U.S. Senate Hearing on Credit Rating Agency Regulation Examines Reform Recommendations

In an August 5, 2009 hearing on a White House Administration proposal to revisit the regulation of credit rating agencies, the U.S. Senate Committee on Banking, Housing and Urban Affairs examined the role of third party credit ratings and rating agencies in the financial system. 

During 2007, the number of nationally recognized statistical rating organizations doubled, just as the performance of many “highly-rated” subprime securities faltered.

Reform options being considered by the Committee include regulating “ratings-shopping,” eliminating conflicts of interest, improving disclosure and transparency, and determining whether new legislation is required.

Senator Richard Shelby opened the meeting by explaining the history of credit rating agencies, which began when the United States government granted special regulatory status to a small number of rating agencies and effected measures to protect those firms from potential competitors.

Beginning in 1975, the Securities and Exchange Commission began embedding “nationally recognized statistical rating organization” (“NRSRO”) ratings into certain key regulatory actions.  Once credit ratings acquired regulatory status, they proliferated into state regulations, as well as private investment guidelines.

Over the years, Congressman Shelby explained, the Securities and Exchange Commission controlled access to the NRSRO designation by subjecting potential entrants to a “vague set of criteria and an incredibly slow time line.”  Once an NRSRO designation was awarded, the SEC did little to oversee it. 

Testimony, which may be viewed by clicking on the corresponding hyperlinks below, was given by the following persons:

 

Minority Statements

• Richard C. Shelby [view statement]

Witnesses

Panel 1

• Mr. Michael S. Barr [view testimony]
  Assistant Secretary-Designate for Financial Institutions
  U.S. Department of the Treasury

Panel 2

• Professor John C. Coffee, Jr. [view testimony]
  Adolf A. Berle Professor of Law
  Columbia University Law School
• Dr. Lawrence J. White [view testimony]
  Leonard E. Imperatore Professor of Economics
  New York University
• Mr. Stephen W. Joynt [view testimony]
  President and Chief Executive Officer
  Fitch Ratings
• Mr. James Gellert [view testimony]
  President and CEO
  Rapid Ratings
• Mr. Mark Froeba [view testimony]
  Principal
  PF2 Securities Evaluations, Inc.

 

Should you have any questions or comments, please contact Colodny Fass.

 

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