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Republicans Immunize Rating Agencies from Accountability in Financial Choice Act

No government regulation will ever apply to any rating agency that the government regulates, according to the Financial Choice Act. This bill would eliminate accountability for nationally recognized statistical rating organizations (NRSROs), i.e., credit rating agencies that SEC ostensibly oversees.

The majority staff of the House Financial Services Committee released a memo on the bill on 21 April. See pp. 24-25 of the memo or further below in this article for the sections that rollback NRSRO oversight.

The House Financial Services Committee held hearings on the Financial Choice Act — “A Legislative Proposal to Create Hope and Opportunity for Investors, Consumers, and Entrepreneurs” — on 26 April.

Do Republicans believe that there never was a financial crisis?

OK. There might have been a financial crisis.

BUT, there never was a rating agency that played a part in a financial crisis.

OK, OK. There might have been a financial crisis in which a rating agency played a part. Like, maybe relating to corn in the 18th Century or something.

BUT, there never was a government regulation that stopped a rating agency from playing a part in a financial crisis.

SO, to repeat, no government regulation will ever apply to any rating agency that the government regulates, according to the Financial Choice Act.

Four blatant give-aways to rating agencies

1.     Rating numbers don’t have to tally — No one at an NRSRO needs attest to the integrity of any aspect of the rating process (Section 853).

2.    What conflict of interest? — Sales and marketing staff can always communicate with rating staff (Section 856).

3.     Re-write history — Congress never found that the rating agencies failed big time ahead of the financial crisis. (Section 857).

4.   Elections have consequences but bad ratings don’t — Immunize NRSROs from expert liability forever. (Section 857, again).

The give-away rating sections in full

“Section 852. Transparency of credit rating methodologies. – Prohibits the SEC from requiring NRSROs to include in their disclosures of rating methodologies references to statutory or regulatory requirements; prohibits the SEC from mandating the specific format of an NRSRO’s disclosure of its rating methodology.”

“Section 853. Repeal of certain attestation requirements relating to credit ratings. – Repeals the requirement that the chief executive officer of an NRSRO attest to its internal controls over processes for determining credit ratings; repeals the requirement that an NRSRO include in its disclosures an attestation that the rating was not influenced by business activities, that the rating was based solely on the merits of the instruments being rated, and that the rating was an independent evaluation of the risks and merits of the instrument.”

“Section 855. Approval of credit rating procedures and methodologies. – Provides that an NRSRO’s Chief Credit Officer may approve an NRSRO’s procedures and methodologies.”

“Section 856. Exception for providing certain material information relating to a credit rating. – Provides that a person who markets or sells an NRSRO’s products and services may provide information to a person who determines or monitors a credit rating or who develops and approves methodologies for determining a rating as long as the information provided is not intended to influence the determination of a credit rating or the methodologies used to determine credit ratings.”

“Section 857. Repeals. – Repeals certain provisions of title IX of the Dodd-Frank Act.

“In Subtitle C (Improvements to the Regulation of Credit Rating Agencies), repeals the section on Congress’s findings on credit ratings and NRSROs, the pleading requirements for state of mind in private actions against NRSROs, timing of regulations, the elimination of the exemption of NRSROs from the fair disclosure rule, and repeals the sections mandating studies on credit rating agency independence, alternative business models, and the creation of an independent professional analyst organization; repeals the section mandating a study and rulemaking on assigned credit ratings; repeals the section rescinding the exemption from expert liability afforded to credit rating agencies under SEC Rule 426(g); repeals the section setting forth the sense of Congress regarding the SEC’s rulemaking authority over NRSROs.”

SFIG has the GOP ear. What about its brain?

The Structured Finance Industry Group (SFIG) supports all of the above, according to an SFIG email blast of 27 April.

“SFIG remains engaged with both chambers on Capitol Hill in these reform efforts, and will continue to discuss our regulatory priorities with those key committees of jurisdiction. These activities come as we work with the various regulatory agencies in the new Administration to identify laws and regulations in need of reform.”

This is only fair, given that SFIG includes rating agencies in its membership along with investors and issuers.

Admittedly, this is a little bit like the American Cancer Society including cigarette manufacturers among its respective membership.

Also from the SFIG email blast of 27 April.

“Please join us at the New York City office of Moody’s Investors Service on May 4th for a review of President Trump’s First 100 Days in Office.The symposium will be split into two sessions:

“First 100 Days Review and Outlook: SFIG’s Director of Advocacy, Tom McCrocklin, will chat with industry leaders including Libby Cantrill (PIMCO), Kathyanne Cohen (Moody’s), and Josh Wilsusen (Morgan Stanley) on the current state of play for securitization legislative change and what we might expect over the coming months.

“SFIG on the Spot: Watch SFIG leadership on the hot seat as they explain in “panel form” the advocacy approach that SFIG has been taking in the first 100 days and give insights into their meetings with regulators and legislators. Howard Kaplan (SFIG Vice-Chair) will moderate Sairah Burki (Senior Director of ABS Policy), and Dan Goodwin (Director of Mortgage Policy) in discussion around SFIG’s policy initiatives and positions.”

Actually, it’s more like the cigarette manufacturers hosting meetings of the American Cancer Society.

Bill Harrington has been assessing derivative contracts in the structured finance sector for 17 years, most recently at Debtwire ABS and previously at Moody’s Investors Service. He has filed evaluations of the capitalization and ratings of derivative contracts and asset-backed securities with US and European regulators and with credit rating agencies. Bill also worked as a structurer of fixed-income and FX derivative contracts at Merrill Lynch and a currency analyst at Wharton Econometrics. Bill has an MBA from The Wharton School and a BA in Economics from the University of Pennsylvania.