;
                    ``(G) a requirement that a nationally recognized 
                statistical rating organization disclose with the 
                publication of a credit rating the type and number of 
                credit ratings it has provided to the person being 
                rated or affiliates of such person, the fees it has 
                billed for the credit rating, and the aggregate amount 
                of net revenue earned by the nationally recognized 
                statistical rating in the preceding 2 fiscal years 
                attributable to the person being rated and its 
                affiliates; and
                    ``(H) any other potential conflict of interest, as 
                the Commission determines necessary or appropriate in 
                the public interest or for the protection of investors.
            ``(4) Look-back requirement.--
                    ``(A) Review by the nationally recognized 
                statistical rating organization.--Each nationally 
                recognized statistical rating organization shall 
                establish, maintain, and enforce policies and 
                procedures reasonably designed to ensure that, in any 
                case in which an employee of a person subject to a 
                credit rating of the nationally recognized statistical 
                rating organization or the issuer, underwriter, or 
                sponsor of a security or money market instrument 
                subject to a credit rating of the nationally recognized 
                statistical rating organization was employed by the 
                nationally recognized statistical rating organization 
                and participated in any capacity in determining credit 
                ratings for the person or the securities or money 
                market instruments during the 1-year period preceding 
                the date an action was taken with respect to the credit 
                rating, the nationally recognized statistical rating 
                organization shall--
                            ``(i) conduct a review to determine whether 
                        any conflicts of interest of the employee 
                        influenced the credit rating; and
                            ``(ii) take action to revise the rating if 
                        appropriate, in accordance with such rules as 
                        the Commission shall prescribe.
                    ``(B) Review by commission.--
                            ``(i) In general.--The Commission shall 
                        conduct periodic reviews of the policies 
                        described in subparagraph (A) and the 
                        implementation of the policies at each 
                        nationally recognized statistical rating 
                        organization to ensure they are reasonably 
                        designed and implemented to most effectively 
                        eliminate conflicts of interest.
                            ``(ii) Timing of reviews.--The Commission 
                        shall review the code of ethics and conflict of 
                        interest policy of each nationally recognized 
                        statistical rating organization--
                                    ``(I) not less frequently than 
                                annually; and
                                    ``(II) whenever such policies are 
                                materially modified or amended.
            ``(5) Report to commission on certain employment 
        transitions.--
                    ``(A) Report required.--Each nationally recognized 
                statistical rating organization shall report to the 
                Commission any case such organization knows or can 
                reasonably be expected to know where a former employee 
                of such organization obtains employment with any 
                issuer, underwriter, or sponsor of a security or money 
                market instrument for which the organization issued a 
                credit rating during the 12-month period prior to such 
                employment, if such employee--
                            ``(i) was an officer of such organization;
                            ``(ii) participated in any capacity in 
                        determining credit ratings for such issuer, 
                        underwriter, or sponsor; or
                            ``(iii) supervised an employee described un 
                        subparagraph (B).
                    ``(B) Public disclosure.--Upon receiving such a 
                report, the Commission shall make such information 
                publicly available.'';
            (7) by amending subsection (j) to read as follows:
    ``(j) Designation of Compliance Officer.--
            ``(1) In general.--Each nationally recognized statistical 
        rating organization shall designate an individual to serve as a 
        compliance officer.
            ``(2) Duties.--The compliance officer shall--
                    ``(A) report directly to the board of the 
                nationally recognized statistical rating organization;
                    ``(B) review compliance with policies and 
                procedures to manage conflicts of interest and assess 
                the risk that the compliance (or lack of such 
                compliance) may compromise the integrity of the credit 
                rating process;
                    ``(C) review compliance with internal controls with 
                respect to the procedures and methodologies for 
                determining credit ratings, including quantitative 
                models and qualitative inputs used in the rating 
                process, and assess the risk that such compliance with 
                the internal controls (or lack of such compliance) may 
                compromise the integrity and quality of the credit 
                rating process;
                    ``(D) in consultation with the board of the 
                nationally recognized statistical rating organization, 
                resolve any conflicts of interest that may arise;
                    ``(E) be responsible for administering the policies 
                and procedures required to be established pursuant to 
                this section;
                    ``(F) ensure compliance with securities laws and 
                the rules and regulations issued thereunder, including 
                rules prescribed by the Commission pursuant to this 
                section; and
                    ``(G) shall establish procedures--
                            ``(i) for the receipt, retention, and 
                        treatment of complaints regarding credit 
                        ratings, models, methodologies, and compliance 
                        with the securities laws and the policies and 
                        procedures required under this section;
                            ``(ii) for the receipt, retention, and 
                        treatment of confidential, anonymous complaints 
                        by employees, issuers, and investors;
                            ``(iii) for the remediation of non-
                        compliance issues found during compliance 
                        office reviews, the reviews required under 
                        paragraph (7), internal or external audit 
                        findings, self-reported errors, or through 
                        validated complaints; and
                            ``(iv) designed so that ratings that the 
                        nationally recognized statistical rating 
                        organization disseminates reflect consideration 
                        of all information that comes to the attention 
                        of and is believed by the nationally recognized 
                        statistical rating organization to be relevant, 
                        in a manner generally consistent with the 
                        nationally recognized statistical rating 
                        organization's published rating methodology, 
                        including information which is provided, 
                        received, or otherwise obtained from issuer and 
                        non-issuer sources, such as investors, the 
                        media, and other interested or informed 
                        parties.
            ``(3) Limitations.--The compliance officer shall not, while 
        serving in that capacity--
                    ``(A) determine credit ratings;
                    ``(B) participate in the establishment of the 
                procedures and methodologies or the quantitative models 
                and qualitative inputs used to determine credit 
                ratings;
                    ``(C) perform marketing or sales functions; or
                    ``(D) participate in establishing compensation 
                levels, other than for employees working for the 
                compliance officer.
            ``(4) Annual reports required.--The compliance officer 
        shall annually prepare and sign a report on the compliance of 
        the nationally recognized statistical rating organization with 
        the securities laws and such organization's internal policies 
        and procedures, including its code of ethics and conflict of 
        interest policies, in accordance with rules prescribed by the 
        Commission. Such compliance report shall accompany the 
        financial reports of the nationally recognized statistical 
        rating organization that are required to be filed with the 
        Commission pursuant to this section and shall include a 
        certification that, under penalty of law, the report is 
        accurate and complete.'';
            (8) in subsection (k)--
                    (A) by striking ``, on a confidential basis,'';
                    (B) by striking ``Each nationally'' and inserting 
                the following:
            ``(1) In general.--Each nationally''; and
                    (C) by adding at the end the following new 
                paragraph:
            ``(2) Exception.--The Commission may treat as confidential 
        any item filed with the Commission under paragraph (1), the 
        publication of which the Commission determines may have a 
        harmful effect on a nationally recognized statistical rating 
        organization.'';
            (9) in subsection (l)(2)(A)(i), by striking ``furnished'' 
        and inserting ``filed'';
            (10) by amending subsection (p) to read as follows:
    ``(p) Establishment of SEC Office.--The Commission shall establish 
an office that administers the rules of the Commission with respect to 
the practices of nationally recognized statistical rating organizations 
in determining ratings, in the public interest and for the protection 
of investors, including rules designed to ensure that credit ratings 
issued by such registrants are accurate and not unduly influenced by 
conflicts of interest.''; and
            (11) by adding after subsection (p) the following new 
        subsections:
    ``(q) Transparency of Ratings Performance.--
            ``(1) Rulemaking required.--The Commission shall, by rule, 
        require each nationally recognized statistical rating 
        organization to publicly disclose information on initial 
        ratings and subsequent changes to such ratings for the purpose 
        of providing a gauge of the performance of ratings and allowing 
        investors to compare performance of ratings by different 
        nationally recognized statistical rating organizations.
            ``(2) Content.--The rules of the Commission under this 
        subsection shall require, at a minimum, disclosures that--
                    ``(A) are comparable among nationally recognized 
                statistical rating organizations, so that investors can 
                compare rating performance across rating organizations;
                    ``(B) are clear and informative for a wide range of 
                investor sophistication;
                    ``(C) include performance information over a range 
                of years and for a variety of classes of credit 
                ratings, as determined by the Commission; and
                    ``(D) are published and made freely available by 
                the nationally recognized statistical rating 
                organization, on an easily accessible portion of its 
                website and in written form when requested by 
                investors.
    ``(r) Credit Ratings Methodologies.--
            ``(1) In general.--The Commission shall prescribe rules, in 
        the public interest and for the protection of investors, that 
        require each nationally recognized statistical rating 
        organization to establish, maintain, and enforce written 
        procedures and methodologies that are reasonably designed to--
                    ``(A) ensure that credit ratings are determined 
                using procedures and methodologies, including 
                quantitative models and qualitative inputs that are 
                determined in accordance with the policies and 
                procedures of the nationally recognized statistical 
                rating organization for developing and modifying credit 
                rating procedures and methodologies;
                    ``(B) ensure that when major changes to credit 
                rating procedures and methodologies, including to 
                quantitative models and qualitative inputs, are made, 
                that the changes are applied consistently to all credit 
                ratings to which the changed procedures and 
                methodologies apply and, to the extent the changes are 
                made to credit rating surveillance procedures and 
                methodologies, they are applied to current credit 
                ratings within a time period to be determined by the 
                Commission by rule, and that the reason for the change 
                is publicly disclosed;
                    ``(C) notify persons who have access to the credit 
                ratings of the nationally recognized statistical rating 
                organization, regardless of whether they are made 
                readily accessible for free or a reasonable fee, of the 
                version of a procedure or methodology, including 
                quantitative models and qualitative inputs, used with 
                respect to a particular credit rating;
                    ``(D) notify persons who have access to the credit 
                ratings of the nationally recognized statistical rating 
                organization, regardless of whether they are made 
                readily accessible for free or a reasonable fee, when a 
                change is made to a procedure or methodology, including 
                to quantitative models and qualitative inputs, or an 
                error is identified in a procedure or methodology that 
                may result in credit rating actions, and the likelihood 
                of the change resulting in current credit ratings being 
                subject to rating actions; and
                    ``(E) use credit rating symbols that distinguish 
                credit ratings for structured products from credit 
                ratings for other products that the Commission 
                determines appropriate or necessary in the public 
                interest and for the protection of investors.
            ``(2) Rating clarity and consistency.--
                    ``(A) Commission obligation.--Subject to 
                subparagraphs (B) and (C), the Commission shall 
                require, by rule, each nationally recognized 
                statistical rating organization to establish, maintain, 
                and enforce written policies and procedures reasonably 
                designed--
                            ``(i) with respect to credit ratings of 
                        securities and money market instruments, to 
                        assess the risk that investors in securities 
                        and money market instruments may not receive 
                        payment in accordance with the terms of such 
                        securities and instruments;
                            ``(ii) to define clearly any credit rating 
                        symbol used by that organization; and
                            ``(iii) to apply such credit rating symbol 
                        in a consistent manner for all types of 
                        securities and money market instruments.
                    ``(B) Additional credit factors.--Nothing in 
                subparagraph (A)--
                            ``(i) prohibits a nationally recognized 
                        statistical rating organization from using 
                        additional credit factors that are documented 
                        and disclosed by the organization and that have 
                        a demonstrated impact on the risk an investor 
                        in a security or money market instrument will 
                        not receive repayment in accordance with the 
                        terms of issuance;
                            ``(ii) prohibits a nationally recognized 
                        statistical rating organization from 
                        considering credit factors that are unique to 
                        municipal securities that are not backed by the 
                        issuer's full faith and credit in its 
                        assessment of the risk an investor in a 
                        security or money market instrument will not 
                        receive repayment in accordance with the terms 
                        of issuance; or
                            ``(iii) prohibits a nationally recognized 
                        statistical rating organization from using an 
                        additional symbol with respect to the ratings 
                        described in subparagraph (A)(i) for the 
                        purpose of distinguishing the ratings of a 
                        certain type of security or money market 
                        instrument from ratings of any other types of 
                        securities or money market instruments.
                    ``(C) Complementary ratings.--The Commission shall 
                not impose any requirement under subparagraph (A) that 
                prevents nationally recognized statistical rating 
                organizations from establishing ratings that are 
                complementary to the ratings described in subparagraph 
                (A)(i) and that are created to measure a discrete 
                aspect of the security's or instrument's risk.
    ``(s) Transparency of Credit Rating Methodologies and Information 
Reviewed.--
            ``(1) In general.--The Commission shall require, by rule, a 
        nationally recognized statistical rating organization to 
        include with the publication of each credit rating regardless 
        of whether the credit rating is made readily accessible for 
        free or a reasonable fee a form that discloses information 
        about the assumptions underlying the procedures and 
        methodologies used, and the data relied on, to determine the 
        credit rating in the format prescribed in paragraph (2) and 
        containing the information described in paragraph (3).
            ``(2) Format.--The Commission shall prescribe a form for 
        use under paragraph (1) that--
                    ``(A) is designed in a user-friendly and helpful 
                manner for investors to understand the information 
                contained in the report;
                    ``(B) requires the nationally recognized 
                statistical rating organization to provide the content, 
                as required by paragraph (3), in a manner that is 
                directly comparable across securities; and
                    ``(C) the nationally recognized statistical rating 
                organization certifies the information on the form as 
                true and accurate.
            ``(3) Content.--The Commission shall prescribe a form that 
        requires a nationally recognized statistical rating 
        organization to disclose--
                    ``(A) the main assumptions included in constructing 
                procedures and methodologies, including quantitative 
                models and qualitative inputs and assumptions about the 
                correlation of defaults across obligors used in rating 
                certain structured products;
                    ``(B) the potential shortcomings of the credit 
                ratings, and the types of risks not measured in the 
                credit ratings that the registrant is not commenting 
                on, such as liquidity, market, and other risks;
                    ``(C) information on the certainty of the rating, 
                including information on the reliability, accuracy, and 
                quality of the data relied on in determining the 
                ultimate credit rating and a statement on the extent to 
                which key data inputs for the credit rating were 
                reliable or limited, including any limits on the reach 
                of historical data, limits in accessibility to certain 
                documents or other forms of information that would have 
                better informed the credit rating, and the completeness 
                of certain information considered;
                    ``(D) whether and to what extent third party due 
                diligence services have been utilized, and a 
                description of the information that such third party 
                reviewed in conducting due diligence services;
                    ``(E) a description of relevant data about any 
                obligor, issuer, security, or money market instrument 
                that was used and relied on for the purpose of 
                determining the credit rating;
                    ``(F) a statement containing an overall assessment 
                of the quality of information available and considered 
                in producing a credit rating for a security in relation 
                to the quality of information available to the 
                nationally recognized statistical rating organization 
                in rating similar obligors, securities, or money market 
                instruments;
                    ``(G) an explanation or measure of the potential 
                volatility for the credit rating, including any factors 
                that might lead to a change in the credit rating, and 
                the extent of the change that might be anticipated 
                under different conditions;
                    ``(H) information on the content of the credit 
                rating, including--
                            ``(i) the expected default probability; and
                            ``(ii) the loss given default;
                    ``(I) information on the sensitivity of the rating 
                to assumptions made by the nationally recognized 
                statistical rating organization;
                    ``(J) where applicable, how the nationally 
                recognized statistical rating organization used 
                servicer or remittance reports, and with what 
                frequency, to conduct surveillance of the credit 
                rating; and
                    ``(K) such additional information as may be 
                required by the Commission.
            ``(4) Due diligence services.--
                    ``(A) Certification required.--In any case in which 
                third-party due diligence services are employed by a 
                nationally recognized statistical rating organization 
                or an issuer or underwriter in connection with the 
                issuance of a credit rating, the firm providing the due 
                diligence services shall provide to the nationally 
                recognized statistical rating organization written 
                certification of such due diligence, which shall be 
                subject to review by the Commission, and the issuer or 
                underwriter shall provide any reports issued by the 
                provider of such due diligence services to the 
                nationally recognized statistical rating organization.
                    ``(B) Format and content.--The Commission shall 
                establish the appropriate format and content for 
                written certifications required under subparagraph (A) 
                to ensure that providers of due diligence services have 
                conducted a thorough review of data, documentation, and 
                other relevant information necessary for the nationally 
                recognized statistical rating organization to provide 
                an reliable rating.
                    ``(C) Disclosure of certification.--The Commission 
                shall adopt rules requiring a nationally recognized 
                statistical rating organization to disclose to persons 
                who have access to the credit ratings of the nationally 
                recognized statistical rating organization regardless 
                of whether they are made readily accessible for free or 
                a reasonable fee the certification described in 
                subparagraph (A) with the publication of the applicable 
                credit rating in a manner that may permit the persons 
                to determine the adequacy and level of due diligence 
                services provided by the third party.
    ``(t) Prohibited Activities.--
            ``(1) In general.--Except as provided in paragraph (2), 
        beginning 180 days from the date of enactment of the 
        Accountability, Reliability, and Transparency in Rating 
        Agencies Act, it shall be unlawful for a nationally recognized 
        statistical rating organization, or an affiliate of a 
        nationally recognized statistical rating organization, or any 
        person associated with a nationally recognized statistical 
        rating organization, to the extent determined appropriate by 
        the Commission, that provides a rating for an issuer, 
        underwriter, or placement agent of a security to provide to 
        that issuer, underwriter, or placement agent, any non-rating 
        service that preceded the retention of the nationally 
        recognized statistical rating organization by the issuer, 
        underwriter, or placement agent to provide a rating for the 
        security in question or any assistance provided after such 
        point for which additional compensation is paid directly or 
        indirectly, including--
                    ``(A) risk management advisory services;
                    ``(B) advice or consultation relating to any 
                merger, sales, or disposition of assets of the issuer;
                    ``(C) ancillary assistance, advice, or consulting 
                services unrelated to any specific credit rating 
                issuance; and
                    ``(D) such further activities or services as the 
                Commission may determine as necessary or appropriate in 
                the public interest or for the protection of investors.
            ``(2) Exemption authority.--The Commission may, on a case 
        by case basis, exempt any person, issuer, underwriter, 
        placement agent, or nationally recognized statistical rating 
        organization from the prohibition in subsection (t), to the 
        extent that such exemption is necessary or appropriate in the 
        public interest and is consistent with the protection of 
        investors, and subject to review by the Commission.''.

SEC. 3. STANDARDS FOR PRIVATE ACTIONS.

    (a) In General.--Section 21D(b)(2) of the Securities Exchange Act 
of 1934 (15 U.S.C. 78u-4(b)(2)) is amended by inserting before the 
period at the end of the following: ``, and in the case of an action 
brought under this title for money damages against a nationally 
recognized statistical rating organization, it shall be sufficient for 
purposes of pleading any required state of mind for purposes of such 
action that the complaint shall state with particularity facts giving 
rise to a strong inference that the nationally recognized statistical 
rating organization knowingly or recklessly violated the securities 
laws.''.
    (b) Pleading Standard.--Section 15E(m) of the Securities Exchange 
Act of 1934 (15 U.S.C. 78o-7(m)) amended to read as follows:
    ``(m) Application of Enforcement Provisions; Pleading Standard in 
Private Rights of Action.--Statements made by nationally recognized 
statistical rating organizations shall not be deemed forward looking 
statements for purposes of section 21E. In any private right of action 
commenced against a nationally recognized statistical rating 
organization under this title, the same pleading standards with respect 
to knowledge and recklessness shall apply to the nationally recognized 
statistical rating organization as would apply to any other person in 
the same or a similar private right of action against such person.''.

SEC. 4. ISSUER DISCLOSURE OF PRELIMINARY RATINGS.

    The Securities and Exchange Commission shall adopt rules under 
authority of the Securities Act of 1933 (15 U.S.C. 77a, et seq.) to 
require issuers to disclose preliminary credit ratings received from 
nationally recognized statistical rating agencies on structured 
products and all forms of corporate debt.

SEC. 5. TIMELINE FOR REGULATIONS.

    Unless otherwise specified in this Act, the Securities and Exchange 
Commission shall adopt rules and regulations, as required by the 
amendments made by this Act, not later than 365 days after the date of 
enactment.

SEC. 6. FEDERAL AGENCY REVIEW OF RELIANCE ON RATINGS.

    (a) Review.--Not later than 1 year after the date of the enactment 
of this Act, each Federal agency and department shall, to the extent 
applicable, review--
            (1) any regulation issued by such agency or department that 
        requires the use of an assessment of the creditworthiness of a 
        security or money market instrument; and
            (2) its policies and practices with regard to such ratings,
to determine if another measure of creditworthiness is appropriate in 
order to reduce the reliance of such agency on such ratings, to the 
extent permitted by law.
    (b) Report.--Upon conclusion of the review required under 
subsection (a), each Federal agency and department shall submit a 
report to the Congress containing a description of--
            (1) any modification of any regulation such agency or 
        department made following the review required by subsection 
        (a); and
            (2) each regulation issued by such agency or department 
        that requires the use of an assessment of the creditworthiness 
        of a security or money market instrument that such agency or 
        department did not modify pursuant to subsection (a), 
        accompanied by an explanation of why such modification could 
        not be made.

SEC. 7. STUDIES AND REPORTS.

    (a) GAO Study.--
            (1) In general.--The Comptroller General shall conduct a 
        study of--
                    (A) the implementation of this Act and the 
                amendments made by this Act by the Securities and 
                Exchange Commission;
                    (B) the appropriateness of relying on ratings for 
                use in Federal, State, and local securities and banking 
                regulations, including for determining capital 
                requirements;
                    (C) the effect of liability in private actions 
                arising under the Securities Exchange Act of 1934; and
                    (D) alternative means for compensating credit 
                rating agencies that would create incentives for 
                accurate credit ratings and what, if any, statutory 
                changes would be required to permit or facilitate the 
                use of such alternative means of compensation.
            (2) Report.--Not later than 30 months after the date of 
        enactment of this Act, the Comptroller General shall submit to 
        Congress and the Securities Exchange Commission, a report 
        containing the findings under the study required by subsection 
        (a).
    (b) SEC Study.--The Securities and Exchange Commission shall 
undertake a study on creating a system whereby nationally recognized 
statistical rating organizations are assigned on a rotating basis to 
issuers seeking a credit rating. Not later than 1 year after the date 
of enactment of this Act, the Securities and Exchange Commission shall 
transmit to Congress a report containing the findings of the study.
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