House panel would rein in rating agencies
WASHINGTON - A House committee voted yesterday to tighten rules for investment rating agencies, which lawmakers say misled investors by giving high marks to risky securities tied to subprime mortgages.
The proposal, approved 49-14, is the House Financial Services Committee’s latest attempt to tighten the rules of the road for financial institutions after last year’s market crisis.
A floor vote was expected as early as November as part of a broader regulation reform package, although the measure would still face scrutiny in the Senate.
The bill would allow the Securities and Exchange Commission to test the methods employed by rating agencies and sanction lax supervisors.
While the legislation does not provide for criminal sanctions against the agencies, it would make them more vulnerable to lawsuits by angry investors who believe they were misled.
“These rating agencies were falsely elevated to some godlike status that when they put a triple-A rating on something, you could take all of your mother’s savings and invest it in there and you were doing the right thing,’’ said Representative Paul Kanjorski, a Pennsylvania Democrat, who sponsored the bill.
Rating agencies did not immediately embrace the legislation. Spokesmen for Standard & Poor’s and Moody’s Investors Service said in separate statements that their agencies were committed to working with lawmakers to increase transparency and improve investor confidence.
As part of its broader effort to clamp down on Wall Street, the committee, which is chaired by Representative Barney Frank of Massachusetts, also has voted to create a federal agency to protect financial consumers against fraud and abuse.
The panel has agreed to give regulators new powers to monitor hedge funds and regulate privately traded derivatives, the kind of complex financial instruments that nearly brought down insurance giant American International Group.
Next week, the committee is expected to pass a proposal by Kanjorski that would bolster the SEC’s powers and double its budget in the next five years.
Under the latest plan, lawmakers tried to reduce potential conflicts of interest at credit rating agencies, which make money by charging fees to companies whose securities they rate.
Under the bill, the SEC could regulate how agencies handle specific conflicts.
