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,…
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.
