In prepared remarks for testimony Tuesday before the House Financial Services subcommittee on capital markets, Gregory W. Smith, general counsel of the Colorado PERA and co-chair of the Council of Institutional Investors also encourages Congress to evaluate the appropriateness of these financial gatekeepers’ exemptions from liability. Smith pointed out that most institutional investors do not rely exclusively on credit ratings for buy/sell decisions, but they are part of a “mosaic of information” that is considered.
“Financial gatekeepers are less likely to engage in negligent, reckless or fraudulent behavior if they are subject to a risk of liability for these behaviors,” Smith said in his testimony. He contended that holding rating agencies accountable will “elevate the standards of quality required of NRSROs to the same level as the market and regulators have set for other vital financial gatekeepers.”
Specifically, Smith asked that Congress and the SEC take action to:
- remove NRSROs’ exemption from liability for forward looking statements in Section 21E of the Securities Exchange Act of 1934;
- remove NRSROs’ exemption from misstatements in registration statements in Section 11 of the Securities Act of 1933;
- remove NRSROs’ exemption from liability as experts under Securities Act Rule 436; and
- adopt legislation indicating that NRSROs are subject to private rights of action under specified statutory criteria, including the failure to conduct a reasonable investigation into the accuracy of the information used to rate a security or to have obtained reasonable verification from other sources independent of the issuer.
Smith also called on Congress to work with the SEC to require complete transparency of NRSROs’ actions, conflicts of interest, fees and methodologies.
Smith’s testimony is here .
Other testimony from industry players including Vanguard, Realpoint and Fitch can be viewed here .
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