Garrett Statement on Credit Rating Agencies for Financial Services Hearing
Washington,
Sep 30, 2009 -
Rep. Scott Garrett (R-NJ) released the following opening statement for today’s House Financial Services Subcommittee on Capital Markets hearing entitled “Reforming Credit Rating Agencies”:
“Thank you, Chairman Kanjorski, for holding this important hearing today and for all of the hard work you and your staff have put into the Discussion Draft.
“I was disappointed, as I’m sure the Chairman was, that we could not find bipartisan consensus on the proposal prior to its release. I pledge to continue to work with the Chairman moving forward in hopes that we can eventually reach a place where we both are able to support the eventual legislation.
“One of the provisions where I know the Chairman has some concern is the removal of the National Recognized Statistical Rating Organization (NRSRO) designation from statute. I approach the debate on credit rating agency reform with the belief that the two most fundamental problems with our ratings system are over-reliance on ratings and lack of investor due diligence.
“Investors have become increasingly, and too often, solely reliant on the use of these ratings in determining the safety and soundness of any investment. In literally hundreds of federal and state government statutes and regulations, there are specific requirements mandating certain grades from the approved agencies.
“It is this formal requirement that provides an implicit stamp of approval to investors. When investors see that the government is requiring a specific grade to make a “safe investment,” it reinforces the belief that any investment attaining such a grade is “safe.”
“I know the SEC has a similar concern. Two weeks ago, the SEC announced it is removing references to NRSROs in several of its regulations and studying other areas to determine where else the reference can be removed. I applaud the SEC for their action and urge them to continue their efforts.
“Congress should follow suit and re-examine all of the areas where statute mandates the ratings of a NRSRO. Credit ratings are only one piece of the puzzle in determining creditworthiness. Investors must be encouraged to do their proper due diligence in evaluating issuer credit quality.
“Another way in which I believe we can help increase investor due diligence that the bill touches on, but does not go far enough, is through increased disclosure of information by the issuer. When dealing with equity securities, investors have all of the public information about the company because of the annual and quarterly filing requirements.
“I believe we should require similar types of reports for debt securities. The issuer of the debt security should disclose the information contained in the offering more broadly so that investors have the ability themselves to delve in deeper to the submitted information.
“While there are many other things included in the proposal that I support, like increased disclosure and better oversight, there are several provisions that give me significant concern. The provisions I am most troubled by center around the question of liability. Unlike many of my friends across the aisle, I do not believe the solution to all of society’s ills is simply more lawsuits. And in this case, I do not believe that is the answer either.
“In the discussion draft, there is a provision to institute Collective Liability among the NRSROs. I am very concerned about the practicality of this provision, not to mention the constitutionality as well. I don’t see what positive can be attained by holding all of the NRSROs accountable for the bad actions of one.
“The main thrust of the 2006 reform act was to increase competition between credit rating agencies. Now, I know that the Chairman voted for final passage of the 06 act, not withstanding his previously stated belief that there might be a “natural” oligopoly within the credit rating business. If we institute a sharing of financial legal liability between all current NRSROs, I cannot think of any bigger impediment to new entries into the marketplace.
“The second area of concern regarding legal liability is the language in Section 4 to lower the pleading standards for lawsuits against the rating agencies. By making the rating agencies subject to suits whenever they act “unreasonably,” you are essentially lowering the bar from fraud to negligence. The practical effect of lowering the pleading standard will be a dramatic increase in cases being filed and eventually going to court.
“I do not believe that having more lawsuits brought against rating agencies is a constructive way to improve the ratings process. Chairman Frank so often noted during the Bush Administration, that he did not realize he was here to defend President Bush’s policies whenever he was in agreement with them. Likewise, I did not realize it would fall upon me to defend President Obama’s efforts in this context. The administration submitted an extensive credit rating agency reform proposal and increasing legal liability was not included anywhere in it.
“Also, a recent ruling by a federal court judge, debunks the myth that it is impossible to get the rating agencies into a courtroom. We should see how this case plays out before possibly overacting.
“I have other concerns as well, besides the increased liability. While I support the SEC providing better oversight of the NRSROs, I am worried that too much SEC involvement with the ratings further implies a government sign-off on the ratings themselves. At what point during the SEC examination process to review whether the rating agencies are following their methodologies, does the SEC start prescribing specific methodologies for the NRSROs to follow? In my opinion, this would only further the belief that the government is doing the rating.
“Also, the requirement for differentiation of ratings for structured products is a concern. All structured products are not the same and giving them to same connotation could imply that they are. The SEC has already once considered this idea and dismissed it after an overwhelming number of investors voiced their concerns.
“I think we all agree that significant reforms for the credit rating agencies are much needed and I applaud the Chairman for his hard work and look forward to working closely with him and the other members as we move forward on this important issue.”
