```

[Congressional Bills 111th Congress]
[From the U.S. Government Publishing Office]
[S. 1073 Introduced in Senate (IS)]

111th CONGRESS
  1st Session
                                S. 1073

     To provide for credit rating reforms, and for other purposes.

_______________________________________________________________________

                   IN THE SENATE OF THE UNITED STATES

                              May 19, 2009

   Mr. Reed introduced the following bill; which was read twice and 
    referred to the Committee on Banking, Housing, and Urban Affairs

_______________________________________________________________________

                                 A BILL

 
     To provide for credit rating reforms, 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 Act may be cited as the ``Rating Accountability and 
Transparency Enhancement Act of 2009'' or the ``RATE Act''.

SEC. 2. FINDINGS.

    Congress finds that--
            (1) because of the systemic importance of credit ratings 
        and the reliance placed on them by individual and institutional 
        investors and financial regulators, the activities and 
        performances of credit rating agencies, including nationally 
        recognized statistical rating organizations, are the subject of 
        national public interest, as they are central to capital 
        formation, investor confidence, and the efficient performance 
        of the United States economy;
            (2) credit rating agencies, including nationally recognized 
        statistical rating organizations, play a critical 
        ``gatekeeper'' role that is functionally similar to that of 
        securities analysts, who evaluate the quality of securities, 
        and auditors, who review the financial statements of firms, and 
        such role justifies a similar level of public oversight and 
        accountability;
            (3) because credit rating agencies perform evaluative and 
        analytical services on behalf of clients, their activities are 
        fundamentally commercial in character and should be subject to 
        the same standards of liability and oversight as apply to 
        auditors and securities analysts;
            (4) in certain of their roles, particularly in advising 
        arrangers of structured financial products on potential ratings 
        of such products, credit rating agencies face conflicts of 
        interest that need to be carefully monitored and that therefore 
        should be addressed explicitly in legislation in order to give 
        clear authority to the Securities and Exchange Commission;
            (5) in the recent credit crisis, the ratings of structured 
        financial products have proven to be inaccurate, and have 
        contributed to the mismanagement of risks by financial 
        institutions and investors, which impacts the health of the 
        economy in the United States and around the world; and
            (6) credit rating agencies should determine their ratings 
        independently, without regulatory approval of methodologies, in 
        order to avoid overreliance on ratings and to ensure that the 
        rating agencies, rather than the Securities and Exchange 
        Commission, are accountable for such methodologies, except that 
        regulators should have strong authority to ensure that all 
        other aspects of rating agency activities are designed to 
        ensure the highest quality ratings and accountability for those 
        creating them.

SEC. 3. 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 (c)--
                    (A) in the second sentence of paragraph (2), by 
                inserting ``including the requirements of this 
                section,'' after ``Notwithstanding any other provision 
                of law,''; and
                    (B) by adding at the end the following:
            ``(3) Review of internal controls for determining credit 
        ratings.--
                    ``(A) In general.--Credit ratings by, and the 
                policies, procedures, and methodologies employed by, 
                each nationally recognized statistical rating 
                organization shall be reviewed by the Commission to 
                ensure that--
                            ``(i) the nationally recognized statistical 
                        rating organization has established and 
                        documented a system of internal controls for 
                        determining credit ratings, taking into 
                        consideration such factors as the Commission 
                        may prescribe by rule; and
                            ``(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) Scope of reviews.--The Commission shall 
                conduct the reviews required by this paragraph--
                            ``(i) for all types of credit ratings; and
                            ``(ii) for new credit ratings, in a timely 
                        manner.
                    ``(C) Manner and frequency.--The Commission shall 
                conduct reviews required by this paragraph in a manner 
                and with a frequency 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 this subsection;'';
            (2) in subsection (d)--
                    (A) by inserting ``fine,'' after ``censure,'' each 
                place that term appears;
                    (B) in the subsection heading, by inserting 
                ``Fine,'' after ``Censure,'';
                    (C) in paragraph (4), by striking ``or'' at the 
                end;
                    (D) in paragraph (5), by striking the period at the 
                end and inserting ``; or''; and
                    (E) by adding at the end the following:
            ``(6) fails to conduct sufficient surveillance to ensure 
        that credit ratings remain current, accurate, and reliable.'';
            (3) by amending subsection (h) to read as follows:
    ``(h) Management of Conflicts of Interest.--
            ``(1) 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 such 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.
            ``(2) Governance improvements at nrsro.--Each nationally 
        recognized statistical rating organization shall establish 
        governance procedures to manage conflicts of interest, 
        consistent with the protection of users of credit ratings, in 
        accordance with rules issued by the Commission pursuant to 
        paragraph (3).
            ``(3) Commission authority.--The Commission shall issue 
        final 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, 
                and the obligor, or any affiliate of the obligor;
                    ``(C) disclosure of business relationships, 
                ownership interests, 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 any affiliation of a nationally 
                recognized statistical rating organization, or any 
                person associated with such nationally recognized 
                statistical rating organization, with any person that 
                underwrites securities, entities, or other instruments 
                that are the subject of a credit rating; and
                    ``(E) any other potential conflict of interest, as 
                the Commission deems necessary or appropriate in the 
                public interest or for the protection of users of 
                credit ratings.
            ``(4) Commission rules.--The rules issued by the Commission 
        under paragraph (3) shall include--
                    ``(A) the establishment of a system of payment for 
                each nationally recognized statistical rating 
                organization that requires that payments are structured 
                to ensure that the nationally recognized statistical 
                rating organization conducts accurate and reliable 
                surveillance of ratings over time, and that incentives 
                for accurate ratings are in place;
                    ``(B) a prohibition on providing credit ratings for 
                structured products that it advised on, in the form of 
                assistance, advice, consultation, or other aid that 
                preceded its retention by any issuer, underwriter, or 
                placement agent to provide a rating for the securities 
                in question (or any assistance provided after such 
                point for which additional compensation is paid 
                directly or indirectly);
                    ``(C) requirements that a nationally recognized 
                statistical rating organization disclose any 
                relationship or affiliation described in subparagraphs 
                (C) and (D) of paragraph (3);
                    ``(D) a requirement that, in each credit rating 
                report issued to the public, a nationally recognized 
                statistical rating organization disclose the type and 
                number of ratings it has provided to the obligor or 
                affiliates of the obligor, including the fees it has 
                billed for the credit rating and aggregate amount of 
                fees in the preceding 2 years that it has billed to the 
                particular obligor or its affiliates; and
                    ``(E) any other requirement as the Commission deems 
                necessary or appropriate in the public interest, or for 
                the protection of users of credit ratings.
            ``(5) Look-back requirement.--
                    ``(A) Review by nrsro.--In any case in which an 
                employee of an obligor or an issuer or underwriter of a 
                security or money market instrument was employed by a 
                nationally recognized statistical rating organization 
                and participated in any capacity in determining credit 
                ratings for the obligor or the securities or money 
                market instruments of the issuer during the 1-year 
                period preceding the date of the issuance of the credit 
                rating, the nationally recognized statistical rating 
                organization shall--
                            ``(i) conduct a review to determine whether 
                        any conflicts of interest of such 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.--The Commission shall 
                conduct periodic reviews of the look-back policies 
                described in subparagraph (A) and the implementation of 
                such policies at each nationally recognized statistical 
                rating organization to ensure they are appropriately 
                designed and implemented to most effectively eliminate 
                conflicts of interest in this area.
            ``(6) Periodic reviews.--
                    ``(A) Reviews required.--The Commission shall 
                conduct periodic reviews of governance and conflict of 
                interest procedures established under this subsection 
                to determine the effectiveness of such procedures.
                    ``(B) Timing of reviews.--The Commission shall 
                review and make available to the public the code of 
                ethics and conflict of interest policy of each 
                nationally recognized statistical rating organization--
                            ``(i) not less frequently than once every 3 
                        years; and
                            ``(ii) whenever such policies are 
                        materially modified or amended.'';
            (4) 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 
                (or the equivalent thereof) or to the senior officer of 
                the nationally recognized statistical rating 
                organization; and
                    ``(B) shall--
                            ``(i) review compliance with policies and 
                        procedures to manage conflicts of interest and 
                        assess the risk that such compliance (or lack 
                        of such compliance) may compromise the 
                        integrity of the credit rating process;
                            ``(ii) review compliance with internal 
                        controls with respect to the procedures and 
                        methodologies for determining credit ratings, 
                        including quantitative and qualitative models 
                        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;
                            ``(iii) in consultation with the board of 
                        the nationally recognized statistical rating 
                        organization, a body performing a function 
                        similar to that of a board, or the senior 
                        officer of the nationally recognized 
                        statistical rating organization, resolve any 
                        conflicts of interest that may arise;
                    ``(C) be responsible for administering the policies 
                and procedures required to be established pursuant to 
                this section; and
                    ``(D) ensure compliance with securities laws and 
                the rules and regulations issued thereunder, including 
                rules promulgated by the Commission pursuant to this 
                section.
            ``(3) Limitations.--No compliance officer designated under 
        paragraph (1), may, while serving in such capacity--
                    ``(A) perform credit ratings;
                    ``(B) participate in the development of rating 
                methodologies or models;
                    ``(C) perform marketing or sales functions; or
                    ``(D) participate in establishing compensation 
                levels, other than for employees working for such 
                officer.
            ``(4) Other duties.--The compliance officer shall establish 
        procedures for the receipt, retention, and treatment of--
                    ``(A) complaints regarding credit ratings, models, 
                methodologies, and compliance with the securities laws 
                and the policies and procedures required under this 
                section; and
                    ``(B) confidential, anonymous complaints by 
                employees or users of credit ratings.
            ``(5) 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 its 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 furnished to the Commission pursuant to this 
        section.'';
            (5) 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:
            ``(2) Exception.--The Commission may treat as confidential 
        any item furnished to the Commission under paragraph (1), the 
        publication of which the Commission determines may have a 
        harmful effect on a nationally recognized statistical rating 
        organization.'';
            (6) by amending subsection (p) to read as follows:
    ``(p) NRSRO Regulation.--
            ``(1) In general.--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, for the protection of 
        users of credit ratings and in the public interest, and to 
        ensure that credit ratings issued by such registrants are 
        accurate and not unduly influenced by conflicts of interest.
            ``(2) Staffing.--The office of the Commission established 
        under this subsection shall be staffed sufficiently to carry 
        out fully the requirements of this section.
            ``(3) Rulemaking authority.--The Commission shall--
                    ``(A) establish by rule fines and other penalties 
                for any nationally recognized statistical rating 
                organization that violates the applicable requirements 
                of this title; and
                    ``(B) issue such rules as may be necessary to carry 
                out this section with respect to nationally recognized 
                statistical rating organizations.
    ``(q) Transparency of Ratings Performance.--
            ``(1) Rulemaking required.--The Commission shall, by rule, 
        require that each nationally recognized statistical rating 
        organization shall disclose publicly information on initial 
        ratings and subsequent changes to such ratings for the purpose 
        of providing a gauge of the accuracy of ratings and allowing 
        users of credit ratings 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 users 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 users.
    ``(r) Credit Ratings Methodologies.--The Commission shall 
promulgate rules, for the protection of users of credit ratings and in 
the public interest, with respect to the procedures and methodologies, 
including qualitative and quantitative models, used by nationally 
recognized statistical rating organizations that require each 
nationally recognized statistical rating organization to--
            ``(1) ensure that credit ratings are determined using 
        procedures and methodologies, including qualitative and 
        quantitative models, that are approved by the board of the 
        nationally recognized statistical rating organization, a body 
        performing a function similar to that of a board, or the senior 
        officer of the nationally recognized statistical rating 
        organization, and in accordance with the policies and 
        procedures of the nationally recognized statistical rating 
        organization for developing and modifying credit rating 
        procedures and methodologies;
            ``(2) ensure that when major changes to credit rating 
        procedures and methodologies, including to qualitative and 
        quantitative models, are made, that the changes are applied 
        consistently to all credit ratings to which such 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 disclosed publicly;
            ``(3) notify users of credit ratings of the version of a 
        procedure or methodology, including a qualitative or 
        quantitative model, used with respect to a particular credit 
        rating; and
            ``(4) notify users of credit ratings when a change is made 
        to a procedure or methodology, including to a qualitative or 
        quantitative model, 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.
    ``(s) Transparency of Credit Rating Methodologies and Information 
Reviewed.--
            ``(1) In general.--The Commission shall establish a form, 
        to accompany each rating issued by a nationally recognized 
        statistical rating organization--
                    ``(A) to disclose information about assumptions 
                underlying credit rating procedures and methodologies, 
                the data that was relied on to determine the credit 
                rating and, 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
                    ``(B) that can be made public and used by investors 
                and other users to better understand credit ratings 
                issued in each class of credit rating issued by the 
                nationally recognized statistical rating organization.
            ``(2) Format.--The Commission shall ensure that the form 
        established under paragraph (1)--
                    ``(A) is designed in a user-friendly and helpful 
                manner for users of credit ratings to understand the 
                information contained in the report; and
                    ``(B) requires the nationally recognized 
                statistical rating organization to provide the 
                appropriate content, as required by paragraph (3).
            ``(3) Content.--Each nationally recognized statistical 
        rating organization shall include on the form established under 
        this subsection, along with its ratings--
                    ``(A) the main assumptions included in constructing 
                procedures and methodologies, including qualitative and 
                quantitative models;
                    ``(B) the potential shortcomings of the credit 
                ratings, and the types of risks excluded from the 
                credit ratings that the registrant is not commenting on 
                (such as liquidity, market, and other risks);
                    ``(C) 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) an explanation or measure of the potential 
                volatility for the rating, including any factors that 
                might lead to a change in the rating, and the extent of 
                the change that might be anticipated under different 
                conditions; and
                    ``(G) additional information, including conflict of 
                interest 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, 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.
                    ``(B) Format and content.--The nationally 
                recognized statistical rating organizations 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 accurate rating.''; and
            (7) by amending subsection (m) to read as follows:
    ``(m) Accountability.--
            ``(1) In general.--The enforcement and penalty provisions 
        of this title shall apply to a nationally recognized 
        statistical rating organization in the same manner and to the 
        same extent as such provisions apply to a registered public 
        accounting firm or a securities analyst under the Federal 
        securities laws for statements made by them, and such 
        statements shall not be deemed forward-looking statements for 
        purposes of section 21E.
            ``(2) Rulemaking.--The Commission shall issue such rules as 
        may be necessary to carry out this subsection.''.

SEC. 4. STATE OF MIND IN PRIVATE ACTIONS.

    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 the 
following: ``, except that 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 failed either to conduct a 
reasonable investigation of the rated security with respect to the 
factual elements relied upon by its own methodology for evaluating 
credit risk, or to obtain reasonable verification of such factual 
elements (which verification may be based on a sampling technique that 
does not amount to an audit) from other sources that it considered to 
be competent and that were independent of the issuer and underwriter''.

SEC. 5. REGULATIONS.

    The Securities and Exchange Commission shall issue final rules and 
regulations, as required by the amendments made by this Act, not later 
than 365 days after the date of enactment of this Act.

SEC. 6. STUDY AND REPORT.

    (a) Study.--The Comptroller General of the United States shall 
undertake a study of--
            (1) the extent to which rulemaking the Securities and 
        Exchange Commission has carried out the provisions of this Act;
            (2) the appropriateness of relying on ratings for use in 
        Federal, State, and local securities and banking regulations, 
        including for determining capital requirements;
            (3) the effect of liability in private actions arising 
        under the Securities Exchange Act of 1934 and the exception 
        added by section 4 of this Act; and
            (4) 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.
    (b) 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).
                                 <all>
```