Credit Rating Agency Duopoly Relief Act of 2006

Mr. Chairman, I yield myself such time as I may consume.

Mr. Chairman, our capital markets rely on the independent assessment of financial strength provided by credit raters. The bill before us, however, would decrease the quality of credit ratings because it would dramatically alter the way in which government identifies entities to issue the credit ratings used for essential regulatory purposes. I therefore oppose H.R. 2990.

In the 1970s, the Securities and Exchange Commission created nationally recognized statistical rating organizations. It is not a very sexy term and not well understood, but those are the little fellows that are called in to evaluate bonds and all types of instruments of debt and other materials that are sold throughout our financial system to pension funds and all others. They created these organizations in a rulemaking on the capital levels that brokers and dealers must hold. Since then, the term, with its inference to quality, credible, and reliable ratings has become embedded in numerous Federal, State, and local statutes, rules, and regulations.

Many private parties have also included references to ``nationally recognized'' agencies in the terms of their contracts, corporate bylaws, and pension trust agreements. Foreign governments and international bodies have used the concept in their accords and codes, too. In considering any bill to modify the process for identifying ``nationally recognized'' agencies, we must, therefore, keep in mind the need to maintain high quality ratings. It is this credible and reliable standard on

which investors rely. We should not lightly abandon this standard.

Critics of the present designation system have raised legitimate concerns about competition. I agree with the supporters of H.R. 2990 that increasing competition in the credit ratings used for regulatory purposes is a desirable goal. I further agree that the current designation process should be improved.

To achieve its objectives of greater competition, however, H.R. 2990 seeks to make statutory changes that will come at a dangerous cost. The bill, through its voluntary registration regime, will increase the number of ``nationally recognized'' agencies without providing sufficient authority to assure the issue ratings are credible and reliable. We must achieve equilibrium in these matters by balancing the desire to increase the quantity of approved credit raters with the need to ensure that their ratings are of a consistently high quality.

The minimum standard set forth in H.R. 2990 that allows any credit rater to obtain the ``nationally recognized'' designation after 3 years of experience are akin to granting a driver's license to anyone who meets a 3-year residency requirement. We know, however, to keep our roads safe, every potential driver must pass one or more quality assurance tests administered by a third party before getting a license. Why should we hold those rating agencies that serve as gatekeepers to our capital markets to a lower oversight standard?

Investor advocates have also concluded that quality should be an important factor in identifying ``nationally recognized'' agencies. The AFL-CIO, for example, has noted that replacing the concept of approved raters, ``with a mere registration process without substantive oversight will be harmful to investors,'' and ``ultimately to the functioning of our credit markets.''

In a recent letter, the Consumer Federation of America has additionally observed that the central provision of H.R. 2990 is ``fatally flawed.'' In competitive markets, ``some credit rating agencies will invariably compete based on the leniency of their ratings methodology. That is not good for investors or for the integrity and efficiency of the markets.''

Moreover, H.R. 2990 could allow history to repeat itself. In the wake of the savings and loan crisis, we required that the debt securities held in portfolios by financial institutions must be of investment grade as determined by a ``nationally recognized'' agency.

I may point out, in response to my colleague, the chairman of my subcommittee, Mr. Baker, he seemed to indicate that the cause of the S&L disaster was that the rating agencies made mistakes. Quite to the contrary. The disaster was that the rating agencies were not used to determine investment grade instruments held in their portfolios, and that only occurred after the S&L disaster.

This bill's failure to ensure that such ratings continue to be credible and reliable could one day create another regrettable situation whereby the taxpayers need to finance a bailout of the deposit insurance funds. Moreover, this legislation threatens the strength of the Securities Investors Protection Corporation, which protects investors against fraud.

Less than 4 years ago, Congress wisely adopted the standards in the Sarbanes-Oxley Act to strengthen financial reporting, restore investor confidence, and assure the integrity of our capital markets. In an effort to promote competition, however, H.R. 2990 would weaken the quality of our ratings, thereby damaging investor confidence and the integrity of our markets going forward. It is, in other words, a step backwards.

In sum, Mr. Chairman, I find such developments are highly regrettable today and I urge my colleagues to reject H.R. 2990.

In response to the chairman of our committee's quoting from a letter addressed to me by Chairman Cox, our former colleague, he failed to read the second paragraph of Mr. Cox's letter, under part B. He properly read the first phase, and I won't repeat that, but Mr. Cox said, ``In the weeks and months ahead, the commission,'' speaking of the Securities and Exchange Commission, ``and its staff will continue to consider potential ways by which we can help facilitate the issuance of high quality ratings using our existing regulatory authority, including the adoption of an existing rulemaking proposal in some form or other approaches,'' thus indicating that the SEC has not had the opportunity to fully address this problem.

The SEC has not been called to testify before the committee on the consideration of this bill, and the fact is that of the five hearings held by this committee, at least four of the five occurred without the concept of the piece of legislation we are considering today.

I sympathize with the makers of this. I know they want to do the right thing. But speed to get a bill passed, to create an on-demand registration of a new entity that is so critical to trillions of dollars of instruments of debt should not pass this House without realizing the potential consequences, and they are great.

I concede rating agencies that exist today have made mistakes in Enron and WorldCom, but I recall, and I guess I have served on the committee a little longer than most, but Mr. Oxley was certainly in the Congress, not on the committee at the time, but during the S&L disaster, I recall a very famous American, who is an economist and served in very high appointive office in the Federal Reserve, testifying before our committee that he had evaluated, for a professional fee, 20 entities, S&Ls, and had found them to be sound. Many of them failed within 4 months of his evaluation. Actually, 19 of the 20 he evaluated failed.

This is not kid's play. This is not a bean bag. This is very serious rating information that investors across the country, indeed across the world rely upon. Quality is clearly as important as quantity. We can have both. Just taking a greater consideration and using the expertise and availability of the Securities and Exchange Commission may do us well.

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, I yield 4 minutes to the gentlewoman from New York (Mrs. Maloney).

Mr. Chairman, I yield such time as he may consume to the gentleman from Massachusetts (Mr. Frank), the ranking member of the Committee on Financial Services.

Mr. Chairman, I think there are good intentions on both sides of this issue, and unfortunately, I find it to be an extremely complicated issue and, most of all, not a sexy issue, as you can see by attendance on the floor.

I doubt whether 5 percent of our viewing audience out there understands what a nationally recognized statistical rating organization really is, and probably not a great deal more really care about it. Except, when you look at what they do and the effect they have on all of our lives in some very big ways, they are an important entity and we have to get this right.

And I want to point out that when this entity was constructed by rule, as Mr. Fitzpatrick pointed out, in 1975, there were originally three agencies that were granted this nationally recognized statistical rating organization nomenclature. Since that time, six have been added, for a total of nine.

Existing today, there are only five because there has been consolidation in the industry. But what that indicates is that this has not been a prohibitive area for qualified organizations to gain the recognition of a nationally recognized statistical rating organization.

I think, and I agree with our friends on the other side, that competition would be good, and the availability to enter this field would be much better if we can find a methodology to do that. It does not necessitate, however, a regimentation regime, and it certainly doesn't justify the thinking process that the marketplace, through competition, will cure all ends, and particularly if you look at the cost of competition and what it means.

Certainly, when we are dealing with hundreds and billions and trillions of dollars in instruments to be evaluated by these organizations, whatever the cost of getting that down is infinitesimal to the importance of getting the quality of the organization correct and the rating correct to protect investors.

I think that what we have a tendency to do is to think competition in and of itself is such a wonderful thing that it is going to solve all purposes. Well, I could suggest to my colleagues on the other side that if brain surgery is expensive we could entertain the idea that any doctor can register after 3 years of practice to be a brain surgeon, and that would qualify him to be a brain surgeon. And in many instances, in many places it clearly may, although I don't want him operating on my brain, and I assure you most of the Members of this House wouldn't want that process used to qualify one's self as a brain surgeon.

This organizational structure and the methodology used in the rating agency are analogous to the complications of brain surgery in the financial field. There aren't many organizations that have the capacity to do it. Those that do should have methodologies of being tested as to quality, transparency and methodology, and they should have increased competition. That we agree upon.

What we disagree upon is the nature of this bill and the regime of registration is not sufficient to guarantee quality. What may very easily happen is one or two rogue organizations, after 3 years, may apply, be designated as a nationally recognized statistical rating organization, and then do what Mr. Baker referred to, actually bid down the value by getting business and offering to give good ratings to get business. They may actually deteriorate the value and the quality of the ratings. We don't know that for certain. We don't want to suggest that. We want to make sure that we structure a methodology and means of designating nationally recognized statistical rating organizations so we don't have deterioration in quality just to get quantity. What we wish to have is quantity and quality, and both are equally important.

I urge my colleagues in the House to consider that when they vote on this measure. I am offering a substitute which we will debate for 20 minutes immediately after the close of this debate.

I think that this is premature. At the very least, the committee and the Congress should have received legitimate critiques from the Securities Exchange Commission with all the expertise that they have. I am sure most of us don't feel fully qualified to view the structure of these organizations and their ability to perform on the basis of what we know individually. We are relying on expertise evaluation that is contained in very limited areas, one of which is certainly an independent agency of the United States Government, the Securities and Exchange Commission.

I would urge, at this time, a ``no'' vote on passage of this when we get to that point in the bill.

Mr. Chairman, I yield back the balance of my time.

Mr. Chairman, I rise to claim the time in opposition.

Mr. Chairman, I rise in order to express some thoughts on the amendment, but I do not intend to oppose the manager's amendment itself.

The manager's amendment, Mr. Chairman, makes a number of technical changes in the bill, improving its precision, fixing drafting errors and extending the implementation time frames. These changes are acceptable and appropriate.

The manager's amendment also makes a set of larger and more significant changes; namely, it alters the bill's wording in multiple places in an attempt to address recently raised concerns about the possible creation of explicit and implicit private rights of action under the bill.

Regardless of one's position on whether these changes are needed, and whether they accomplish their intended purposes, the fact is that these modifications are coming late in the legislative process and indicates that the legislation is not well thought out.

Moreover, this is precisely the type of issue on which getting the views of the experts at the Securities and Exchange Commission would have been helpful and invaluable.

That said, Mr. Chairman, I do not intend to object to the manager's amendment.

Mr. Chairman, I have no further requests for time, and I yield back the balance of my time.

Mr. Chairman, I offer a substitute amendment.

Mr. Chairman, I yield myself such time as I may consume.

While the supporters of H.R. 2990 have tinkered with and somewhat improved the bill since its introduction, the central provision of the legislation, in the words of the Consumer Federation of America, is ``fatally flawed.'' I am likewise very concerned that this bill sacrifices the quality of independent assessments of financial strength provided by the ``nationally recognized'' credit raters that help our capital markets remain vibrant.

As a result, I am offering a substitute. Unlike H.R. 2990, which creates an untested system for establishing nationally recognized agencies, this alternative expedites and builds upon existing regulatory, private sector, and international reform efforts.

The voluntary registration regime of H.R. 2990 will increase the number of nationally recognized agencies without assuring the credibility and reliability of the issued ratings. We must seek equilibrium, balancing the desire to increase the quantity of approved agencies with the need to ensure high-quality ratings. The substitute addresses this shortcoming.

Moreover, H.R. 2990 ignores ongoing reform efforts. The Securities and Exchange Commission has a rulemaking pending on these matters. Currently, approved raters are also developing a voluntary, robust self-regulatory regime based on the industry code established by the International Organization of Securities Commissions. Moreover, the European Commission recently relied on this global code to oversee its approved rating agencies.

Congress should build upon these domestic, private sector, and international reform efforts rather than creating chaos by forging a new regulatory plan. To ensure the advancement of good public policy in this area, we need to recognize the work of others. We also ought to provide for the continued legislative oversight of these matters and minimize unintended consequences.

Specifically, the substitute would require the commission to complete its definitional rulemaking on what constitutes an approved rating agency within 60 days of enactment. It would also require the commission to establish public guidance about the process used to identify new, nationally recognized agencies within 180 days of enactment.

The substitute would additionally encourage participating parties to expedite and complete their discussions over the voluntary framework to improve market discipline and enhance rating quality. Finally, it would require annual hearings before the Financial Services Committee to explore the need for further action.

In short, the substitute establishes a globally consistent market- based approach. It protects the quality of ratings, enhances competition, and injects transparency into the process for determining nationally recognized agencies. It also promotes international harmonization; ensures that Congress stays focused on these matters; and gives the commission, which has the foremost expertise on these issues, a seat at the table in developing any future bill.

In Monday's Bond Buyer, the head of JPMorgan's rating advisory group opined that efforts related to the rulemaking to defined approved rating agencies and to establish a voluntary framework consistent with global standards offers a ``positive solution'' to present concerns. We should heed his advice to balance quality and quantity concerns in order to ensure that investors benefit from the best thinking and the best opinions by passing this substitute.

In sum, Mr. Chairman, the substitute pursues a more prudent course that accelerates and adds to ongoing domestic, private sector, and international reform efforts instead of creating an untested system for establishing nationally recognized agencies. This alternative would also protect investors by ensuring high-quality ratings.

It is the better approach, and I urge its adoption.

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, I yield 4 minutes to the gentleman from North Dakota (Mr. Pomeroy).

Mr. Chairman, may I inquire as to how many speakers are on the other side.

Then I will reserve my time.

Mr. Chairman, I think I have the right to close, so I will reserve my time.

Mr. Chairman, I yield myself the balance of the time.

Mr. Chairman, I listened to the last speaker with somewhat dismay. He tended to quote a lot of votes. Yes, there was a vote that passed this on from the committee to the floor, and after the preceding vote that was held by the committee on the substitute he failed to inform the House that there were 35 against the substitute, 31 in favor of the substitute. This did not come out of the committee without contention. It came out on the voice vote because we saw the count was 35-31. We did not call for a vote.

Secondly, the gentleman charges my suggestion of the substitute as a definition to define and maintain the status quo. Either he has not looked at the substitute or we define the status quo in different proportions because this substitute does several things.

First and foremost, it would require the Securities and Exchange Commission to complete its definitional rulemaking of what constitutes an approved rating agency within 60 days of enactment. That does not give them unlimited time to continue to pursue. Within 60 days they have to have the definition.

The second position, it would require the commission to establish public guidelines about the process used to identify new nationally recognized agencies within 180 days of enactment, within 6 months. That is hardly the status quo.

Then, finally, we would encourage continuation and participation of the parties to expedite and complete a voluntary framework to improve the discipline and enhance rating quality.

This substitute accomplishes several things, moves the process along but does not create an entire new entity and process which is contradictory to international agreements and other conditions held throughout the world.

I urge the adoption of the substitute.

Mr. Chairman, I demand a recorded vote.

Mr. Chairman, I yield myself such time as I may consume.

Mr. Chairman, in response to the largest corporate scandals in U.S. history, Congress passed the Sarbanes-Oxley Act strengthening the role of gatekeepers such as auditors, boards of directors, audit committees, and equity analysts. We now turn our attention to another gatekeeper, the credit rating agency, and Congressman Fitzpatrick's H.R. 2990, the Credit Rating Agency Duopoly Relief Act.

Credit ratings serve a vital function in our capital market system, providing investors with an understanding of the creditworthiness of corporations and municipalities with respect to debt and other securities. As evidenced by the failures in the rating of Enron and WorldCom, who were given investment grade ratings by Moody's and Standard & Poor's just days before declaring bankruptcy, the credit rating industry is in drastic need of increased competition and improved transparency.

Currently, the SEC designates ratings agencies as nationally recognized statistical ratings organizations, or NRSROs, through an opaque process that provides applicants little guidance on the substance and procedure by which they will be evaluated. Currently, only five rating agencies are designated as NRSROs by the SEC. Understandably, many more aspire to attain that designation, as NRSRO status confers a significant competitive advantage. However, new applications often languish for years without an up or down vote on admission into this elite club. In fact, the Department of Justice commented upon the SEC designation process in 1998, calling it a ``nearly insurmountable barrier to entry.''

The SEC's opaque designation process has created an artificial government-sponsored barrier to entry that has stifled competition and helped the two top rating agencies, Moody's and Standard & Poor's, garner some 80 percent of the market share. Without true competition of this industry, fees have skyrocketed and ratings quality has deteriorated. To put it mildly, this is not a transparent and efficient mark with robust competition.

Wanting to understand an industry with such a significant impact on the markets, Congress directed the SEC to examine credit rating agencies as part of the Sarbanes-Oxley Act. Since the release of the SEC's report on rating agencies in January 2003, the Committee on Financial Services and its Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises through its chairman, Richard Baker, have held five hearings on this subject, two of those hearings focused on H.R. 2990. Witnesses from the SEC, industry, academia, think tanks, and the rating agencies themselves echoed the problem areas highlighted by the SEC; namely, barriers to entry leading to a lack of competition, conflicts of interest, poor transparency of agencies' rating methodologies, and a lack of accountability. Mr. Fitzpatrick's bill is the product of this comprehensive examination.

In his testimony of this past May before the Committee on Financial Services, our former colleague, SEC Chairman Cox, expressed support for the goals of H.R. 2990, and requested enhanced authority in this area. In a June 2006 letter to Ranking Member Kanjorski, Mr. Cox stated, ``You also asked whether the quality of credit ratings concerns me. My answer is most assuredly yes. In fact, transparency, competition, and greater oversight, the principles I mentioned during my testimony before the House Financial Services Committee on May 3, 2006, are, in my view, important means to achieve the end of ensuring the high quality of credit ratings.'' The principles cited by Mr. Cox are the very principles of Mr. Fitzpatrick's legislation before us.

In addition, SEC Commissioners Paul Atkins and Cynthia Glassman have expressed their disapproval with the current designation system, and Mr. Atkins has expressed support for a registration approach like the one embodied in this bill. SEC Commissioner Roel Campos has also expressed a need for legislation that deals with conflicts, increased transparency, and provides for SEC examination.

Mr. Fitzpatrick's bill follows the regulatory regimes applied to broker-dealers and investment advisors. In doing so, it rejects regulation controlled by the SEC in favor of the market-based approach that has driven our securities laws since the 1930s.

H.R. 2990 removes the SEC's designation process, and in its place gives rating agencies who have issued ratings for 3 years the option of registering as NRSROs. A voluntary registration system will level the playing field for all rating agencies and inject much needed competition into this industry. As we have seen time and time again in other markets, true competition begets lower prices and better performance. When dealing with investor protection, it is all the more critical to ensure that healthy competition exists, yielding more accurate and reliable ratings.

In addition, H.R. 2990 promotes transparency and empowers investors by requiring registrants to disclose the methodologies by which they generate ratings. It requires rating agencies to provide short, medium, and long-term performance statistics, and to make all information and documents submitted to the SEC publicly available. This will give the market a clearer understanding of the agencies that are rating debt. The bill also requires that rating agencies maintain a chief compliance officer to oversee compliance with the securities laws and protects market stability, providing that the voluntary regime will not go into effect until January 2008.

To insulate the rating agencies from overreaching legislation, H.R. 2990 affirms that the Federal Government may not intrude into rating agencies' methodologies or the ratings process.

Finally, I have concerns about the conflicts of interest which plague this industry. Ratings firms have expanded into new areas which, many commentators have suggested, further compromise their objectivity.

In addition, it has been alleged that leading rating agencies engage in certain abusive practices to the detriment of smaller market players. H.R. 2990 requires disclosure of conflicts of interest and prohibits such anti-competitive practices.

The many hours that the Committee on Financial Services and Mr. Fitzpatrick have spent on this issue have shown the problems cited by the SEC report are best rectified through a system of voluntary registration open to all eligible rating agencies. This will eliminate barriers to entry, promote competition, and do so using the least restrictive means of regulation.

I urge all Members to support this important bill.

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, I am now pleased to yield 2 minutes to the gentleman from Georgia (Mr. Price), a valuable member of the committee.

(Mr. PRICE of Georgia asked and was given permission to revise and extend his remarks.)

Mr. Chairman, I yield 2 minutes to the gentlewoman from Pennsylvania (Ms. Hart).

Mr. Chairman, I yield 8 minutes to the author of the legislation, the gentleman from Pennsylvania (Mr. Fitzpatrick).

Mr. Chairman, I yield 3 minutes to the gentleman from Louisiana (Mr. Baker), the chairman of the Capital Markets Subcommittee.

Mr. Chairman, in closing, let me first of all recognize the gentleman from Pennsylvania, Mr. Fitzpatrick. He has been a real bulldog on this issue. The committee has worked its will passing this bill on a voice vote in the committee. His leadership has been extraordinary. The committee has had numerous hearings. We have had input from all of the usual sources, and then some, to craft this legislation.

If somebody were to tell you or anybody in this body that there was an industry out there where 80 percent of that business was controlled by two companies, whether it was in the steel industry or the auto industry, the health care field, I would suggest that particularly my friends on the other side of the aisle would be particularly upset and call it restraint of trade and ask for all kinds of investigations and to try to induce more competition and new entries into that marketplace. And that is exactly what we have got here. We have got credit rating agencies that for the last 35 years have basically had a duopoly on this very lucrative business. And as in the case with any other kind of business, when you have a duopoly or an oligopoly, you have lack of competition. You have a situation where you have conflicts of interest almost guaranteed, and you have a lack of transparency at the same time. That is what we attack in the Fitzpatrick legislation.

Now, I have been chairman of this committee for 6 years. Even before I was chairman of this committee this was an issue. The SEC would always come up before the committee, testify, well, we are working on it. We are trying to open this up. And yet, a frustrated member of the committee said, when are you ever going to get around to it?

This legislation is a wakeup call to the SEC, to the industry that, at least from our perspective, we are tired of waiting for this to happen. Everybody likes competition, but nobody likes competitors. Everybody wants to go to heaven, but nobody wants to die.

It is time that we provide the kind of competitive structure in this critical area that is long due coming.

There is a reason why, Mr. Chairman, in the Sarbanes-Oxley Act that we requested this study, because we knew that part of the problem going forward with Enron and WorldCom and the like was lack of competition and the abysmal ratings effect that two members of the duopoly created right before Enron and WorldCom collapsed. Just think about the credit rating that they gave to Enron and WorldCom just weeks before they collapsed, and it tells you a lot about the lack of competition, the lack of transparency and a potential conflict of interest in the existing status quo.

This bill is anti-status quo. It is far reaching. It is visionary, and Mike Fitzpatrick's leadership on this cannot be overestimated. And so I think that every Member should take a look at this. This is part of the ongoing process to make our markets more competitive, more transparent, and this bill is a natural follow-up on what this Congress and what this committee has done over the years to create better confidence in the markets by investors to provide more competition therein. This legislation gets the job done, and all Members should support it.

Mr. Chairman, I yield back the balance of my time.

Mr. Chairman, I offer an amendment.

Mr. Chairman, I yield myself such time as I may consume.

Mr. Chairman, I rise to offer an amendment to H.R. 2990, the Credit Rating Agency Duopoly Relief Act. This amendment makes certain clarifying and technical changes to Mr. Fitzpatrick's rating agency reform legislation.

Specifically, the amendment clarifies that there is no private right of action for rating agencies registered as nationally recognized statistical rating organizations, or NRSROs, under the Securities Exchange Act of 1934. Neither is there an express or an implied private right of action with respect to rating agencies registered as NRSROs under the Securities Exchange Act. The Securities and Exchange Commission will retain its enforcement authority over registered rating agencies.

In addition, the amendment allots to the Securities and Exchange Commission an additional 6 months, for a total of 1 year, to review and, if necessary, revise its regulations that use the term ``NRSRO.'' The additional time will allow the SEC and industry participants more time to properly assess regulations using the NRSRO technology.

This amendment also makes a number of technical amendments, clarifying definitions, findings and disclosure requirements.

I urge all Members to support this amendment.

Mr. Chairman, I reserve the balance of my time.

Mr. Chairman, I have no further requests for time, and I yield back the balance of my time.

Mr. Speaker, I demand a recorded vote.

Mr. Chairman, I thank Chairman Oxley and subcommittee Chairman Baker for their considerable leadership on this issue.

There have been no less than five hearings over the last two terms of Congress, dozens of witnesses and approaching 1,000 pages of transcribed testimony, all pointing to the unavoidable conclusion, which is that it is vital that Congress bring competition, transparency and accountability to the credit rating industry in this Nation.

Mr. Chairman, credit rating agencies have been issuing ratings on the likelihood of an issuer's default on debt payments since the early 20th century. Today, credit rating agencies rate companies, countries and bonds. Despite being often underestimated and overlooked, their power is immense. Credit

rating agencies have a great impact on the bottom line of companies, municipalities and school districts. The better the credit rating, the lower the interest rate that the borrower must pay.

This expansive influence finally came into question because of the recent corporate scandals and the fact that the two largest NRSROs, Standard & Poor's and Moody's, rated Enron and WorldCom at investment grade just prior to their bankruptcy filings. Essentially, they told the market that Enron and WorldCom were safe investments, even though their problems were very apparent in the marketplace. As a result, reforming the rating agency industry has been the subject of much debate in the House Committee on Financial Services.

S&P's and Moody's monitoring and reviewing of Enron and WorldCom fell far below the careful efforts one would have expected from organizations whose ratings hold so much importance. And Enron and WorldCom were not their only problems. But what are the other options that are out there?

There are 130 credit rating agencies in the financial market; however, only five are rated and designated as NRSROs by the SEC. This label is the root of the problem. The SEC coined the term NRSRO without defining it in its 1975 rule on net capital requirements when it obligated broker-dealers to hold more capital for those bonds rated junk by a NRSRO. Since then, other regulators in the private investment community have taken up the term, but also without defining it. As a result, credit ratings matter only if they are issued by an NRSRO.

The commission still has never defined the term, and it has been over 30 years. It is more than naive to assume that the SEC will actually define it now. Their track record is not encouraging.

To receive the illusive distinction, companies must be nationally recognized. This artificial barrier to entry has created a chicken-and- the-egg situation for non-NRSRO credit rating agencies trying to enter this industry. As a result of the artificial barrier to entry, there are only five NRSROs. Reputable credit rating firms have been unable to receive this distinction after trying for as long as a decade. Firms like Egan Jones in my home State of Pennsylvania receive no explanation from the SEC because no process actually exists.

This SEC-imposed barrier to entry has consolidated the industry, thus fostering a duopoly. Moody's and S&P enjoy over 80 percent of the market share and rate 99 percent of the debt in the market. As a result, Moody's and S&P are raking in record fees. Since 2000, Moody's and S&P have earned average annual returns on assets of 37 and 39 percent respectively over a 6-year period. This compares to the average return on assets over the same period earned by U.S. manufacturing firms of less than 5 percent per year.

These excessive profits are government-granted to those two NRSROs by virtue of the special status granted to them by the government. As a result of this lack of competition, the quality of ratings has decreased, prices are inflated, innovation has been stifled, and anticompetitive industry practices have been allowed in conflicts of interest, like tying, notching and unsolicited ratings, have gone unchecked.

Mr. Chairman, in the wake of the seminal failure by S&P and Moody's in the WorldCom and Enron scandals, we must ensure integrity in the credit rating process. H.R. 2990 would inject greater competition, transparency and accountability in the credit rating industry. As a result, prices and anticompetitive practices will be reduced, credit rating quality will improve, and firms will be forced to innovate.

This view is shared by the Bond Market Association, the Association for Financial Professionals, the Financial Executives International, Investment Company Institute, and The Financial Services Roundtable, and I will submit their letters of support for the Record.

Mr. Chairman, there is a lot of talk in this town about reform and transparency and managing conflicts of interest. This bill, I would submit, meets each of those challenges, and I would like to leave you with a quote right from the horse's mouth.

The SEC stated: ``The greater competition in the market for credit ratings and analysis could provide for more credible and reliable ratings, and greater competition could also stimulate innovation in the technology and methods of analysis for issuing credit ratings, which could further lower barriers to entry.''

I submit H.R. 2990 would do just that. I strongly urge a ``yes'' vote on H.R. 2990 to ensure integrity in the credit rating industry.

The Bond Market Association,

July 10, 2006.

Hon. Michael Fitzpatrick,

House of Representatives,

Washington, DC.

Dear Representative Fitzpatrick: I applaud your efforts on

legislation to reform the credit rating agency industry. The

significant growth in the global capital markets in recent

years has increased the importance of credit quality

analysis. Boosting competition among credit rating agencies,

as your legislation, the Credit Rating Agency Duopoly Relief

Act (H.R. 2990), seeks to do, assures this critical industry

will remain robust and innovative.

I appreciate that the version of H.R. 2990 approved last

month by the House Financial Services Committee addresses

concerns of Association members with an earlier version of

the legislation. Specifically, the bill would no longer

compel registration of a credit rating agency with the

Securities and Exchange Commission. The amended version of

H.R. 2990 also expands the definition of credit rating agency

to include any person in the business of issuing credit

ratings on the Internet or other readily accessible means for

free or for a reasonable fee. Association members viewed the

previous legislation as both too narrow--deeming a rating

public only if it was disseminated on the Internet--and too

broad--including companies who produce ratings not used for

regulatory purposes. The changes included in the new

legislation will help foster competition in the industry.

Again, I commend your leadership on this important issue.

We support H.R. 2990 and look forward to speedy action on the

bill in the House.

Sincerely,

John R. Vogt,

Executive Vice President.

Mr. Chairman, as the bill's sponsor, I rise in opposition to the substitute amendment offered.

It is vital that Congress bring competition, transparency, and accountability to the credit rating industry. And H.R. 2990 would accomplish just that. However, Congressman Kanjorski's substitute amendment retains the anticompetitive status quo and provides no transparency and no accountability.

The subcommittee amendment offered today has three key components: It requires the SEC to complete its definitional rulemaking; it encourages completion of the voluntarily framework; and it calls for hearings on rating agencies before the Committee on Financial Services.

First, the SEC has never defined the term ``NRSRO,'' and it has been over 30 years. I doubt that the SEC's illustrious track record on this issue deserves this much faith. H.R. 2990 replaces this vague and undefined system with a registration system and is consistent with the free market principles of our Federal securities laws. The substitute amendment makes no change to this ambiguous and anticompetitive system.

Second, a voluntary agreement offers no real accountability. The SEC cannot enforce violations of the voluntary agreement by rating agencies that sign it, let alone those agencies that are not signatories. H.R. 2990 holds credit rating firms accountable and requires adherence to the credit rating firm's stated methodologies.

Third, there already have been numerous hearings in the Financial Services Committee in the 108th and 109th Congresses. No less than five, dozens of witnesses have been called to testify before the committee, and close to 1,000 pages of recorded and transcribed testimony. The Financial Services Committee has been diligent in holding hearings on this important issue.

Mr. Chairman, in the wake of a seminal failure by S&P and Moody's in the Enron and WorldCom scandals, we must ensure integrity in the credit ratings process. This bill would inject greater competition, transparency and accountability in the credit rating industry. As a result, prices and anticompetitive practices will be reduced, credit ratings quality will improve, and firms will innovate.

Mr. Chairman, I strongly urge a ``no'' vote on the substitute amendment.

Mr. Speaker, by direction of the Committee on Rules, I call up House Resolution 906 and ask for its immediate consideration.

Mr. Speaker, for the purpose of debate only, I yield the customary 30 minutes to the gentlewoman from California (Ms. Matsui), pending which I yield myself such time as I may consume.

Last night, the Rules Committee granted a structured rule for H.R. 2990, the Credit Agency Duopoly Relief Act of 2006. The rule provides 1 hour of general debate equally divided and controlled by the chairman and ranking minority member of the Committee on Financial Services; waives all points of order against consideration of the bill. The rule also provides that the amendment in the nature of a substitute recommended by the Committee on Financial Services now printed in the bill shall be considered as an original bill for the purpose of amendment and shall be considered as read.

The rule makes in order only those amendments printed in the Rules Committee report accompanying the resolution. It also provides that the amendments printed in the report may be offered only in the order printed in the report, may be offered only by a Member designated in the report, shall be considered as read, shall be debatable for the time specified in the report equally divided and controlled by the proponent and an opponent, shall not be subject to amendment, and shall not be subject to a demand for division of the question in the House or in the Committee of the Whole.

The rule waives all points of order against the amendments printed in the report and provides one motion to recommit, with or without instructions.

During consideration of the resolution, all time yielded is for the purpose of debate only.

Mr. Speaker, this is a fair rule, making all germane amendments that were offered in the Committee on Rules in order.

The underlying legislation is an important, commonsense approach to providing greater transparency for credit rating agencies. Who can forget the scandals following the bankruptcies of Enron and WorldCom? Even more shocking is the fact that both corporations were given investment grade ratings by credit rating agencies just before their financial collapse. This misrepresentation resulted in the loss of millions of dollars for investors.

The root of the problem lies with the current process of recognizing statistical rating organizations by the Securities and Exchange Commission. The current process stifles competition and fosters an environment that has led to two rating agencies holding 80 percent of the market share.

A level playing field is needed so smaller companies with expertise in specific areas can enter the market. H.R. 2990 clearly lays out the registration requirements for rating agencies replacing the current opaque designation process by the SEC. By injecting the current system with competition and greater transparency, the quality of ratings will be enhanced.

This act will also provide greater investor protection, including provisions requiring rating agencies to be in the business of issuing credit ratings for at least 3 years prior to filing an application for registration as a nationally recognized statistical ratings organization, ensuring better quality assessments for investors.

Mr. Speaker, the economy is booming due in part to greater participation by investors in the various markets. Greater transparency, accountability and competition among credit ratings agencies will provide investors with better information and encourage future investment. The underlying legislation is a step in the right direction towards ensuring this success.

Finally, this legislation will improve the quality of information provided to investors. It is no secret that a little competition improves quality and expands services offered. Armed with more reliable and accurate credit ratings, investors will continue to drive the economy and foster a more innovative environment.

I would like to remind all Members that the rule makes in order all germane amendments presented to the Committee on Rules.

I urge all Members to support this fair rule and the underlying legislation.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield 5 minutes to the gentleman from Pennsylvania (Mr. Fitzpatrick), the sponsor of the bill.

Mr. Speaker, I yield myself such time as I may consume.

Mr. Speaker, I would like to remind my colleagues that the vote that we

are discussing is the rule on the duopoly bill, which will increase the number of credit rating agencies so that we can have more transparency, more accountability, so that not only investors will be protected, but also those folks who work for those businesses who have 401(k)s who have their savings invested in the company that they work for.

This will provide for them better protections, better transparency, and better accountability.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield myself such time as I may consume.

Mr. Speaker, I find it rather ironic that the bill before us today is a bill that I think would help go a long way towards bringing more transparency and accountability to credit rating agencies. They agree with the principles behind the bill, which would avert and help the working people of America to make not only better investment decisions, but to know that the company that they are working for and entrusting their savings with is going to have a fair and balanced look at their books.

We have no disagreement in terms of the rule. We have two different approaches to this, and I think we would really be well served to keep the debate looking towards how we can best protect those working people under the realm of the bill that we are discussing today.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, it is my honor to yield 4 minutes to Mr. Baker of Louisiana, a champion of the Financial Services Committee.

Mr. Speaker, let me conclude my remarks by reminding my colleagues that defeating the previous question is nothing more than an exercise because the minority wants to offer an amendment that would otherwise be ruled out of order as nongermane. So the vote is without substance.

The previous question vote itself is a procedural motion to close debate on this rule and proceed to a vote on its adoption. The vote has no substantive policy implications whatsoever.

At this point in the Record, Mr. Speaker, I insert an explanation of the previous question.

The Previous Question Vote: What Does It Mean?

House Rule XIX (``Previous Question'') provides in part

that:

There shall be a motion for the previous question, which,

being ordered, shall have the effect of cutting off all

debate and bringing the House to a direct vote on the

immediate question or questions on which it has been ordered.

In the case of a special rule or order of business

resolution reported from the House Rules Committee, providing

for the consideration of a specified legislative measure, the

previous question is moved following the one hour of debate

allowed for under House Rules.

The vote on the previous question is simply a procedural

vote on whether to proceed to an immediate vote on adopting

the resolution that sets the ground rules for debate and

amendment on the legislation it would make in order.

Therefore, the previous question has no substantive

legislative or policy implications whatsoever.

Mr. Speaker, I would like to say that the underlying legislation is an important step towards improving transparency in the credit rating industry and the quality of information provided by the agencies. The industries receiving credit ratings are wide-ranging, from information technology, healthcare, manufacturing, financial services, and the list goes on.

I would also like to remind my colleagues that many, many workers in America and investors in America are heavily reliant on the full health of the companies that they work for and invest in, all up and down the economic ladder. Allowing smaller industry specific credit rating agencies to enter the market will improve the information provided to investors.

We cannot forget those workers of Enron and WorldCom who were saving for colleges, saving for retirement, and basically left penniless. With the ever-increasing importance placed on these ratings by investors, it is important that clear requirements for registration of credit rating agencies be created, and this legislation is a giant step towards that goal.

I would like to remind my colleagues that this fair rule makes in order all germane amendments that were presented to the Committee on Rules.

Mr. Speaker, I yield back the balance of my time, and I move the previous question on the resolution.

Mr. Speaker, I yield myself such time as I may consume, and I thank the gentlewoman from West Virginia for yielding me the time.

(Ms. MATSUI asked and was given permission to revise and extend her remarks.)

Mr. Speaker, the issue we are debating today may not be glamorous, but I want to emphasize for our constituents its importance. H.R. 2990 will significantly affect the guidance investors receive on the soundness of all kinds of investments.

The type of debt rating that a company or municipality receives is an essential guidepost for investors, and the degree to which that rating is accurate has far reaching consequences. So by reforming the way that firms receive the stamp of legitimacy to offer these ratings, Congress is making a significant change.

As we have seen during the past few years, financial investments can have a huge impact on our constituents. Just ask anyone who held stock in Enron or WorldCom. This is about protecting investors, whether you manage your own portfolio or you rely on a pension for your retirement.

So we need to tread carefully as we consider how we determine which firms should be deemed nationally recognized statistical ratings organizations. Established in the 1970s, only credit agencies that receive this designation have the legitimacy to assess the likelihood of a company or a municipality to default on its debt. In other words, they tell investors whether they are likely to get paid back.

Today, there are only five firms that are nationally recognized by the Securities and Exchange Commission. The purpose of H.R. 2990 is to add to that number, increasing competition in the credit ratings market. This is a worthy goal. I know the Financial Services Committee has been exploring the best way to achieve it. Unfortunately, in its pursuit of quantity, this bill will sacrifice quality. This is a risky proposal that I do not believe the House should accept.

H.R. 2990 would allow virtually any firm to be considered a nationally recognized credit rating agency. The SEC would no longer be able to ensure that such firms are producing reliable and credible ratings. Under this new voluntary regime, any ratings agency that has been around for 3 years and discloses its performance data can become nationally recognized. That is a pretty low bar.

I know the majority will argue that H.R. 2990 would allow market forces to sift the good credit rating agencies from the bad. While Democrats do not object to letting the market play a role in ensuring quality, why not let the experts at the SEC also evaluate the quality of the ratings firms? Congress needs to strike a balance between quantity and quality, but this bill falls short of that goal.

Under this bill anyone can open up shop and 3 years later be nationally recognized. That means we may be allowing firms that will offer an investment grade rating to anyone willing to pay, regardless of whether that rating is based on sound facts. As long as a rating firm continues to provide certain disclosures, it will still be nationally recognized, even if it issues credit ratings of the lowest possible quality.

Additionally, this bill could lead to a series of unintended consequences. Federal, State and local agencies, as well as many private sector entities, rely on the current definition of a nationally recognized credit rating agency. By undermining the credibility of this established benchmark, this bill could impose a significant burden on all of these groups, possibly increasing risks and imposing new costs for a wide swath of Americans.

Certainly, the House can increase competition in a more responsible way. Representative Kanjorski, the ranking member on the Capital Markets Subcommittee, with the support of Ranking Member Frank, has offered a logical substitute. It will ensure quality while moving to increase competition in the credit ratings market. I am pleased that the rule will allow a vote on this commonsense proposal.

The Kanjorski substitute would direct the SEC to expeditiously complete rulemaking on nationally recognized statistical ratings organizations. In doing so, the SEC would, for the first time, publicly define what constitutes a nationally recognized credit rating agency. It would also direct the SEC to design a process to identify new nationally recognized credit rating agencies. These steps would bring an unprecedented level of transparency and scrutiny to the selection process. The result will increase competition in the credit ratings market without the negative consequences associated with H.R. 2990.

The Kanjorski substitute will also encourage the establishment of a voluntary framework for industry self-regulation. This will further protect investors from conflicts of interest and other abusive practices.

To ensure that all of these reforms are effective, the Kanjorski amendment will require annual hearings on this topic for the next 5 years.

So Members have two options today. Both will increase competition in the

credit ratings market. However, only the Kanjorski substitute will ensure that investors continue to receive credible and reliable credit ratings from nationally recognized agencies.

I urge my colleagues to support this wise approach.

Mr. Speaker, another responsible policy that Members will have an opportunity to support today is an increase in the minimum wage. Just as the credit rating bill seeks to safeguard average Americans in the long term, so should Congress protect their immediate financial needs by increasing the minimum wage.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield 4 minutes to the gentleman from Massachusetts (Mr. McGovern), my colleague on the Rules Committee.

Mr. Speaker, I yield 4 minutes to the gentleman from Massachusetts (Mr. Frank).

Mr. Speaker, I yield 4 minutes to the gentleman from Pennsylvania (Mr. Kanjorski).

Mr. Speaker, I yield 3 minutes to the gentleman from New Jersey (Mr. Holt).

I yield 5 minutes to the gentleman from Wisconsin, my friend, Mr. Obey.

Mr. Speaker, I yield 3 minutes to the gentleman from Maryland, the Democratic whip, Mr. Hoyer.

Mr. Speaker, I have no further speakers. And since the gentlewoman has no further speakers, I will go to closing.

Mr. Speaker, I will be asking Members to vote ``no'' on the previous question so I can amend the rule and provide this House with an opportunity to vote on legislation to increase the Federal minimum wage, something that has not happened in almost 10 years.

I ask unanimous consent to insert the text of the amendment and extraneous materials immediately prior to the vote on the previous question.

Mr. Speaker, my amendment to the rule provides that immediately after the House adopts this rule, it will bring H.R. 2429 to the House floor for an up-or-down vote. This bill will gradually increase the minimum wage from the current level of $5.15 an hour to $7.25 an hour after about 2 years.

This bill has 136 cosponsors and a discharge petition to bring to the House, the bill to the floor, and has the signatures of 190 Members of the House. This bill is also identical to language as included in the Labor-HHS appropriations bill that was blocked by the leadership just last month.

Mr. Speaker, it is unconscionable that this Congress has refused to help America's low-income workers and their families by increasing the minimum wage. Somehow there is always time for another tax break for multimillionaires who don't need the money, but nothing to ease the financial struggle that low-income families face each day.

The minimum wage is now at its lowest level in 50 years. A full-time, minimum-wage earner earns just $10,700 a year, an amount that is $5,000 below the poverty line for a family of three. It takes a full day's pay just to pay for a tank of gas.

Mr. Speaker, I urge all Members to vote ``no'' on the previous question so that we can help millions and millions of American workers who would directly benefit from an increase in the minimum wage.

I yield back the balance of my time.

Mr. Speaker, on that I demand the yeas and nays.