By James Hamilton, J.D., LL.M.
The recently enacted Credit Rating Agency Reform Act has a federal preemption provision that gives the SEC the exclusive right to register and qualify nationally recognized statistical rating organizations (NRSROs). There is, however, a carve out for states to bring enforcement actions to combat fraud.
There is also some imporatant legislative history on the preemption provision that should not be overlooked. According to Rep. Paul Kanjorski, a leading member of the House Financial Services Committee, the provision should be viewed narrowly as limiting a state’s authority to regulate the day-to-day activities of credit rating agencies. The preemption provision should not be construed to apply to typical state governmental functions in which states are users of credit ratings. Thus, states will continue to have the ability to continue to oversee their departments, programs, and political subdivisions with regard to debt issuance conditions, contract specifications, and investment standards for governmental funds, such as pension portfolios and financial reserves. Similarly, the preemption should not be taken to apply to the regulation of insurers and bank solvency standards and generic business licensing requirements normally applied to entities performing business within a state. (Cong. Rec., Sept 27, 2006, p. H7569).