Kanjorski Releases Rating Agency Reform Plan
SEC Staff Framework Establishes a Comprehensive Oversight Regime

WASHINGTON -- Congressman Paul E. Kanjorski (PA-11), the most senior Democrat on the House Financial Services Capital Markets Subcommittee, today released an outline of key issues for a statutory framework developed by the experts at the Securities and Exchange Commission for creating a comprehensive regime for overseeing credit rating agencies.

"Although rating agencies received some scrutiny after the recent surge of corporate scandals, we have not yet mandated any substantive changes in their practices," said Congressman Kanjorski. "This reform proposal, developed at my request, offers us a real roadmap for potentially modifying the oversight of credit rating agencies and better protecting American investors."

Credit rating agencies -- entities like Moody's, Standard and Poor's, and Fitch -- have long published their views on the creditworthiness of the issuers of debt securities. The significance of these opinions has greatly expanded in recent years as a result of increases in the number of issues and issuers, the globalization of our financial markets, and the introduction of complex financial products. Despite their importance in serving as gatekeepers to the nation's capital markets, these agencies have been subject to very limited regulatory oversight, as highlighted late last year in an investigative series by The Washington Post.

The Capital Markets Subcommittee, which has the primary jurisdiction in the House for overseeing rating agencies and America's securities markets, has convened three hearings in the last two years to explore the need to reform rating agency oversight. Participants at these hearings have frequently emphasized the need for improved oversight of the industry.

The three existing nationally recognized agencies at the time of Enron's failure rated the company at investment grade until four days before its bankruptcy filing. A Senate investigative report additionally determined that the monitoring and review of Enron's finances "fell far below the careful efforts one would have expected from organizations whose ratings hold so much importance."

Congressman Kanjorski commented, "The failure of the agencies to report the true financial condition of Enron and update its credit ratings in a timely manner in the case of Enron and in other instances -- such as WorldCom's bankruptcy, New York City's debt crisis, Washington Public Power Supply System's default, First Executive Life's insolvency, and Orange County's collapse -- have resulted in great financial losses for many Americans who could not understand the true credit risks of their investments. We now need to work together in Washington to take appropriate steps to protect investors."

To incrementally improve rating agency oversight, the Securities and Exchange Commission recently put forward for public comment a proposed rule to define what constitutes a Nationally Recognized Statistical Rating Organization and the process for making such a designation. Top officials at the Securities and Exchange Commission and senior experts in the field, however, have regularly suggested that additional legislative authority may be needed in the area of rating agencies to establish a comprehensive regulatory regime.

"While the Commission's rule proposal on rating agencies was a good first step in addressing these matters, more still needs to be done," said Congressman Kanjorski. "That is why I called upon the experts at the Commission to provide details on the specific authorities needed to effectively oversee rating agencies."

Staff at the Securities and Exchange Commission developed the legislative framework after Congressman Kanjorski requested the technical assistance in April. The framework outlines an effective supervisory system to ensure that credit rating agencies operate in a transparent manner with adequate policies and procedures. A copy of the framework is attached.

"Just as the Commission's staff outlines possible statutory improvements to promote the transparency of rating agencies, the Congress should be transparent in its deliberations on the need for this legislation. It is therefore my hope that all interested parties will review these well-developed ideas and offer up to us their views on these matters by the end of August," said Congressman Kanjorski.

"The Congress will ultimately decide whether to consider a bill related to these issues and the contents of such legislation, but there is growing bipartisan interest in moving such a bill, as Capital Markets Subcommittee Chairman Richard Baker (LA-6) has already expressed deep and continued interest in addressing these matters," observed Congressman Kanjorski. "Obtaining the insights of others outside of the Commission and the Congress will therefore help us in crafting an appropriately balanced piece of legislation, particularly as it relates to the First Amendment protections raised by this issue."

Beyond requesting comments on the legislative framework for rating agency oversight, Congressman Kanjorski expressed hope that the Commission and the rating agencies will expedite their deliberations over a voluntary agreement to improve transparency in the coming months. The success of these negotiations and the effectiveness in enforcing any final voluntary accord will help to determine the need for a compulsory bill and the speed of legislative action.

Congressman Kanjorski concluded, "During our past hearings on these matters, it has become increasingly clear to me that our capital markets and the ratings industry have evolved considerably in recent years. The Commission's rules in this area, however, have changed little, even though it has studied these issues for more than a decade. This issue is therefore one on which we should focus in the 109^th Congress."

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Editor's Note: The four-page response of the Securities and Exchange Commission to Congressman's Kanjorski's request for technical assistance is attached.