For a recap of what the House had on ratings agency reform, check out this quote from my interview with ratings agency expert Jerome Fons:
Right. You need to disentangle the ratings agencies and the regulation. One of the nice things about the House bill is that it raises rating agencies’ legal liability and it instructed every federal agency to remove references to NRSRO. That did not make it into the current Senate bill. In the Senate bill, the GAO will study it and give a report.
Those are the two goals: increasing rating agencies’ legal liability, and removing references to NRSRO from federal agencies and the law.
So, the Franken Amendment passed, as did an amendment by LeMieux. We discussed the Franken amendment before, but what does the LeMieux amendment do?
In the final House Bill, the section “SEC. 6009. REMOVAL OF STATUTORY REFERENCES TO CREDIT RATINGS” removes the references to NRSRO from federal agencies and the law. The LeMieux amendment is the language of SEC. 6009 from the House moved over, language which was missing in the Senate bill.
If you read 6009, you see a chainsaw taken to rating agencies in the law, such as:
(NYSE:B) in paragraph (1), by striking `not of investment grade’ and inserting `that does not meet standards of credit-worthiness as established by the Corporation’
(2) by striking `that is a nationally recognized statistical rating organization, as such term is defined in section 3(a) of the Securities Exchange Act of 1934.’
Essentially, ratings were put into code through a handful of laws, and the language strikes the references to the ratings agencies. The places it strikes them from are:
- Federal Deposit Insurance Act
- Federal Housing Enterprises Financial Safety and Soundness Act of 1992
- Investment Company Act of 1940
- Section 5136A of title LXII of the Revised Statutes of the United States
- Securities Exchange Act of 1934
- Committee on Banking, Finance and Urban Affairs 1988, as enacted into law by section 555 of Public Law
It strikes out the references to the ratings agencies and ratings generally, and replaces it with the standards of the Corporation, which is the internal government regulating mechanism to be determined. SA 3774, LeMieux’ amendment also does the hacking that was missing from the Senate Bill. So there should be significantly less in terms of government agencies that are directed, by law, to use a ratings agency, which is a win.
However, the replacement mechanism is still to be determined. This is not trivial, as selecting a select group of private market agents to handle the determining the credit risk of government agencies and ringfencing them is what helped create the ratings agency problem in the first place. More on this shortly. But rating agencies reform is far further along today than it was yesterday.
Disclosure: No positions