109TH CONGRESS

2D SESSION S. 3850

AN ACT

To improve ratings quality for the protection of investors

and in the public interest by fostering accountability,

transparency, and competition in the credit rating agency

industry.

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 Act may be cited as the ‘‘Credit Rating Agency

5 Reform Act of 2006’’.
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1 SEC. 2. FINDINGS.

2 Upon the basis of facts disclosed by the record and

3 report of the Securities and Exchange Commission made

4 pursuant to section 702 of the Sarbanes-Oxley Act of

5 2002 (116 Stat. 797), hearings before the Committee on

6 Banking, Housing, and Urban Affairs of the Senate and

7 the Committee on Financial Services of the House of Rep8 resentatives during the 108th and 109th Congresses, com9 ment letters to the concept releases and proposed rules

10 of the Commission, and facts otherwise disclosed and

11 ascertained, Congress finds that credit rating agencies are

12 of national importance, in that, among other things—

13 (1) their ratings, publications, writings, anal14 yses, and reports are furnished and distributed, and

15 their contracts, subscription agreements, and other

16 arrangements with clients are negotiated and per17 formed, by the use of the mails and other means and

18 instrumentalities of interstate commerce;

19 (2) their ratings, publications, writings, anal20 yses, and reports customarily relate to the purchase

21 and sale of securities traded on securities exchanges

22 and in interstate over-the-counter markets, securities

23 issued by companies engaged in business in inter24 state commerce, and securities issued by national

25 banks and member banks of the Federal Reserve

26 System;
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1 (3) the foregoing transactions occur in such vol2 ume as substantially to affect interstate commerce,

3 the securities markets, the national banking system,

4 and the national economy;

5 (4) the oversight of such credit rating agencies

6 serves the compelling interest of investor protection;

7 (5) the 2 largest credit rating agencies serve

8 the vast majority of the market, and additional com9 petition is in the public interest; and

10 (6) the Commission has indicated that it needs

11 statutory authority to oversee the credit rating in12 dustry.

13 SEC. 3. DEFINITIONS.

14 (a) SECURITIES EXCHANGE ACT OF 1934.—Section

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

16 78c(a)) is amended by adding at the end the following new

17 paragraphs:

18 ‘‘(60) CREDIT RATING.—The term ‘credit rat19 ing’ means an assessment of the creditworthiness of

20 an obligor as an entity or with respect to specific se21 curities or money market instruments.

22 ‘‘(61) CREDIT RATING AGENCY.—The term

23 ‘credit rating agency’ means any person—

24 ‘‘(A) engaged in the business of issuing

25 credit ratings on the Internet or through an-
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1 other readily accessible means, for free or for a

2 reasonable fee, but does not include a commer3 cial credit reporting company;

4 ‘‘(B) employing either a quantitative or

5 qualitative model, or both, to determine credit

6 ratings; and

7 ‘‘(C) receiving fees from either issuers, in8 vestors, or other market participants, or a com9 bination thereof.

10 ‘‘(62) NATIONALLY RECOGNIZED STATISTICAL

11 RATING ORGANIZATION.—The term ‘nationally rec12 ognized statistical rating organization’ means a cred13 it rating agency that—

14 ‘‘(A) has been in business as a credit rat15 ing agency for at least the 3 consecutive years

16 immediately preceding the date of its applica17 tion for registration under section 15E;

18 ‘‘(B) issues credit ratings certified by

19 qualified institutional buyers, in accordance

20 with section 15E(a)(1)(B)(ix), with respect to—

21 ‘‘(i) financial institutions, brokers, or

22 dealers;

23 ‘‘(ii) insurance companies;

24 ‘‘(iii) corporate issuers;
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1 ‘‘(iv) issuers of asset-backed securities

2 (as that term is defined in section 1101(c)

3 of part 229 of title 17, Code of Federal

4 Regulations, as in effect on the date of en5 actment of this paragraph);

6 ‘‘(v) issuers of government securities,

7 municipal securities, or securities issued by

8 a foreign government; or

9 ‘‘(vi) a combination of one or more

10 categories of obligors described in any of

11 clauses (i) through (v); and

12 ‘‘(C) is registered under section 15E.

13 ‘‘(63) PERSON ASSOCIATED WITH A NATION14 ALLY RECOGNIZED STATISTICAL RATING ORGANIZA15 TION.—The term ‘person associated with’ a nation16 ally recognized statistical rating organization means

17 any partner, officer, director, or branch manager of

18 a nationally recognized statistical rating organiza19 tion (or any person occupying a similar status or

20 performing similar functions), any person directly or

21 indirectly controlling, controlled by, or under com22 mon control with a nationally recognized statistical

23 rating organization, or any employee of a nationally

24 recognized statistical rating organization.
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1 ‘‘(64) QUALIFIED INSTITUTIONAL BUYER.—The

2 term ‘qualified institutional buyer’ has the meaning

3 given such term in section 230.144A(a) of title 17,

4 Code of Federal Regulations, or any successor there5 to.’’.

6 (b) APPLICABLE DEFINITIONS.—As used in this

7 Act—

8 (1) the term ‘‘Commission’’ means the Securi9 ties and Exchange Commission; and

10 (2) the term ‘‘nationally recognized statistical

11 rating organization’’ has the same meaning as in

12 section 3(a)(62) of the Securities Exchange Act of

13 1934, as added by this Act.

14 SEC. 4. REGISTRATION OF NATIONALLY RECOGNIZED STA15 TISTICAL RATING ORGANIZATIONS.

16 (a) AMENDMENT.—The Securities Exchange Act of

17 1934 is amended by inserting after section 15D (15

18 U.S.C. 78o–6) the following new section:

19 ‘‘SEC. 15E. REGISTRATION OF NATIONALLY RECOGNIZED

20 STATISTICAL RATING ORGANIZATIONS.

21 ‘‘(a) REGISTRATION PROCEDURES.—

22 ‘‘(1) APPLICATION FOR REGISTRATION.—

23 ‘‘(A) IN GENERAL.—A credit rating agency

24 that elects to be treated as a nationally recog25 nized statistical rating organization for pur-
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1 poses of this title (in this section referred to as

2 the ‘applicant’), shall furnish to the Commis3 sion an application for registration, in such

4 form as the Commission shall require, by rule

5 or regulation issued in accordance with sub6 section (n), and containing the information de7 scribed in subparagraph (B).

8 ‘‘(B) REQUIRED INFORMATION.—An appli9 cation for registration under this section shall

10 contain information regarding—

11 ‘‘(i) credit ratings performance meas12 urement statistics over short-term, mid13 term, and long-term periods (as applicable)

14 of the applicant;

15 ‘‘(ii) the procedures and methodolo16 gies that the applicant uses in determining

17 credit ratings;

18 ‘‘(iii) policies or procedures adopted

19 and implemented by the applicant to pre20 vent the misuse, in violation of this title

21 (or the rules and regulations hereunder),

22 of material, nonpublic information;

23 ‘‘(iv) the organizational structure of

24 the applicant;
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1 ‘‘(v) whether or not the applicant has

2 in effect a code of ethics, and if not, the

3 reasons therefor;

4 ‘‘(vi) any conflict of interest relating

5 to the issuance of credit ratings by the ap6 plicant;

7 ‘‘(vii) the categories described in any

8 of clauses (i) through (v) of section

9 3(a)(62)(B) with respect to which the ap10 plicant intends to apply for registration

11 under this section;

12 ‘‘(viii) on a confidential basis, a list of

13 the 20 largest issuers and subscribers that

14 use the credit rating services of the appli15 cant, by amount of net revenues received

16 therefrom in the fiscal year immediately

17 preceding the date of submission of the ap18 plication;

19 ‘‘(ix) on a confidential basis, as to

20 each applicable category of obligor de21 scribed in any of clauses (i) through (v) of

22 section 3(a)(62)(B), written certifications

23 described in subparagraph (C), except as

24 provided in subparagraph (D); and
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1 ‘‘(x) any other information and docu2 ments concerning the applicant and any

3 person associated with such applicant as

4 the Commission, by rule, may prescribe as

5 necessary or appropriate in the public in6 terest or for the protection of investors.

7 ‘‘(C) WRITTEN CERTIFICATIONS.—Written

8 certifications required by subparagraph

9 (B)(ix)—

10 ‘‘(i) shall be provided from not fewer

11 than 10 qualified institutional buyers, none

12 of which is affiliated with the applicant;

13 ‘‘(ii) may address more than one cat14 egory of obligors described in any of

15 clauses (i) through (v) of section

16 3(a)(62)(B);

17 ‘‘(iii) shall include not fewer than 2

18 certifications for each such category of ob19 ligor; and

20 ‘‘(iv) shall state that the qualified in21 stitutional buyer—

22 ‘‘(I) meets the definition of a

23 qualified institutional buyer under

24 section 3(a)(64); and
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1 ‘‘(II) has used the credit ratings

2 of the applicant for at least the 3

3 years immediately preceding the date

4 of the certification in the subject cat5 egory or categories of obligors.

6 ‘‘(D) EXEMPTION FROM CERTIFICATION

7 REQUIREMENT.—A written certification under

8 subparagraph (B)(ix) is not required with re9 spect to any credit rating agency which has re10 ceived, or been the subject of, a no-action letter

11 from the staff of the Commission prior to Au12 gust 2, 2006, stating that such staff would not

13 recommend enforcement action against any

14 broker or dealer that considers credit ratings

15 issued by such credit rating agency to be rat16 ings from a nationally recognized statistical rat17 ing organization.

18 ‘‘(E) LIMITATION ON LIABILITY OF QUALI19 FIED INSTITUTIONAL BUYERS.—No qualified

20 institutional buyer shall be liable in any private

21 right of action for any opinion or statement ex22 pressed in a certification made pursuant to sub23 paragraph (B)(ix).

24 ‘‘(2) REVIEW OF APPLICATION.—
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1 ‘‘(A) INITIAL DETERMINATION.—Not later

2 than 90 days after the date on which the appli3 cation for registration is furnished to the Com4 mission under paragraph (1) (or within such

5 longer period as to which the applicant con6 sents) the Commission shall—

7 ‘‘(i) by order, grant such registration

8 for ratings in the subject category or cat9 egories of obligors, as described in clauses

10 (i) through (v) of section 3(a)(62)(B); or

11 ‘‘(ii) institute proceedings to deter12 mine whether registration should be de13 nied.

14 ‘‘(B) CONDUCT OF PROCEEDINGS.—

15 ‘‘(i) CONTENT.—Proceedings referred

16 to in subparagraph (A)(ii) shall—

17 ‘‘(I) include notice of the grounds

18 for denial under consideration and an

19 opportunity for hearing; and

20 ‘‘(II) be concluded not later than

21 120 days after the date on which the

22 application for registration is fur23 nished to the Commission under para24 graph (1).
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1 ‘‘(ii) DETERMINATION.—At the con2 clusion of such proceedings, the Commis3 sion, by order, shall grant or deny such ap4 plication for registration.

5 ‘‘(iii) EXTENSION AUTHORIZED.—The

6 Commission may extend the time for con7 clusion of such proceedings for not longer

8 than 90 days, if it finds good cause for

9 such extension and publishes its reasons

10 for so finding, or for such longer period as

11 to which the applicant consents.

12 ‘‘(C) GROUNDS FOR DECISION.—The Com13 mission shall grant registration under this

14 subsection—

15 ‘‘(i) if the Commission finds that the

16 requirements of this section are satisfied;

17 and

18 ‘‘(ii) unless the Commission finds (in

19 which case the Commission shall deny such

20 registration) that—

21 ‘‘(I) the applicant does not have

22 adequate financial and managerial re23 sources to consistently produce credit

24 ratings with integrity and to materi25 ally comply with the procedures and
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1 methodologies disclosed under para2 graph (1)(B) and with subsections

3 (g), (h), (i), and (j); or

4 ‘‘(II) if the applicant were so reg5 istered, its registration would be sub6 ject to suspension or revocation under

7 subsection (d).

8 ‘‘(3) PUBLIC AVAILABILITY OF INFORMATION.—

9 Subject to section 24, the Commission shall, by rule,

10 require a nationally recognized statistical rating or11 ganization, upon the granting of registration under

12 this section, to make the information and documents

13 submitted to the Commission in its completed appli14 cation for registration, or in any amendment sub15 mitted under paragraph (1) or (2) of subsection (b),

16 publicly available on its website, or through another

17 comparable, readily accessible means, except as pro18 vided in clauses (viii) and (ix) of paragraph (1)(B).

19 ‘‘(b) UPDATE OF REGISTRATION.—

20 ‘‘(1) UPDATE.—Each nationally recognized sta21 tistical rating organization shall promptly amend its

22 application for registration under this section if any

23 information or document provided therein becomes

24 materially inaccurate, except that a nationally recog-
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1 nized statistical rating organization is not required

2 to amend—

3 ‘‘(A) the information required to be fur4 nished under subsection (a)(1)(B)(i) by fur5 nishing information under this paragraph, but

6 shall amend such information in the annual

7 submission of the organization under paragraph

8 (2) of this subsection; or

9 ‘‘(B) the certifications required to be pro10 vided under subsection (a)(1)(B)(ix) by fur11 nishing information under this paragraph.

12 ‘‘(2) CERTIFICATION.—Not later than 90 days

13 after the end of each calendar year, each nationally

14 recognized statistical rating organization shall fur15 nish to the Commission an amendment to its reg16 istration, in such form as the Commission, by rule,

17 may prescribe as necessary or appropriate in the

18 public interest or for the protection of investors—

19 ‘‘(A) certifying that the information and

20 documents in the application for registration of

21 such nationally recognized statistical rating or22 ganization (other than the certifications re23 quired under subsection (a)(1)(B)(ix)) continue

24 to be accurate; and
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1 ‘‘(B) listing any material change that oc2 curred to such information or documents during

3 the previous calendar year.

4 ‘‘(c) ACCOUNTABILITY FOR RATINGS PROCE5 DURES.—

6 ‘‘(1) AUTHORITY.—The Commission shall have

7 exclusive authority to enforce the provisions of this

8 section in accordance with this title with respect to

9 any nationally recognized statistical rating organiza10 tion, if such nationally recognized statistical rating

11 organization issues credit ratings in material con12 travention of those procedures relating to such na13 tionally recognized statistical rating organization, in14 cluding procedures relating to the prevention of mis15 use of nonpublic information and conflicts of inter16 est, that such nationally recognized statistical rating

17 organization—

18 ‘‘(A) includes in its application for reg19 istration under subsection (a)(1)(B)(ii); or

20 ‘‘(B) makes and disseminates in reports

21 pursuant to section 17(a) or the rules and regu22 lations thereunder.

23 ‘‘(2) LIMITATION.—The rules and regulations

24 that the Commission may prescribe pursuant to this

25 title, as they apply to nationally recognized statis-
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1 tical rating organizations, shall be narrowly tailored

2 to meet the requirements of this title applicable to

3 nationally recognized statistical rating organizations.

4 Notwithstanding any other provision of law, neither

5 the Commission nor any State (or political subdivi6 sion thereof) may regulate the substance of credit

7 ratings or the procedures and methodologies by

8 which any nationally recognized statistical rating or9 ganization determines credit ratings.

10 ‘‘(d) CENSURE, DENIAL, OR SUSPENSION OF REG11 ISTRATION; NOTICE AND HEARING.—The Commission, by

12 order, shall censure, place limitations on the activities,

13 functions, or operations of, suspend for a period not ex14 ceeding 12 months, or revoke the registration of any na15 tionally recognized statistical rating organization if the

16 Commission finds, on the record after notice and oppor17 tunity for hearing, that such censure, placing of limita18 tions, suspension, or revocation is necessary for the protec19 tion of investors and in the public interest and that such

20 nationally recognized statistical rating organization, or

21 any person associated with such an organization, whether

22 prior to or subsequent to becoming so associated—

23 ‘‘(1) has committed or omitted any act, or is

24 subject to an order or finding, enumerated in sub25 paragraph (A), (D), (E), (H), or (G) of section
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1 15(b)(4), has been convicted of any offense specified

2 in section 15(b)(4)(B), or is enjoined from any ac3 tion, conduct, or practice specified in subparagraph

4 (C) of section 15(b)(4), during the 10-year period

5 preceding the date of commencement of the pro6 ceedings under this subsection, or at any time there7 after;

8 ‘‘(2) has been convicted during the 10-year pe9 riod preceding the date on which an application for

10 registration is furnished to the Commission under

11 this section, or at any time thereafter, of—

12 ‘‘(A) any crime that is punishable by im13 prisonment for 1 or more years, and that is not

14 described in section 15(b)(4)(B); or

15 ‘‘(B) a substantially equivalent crime by a

16 foreign court of competent jurisdiction;

17 ‘‘(3) is subject to any order of the Commission

18 barring or suspending the right of the person to be

19 associated with a nationally recognized statistical

20 rating organization;

21 ‘‘(4) fails to furnish the certifications required

22 under subsection (b)(2); or

23 ‘‘(5) fails to maintain adequate financial and

24 managerial resources to consistently produce credit

25 ratings with integrity.
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1 ‘‘(e) TERMINATION OF REGISTRATION.—

2 ‘‘(1) VOLUNTARY WITHDRAWAL.—A nationally

3 recognized statistical rating organization may, upon

4 such terms and conditions as the Commission may

5 establish as necessary in the public interest or for

6 the protection of investors, withdraw from registra7 tion by furnishing a written notice of withdrawal to

8 the Commission.

9 ‘‘(2) COMMISSION AUTHORITY.—In addition to

10 any other authority of the Commission under this

11 title, if the Commission finds that a nationally rec12 ognized statistical rating organization is no longer in

13 existence or has ceased to do business as a credit

14 rating agency, the Commission, by order, shall can15 cel the registration under this section of such na16 tionally recognized statistical rating organization.

17 ‘‘(f) REPRESENTATIONS.—

18 ‘‘(1) BAN ON REPRESENTATIONS OF SPONSOR19 SHIP BY UNITED STATES OR AGENCY THEREOF.—It

20 shall be unlawful for any nationally recognized sta21 tistical rating organization to represent or imply in

22 any manner whatsoever that such nationally recog23 nized statistical rating organization has been des24 ignated, sponsored, recommended, or approved, or

25 that the abilities or qualifications thereof have in
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1 any respect been passed upon, by the United States

2 or any agency, officer, or employee thereof.

3 ‘‘(2) BAN ON REPRESENTATION AS NRSRO OF

4 UNREGISTERED CREDIT RATING AGENCIES.—It shall

5 be unlawful for any credit rating agency that is not

6 registered under this section as a nationally recog7 nized statistical rating organization to state that

8 such credit rating agency is a nationally recognized

9 statistical rating organization registered under this

10 title.

11 ‘‘(3) STATEMENT OF REGISTRATION UNDER SE12 CURITIES EXCHANGE ACT OF 1934 PROVISIONS.—No

13 provision of paragraph (1) shall be construed to pro14 hibit a statement that a nationally recognized statis15 tical rating organization is a nationally recognized

16 statistical rating organization under this title, if

17 such statement is true in fact and if the effect of

18 such registration is not misrepresented.

19 ‘‘(g) PREVENTION OF MISUSE OF NONPUBLIC IN20 FORMATION.—

21 ‘‘(1) ORGANIZATION POLICIES AND PROCE22 DURES.—Each nationally recognized statistical rat23 ing organization shall establish, maintain, and en24 force written policies and procedures reasonably de25 signed, taking into consideration the nature of the
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1 business of such nationally recognized statistical rat2 ing organization, to prevent the misuse in violation

3 of this title, or the rules or regulations hereunder,

4 of material, nonpublic information by such nationally

5 recognized statistical rating organization or any per6 son associated with such nationally recognized statis7 tical rating organization.

8 ‘‘(2) COMMISSION AUTHORITY.—The Commis9 sion shall issue final rules in accordance with sub10 section (n) to require specific policies or procedures

11 that are reasonably designed to prevent misuse in

12 violation of this title (or the rules or regulations

13 hereunder) of material, nonpublic information.

14 ‘‘(h) MANAGEMENT OF CONFLICTS OF INTEREST.—

15 ‘‘(1) ORGANIZATION POLICIES AND PROCE16 DURES.—Each nationally recognized statistical rat17 ing organization shall establish, maintain, and en18 force written policies and procedures reasonably de19 signed, taking into consideration the nature of the

20 business of such nationally recognized statistical rat21 ing organization and affiliated persons and affiliated

22 companies thereof, to address and manage any con23 flicts of interest that can arise from such business.

24 ‘‘(2) COMMISSION AUTHORITY.—The Commis25 sion shall issue final rules in accordance with sub-
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1 section (n) to prohibit, or require the management

2 and disclosure of, any conflicts of interest relating to

3 the issuance of credit ratings by a nationally recog4 nized statistical rating organization, including, with5 out limitation, conflicts of interest relating to—

6 ‘‘(A) the manner in which a nationally rec7 ognized statistical rating organization is com8 pensated by the obligor, or any affiliate of the

9 obligor, for issuing credit ratings or providing

10 related services;

11 ‘‘(B) the provision of consulting, advisory,

12 or other services by a nationally recognized sta13 tistical rating organization, or any person asso14 ciated with such nationally recognized statistical

15 rating organization, to the obligor, or any affil16 iate of the obligor;

17 ‘‘(C) business relationships, ownership in18 terests, or any other financial or personal inter19 ests between a nationally recognized statistical

20 rating organization, or any person associated

21 with such nationally recognized statistical rat22 ing organization, and the obligor, or any affil23 iate of the obligor;

24 ‘‘(D) any affiliation of a nationally recog25 nized statistical rating organization, or any per-
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1 son associated with such nationally recognized

2 statistical rating organization, with any person

3 that underwrites the securities or money market

4 instruments that are the subject of a credit rat5 ing; and

6 ‘‘(E) any other potential conflict of inter7 est, as the Commission deems necessary or ap8 propriate in the public interest or for the pro9 tection of investors.

10 ‘‘(i) PROHIBITED CONDUCT.—

11 ‘‘(1) PROHIBITED ACTS AND PRACTICES.—The

12 Commission shall issue final rules in accordance

13 with subsection (n) to prohibit any act or practice

14 relating to the issuance of credit ratings by a nation15 ally recognized statistical rating organization that

16 the Commission determines to be unfair, coercive, or

17 abusive, including any act or practice relating to—

18 ‘‘(A) conditioning or threatening to condi19 tion the issuance of a credit rating on the pur20 chase by the obligor or an affiliate thereof of

21 other services or products, including pre-credit

22 rating assessment products, of the nationally

23 recognized statistical rating organization or any

24 person associated with such nationally recog25 nized statistical rating organization;
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1 ‘‘(B) lowering or threatening to lower a

2 credit rating on, or refusing to rate, securities

3 or money market instruments issued by an

4 asset pool or as part of any asset-backed or

5 mortgage-backed securities transaction, unless a

6 portion of the assets within such pool or part

7 of such transaction, as applicable, also is rated

8 by the nationally recognized statistical rating

9 organization; or

10 ‘‘(C) modifying or threatening to modify a

11 credit rating or otherwise departing from its

12 adopted systematic procedures and methodolo13 gies in determining credit ratings, based on

14 whether the obligor, or an affiliate of the obli15 gor, purchases or will purchase the credit rating

16 or any other service or product of the nationally

17 recognized statistical rating organization or any

18 person associated with such organization.

19 ‘‘(2) RULE OF CONSTRUCTION.—Nothing in

20 paragraph (1), or in any rules or regulations adopt21 ed thereunder, may be construed to modify, impair,

22 or supersede the operation of any of the antitrust

23 laws (as defined in the first section of the Clayton

24 Act, except that such term includes section 5 of the

25 Federal Trade Commission Act, to the extent that
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1 such section 5 applies to unfair methods of competi2 tion).

3 ‘‘(j) DESIGNATION OF COMPLIANCE OFFICER.—Each

4 nationally recognized statistical rating organization shall

5 designate an individual responsible for administering the

6 policies and procedures that are required to be established

7 pursuant to subsections (g) and (h), and for ensuring com8 pliance with the securities laws and the rules and regula9 tions thereunder, including those promulgated by the

10 Commission pursuant to this section.

11 ‘‘(k) STATEMENTS OF FINANCIAL CONDITION.—

12 Each nationally recognized statistical rating organization

13 shall, on a confidential basis, furnish to the Commission,

14 at intervals determined by the Commission, such financial

15 statements, certified (if required by the rules or regula16 tions of the Commission) by an independent public ac17 countant, and information concerning its financial condi18 tion, as the Commission, by rule, may prescribe as nec19 essary or appropriate in the public interest or for the pro20 tection of investors.

21 ‘‘(l) SOLE METHOD OF REGISTRATION.—

22 ‘‘(1) IN GENERAL.—On and after the effective

23 date of this section, a credit rating agency may only

24 be registered as a nationally recognized statistical
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1 rating organization for any purpose in accordance

2 with this section.

3 ‘‘(2) PROHIBITION ON RELIANCE ON NO-ACTION

4 RELIEF.—On and after the effective date of this

5 section—

6 ‘‘(A) an entity that, before that date, re7 ceived advice, approval, or a no-action letter

8 from the Commission or staff thereof to be

9 treated as a nationally recognized statistical

10 rating organization pursuant to the Commission

11 rule at section 240.15c3–1 of title 17, Code of

12 Federal Regulations, may represent itself or act

13 as a nationally recognized statistical rating or14 ganization only—

15 ‘‘(i) during Commission consideration

16 of the application, if such entity has fur17 nished an application for registration

18 under this section; and

19 ‘‘(ii) on and after the date of approval

20 of its application for registration under

21 this section; and

22 ‘‘(B) the advice, approval, or no-action let23 ter described in subparagraph (A) shall be void.

24 ‘‘(3) NOTICE TO OTHER AGENCIES.—Not later

25 than 30 days after the date of enactment of this sec-
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1 tion, the Commission shall give notice of the actions

2 undertaken pursuant to this section to each Federal

3 agency which employs in its rules and regulations

4 the term ‘nationally recognized statistical rating or5 ganization’ (as that term is used under Commission

6 rule 15c3–1 (17 C.F.R. 240.15c3–1), as in effect on

7 the date of enactment of this section).

8 ‘‘(m) RULES OF CONSTRUCTION.—

9 ‘‘(1) NO WAIVER OF RIGHTS, PRIVILEGES, OR

10 DEFENSES.—Registration under and compliance

11 with this section does not constitute a waiver of, or

12 otherwise diminish, any right, privilege, or defense

13 that a nationally recognized statistical rating organi14 zation may otherwise have under any provision of

15 State or Federal law, including any rule, regulation,

16 or order thereunder.

17 ‘‘(2) NO PRIVATE RIGHT OF ACTION.—Nothing

18 in this section may be construed as creating any pri19 vate right of action, and no report furnished by a

20 nationally recognized statistical rating organization

21 in accordance with this section or section 17 shall

22 create a private right of action under section 18 or

23 any other provision of law.

24 ‘‘(n) REGULATIONS.—
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1 ‘‘(1) NEW PROVISIONS.—Such rules and regula2 tions as are required by this section or are otherwise

3 necessary to carry out this section, including the ap4 plication form required under subsection (a)—

5 ‘‘(A) shall be issued by the Commission in

6 final form, not later than 270 days after the

7 date of enactment of this section; and

8 ‘‘(B) shall become effective not later than

9 270 days after the date of enactment of this

10 section.

11 ‘‘(2) REVIEW OF EXISTING REGULATIONS.—Not

12 later than 270 days after the date of enactment of

13 this section, the Commission shall—

14 ‘‘(A) review its existing rules and regula15 tions which employ the term ‘nationally recog16 nized statistical rating organization’ or

17 ‘NRSRO’; and

18 ‘‘(B) amend or revise such rules and regu19 lations in accordance with the purposes of this

20 section, as the Commission may prescribe as

21 necessary or appropriate in the public interest

22 or for the protection of investors.

23 ‘‘(o) NRSROS SUBJECT TO COMMISSION AUTHOR24 ITY.—
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1 ‘‘(1) IN GENERAL.—No provision of the laws of

2 any State or political subdivision thereof requiring

3 the registration, licensing, or qualification as a cred4 it rating agency or a nationally recognized statistical

5 rating organization shall apply to any nationally rec6 ognized statistical rating organization or person em7 ployed by or working under the control of a nation8 ally recognized statistical rating organization.

9 ‘‘(2) LIMITATION.—Nothing in this subsection

10 prohibits the securities commission (or any agency

11 or office performing like functions) of any State

12 from investigating and bringing an enforcement ac13 tion with respect to fraud or deceit against any na14 tionally recognized statistical rating organization or

15 person associated with a nationally recognized statis16 tical rating organization.

17 ‘‘(p) APPLICABILITY.—This section, other than sub18 section (n), which shall apply on the date of enactment

19 of this section, shall apply on the earlier of—

20 ‘‘(1) the date on which regulations are issued in

21 final form under subsection (n)(1); or

22 ‘‘(2) 270 days after the date of enactment of

23 this section.’’.

24 (b) CONFORMING AMENDMENTS.—
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1 (1) SECURITIES EXCHANGE ACT OF 1934.—The

2 Securities Exchange Act of 1934 (15 U.S.C. 78 et

3 seq.) is amended—

4 (A) in section 15(b)(4) (15 U.S.C.

5 78o(b)(4))—

6 (i) in subparagraph (B)(ii), by insert7 ing ‘‘nationally recognized statistical rating

8 organization,’’ after ‘‘transfer agent,’’; and

9 (ii) in subparagraph (C), by inserting

10 ‘‘nationally recognized statistical rating or11 ganization,’’ after ‘‘transfer agent,’’; and

12 (B) in section 21B(a) (15 U.S.C. 78u–

13 2(a)), by inserting ‘‘15E,’’ after ‘‘15C,’’.

14 (2) INVESTMENT COMPANY ACT OF 1940.—The

15 Investment Company Act of 1940 (15 U.S.C. 80a et

16 seq.) is amended—

17 (A) in section 2(a) (15 U.S.C. 80a–2(a)),

18 by adding at the end the following new para19 graph:

20 ‘‘(53) The term ‘credit rating agency’ has the

21 same meaning as in section 3 of the Securities Ex22 change Act of 1934.’’; and

23 (B) in section 9(a) (15 U.S.C. 80a–9(a))—
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1 (i) in paragraph (1), by inserting

2 ‘‘credit rating agency,’’ after ‘‘transfer

3 agent,’’; and

4 (ii) in paragraph (2), by inserting

5 ‘‘credit rating agency,’’ after ‘‘transfer

6 agent,’’.

7 (3) INVESTMENT ADVISERS ACT OF 1940.—The

8 Investment Advisers Act of 1940 (15 U.S.C. 80b et

9 seq.) is amended—

10 (A) in section 202(a) (15 U.S.C. 80b–

11 2(a)), by adding at the end the following new

12 paragraph:

13 ‘‘(28) The term ‘credit rating agency’ has the

14 same meaning as in section 3 of the Securities Ex15 change Act of 1934.’’;

16 (B) in section 202(a)(11) (15 U.S.C. 80b–

17 2(a)(11)), by striking ‘‘or (F)’’ and inserting

18 the following: ‘‘(F) any nationally recognized

19 statistical rating organization, as that term is

20 defined in section 3(a)(62) of the Securities Ex21 change Act of 1934, unless such organization

22 engages in issuing recommendations as to pur23 chasing, selling, or holding securities or in man24 aging assets, consisting in whole or in part of

25 securities, on behalf of others; or (G)’’; and
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1 (C) in section 203(e) (15 U.S.C. 80b–

2 3(e))—

3 (i) in paragraph (2)(B), by inserting

4 ‘‘credit rating agency,’’ after ‘‘transfer

5 agent,’’; and

6 (ii) in paragraph (4), by inserting

7 ‘‘credit rating agency,’’ after ‘‘transfer

8 agent,’’.

9 (4) HOUSING AND COMMUNITY DEVELOPMENT

10 ACT OF 1992.—Section 1319 of the Housing and

11 Community Development Act of 1992 (12 U.S.C.

12 4519) is amended by striking ‘‘effectively’’ and all

13 that follows through ‘‘broker-dealers’’ and inserting

14 ‘‘that is a nationally recognized statistical rating or15 ganization, as such term is defined in section 3(a)

16 of the Securities Exchange Act of 1934’’.

17 (5) HIGHER EDUCATION ACT OF 1965.—Section

18 439(r)(15)(A) of the Higher Education Act of 1965

19 (20 U.S.C. 1087–2(r)(15)(A)) is amended by strik20 ing ‘‘means any entity recognized as such by the Se21 curities and Exchange Commission’’ and inserting

22 ‘‘means any nationally recognized statistical rating

23 organization, as that term is defined in section 3(a)

24 of the Securities Exchange Act of 1934’’.
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1 (6) TITLE 23.—Section 181(11) of title 23,

2 United States Code, is amended by striking ‘‘identi3 fied by the Securities and Exchange Commission as

4 a nationally recognized statistical rating organiza5 tion’’ and inserting ‘‘registered with the Securities

6 and Exchange Commission as a nationally recog7 nized statistical rating organization, as that term is

8 defined in section 3(a) of the Securities Exchange

9 Act of 1934’’.

10 SEC. 5. ANNUAL AND OTHER REPORTS.

11 Section 17(a)(1) of the Securities Exchange Act of

12 1934 (15 U.S.C. 78q(a)(1)) is amended—

13 (1) by inserting ‘‘nationally recognized statis14 tical rating organization,’’ after ‘‘registered transfer

15 agent,’’; and

16 (2) by adding at the end the following: ‘‘Any re17 port that a nationally recognized statistical rating

18 organization is required by Commission rules under

19 this paragraph to make and disseminate to the Com20 mission shall be deemed furnished to the Commis21 sion.’’.

22 SEC. 6. COMMISSION ANNUAL REPORT.

23 The Commission shall submit an annual report to the

24 Committee on Banking, Housing, and Urban Affairs of

25 the Senate and the Committee on Financial Services of
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1 the House of Representatives that, with respect to the

2 year to which the report relates—

3 (1) identifies applicants for registration under

4 section 15E of the Securities Exchange Act of 1934,

5 as added by this Act;

6 (2) specifies the number of and actions taken

7 on such applications; and

8 (3) specifies the views of the Commission on the

9 state of competition, transparency, and conflicts of

10 interest among nationally recognized statistical rat11 ing organizations.

12 SEC. 7. GAO STUDY AND REPORT REGARDING NATIONALLY

13 RECOGNIZED STATISTICAL RATING ORGANI14 ZATIONS.

15 (a) STUDY REQUIRED.—The Comptroller General of

16 the United States shall conduct a study—

17 (1) to determine the impact of this Act and the

18 amendments made by this Act on—

19 (A) the quality of credit ratings issued by

20 nationally recognized statistical ratings organi21 zations;

22 (B) the financial markets;

23 (C) competition among credit rating agen24 cies;
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1 (D) the incidence of inappropriate conflicts

2 of interest and sales practices by nationally rec3 ognized statistical rating organizations;

4 (E) the process for registering as a nation5 ally recognized statistical rating organization;

6 and

7 (F) such other matters relevant to the im8 plementation of this Act and the amendments

9 made by this Act, as the Comptroller General

10 deems necessary to bring to the attention of the

11 Congress;

12 (2) to identify problems, if any, that have re13 sulted from the implementation of this Act and the

14 amendments made by this Act; and

15 (3) to recommend solutions, including any legis16 lative or regulatory solutions, to any problems iden17 tified under paragraphs (1) and (2).

18 (b) REPORT REQUIRED.—Not earlier than 3 years

19 nor later than 4 years after the date of enactment of this

20 Act, the Comptroller General shall submit a report on the

21 results of the study required by this section to the Com22 mittee on Banking, Housing, and Urban Affairs of the
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1 Senate and the Committee on Financial Services of the

2 House of Representatives.

Passed the Senate September 22, 2006.

Attest:

Secretary.
109TH CONGRESS

2D SESSION S. 3850

AN ACT

To improve ratings quality for the protection of inthe credit rating agency industry. countability, transparency, and competition in vestors and in the public interest by fostering ac-