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House Considering Weakening Proposed Rules in Reforming Credit Raters

Source: MarketWatch

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Posted on 15 Jun 2010

Lawmakers in the Senate and House are expected on Tuesday to consider moves to weaken 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.

Representative Barney Frank proposed dropping a proposal, drawn up by Senator Al Franken, to create a government panel that would act as an intermediary between debt issuers and credit rating agencies for new structured securities.

Instead of setting up the panel, Frank called for commissioning a Securities and Exchange Commission study of the ratings agency industry, perceptions that it suffers from an inherent conflict of interest, and what to do about it.

A spokeswoman for Senator Franken said in a statement that Frank's counter-offer was "very concerning."

"We don't believe a study is necessary. We know what went wrong with Wall Street's credit rating system -- conflicts of interest eroded it by rewarding cozy relationships instead of accuracy," said Franken spokeswoman Jess McIntosh.

"And we know how to fix it -- the Franken amendment that passed the Senate with broad bipartisan support," she said.

Credit rating agencies were widely criticized for their role in the 2007-2009 financial crisis for badly over-rating subprime mortgage-backed securities that later imploded, triggering a credit crisis that brought Wall Street to its knees. The crisis tipped the U.S. economy into a deep recession, led to massive taxpayer bailouts of Wall Street banks and unleashed a wave of financial reform initiatives worldwide.

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.


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