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June 14, 2010 Monday
SECTION: BUSINESS AND FINANCIAL NEWS
LENGTH: 1299 words
HEADLINE: House move would weaken credit-rating reform
BYLINE: By Ronald D. Orol, MarketWatch
WASHINGTON _ Senate and House lawmakers are expected on Tuesday to consider moves to water down stricter proposed rules on credit raters and toughen rules for private equity firms in their first real business day to work out differences in their respective sweeping bank reform bills.
The legislation marks the most significant expansion of the regulations governing U.S. financial firms since the Great Depression. Yet as the bill inches closer to becoming law, lawmakers are already at loggerheads over whether to include a contentious Senate measure that would dramatically transform the relationship between institutions and credit rating agencies.
The measure, introduced by Sen. Al Franken, D-Minn., and approved by the Senate in May, would create a clearinghouse intermediary to assign credit raters for banks’ structured finance securities. It would have the Securities and Exchange Commission set up a credit-rating agency board, made up mostly of institutional investors, that would pick credit raters for a packaged securities such as mortgage securities issued by a financial institutions.
Franken is seeking to limit conflicts in the existing system, where an institution pays for its rating, and at times, shops for the best rating it can get for the lowest price.
But late Monday, House leaders, including House Financial Services Committee Chairman Barney Frank, D-Mass., put together an offer to the Senate that would strike that measure and replace it with a House provision that would have the SEC conduct a one-year study to evaluate whether such a board would work and present to Congress recommendations for regulatory or statutory change.
Franken says the House language is very concerning.
“We don’t believe a study is necessary,” Franken said. “We know what went wrong with Wall Street’s credit rating system _ conflicts of interest eroded it by rewarding cozy relationships instead of accuracy.”
However, he acknowledged that a study would have some upside because it would result in findings. “You can be sure that if such a study came back, it would confirm the conflicts of interest. It just makes more sense to end the delay and instate the reform now,” he said.
Frank’s offer is expected to be approved by House Democrat members of the conference panel reconciling the bill. But the Franken measure also has bipartisan backing by some Senate members of the committee.
As a result, it is unclear whether a senator will seek to reinstate the Franken provision.
Rep. Brad Sherman, D-Calif., a key House backer of the Franken measure, said in an interview with MarketWatch he may have an opportunity to speak before the conference about why a credit rater board makes sense. Responding to concerns among lawmakers that the concept hasn’t been fully vetted with congressional hearings, Sherman said that a possible compromise option would be to require Congress to vote on the measure at some defined point down later in 2010.
“This would give lawmakers a chance to have hearings on the subject,” Sherman said. “This would be a major change that wasn’t thought about by Treasury or the SEC so there is anxiety about it. Getting a study with no assurances that Congress is going to consider the study is no better than a poke in the eye with a sharp stick.”
Sherman sought to introduce a measure on the subject in the House but agreed not to seek a vote on it after Frank said he would have a hearing on the subject.
Even if the Franken measure is reduced to a study, the House is seeking to make some changes that would increase restrictions on raters beyond what is in the underlying Senate bill. The House is seeking to amend the Senate bill with a provision that would prohibit a rater from advising a corporation and rating its securities. Raters would also be required to issue public notifications when an analyst switches jobs, moving from a corporation to a rater or vice versa.
Lawmakers will also battle over a House provision that would require private equity fund managers to register with the SEC and open up their books to periodic examinations. The Senate bill exempts buyout shops, but both bills would require hedge fund managers to register with the agency.
On Monday, the House proposed changing the Senate bill with a provision that would eliminate the Senate exemption of private equity firms. The House proposal also would exempt hedge fund managers with less than $150 million from federal registration but have state regulators oversee smaller funds. That provision, if approved, would change the underlying Senate bill that only exempts funds with $100 million in assets from federal registration. With the Senate bill, smaller funds would also need to fall under state regulation.
The private equity industry is lobbying heavily for an exemption from the House regulation provision, said Nathan Greene, partner at Shearman & Sterling’s asset management group, because the measure would add new transparency, recordkeeping and reporting costs to the industry.
He added that legislators are expanding regulation for hedge funds and private equity, in part, in response to a $50 billion “Ponzi scheme” perpetrated by investment manager Bernard Madoff that was revealed last year as the crisis expanded. However, Greene said the two investment management groups contend that they did not cause the crisis and shouldn’t be punished.
“The argument that everyone in the private equity and hedge fund community is making is: What did we do to warrant any punitive measures here?” Greene said.
The hedge fund industry is also opposed to new regulations, but because the House and Senate bills both contain similar registration requirements, they are less likely to win their battle for removal.
Greene said there would likely be unintended consequences should lawmakers and regulators require hedge fund managers to register while excluding buyout shops from new rules. Hedge fund managers would increase their ‘lock ups,’ the amount of time their investors must keep their capital at the fund, to resemble private equity companies and escape regulations, he said.
The contentious Franken credit rater measure in the Senate bill comes in response, in part, to federal and state investigations into conflicts of interest at financial institutions and credit-rating agencies.
It’s unclear whether it will ultimately be included in the final bill. In addition to Frank’s opposition to the measure, Senate Banking Committee Chairman Christopher Dodd, D-Conn., voted against it, arguing that it was hard to figure out how it would work.
Both Frank and Dodd are the most senior members of the reconciliation committee and their opposition would likely carry weight. However, some proponents on both sides of the aisle back the measure. Sens. Charles Schumer, D-N.Y., and Mike Crapo, R-Idaho, both members of the conference committee, voted for the measure.
Lawmakers are also expected to vote on less controversial measures of the bill, including a provision that would combine the Office of Thrift Supervision with the Office of the Comptroller of the Currency. Legislators argue that too many problematic companies, including American International Group Inc. and Washington Mutual, registered with the OTS to avoid regulation.
The conference group will also vote to approve a new Office of National Insurance within the Treasury Department, to gather information and negotiate international agreements in the insurance sector.
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