Read the pdf here.
May 3rd, 2011
Dear Representative,
On behalf of Americans for Financial Reform, we are writing to urge you to oppose H.R. 1539, a bill that would hamstring the Dodd Frank Wall Street Reform and Consumer Protection Act’s effort to hold Nationally Recognized Statistical Rating Organizations (NRSROs) to a higher standard of conduct.
Americans for Financial Reform is an unprecedented coalition of over 250 national, state and local groups who have come together to reform the financial industry. Members of our coalition include consumer, civil rights, investor, retiree, community, labor, religious and business groups as well as prominent economists.
HR 1539, which seeks to roll back Dodd Frank’s new standards for the rating industry, could not be more badly timed. Just two weeks ago ratings agencies were blasted in Senator Carl Levin and Tom Coburn’s April 13, 2011 report investigating the causes of the financial crisis. This report highlighted the fact that rating agencies knowingly continued to bestow AAA ratings on high-risk mortgage-backed securities long after evidence emerged that the housing market was undergoing a drastic decline. In the end, over 90% of the AAA ratings given to mortgage-backed securities in 2006 and 2007 were downgraded to junk status. The Levin-Coburn report confirmed the earlier conclusions of the Financial Crisis Inquiry Commission, which called the rating agencies “essential cogs in the wheel of financial destruction”.
A significant contributor to the dishonest practices of the NRSROs during the housing bubble was the fact that investors had little recourse under the law even if one of the NRSROs issued a materially misleading rating opinion in connection with an offering of asset-backed securities. Under the Securities Act of 1933, experts like accountants or appraisers who give consent for their opinion to be used in an offering are subject to liability if they make a materially false statement. However, ratings agencies that gave consent for their opinions to be used in connection with offerings of asset backed securities were granted a special exemption, found in Section 436(g) of the Securities Act, which spared them from liability. This exemption greatly facilitated the disastrous race to the bottom that preceded our recent financial crisis.
The Dodd Frank legislation removed Section 436(g) – ensuring that credit rating agencies would be subject to liability for false statements under the Securities Act just as other experts are. This did not sit well with the NRSROs themselves, who quickly declared that they would withhold consent for the inclusion of their ratings in the offering of asset backed securities if regulators attempted to implement Congress’ will—effectively holding the resurgent asset-backed securities industry hostage.
HR 1539 would reinstate the special exemption from expert liability for credit rating agencies, just months after Congress passed it. It simply gives in to the tactics of the rating agencies and helps restore the pre-Dodd Frank status quo that gave NRSROs the ability to mislead the public about the risks of asset-backed securities. Furthermore, this drastic step is unnecessary, as the SEC has taken steps to ensure that ratings agencies cannot hold up the issuance of asset-backed securities. The SEC issued a “no action” letter indicating that it would not bring enforcement actions against issuers that did not disclose ratings in prospectuses, thus allowing issuance without a rating. The intent of this action is to get time for the agency to completely remove references to ratings from its laws and regulations. This will end the government-sanctioned monopoly of the NRSROs. This approach is far preferable to the outright reversal on rule 436(g) proposed by this legislation.
HR 1539 goes well beyond a simple technical amendment to the landmark Dodd Frank legislation. Rather, the legislation would significantly weaken the first meaningful attempt to rein in an industry which played an important role in the disastrous financial crisis of 2007-2008. We urge you to reject HR 1539.
Sincerely,
Americans for Financial Reform