Martinco (LSE:MCO)
Historical Stock Chart

From May 2019 to May 2024

A bill that would impose more regulations on credit-ratings agencies and make it easier for investors to win lawsuits over shoddy ratings cleared a key U.S. House panel on Wednesday in a 49-14 vote.

The credit-ratings bill is the latest to be approved by the House Financial Services Committee as it works toward implementing a major regulatory revamp of the country's financial system. Another vote to bolster the U.S. Securities and Exchange Commission's investor protection powers is expected later on Wednesday.

The credit-ratings bill, drafted by Rep. Paul Kanjorski (D., Pa.) aims to address concerns about the role that credit-raters played in the financial crisis after they gave overly generous ratings to toxic securitized products. Critics say the big three raters--Standard & Poor's, Moody's and Fitch Ratings--are plagued by an inherent conflict of interest because debt issuers pay them to rate their products.

The bill approved Wednesday tries to address those conflicts without changing the companies' business model.

It would for the first time establish an office within the SEC to oversee ratings firms and ensure their ratings are accurate and not ridden with conflicts. Under the bill, the SEC would be able to review raters' internal policies and methodologies to make sure they are performing their due diligence.

The most controversial provision in the bill would make it easier for investors to win civil lawsuits against raters that "knowingly or recklessly" issue poor-quality ratings. The ratings agencies strongly oppose the provision.

The SEC already has approved some rules clamping down on conflicts at ratings agencies, and recently proposed numerous other rules aimed at beefing up disclosure.

This bill would also try to address conflicts by requiring the agency to impose new rules and require raters to disclose their compensation arrangements. The SEC would also be able to sanction firms that violate securities laws. In addition, credit ratings organizations would be required to appoint compliance officers, who would be responsible for managing conflicts of interest and assessing and reviewing internal controls.

The measure would prohibit linking a compliance officer's compensation to the business performance of a credit-ratings agency to ensure independence.

 
   -By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com