House OKs New Rules for Debt Raters

The U.S. House of Representatives Wednesday voted to overhaul regulation of the $2.5-billion debt rating business to foster more competition.

The Republican-sponsored Credit Rating Agency Duopoly Relief Act of 2006 was approved by a 255-166 vote largely along party lines. The bill sets up a new regulatory framework for firms that assess the creditworthiness of companies and governments that issue bonds and other debt.

Debt rating is now dominated by a handful of companies, including McGraw-Hill Cos. unit Standard & Poor’s, Moody’s Corp. unit Moody’s Investors Service and Fitch Ratings, which are designated by the Securities and Exchange Commission as nationally recognized statistical ratings organizations.

But the recent financial collapses of Enron Corp. and WorldCom -- whose debts were rated investment grade by Moody’s and Standard & Poor’s just before their bankruptcy filings -- have called into question the quality of ratings that support trillions of dollars in investments.

The bill would scrap the SEC’s 30-year-old staff designation for the five existing nationally recognized rating companies and allow any firm that had three years’ experience and met certain standards to register with the agency as statistical ratings organizations.

The bill’s sponsor, Rep. Michael G. Fitzpatrick (R-Pa.), argued that more competition would improve the quality and transparency of ratings and said the SEC had never adequately defined how a firm could qualify for national recognition.

Democrats argued the bill could actually reduce the quality of ratings by allowing less-capable or unscrupulous firms to offer ratings to investors.