This week more progress has been achieved in the US with regards to the regulatory crackdown on credit ratings agencies: the House Financial Services Committee has thrown its support behind the bill to increase oversight of this corner of the market. The bill, which was first proposed by Paul Kanjorski, chairman of the House subcommittee on capital markets, goes one step further than the Obama administration’s proposed reforms for the sector by making these agencies collectively liable for inaccuracies in their ratings.
The aim of the new regulation is to try to reduce the conflicts of interests at ratings firms and make it easier to sue them when they provide investors with inaccurate findings. It would require these agencies to be liable under securities law for inaccuracies in their ratings, which would mean that they would be regulated as “experts” under securities law, in the same way as auditors, who can currently be more easily sued over their findings.
The bill would also require these firms to provide more information to the market about how they have been paid for their ratings services and would grant the Securities and Exchange Commission (SEC) more power to oversee their practices. Moreover, the ratings firms would need to appoint more independent members to their boards of directors in order to reduce the chances of conflicts of interests occurring.
The support of the House committee brings the proposals one step further to enactment, but they still have a long way to go as the Senate is moving on a far slower schedule than the House.
Unsurprisingly, the ratings agencies are not keen to face a potential barrage of lawsuits and have been vigorously lobbying for these proposals to be dropped. They have employed the tactic of suggesting that this development would push up costs for end investors for their services in the long run.