[House Report 112-196]
[From the U.S. Government Publishing Office]
112th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 112-196
======================================================================
ASSET-BACKED MARKET STABILIZATION ACT OF 2011
_______
August 12, 2011.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Bachus, from the Committee on Financial Services,
submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 1539]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 1539) to repeal section 939G of the Dodd-Frank
Wall Street Reform and Consumer Protection Act and to restore
Securities and Exchange Commission Rule 436(g) repealed by such
section, having considered the same, report favorably thereon
without amendment and recommend that the bill do pass.
Purpose and Summary
H.R. 1539, the ``Asset-Backed Market Stabilization Act of
2011,'' repeals Section 939G of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Public Law 111-203), which
in turn repealed Securities and Exchange Commission (SEC) Rule
436(g). SEC Rule 436(g) provided that a credit rating from a
Nationally Recognized Statistical Rating Organization (NRSRO)
assigned to a public offering registered under the Securities
Act of 1933 was not considered an expert-certified part of the
registration statement or prospectus, as defined by Sections 7
and 11 of the '33 Act. Repeal of Rule 436(g) prompted severe
dislocation in the trillion dollar asset-backed securities
market, requiring SEC intervention to ensure that the market
remained open and functioning. By restoring Rule 436(g), H.R.
1539 provides certainty to the vitally important securitization
market, which increases the availability and affordability of
credit to businesses, consumers, students, and homeowners in
the United States.
Background and Need for Legislation
On July 22, 2010, the day the repeal of Rule 436(g) went
into effect under the Dodd-Frank Act, the NRSROs refused to
consent to including their ratings in prospectuses. Because SEC
rules require that ratings be included in prospectuses, issuers
of asset-backed securities had no choice but to postpone their
offerings, which disrupted the securitization market for assets
other than residential and commercial mortgages. In response,
the SEC immediately issued a six-month no-action letter
providing relief for registered offerings of asset-backed
securities; on November 23, 2010, the SEC extended the no-
action letter indefinitely.
The risk of greater liability as a result of subjecting
NRSROs to Section 11 could undermine competition if credit
rating agencies decide that they are unable to bear the risk of
liability and thus exit the ratings business. Similarly, credit
rating agencies contemplating entering the ratings business
might reconsider this decision because of the increased risk of
legal liability. This could have the effect of undermining the
goals and purposes of the Credit Rating Agency Reform Act of
2006, which was to increase competition and break the Standard
& Poor's and Moody's ratings duopoly. The mere threat of
liability may particularly affect smaller, less-established
rating agencies that may find it more difficult to negotiate
for indemnification or bear the risk of additional liability.
Importantly, H.R. 1539 does nothing to remove the new
credit rating agency liability standards added by Section 933
of the Dodd-Frank Act. Section 933 changed the pleading
standards for a private action brought against credit rating
agencies under the Securities Exchange Act of 1934. For
securities fraud lawsuits, it is now sufficient for a plaintiff
to allege that a credit rating agency ``knowingly or recklessly
failed to conduct a reasonable investigation'' of facts about
the rated debt offering, or knowingly or recklessly failed to
obtain reasonable verification that such an investigation was
performed by a source independent of the issuer or underwriter.
At a March 16, 2011 hearing of the Subcommittee on Capital
Markets and Government Sponsored Enterprises, Tom Deutsch,
Executive Director of the American Securitization Forum,
explained how Section 939G of the Dodd-Frank Act temporarily
shut down portions of the securitization market, and described
how ``the absence of a properly functioning securitization
market, and the funding and liquidity this market has
historically provided, adversely impacts consumers, businesses,
financial markets and the broader economy.'' Mr. Deutsch also
stated that ``an act by Congress to repeal [Section 939G] would
provide the most straightforward and effective way to remove a
key barrier that remains to resuming the normal flow of credit
in America.'' In an April 28, 2011 letter to Chairman Bachus,
Ford Motor Company stated, ``We recognize that the provision
repealing 436g of the Securities Act created an unintended
consequence in the asset-back securities markets. [H.R. 1539]
addresses the unintended consequence of the Dodd-Frank Act by
allowing the inclusion of these ratings, which are material and
need to be disclosed.''
In order to ensure that the asset-backed securitization
market continues to operate and provide credit to businesses,
students, consumers, and homeowners, Representative Steve
Stivers introduced H.R. 1539 on April 14, 2011.
Hearings
On March 16, 2011, the Subcommittee on Capital Markets and
Government Sponsored Enterprises held a hearing entitled
``Legislative Proposals to Promote Job Creation, Capital
Formation, and Market Certainty,'' to consider H.R. 1539 and
four other bills.
Witnesses included:
Mr. Kenneth A. Bertsch, President and CEO,
Society of Corporate Secretaries & Governance
Professionals
Mr. Tom Deutsch, Executive Director,
American Securitization Forum
Ms. Pam Hendrickson, Chief Operating
Officer, The Riverside Company
Mr. Damon Silvers, Policy Director and
Special Counsel, AFL-CIO
Mr. David Weild, Senior Advisor, Grant
Thornton, LLP
Mr. Luke Zubrod, Director, Chatham Financial
Committee Consideration
The Subcommittee on Capital Markets and Government
Sponsored Enterprises met in open session on May 3 and 4, 2011,
and ordered H.R. 1539 favorably reported to the full Committee
by a record vote of 18 yeas and 14 nays (Record vote no. CM-
29).
The Committee on Financial Services met in open session on
July 20, 2011 and ordered H.R. 1539 favorably reported to the
House by a record vote of 31 yeas and 19 nays (Record vote no.
FC-50).
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. A
motion by Chairman Bachus to report the bill, as amended, to
the House with a favorable recommendation was agreed to by a
record vote of 31 yeas and 19 nays (Record vote no. FC-50). The
names of Members voting for and against follow:
RECORD VOTE NO. FC-50
----------------------------------------------------------------------------------------------------------------
Representative Aye Nay Present Representative Aye Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Bachus..................... X ........ ......... Mr. Frank (MA)... ........ X .........
Mr. Hensarling................. ........ ........ ......... Ms. Waters....... ........ ........ .........
Mr. King (NY).................. X ........ ......... Mrs. Maloney..... ........ X .........
Mr. Royce...................... X ........ ......... Mr. Gutierrez.... ........ ........ .........
Mr. Lucas...................... X ........ ......... Ms. Velazquez.... ........ X .........
Mr. Paul....................... X ........ ......... Mr. Watt......... ........ ........ .........
Mr. Manzullo................... X ........ ......... Mr. Ackerman..... ........ X .........
Mr. Jones...................... X ........ ......... Mr. Sherman...... ........ X .........
Mrs. Biggert................... X ........ ......... Mr. Meeks........ ........ X .........
Mr. Gary G. Miller (CA)........ X ........ ......... Mr. Capuano...... ........ ........ .........
Mrs. Capito.................... X ........ ......... Mr. Hinojosa..... ........ X .........
Mr. Garrett.................... X ........ ......... Mr. Clay......... ........ X .........
Mr. Neugebauer................. X ........ ......... Mrs. McCarthy ........ X .........
(NY).
Mr. McHenry.................... X ........ ......... Mr. Baca......... ........ X .........
Mr. Campbell................... X ........ ......... Mr. Lynch........ ........ ........ .........
Mrs. Bachmann.................. ........ ........ ......... Mr. Miller (NC).. ........ X .........
Mr. McCotter................... X ........ ......... Mr. David Scott ........ X .........
(GA).
Mr. McCarthy (CA).............. ........ ........ ......... Mr. Al Green (TX) ........ X .........
Mr. Pearce..................... X ........ ......... Mr. Cleaver...... ........ ........ .........
Mr. Posey...................... X ........ ......... Ms. Moore........ ........ ........ .........
Mr. Fitzpatrick................ X ........ ......... Mr. Ellison...... ........ ........ .........
Mr. Westmoreland............... X ........ ......... Mr. Perlmutter... ........ X .........
Mr. Luetkemeyer................ X ........ ......... Mr. Donnelly..... ........ X .........
Mr. Huizenga................... X ........ ......... Mr. Carson....... ........ X .........
Mr. Duffy...................... X ........ ......... Mr. Himes........ ........ X .........
Ms. Hayworth................... X ........ ......... Mr. Peters....... ........ X .........
Mr. Renacci.................... X ........ ......... Mr. Carney....... ........ X .........
Mr. Hurt....................... X ........ .........
Mr. Dold....................... X ........ .........
Mr. Schweikert................. X ........ .........
Mr. Grimm...................... X ........ .........
Mr. Canseco.................... X ........ .........
Mr. Stivers.................... X ........ .........
Mr. Fincher.................... X ........ .........
----------------------------------------------------------------------------------------------------------------
During the Committee consideration of H.R. 1539, the
following amendment was considered:
1. An amendment offered by Mr. Ackerman, no. 1, to require
the Securities and Exchange Commission to prohibit the
inclusion of ratings provided by a NRSRO in a prospectus or
other offering material provided by an issuer, was not agreed
to by voice vote.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee has held hearings and
made findings that are reflected in this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee establishes the
following performance-related goals and objectives for this
legislation:
The objective for H.R. 1539 is to restore SEC Rule 436(g)
which was repealed by section 939G of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Public Law 111-203).
SEC Rule 436(g) provided that a credit rating from a Nationally
Recognized Statistical Rating Organization (NRSRO) assigned to
a public offering registered under the Securities Act of 1933
was not considered an expert-certified part of the registration
statement or prospectus, as defined by Sections 7 and 11 of the
'33 Act. Repeal of Rule 436(g) prompted severe dislocation in
the trillion dollar asset-backed securities market, requiring
SEC intervention to ensure that the market remained open and
functioning. By restoring Rule 436(g), H.R. 1539 provides
certainty to the vitally important securitization market, which
increases the availability and affordability of credit to
businesses, consumers, students, and homeowners in the United
States.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Committee Cost Estimate
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
August 8, 2011.
Hon. Spencer Bachus,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 1539, the Asset-
Backed Market Stabilization Act of 2011.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Susan Willie.
Sincerely,
Douglas W. Elmendorf.
Enclosure.
H.R. 1539--Asset-Backed Market Stabilization Act of 2011
H.R. 1539 would reinstate a rule developed by the
Securities and Exchange Commission (SEC) that exempts ratings
provided by certain credit rating agencies, known as nationally
recognized statistical rating organizations or NRSROs, from
being considered part of the registration statement for new
issuances of asset-backed securities (ABS). That rule was
repealed by the Dodd-Frank Wall Street Reform and Consumer
Protection Act. Under current law, registration statements for
ABS must include the assignment of a rating by one or more
rating agencies. In reinstating the rule, the bill would exempt
NRSROs from liability if the information provided in the
offering statement is found to be untrue.
Based on information from the SEC, CBO estimates that
implementing H.R. 1539 would not significantly affect spending
subject to appropriation because the SEC has already taken
steps to limit enforcement of the requirement that ratings be
included in registration statements for new issuances of ABS.
Enacting H.R. 1539 would not affect direct spending or
revenues; therefore, pay-as-you-go procedures do not apply.
H.R. 1539 would impose a mandate, as defined in the
Unfunded Mandates Reform Act, on both public and private
investors by protecting NRSROs from liability if the ratings
information provided in an offering statement for a security is
found to be untrue. Under current law, investors have a right
to seek compensation if they are harmed by a material omission
or misstatement that is provided by an NRSRO and included in an
offering statement. However, industry sources indicate that
NRSROs do not allow their ratings to appear in offering
statements, and the SEC has limited enforcement of the
requirement on issuers to include such ratings. Consequently,
under current law, no entity would have grounds to sue an
NRSRO, and CBO estimates that the mandate would impose no costs
on intergovernmental or private-sector entities.
The CBO staff contact for this estimate is Susan Willie
(for federal costs), Elizabeth Cove Delisle (for
intergovernmental mandates) and Paige Piper/Bach and Sam Wice
(for private-sector mandates). The estimate was approved by
Theresa Gullo, Deputy Assistant Director for Budget Analysis.
Federal Mandates Statement
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
H.R. 1539 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This section provides a short title to the bill by citing
it as the ``Asset-Backed Market Stabilization Act of 2011.''
Section 2. Restoration of rule relating to a certain exemption for
rating agencies
This section repeals Section 939G of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (P.L. 111-203), and
provides that the regulation repealed by such section is
restored or revived as if such section had not been enacted.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets and
existing law in which no change is proposed is shown in roman):
DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT
* * * * * * *
TITLE IX--INVESTOR PROTECTIONS AND IMPROVEMENTS TO THE REGULATION OF
SECURITIES
* * * * * * *
Subtitle C--Improvements to the Regulation of Credit Rating Agencies
* * * * * * *
[SEC. 939G. EFFECT OF RULE 436(G).
[Rule 436(g), promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, shall have no
force or effect.]
* * * * * * *
MINORITY VIEWS
The credit rating agencies repeated glaring inaccuracies
were one of the leading causes of the financial crash. The Wall
Street Reform and Consumer Protection Act provided several
reforms to the ratings industry, including a repeal of a
Securities and Exchange Commission rule that provided rating
agencies an exemption from liability for misstatements and
omissions under Section 11 of the Securities Act of 1933 when
their ratings appeared in the prospectus of a security
offering. If ratings appear in a prospectus, investors today
can hold rating agencies accountable to the same standards that
apply to other experts, such as auditors, giving opinions in
the legal documents of security offerings. H.R. 1539 restores
that exemption, which both makes it harder for a purchaser of a
mis-rated security to get into court and requires the purchaser
to meet a much higher standard to prevail--for example, blatant
misstatements would not be sufficient. We believe that reducing
the increased liability the Act imposes on rating agencies is a
grave error.
Barney Frank.
Emanuel Cleaver.
Maxine Waters.
Luis V. Gutierrez.
Joe Donnelly.
Gary L. Ackerman.
Melvin L. Watt.
Wm. Lacy Clay.
Stephen F. Lynch.
Carolyn B. Maloney.
Andre Carson.
Gary C. Peters.
Ruben Hinojosa.
Michael E. Capuano.
Brad Miller.
Gregory W. Meeks.
Keith Ellison.
Carolyn McCarthy.