The chairman of a House Financial Services Committee panel yesterday suggested Congress ought to consider legislation making it easier for investors to sue credit rating agencies for "grossly inaccurate" ratings, as lawmakers sharply criticized the agencies for their failure to accurately rate structured finance products and other securities.
At a hearing on "approaches to improving credit rating agency regulation," Rep. Paul Kanjorski, D-Pa., the chairman of the House Financial Services capital markets subcommittee, said Congress should address the First Amendment defense that the rating agencies rely upon in asserting their ratings opinions are a form of protected speech.
"The view that the agencies are mere publishers issuing opinions bears little resemblance to reality, and the threat of civil liability would force the industry to issue more accurate ratings," Kanjorski said, opening the hearing.
His remarks came as Sen. Jack Reed, D-R.I., chairman of the Senate Banking Committee's securities subcommittee, introduced legislation yesterday that he said would make it easier to sue rating agencies if they fail to review certain key information in developing ratings.
In a statement, Reed said rating agencies could avoid litigation by conducting thorough reviews or by obtaining assessments from independent firms. "Credit rating firms like any other industry should be held accountable if they knowingly or recklessly mislead investors," he said.
Reed's bill, called the Rating Accountability and Transparency Enhancement (RATE) Act of 2009, also would establish an office within the Securities and Exchange Commission (SEC) to coordinate regulatory activities for nationally recognized statistical rating organizations. In addition, it would require the SEC to ensure that NRSRO methodologies follow internal NRSRO guidelines and requirements for accuracy, while avoiding conflicts of interest.
Stephen Joynt, president and chief executive of Fitch Ratings, who testified at yesterday's hearing, criticized a draft of Reed's bill, arguing that in hindsight it will always look like a rating agency could have reasonably foreseen future problems with different assumptions and stress testing.
"Congress should consider the consequences of such a law," he said. "If a bill such as the one being discussed is passed, all rating agencies will be motivated to rate a security as low as possible. There will be no other effective way to adequately mitigate liability."
In the House, a separate bill introduced by Reps. Gary Ackerman, D-N.Y., and Michael Castle, R-Del., two members of the House Financial Services Committee, would require the SEC to write specific rules for rating complex securities, according to the Associated Press. A copy of the legislation was not available by press time.
In December, the SEC adopted new rules to restrict conflicts of interest and provide more transparency to the rating industry, but chairman Mary Schapiro has said that the commission must do more.
At a six-hour April roundtable, SEC commissioners heard from a variety of market participants but did not appear to reach any obvious agreement on how to move forward with additional NRSRO rules.