by Adam Tempkin
NEW YORK, July 20 (IFR) - The House Financial Services
Committee on Wednesday voted to approve legislation introduced
by Representative Steve Stivers (R-Ohio) that would repeal a
provision of the Dodd-Frank legislation from last year which
made credit rating agencies liable for increased lawsuit
The Asset-Backed Market Stabilization Act of 2011 (H.R.
1539), introduced early this year, would restore Rule 436(g) of
The Securities Act of 1933, which exempted rating agencies from
"expert" liability when they issue credit ratings on
The Dodd-Frank Act had repealed 436(g) and the ABS market
froze in the summer of 2010 until the SEC issued a temporary
no-action letter effectively exempting the rating agencies from
With the exemption for credit ratings removed, rating
agencies had feared exposure to the same degree of expert
liability under the Securities Act of 1933 as accountants and
other parties that participate in bond sales, according to
Therefore, in July 2010, Standard & Poor's, Moody's and
Fitch refused to give their consent to allow their ratings from
appearing in prospectuses and registration statements.
The SEC no-action letter was meant to last for six months,
but the SEC later extended the disclosure exemption
indefinitely, avoiding a potential shutdown of the
Some market participants and state attorneys general were
disconcerted by the SEC's lack of enforcement on the 436(g)
matter, and were vocal about the regulator's inaction and
coddling of the credit rating agencies, who have had good luck
so far in battling investor lawsuits related to undeserved AAA
ratings given in the run-up to the financial crisis.
A group of Republican Representatives known as the
Financial Services Working Group, which Mr. Stivers is a member
of, claim that Dodd-Frank's removal of 436(g) "would raise the
cost of rating bonds from approximately $100,000 per rating to
approximately $1 million, and it could result in some bonds not
getting a rating, which would prevent those bonds from coming
The Group claims that "this provision has a devastating
effect on auto manufacturers and other who use asset-backed
bonds to finance their business."
The provision threatens the 8 million automotive-related
jobs in the United States, according to Congressman Stivers.
However, a lobby of hundreds of organizations called
Americans for Financial Reform, which includes groups such as
the AARP, AFL-CIO, Center for Responsible Lending, and Center
for Economic Progress, has vigorously fought the Asset-Backed
Market Stabilization Act of 2011 for months.
The group says that the bill, 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
Nationally Recognized Statistical Rating Organizations (NRSROs)
the ability to mislead the public about the risks of
asset-backed securities," the group wrote in a May letter to
members of the House of Representatives.
The group also said that "this drastic step is
unnecessary", as the SEC has taken steps to ensure that rating
agencies cannot hold up the issuance of asset-backed
The SEC has indicated in the past that the "no action"
letter and the indefinite extension of the disclosure exemption
for rating agencies was meant to give time to Federal
regulators to completely remove references to ratings in their
laws and regulations.
Interestingly, the repeal of 436(g) was inserted into the
Dodd-Frank Act late in the process in 2010 by Stivers'
predecessor Mary Jo Kilroy, a Democrat from Ohio who was trying
to increase the potential liability for credit rating
Her amendment to the last version of the bill that became
Dodd-Frank was passed on June 16, 2010, while the House and
Senate versions were being reconciled.
The American Securitization Forum (ASF), a trade group for
the securitization markets, were pleased by today's House
Financial Services Committee vote.
"The ASF applauds the House Financial Services Committee
for approving Representative Stivers' legislation," said Tom
Deutsch, the Executive Director of the ASF, in a prepared
statement. "The ABS markets need certainty in order to operate
in a sound and robust manner, providing critical credit to car
buyers, students, and business.
"...It is now crucial for the full House of Representatives
and Senate to pass Stiver's bill to ensure permanent stability
for the ABS markets. We strongly encourage lawmakers to act
decisively on this critical matter."
(Adam Tempkin is a senior IFR structured finance analyst)