To instruct the Securities and Exchange Commission to establish a self-regulatory organization to assign credit rating agencies to provide initial credit ratings.

SA 3808. Mr. FRANKEN (for himself, Mr. Schumer, Mr. Nelson of
Florida, Mr. Whitehouse, Mr. Brown of Ohio, and Mr. Murray) submitted
an amendment intended to be proposed to amendment SA 3739 proposed by
Mr. Reid (for Mr. Dodd (for himself and Mrs. Lincoln)) to the bill S.
3217, to promote the financial stability of the United States by
improving accountability and transparency in the financial system, to
end ``too big to fail'', to protect the American taxpayer by ending
bailouts, to protect consumers from abusive financial services
practices, and for other purposes; which was ordered to lie on the
table; as follows:

On page 1006, line 7, strike ``Such inaccuracy'' and all
that follows through line 9, and insert the following: ``Such
inaccuracy necessitates changes in the way initial credit
ratings are assigned.''.
On page 1042, strike lines 17 through 24, and insert the
following:
(a) Study.--Not later than 1 year after the Credit Rating
Agency Board, as established under section 15E(w) of the
Securities Exchange Act of 1934, begins to assign nationally
recognized statistical rating organizations to provide
initial credit ratings, the Comptroller General of the United
States shall conduct a study on the effectiveness of the
implementation of the changes made to that section by section
939D of this Act, including the selection method by which the
Credit Rating Agency Board assigns nationally recognized
statistical rating organizations to provide initial credit
ratings.
On page 1044, between lines 2 and 3, insert the following:

SEC. 939D. INITIAL CREDIT RATING ASSIGNMENTS.

Section 15E of the Securities Exchange Act of 1934 (15
U.S.C. 78o-7), as amended by this Act, is amended by adding
at the end the following:
``(w) Initial Credit Rating Assignments.--
``(1) Definitions.--In this subsection the following
definitions shall apply:
``(A) Board.--The term `Board' means the Credit Rating
Agency Board established under paragraph (2).
``(B) Qualified nationally recognized statistical rating
organization.--The term `qualified nationally recognized
statistical rating organization', with respect to a category
of structured finance products, means a nationally recognized
statistical rating organization that the Commission
determines, under paragraph (3)(B), to be qualified to issue
credit ratings with respect to such category.
``(C) Regulations.--
``(i) Category of structured finance products.--

``(I) In general.--The term `category of structured finance
products'--

``(aa) shall include any asset backed security and any
structured product based on an asset-backed security; and
``(bb) shall be further defined and expanded by the
Commission, by rule, as necessary.

``(II) Considerations.--In issuing the regulations required
subclause (I), the Commission shall consider--

``(aa) the types of issuers that issue structured finance
products;
``(bb) the types of investors who purchase structured
finance products;
``(cc) the different categories of structured finance
products according to--
``(AA) the types of capital flow and legal structure used;
``(BB) the types of underlying products used; and
``(CC) the types of terms used in debt securities;
``(dd) the different values of debt securities; and
``(ee) the different numbers of units of debt securities
that are issued together.
``(ii) Reasonable fee.--The Board shall issue regulations
to define the term `reasonable fee'.
``(2) Credit rating agency board.--
``(A) In general.--Not later than 180 days after the date
of enactment of the Restoring American Financial Stability
Act of 2010, the Commission shall--
``(i) establish the Credit Rating Agency Board, which shall
be a self-regulatory organization;
``(ii) subject to subparagraph (C), select the initial
members of the Board; and
``(iii) establish a schedule to ensure that the Board
begins assigning qualified nationally recognized statistical
rating organizations to provide initial ratings not later
than 1 year after the selection of the members of the Board.
``(B) Schedule.--The schedule established under
subparagraph (A)(iii) shall prescribe when--
``(i) the Board will conduct a study of the securitization
and ratings process and provide recommendations to the
Commission;
``(ii) the Commission will issue rules and regulations
under this section;
``(iii) the Board may issue rules under this subsection;
and
``(iv) the Board will--

[[Page S3110]]

``(I) begin accepting applications to select qualified
national recognized statistical rating organizations; and
``(II) begin assigning qualified national recognized
statistical rating organizations to provide initial ratings.

``(C) Membership.--
``(i) In general.--The Board shall initially be composed of
an odd number of members selected from the industry, with the
total numerical membership of the Board to be determined by
the Commission.
``(ii) Specifications.--Of the members initially selected
to serve on the Board--

``(I) not less than a majority of the members shall be
representatives of the investor industry, including both
institutional and retail investors who do not represent
issuers;
``(II) not less than 1 member should be a representative of
the issuer industry;
``(III) not less than 1 member should be a representative
of the credit rating agency industry; and
``(IV) not less than 1 member should be an independent
member.

``(iii) Terms.--Initial members shall be appointed by the
Commission for a term of 4 years.
``(iv) Nomination and election of members.--

``(I) In general.--Prior to the expiration of the terms of
office of the initial members, the Commission shall establish
fair procedures for the nomination and election of future
members of the Board.
``(II) Modifications of the board.--Prior to the expiration
of the terms of office of the initial members, the
Commission--

``(aa) may increase the size of the board to a larger odd
number and adjust the length of future terms; and
``(bb) shall retain the composition of members described in
clause (ii).
``(v) Responsibilities of members.--Members shall perform,
at a minimum, the duties described in this subsection.
``(vi) Rulemaking authority.--The Commission shall, if it
determines necessary and appropriate, issue further rules and
regulations on the composition of the membership of the Board
and the responsibilities of the members.
``(D) Other authorities of the board.--The Board shall have
the authority to levy fees from qualified nationally
recognized statistical rating organization applicants, and
periodically from qualified nationally recognized statistical
rating organizations as necessary to fund expenses of the
Board.
``(E) Regulation.--The Commission has the authority to
regulate the activities of the Board, and issue any further
regulations of the Board it deems necessary, not in
contravention with the intent of this section.
``(3) Board selection of qualified nationally recognized
statistical rating organization.--
``(A) Application.--
``(i) In general.--A nationally recognized statistical
rating organization may submit an application to the Board,
in such form and manner as the Board may require, to become a
qualified nationally recognized statistical rating
organization with respect to a category of structured
financial products.
``(ii) Contents.--An application submitted under clause (i)
shall contain--

``(I) information regarding the institutional and technical
capacity of the nationally recognized statistical rating
organization to issue credit ratings;
``(II) information on whether the nationally recognized
statistical rating organization has been exempted by the
Commission from any requirements under any other provision of
this section; and
``(III) any additional information the Board may require.

``(iii) Rejection of applications.--The Board may reject an
application submitted under this paragraph if the nationally
recognized statistical rating organization has been exempted
by the Commission from any requirements under any other
provision of this section.
``(B) Selection.--The Board shall select qualified national
recognized statistical rating organizations with respect to
each category of structured finance products from among
nationally recognized statistical rating organizations that
submit applications under subparagraph (A).
``(C) Retention of status and obligations after
selection.--An entity selected as a qualified nationally
recognized statistical rating organization shall retain its
status and obligations under the law as a nationally
recognized statistical rating organization, and nothing in
this subsection grants authority to the Commission or the
Board to exempt qualified nationally recognized statistical
rating organizations from obligations or requirements
otherwise imposed by Federal law on nationally recognized
statistical rating organizations
``(4) Requesting an initial credit rating.--An issuer that
seeks an initial credit rating for a structured finance
product--
``(A) may not request an initial credit rating from a
nationally recognized statistical rating organization; and
``(B) shall submit a request for an initial credit rating
to the Board, in such form and manner as the Board may
prescribe.
``(5) Assignment of rating duties.--
``(A) In general.--For each request received by the Board
under paragraph (4)(B), the Board shall select a qualified
nationally recognized statistical rating organization to
provide the initial credit rating to the issuer.
``(B) Method of selection.--
``(i) In general.--The Board shall--

``(I) evaluate a number of selection methods, including a
lottery or rotating assignment system, incorporating the
factors described in clause (ii), to reduce the conflicts of
interest that exist under the issuer-pays model; and
``(II) prescribe and publish the selection method to be
used under subparagraph (A).

``(ii) Consideration.--In evaluating a selection method
described in clause (i)(I), the Board shall consider--

``(I) the information submitted by the qualified nationally
recognized statistical rating organization under paragraph
(3)(A)(ii) regarding the institutional and technical capacity
of the qualified nationally recognized statistical rating
organization to issue credit ratings;
``(II) evaluations conducted under paragraph (6);
``(III) formal feedback from institutional and retail
investors; and
``(IV) information from subclauses (I) and (II) to
implement a mechanism which increases or decreases
assignments based on past performance.

``(iii) Prohibition.--The Board, in choosing a selection
method, may not use a method that would allow for the
solicitation or consideration of the preferred national
recognized statistical rating organizations of the issuer.
``(iv) Adjustment of process.--The Board shall issue rules
describing the process by which it can modify the assignment
process described in clause (i).
``(C) Right of refusal.--
``(i) Refusal.--A qualified nationally recognized
statistical rating organization selected under subparagraph
(A) may refuse to accept a selection for a particular request
by--

``(I) notifying the Board of such refusal; and
``(II) submitting to the Board a written explanation of the
refusal.

``(ii) Selection.--Upon receipt of a notification under
clause (i), the Board shall make an additional selection
under subparagraph (A).
``(iii) Inspection reports.--The Board shall annually
submit any explanations of refusals received under clause
(i)(II) to the Commission, and such explanatory submissions
shall be published in the annual inspection reports required
under subsection (p)(3)(C).
``(6) Evaluation of performance.--
``(A) In general.--The Board shall prescribe rules by which
the Board will evaluate the performance of each qualified
nationally recognized statistical rating organization,
including rules that require, at a minimum, an annual
evaluation of each qualified nationally recognized
statistical rating organization.
``(B) Considerations.--The Board, in conducting an
evaluation under subparagraph (A), shall consider--
``(i) the results of the annual examination conducted under
subsection (p)(3);
``(ii) surveillance of credit ratings conducted by the
qualified nationally recognized statistical rating
organization after the credit ratings are issued, including--

``(I) how the rated instruments perform;
``(II) the accuracy of the ratings provided by the
qualified nationally recognized statistical rating
organization as compared to the other nationally recognized
statistical rating organizations; and
``(III) the effectiveness of the methodologies used by the
qualified nationally recognized statistical rating
organization; and

``(iii) any additional factors the Board determines to be
relevant.
``(C) Request for reevaluation.--Subject to rules
prescribed by the Board, and not less frequently than once a
year, a qualified nationally recognized statistical rating
organization may request that the Board conduct an evaluation
under this paragraph.
``(D) Disclosure.--The Board shall make the evaluations
conducted under this paragraph available to Congress.
``(7) Rating fees charged to issuers.--
``(A) Limited to reasonable fees.--A qualified nationally
recognized statistical rating organization shall charge an
issuer a reasonable fee, as determined by the Commission, for
an initial credit rating provided under this section.
``(B) Fees.--Fees may be determined by the qualified
national recognized statistical rating organizations unless
the Board determines it is necessary to issue rules on fees.
``(8) No prohibition on additional ratings.--Nothing in
this section shall prohibit an issuer from requesting or
receiving additional credit ratings with respect to a debt
security, if the initial credit rating is provided in
accordance with this section.
``(9) No prohibition on independent ratings offered by
nationally recognized statistical rating organizations.--
``(A) In general.--Nothing in this section shall prohibit a
nationally recognized statistical rating organization from
independently providing a credit rating with respect to a
debt security, if--
``(i) the nationally recognized statistical rating
organization does not enter into a contract with the issuer
of the debt security to provide the initial credit rating;
and
``(ii) the nationally recognized statistical rating
organization is not paid by the issuer of the debt security
to provide the initial credit rating.
``(B) Rule of construction.--For purposes of this section,
a credit rating described in

[[Page S3111]]

subparagraph (A) may not be construed to be an initial credit
rating.
``(10) Public communications.--Any communications made with
the public by an issuer with respect to the credit rating of
a debt security shall clearly specify whether the credit
rating was made by--
``(A) a qualified nationally recognized statistical rating
organization selected under paragraph (5)(A) to provide the
initial credit rating for such debt security; or
``(B) a nationally recognized statistical rating
organization not selected under paragraph (5)(A).
``(11) Prohibition on misrepresentation.--With respect to a
debt security, it shall be unlawful for any person to
misrepresent any subsequent credit rating provided for such
debt security as an initial credit rating provided for such
debt security by a qualified nationally recognized
statistical rating organization selected under paragraph
(5)(A).
``(12) Initial credit rating revision after material change
in circumstance.--If the Board determines that it is
necessary or appropriate in the public interest or for the
protection of investors, the Board may issue regulations
requiring that an issuer that has received an initial credit
rating under this subsection request a revised initial credit
rating, using the same method as provided under paragraph
(4), each time the issuer experiences a material change in
circumstances, as defined by the Board.
``(13) Conflicts.--
``(A) Members or employees of the board.--
``(i) Loan of money or securities prohibited.--

``(I) In general.--A member or employee of the Board shall
not accept any loan of money or securities, or anything above
nominal value, from any nationally recognized statistical
rating organization, issuer, or investor.
``(II) Exception.--The prohibition in subclause (I) does
not apply to a loan made in the context of disclosed, routine
banking and brokerage agreements, or a loan that is clearly
motivated by a personal or family relationship.

``(ii) Employment negotiations prohibition.--A member or
employee of the Board shall not engage in employment
negotiations with any nationally recognized statistical
rating organization, issuer, or investor, unless the member
or employee--

``(I) discloses the negotiations immediately upon
initiation of the negotiations; and
``(II) recuses himself from all proceedings concerning the
entity involved in the negotiations until termination of
negotiations or until termination of his employment by the
Board, if an offer of employment is accepted.

``(B) Credit analysts.--
``(i) In general.--A credit analyst of a qualified
nationally recognized statistical rating organization shall
not accept any loan of money or securities, or anything above
nominal value, from any issuer or investor.
``(ii) Exception.--The prohibition described in clause (i)
does not apply to a loan made in the context of disclosed,
routine banking and brokerage agreements, or a loan that is
clearly motivated by a personal or family relationship.
``(14) Evaluation of credit rating agency board.--Not later
than 5 years after the date that the Board begins assigning
qualified nationally recognized statistical rating
organizations to provide initial ratings, the Commission
shall submit to Congress a report that provides
recommendations of--
``(A) the continuation of the Board;
``(B) any modification to the procedures of the Board; and
``(C) modifications to the provisions in this
subsection.''.
______