Bond Rating Agencies: Examining the “Nationally Recognized” Statistical Rating... (EventID=112698)

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Connect with the House Financial Services Committee Get the latest news: https://financialservices.house.gov/ Follow us on Facebook: https://www.facebook.com/HouseFinancialCmte Follow us on Twitter: https://twitter.com/FSCDems ___________________________________ On Wednesday, July 21, 2021, at 2:00 p.m. (ET) Investor Protection, Entrepreneurship, and Capital Markets Subcommittee Chairman Sherman and Ranking Member Huizenga will host a virtual hearing entitled, “Bond Rating Agencies: Examining the “Nationally Recognized” Statistical Rating Organizations." - - - - - - - - Witnesses for this one-panel hearing will be: • Amy Copeland McGarrity, Chief Investment Officer, Colorado Public Employees Retirement Association • Ian Linnell, President, Fitch Ratings • Jim Nadler, Chief Executive Officer, Kroll Bond Rating Agency • Robert J. Rhee, Professor, University of Florida Law School • Michael Bright, Chief Executive Officer, Structured Finance Association Overview Bond or credit rating agencies are Securities and Exchange Commission (SEC) registered and regulated entities that assign creditworthiness ratings to public and private institutions and the individual debt instruments those institutions issue. Credit ratings are commonly used by market participants, including retail and institutional investors, to determine whether to invest in bonds and other debt instruments. The Financial Crisis Inquiry Commission found that the rating agencies inflated ratings of mortgage-backed securities (MBS) and other asset-backed securities (ABS) were a primary cause of the 2008 financial crisis. As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), Congress passed several reforms of the rating industry in the wake of the crisis, including addressing the conflicts of interest inherent in a system in which the issuers of securities pay for their own ratings. However, some of these reforms have not been implemented or were curtailed by the SEC. Rating agencies also play a role in the markets as climate change and other emerging risks, such as pandemics, and affect the creditworthiness of private and public debt issuers. This hearing will review the state of the bond rating agency industry, the efficacy of the reforms that have been implemented, and whether additional regulatory or legislative reforms are warranted. Background Today, there are nine rating agencies, two of which are headquartered outside of the United States, registered with the SEC as nationally recognized statistical rating organizations (NRSROs), a formal designation that has been granted to certain bond rating agencies by the SEC since 1975.3 The designation was codified in statute by the passage of the Credit Rating Agency Reform Act of 2006 (the “Reform Act”). As of December 31, 2019, 95.1% of all NRSRO credit ratings outstanding were published by the three largest agencies, S&P Global Ratings (S&P), Moody’s Investors Service (Moody’s), and Fitch Ratings (Fitch). Between 2016 and 2019, these three firms earned 93.3% of the revenues of all NRSROs. The ratings issued by NRSROs are based on the likelihood that the institution or instrument will default on its obligations or otherwise fail to make timely payments of interest and fall within six categories. These categories include credit ratings for: (1) financial institutions; (2) brokers, or dealers; (3) insurance companies; (4) corporate issuers; (5) ABS issuers; and (6) issuers of government securities, municipal securities, or securities issued by a foreign government; or a combination of one or more categories of obligors previously listed. Five NRSROs are registered to provide credit ratings in all six categories outlined by the Reform Act. A.M. Best Rating Services (AMB), Egan-Jones Ratings Company (Egan-Jones), and HR Ratings de México (HR) are each registered to provide ratings for three of the six categories. The credit ratings provided by NRSROs are typically summarized by an alphabetical or alphanumeric symbol that indicates the tier of creditworthiness which the NRSRO believes the institution or debt instrument falls into. Although there is sometimes significant variation in the scoring frameworks used by different NRSROs, ratings generally range from “AAA” or “Aaa” at the highest level of creditworthiness to “D” at the lowest level, which typically indicates a default on a debt. For the most part, each NRSRO maintains a set threshold at which an institution or instrument’s credit rating moves from being considered “investment grade” to “non-investment grade” or “high yield” debt (commonly referred to as “junk bonds”). For example, S&P deems any institution or instrument that it rates below “BBB-” as being non-investment grade. A wide range of institutional investors, including many pension funds, 401k plans, and life insurance companies, are... Hearing page: https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=408110