WASHINGTON (Reuters) - Credit rating agencies would be more tightly regulated and more exposed to lawsuits under legislation approved on Wednesday by the U.S. House of Representatives Financial Services Committee.
In another procedural step forward for the Obama administration's and congressional Democrats' push for financial reform, the committee voted 49-14 to send the bill to the full House for a vote, likely next month.
Credit rating agencies are widely blamed for failing to spot credit market problems, with securitized debt and other instruments, in the run-up to last year's financial crisis.
President Barack Obama and Democrats have been working for months on a package of proposals to tighten bank and capital market regulation after the crisis, the worst in decades.
"The rating agencies really screwed up and now people are asking for us to put their heads in the guillotine ... But what really needs to happen is to see what can be done to make sure this doesn't happen again," said Representative Paul Kanjorski, author of the committee's bill.
The agencies are viewed by critics as compromised by their prevailing business model, in which issuers of debt pay the agencies for debt ratings. Kanjorski said lawmakers explored ways to change that model, but found it was impractical.
Instead, the bill imposes regulations on the industry intended to "close many of the weaknesses and the loopholes," said Kanjorski, a Democrat.
Firms affected by the bill include Moody's Corp (MCO.N), Standard & Poor's MHP.N and Fitch Ratings LBCP.PA.
The bill would for the first time set up an office in the U.S. Securities and Exchange Commission to oversee the agencies and their ratings and how they are determined.
It would also open the door to more lawsuits by investors against agencies over flawed ratings, a provision opposed by the agencies and likely to attract controversy as the bill works its way to the House floor and the Senate.
The bill also calls for removing some references in federal law that mandate certified agencies' credit ratings as a way to reduce the pervasiveness of their use.
The committee, chaired by Democratic Representative Barney Frank, was expected to vote later on a bill to beef up the SEC's budget and legal protection standards for investors.
Editing by Dan Grebler