In tommorrow's meeting of the House-Senate conference committee on the financial reform legislation, the House will propose the stripping of the Franken Amendment in the baseline conference bill. The Franken Amendment, codified as Sec. 939D, would create an SRO under the SEC that would randomly assign responsibility for initial ratings of structured securities to a qualified credit rating agency. The provision is designed to end the conflict of interest inherent in the issuer-pays rating system.
The House will propose to replace the Franken provisions with a House provision that commissions an SEC study to evaluate conflicts of interest, the metrics applied to determine the accuracy of ratings, the use of an independent utility that assigns ratings for structured finance, and the ability of an SRO-type entity to set appropriate fees to compensate and provide incentives for accurate ratings. The SEC will have one year to conduct the study. The SEC will present to Congress recommendations for either regulatory or statutory changes that the SEC believes should be made to implement the findings.