House Passes Credit-Rating Industry Bill
Thursday, July 13, 2006
The House approved legislation yesterday intended to encourage more companies to enter the industry that rates the creditworthiness of corporations and their debt, an arena now dominated by two firms.
The bill, passed by a vote of 255 to 166, would also require credit-rating companies to give investors more information about how credit risk is calculated. And it would give the Securities and Exchange Commission oversight of the industry for the first time. Thirty-one Democrats voted for the measure. No Republicans voted against it.
Retooling the credit-rating industry, dominated by Standard & Poor's and Moody's Corp., would address one of the last major issues many business and consumer groups raised in response to a string of corporate scandals in recent years, beginning with the meltdown of energy trader Enron Corp. in the fall of 2001, which cost thousands of employees their jobs and investors and retirees billions of dollars in losses.
Many business and consumer groups accuse the major credit agencies of failing to detect the debt problems that contributed to the downfall of Enron and other once-high-flying companies. The credit-rating companies, which have lobbied against the bill, say they were duped by executives at those firms.
But critics of the credit-rating agencies say the firms too often accept management's word about a company's financial status without delving deeper. Credit-rating agencies have potential conflicts of interest because they are paid by the companies whose creditworthiness and debt they assess, and they often sell other consulting services to those firms that aren't clearly disclosed to the public.
Bringing more competition, transparency and federal regulation to the industry would change that, according to the bill's supporters, which include the Association for Financial Professionals, the trade group for finance executives, and the Investment Company Institute, the trade group for mutual fund managers.
Another measure is in the works in the Senate Banking Committee, which plans to hold hearings on the subject and craft and pass similar legislation before Congress recesses in August, said Andrew Gray, spokesman for the committee chairman, Richard C. Shelby (R-Ala.). The bill would have to pass the full Senate and then be reconciled with the House version before Congress could take a final vote.
The push to restructure the credit-rating industry comes as many business groups are seeking to undo key portions of the Sarbanes-Oxley Act of 2002, the signature piece of legislation Congress has passed in response to corporate scandals. Backers of the credit-rating bill say they have much to accomplish in a short time but that bipartisan support for the measure in the House and Senate makes it doable.
"It wasn't that long ago that the headlines were screaming about individual investors who had lost everything, retirees who had lost everything, and speeches were being made on the floor of Congress," said Rep. Michael G. Fitzpatrick (R-Pa.), the bill's sponsor. "This legislation is overdue."
The SEC has wrestled with the credit-rating issue for 25 years without resolution, prompting repeated accusations of foot-dragging from members of Congress. The SEC proposed changes more than a decade ago, when similar complaints were being made about shortcomings at credit-rating firms, but never issued final rules.
The SEC requires companies that file financial statements with the agency to have their credit-risk assessed by an independent third party. In theory, that should mean any credit-rating firm could perform the task. In practice, credit-rating providers that carry an SEC designation of being "nationally recognized" get most of the business.
Only five of the 130 credit-rating agencies carry that designation, and among those, Moody's and S&P have an overwhelming market share, rating 99 percent of the debt registered with the SEC, Fitzpatrick said.
Under the proposed legislation, the SEC designation would go to any firm that has been in business for three years, registers with the SEC, and publicly discloses its method of weighing credit risk and any potential conflicts of interest. The SEC would have to oversee registrants to ensure each company keeps proper records and makes full and adequate disclosures.