Frank Postpones Vote on Rating Agencies Bill

WASHINGTON - At the request of Republican members, House Financial Services Committee chairman Barney Frank, D-Mass., has postponed until next month a vote on a bill he is sponsoring that would require credit rating agencies to rate municipal, corporate, and other securities in the same manner and based on the likelihood of repayment alone.

The committee had been scheduled to vote on the bill yesterday but the "Republicans asked for more time and the chairman said yes," one knowledgeable source said yesterday.

A source close to Republican lawmakers said that the bill's proposals are not simple and should be considered only after careful review. The Republicans want a hearing to be held on the bill before it is marked up, the source said.

But another knowledgeable source who is familiar with Frank's thinking on the matter predicted that the committee would consider the legislation after the recess without a hearing.

Frank said Friday that the legislation is necessary to rectify the use of separate scales for municipal bonds that have caused high-quality munis to be rated lower than corporate debt that has a similar or higher risk of default. He stressed that defaults on general obligation debt issued by states and localities are practically nonexistent.

In a nod to market participants who support a single scale but want to maintain some degree of gradations among different municipal credits, Frank's ratings bill would prohibit the Securities and Exchange Commission from barring rating agencies from providing additional "complementary" ratings to measure a security's volatility.

A companion bill, which would require action by the House Ways and Means Committee, seeks to loosen restrictions on tax-exempt bond ownership stemming from the 1986 Tax Reform Act. The bill would, among other things, increase to $30 million from $10 million the tax code's definition of a small issuer for the purposes of bank deductibility limits for tax-exempt securities. No date has been set yet for a vote on this bill.

Frank's legislation comes as the SEC is scheduled today to unveil the last of three sets of proposed rules that are widely expected to reduce the role of credit ratings, by among other things, eliminating the rating requirements from Rule 2a-7 on money market funds. The rule generally limits those funds to short-term securities that have ratings of double-A or higher.

The third set of rules are designed to avoid creating a so-called moral hazard by seeming to bestow in SEC rules the government's endorsement of the ratings of private credit rating agencies registered as nationally recognized statistical rating organizations.

Erik Sirri, the director of the SEC's division of markets and trading, said yesterday that the commission will propose that investment funds rely on criteria such as a security's liquidity and volatility instead of its rating.

The SEC will propose that references to credit ratings in its rules be replaced "by something that refers to, say, the characteristic for which the credit rating was proxying: liquidity, volatility, probability of loss," Sirri said while speaking on a panel hosted by the American Enterprise Institute.

Stressing that the commission staff believes investors should conduct more of their own analysis to support their investment decisions, Sirri said: "We don't want to see anyone buying [securities] ... completely delegating and abdicating the responsibility for that investment decision" to the rating agencies.

The proposals on ratings and rating agencies come in response to record losses reported by Wall Street firms with investments in tainted subprime mortgage bonds, which were rated triple-A despite their poor credit quality. On June 11, the commission approved two sets of proposed rules that are designed to limit rating agencies' conflicts of interest, increase their disclosure, and encourage them to provide symbols for structured finance products so that investors can better differentiate between structured, corporate or municipal securities.

They were the first sets of rules the SEC has considered since last year's implementation of the Credit Rating Agency Reform Act, which gave the SEC the authority to register and regulate certain rating agencies as nationally recognized statistical rating organizations.

Meanwhile, Deven Sharma, president of Standard & Poor's, yesterday called for a globally coordinated approach to the oversight of credit rating agencies in order to ensure consistency for investors and issuers operating in international markets.

"We must focus on preserving a consistent approach across borders," he said at a Standard & Poor's conference in London. "A coordinated response from policy makers and a common approach to overseeing ratings firms - along the lines [already proposed by European regulators] - would be in the best interests of international users of ratings."

But Joshua Rosner, a managing director at Graham Fisher & Co. who also spoke on the AEI panel, said it would essentially be impossible to generate a globally coordinated response that would accomplish what the SEC is doing by eliminating explicit references to the rating agencies.

"It will be almost impossible in any short or coordinated manner to get global banking regulators, safety and soundness regulators, the Treasury for pension investors, and 50 state [members of the] National Association of Insurance Commissioners, to all agree to do away with precisely those regulations that require those investors to rely on rating agencies," he said.

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