In testimony today before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, Rita M. Bolger, Standard & Poor’s managing director and associate general counsel said, that legislation to regulate credit rating agencies overlooks the impact of potential legislation on markets, threatens the quality and diversity of rating opinions, and is unconstitutional. Bolger said that recent initiatives should be considered before Congress contemplates legislation.
“Standard & Poor’s has been, and remains, committed to constructive change that would eliminate unnecessary barriers to competition and provide an effective oversight framework. However, we have serious concerns about H.R. 2990 and the disruptive effect it could have on the efficient operation of the capital markets,” she said.
Participants at the hearing were asked to provide their views on H.R. 2990, introduced by Congressman Michael Fitzpatrick (R-Pa) last week and on technical advice released last week by Congressman Paul E. Kanjorski (D-Pa.), ranking minority member of the Subcommittee on a potential SEC Legislative Framework.
Bolger said, “When the SEC asked market participants in connection with its 2003 Concept Release whether it should retain the NRSRO concept, the vast majority unequivocally said ‘yes.’ These commenters represented that eliminating the NRSRO concept would be disruptive to the capital markets, and would be costly and complicated to replace.” Bolger noted that S&P agrees with this view “as does the Bond Market Association, an organization that, according to their submission in connection with this hearing, ‘speaks for the bond industry worldwide.’ As the BMA observes, ‘[t]he NRSRO designation serves a unique purpose in SEC regulations for which a substitute is either not available or not practical.'”
Bolger said S&P believes that “intrusive regulatory oversight of the sort contemplated by the bill will result in ratings of lesser, not higher, quality. Because credit ratings are opinions as to which reasonable analysts can and do disagree, there is no one ‘correct’ way to go about forming them. Comprehensive regulation could produce standardized approaches and ratings opinions that do not reflect the uncompromised view of the rating committee. In addition, intrusive regulation is likely to erect new barriers to entry that will inhibit, rather than promote, increased competition as it will force new entrants to bear significant regulatory-related costs they currently do not bear.”
“Importantly, we also believe that H.R. 2990, as written, is unconstitutional on its face. Rating agencies have consistently been afforded a high level of First Amendment protection by numerous state and federal courts. This is so because, at their core, rating agencies such as S&P perform the journalistic activities of gathering information on matters of public concern, analyzing that information, forming opinions about it and broadly disseminating those opinions to the general public.” She noted “We believe that the bill would specifically violate the First Amendment by making it illegal for a credit rating agency
to publish its opinions without first registering with the government, providing mandatory disclosures about its business activities, and obtaining approval of that registration.”
Bolger concluded her remarks by highlighting initiatives already underway, including the SEC’s proposed rule, an international Code of Conduct for rating agencies and an SEC oversight framework that would protect the essential independence of NRSROs and at the same time include a compliance mechanism.
“Once these initiatives have been given a chance, then Congress would be in a better position to assess the necessity of legislation. It is our belief that, after these initiatives have been tested, you will conclude that legislation is not the best approach for the market.”