Kanjorski Draft On Credit Rating Agency Legislation Released
Rep. Kanjorski's proposed bill on Credit Agency Reform attached. Currently perusing but some notable highlights:
‘‘(A) REVIEW BY THE NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION.—
Each nationally recognized statistical rating organization shall establish policies and procedures to ensure that, in any case in which an employee of an obligor or an issuer or under writer of a security or money market instrument was employed by a nationally recognized statistical rating organization and participated in any capacity in determining credit ratings for the obligor or the securities or money market instruments of the issuer during the 1-year period preceding the date of the issuance of the
credit rating, the nationally recognized statistical rating organization shall—‘‘(i) conduct a review to determine whether any conflicts of interest of the employee influenced the credit rating; and ‘‘(ii) take action to revise the rating if appropriate, in accordance with such rules as the Commission shall prescribe.
‘‘(E) a requirement that each nationally recognized statistical rating organization disclose on such organization’s website a consolidated report at the end of each fiscal year that shows—‘‘(i) the percent of net revenue earned by the nationally recognized statistical rating organization or an affiliate of a nationally recognized statistical rating organization, or any person associated with a na8
tionally recognized statistical rating organization, to the extent determined appropriate by the Commission, for that fiscal year for providing services and products other than credit rating services to each person who paid for a credit rating; and ‘‘(ii) the relative standing of each such person in terms of the amount of net revenue earned by the nationally recognized statistical rating organization attributable to each such person and classified by the highest 5, 10, 25, and 50 percentiles and lowest 50 and 25 percentiles.
‘‘(F) rules providing for the establishment of a system of payment for each nationally recognized statistical rating organization that requires that payments are structured to ensure that the nationally recognized statistical rating organization conducts accurate and reliable surveillance of ratings over time, as applicable, and that incentives for reliable ratings are in place;
Too bad Rep. Kanjorski's initiative is too little too late. The credibility of the raters is now forever destroyed. Had this initiative taken place 5 years ago, it may have had some marginal benefits. As it stands, currently, it is just mere window dressing, as more and more clients of the S&Ps and Moody's of the world migrate to truly independent third party research sources. Alas, the same issues that the legislature is tacking in their much delayed response to the rating agencies, will eventually trickle down to other subsegments of the broader market. However, as in this case, the response will be materially after the fact: restoring investor confidence is not a retroactive affair. Neither is it an affair that deals with a market that goes higher with no interruptions until it stops and everyone flees. But this is a lesson that Washington has never been able to learn before. Why naively assume that anything has changed this time.