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Treasury Sends Credit-Rating Agency Bill to Hill

July 21, 2009

The Treasury Department has proposed a new bill to more strongly regulate credit-rating agencies and hopefully reduce conflicts of interest.

The legislation is said to be tougher than expected, although others complain it doesn’t go far enough. The same could probably be said about almost any major piece of legislation. The proposed bill that the Treasury sent to Congress today would bar credit-rating agencies such as Standard & Poor’s, Moody’s and Fitch from consulting with any company they also rate, and require the disclosure of conflicts arising from the way a ratings agency is paid, its business relationships, or other conflicts.

Each rating report would have to disclose the fees paid by the issuer for a particular rating, as well as the total amount of fees paid by the issuer in the past two years. Issuers would also have to disclose all of the preliminary ratings they had received from different credit-rating agencies to discourage them from shopping around among the various agencies to get the best rating. The SEC would also establish a dedicated office to supervise rating agencies.

However, the bill does not make it much easier for investors to file lawsuits against the agencies for providing misleading ratings. Investors have to overcome some high bars to file such suits, although a number of class-action lawsuits are underway. One argument being used by the agencies is that they should enjoy First Amendment protections, claiming that their ratings are a form of free speech. There may be something to that argument, and the ratings agencies have reportedly hired First Amendment expert Floyd Abrams to make the case for them in court.

The administration is looking for ways to keep another financial crisis from erupting on its watch, and perhaps one way to do that is to try to make the rating agencies do a better job of looking under the hood at the securities they grade.

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