Standard & Poor’s Striving to Change Bill

McGraw-Hill, which owns Standard & Poor’s, wants to change language in a Senate financial overhaul bill. It believes the current language would put credit-rating companies at a disadvantage in court.

McGraw-Hill Executive Vice President Ted Smyth issued a statement Wednesday that said the bill “creates a discriminatory pleading standard for credit rating agencies, with many unintended consequences for the market.”

Smyth was referring specifically to the portion of the bill that would enable investors to take legal action against rating firms that “knowingly or recklessly” fail to conduct a reasonable investigation of a company when developing ratings.

Instead McGraw-Hill argues that a credit rating agency could be sued for failing to predict a bankruptcy, for example, that occurred without fraud while auditors, lawyers, bankers and equity analysts would have no liability. The firm wants the provision altered to remove with this discriminatory language and instead retain the agencies’ current liability standard that requires that fraud be present.

If we are trying to create a Full Employment Act for class action securities lawyers, this will do it. Can’t we just use a simple, elegant age-old solution? Fully disclose any conflicts of interest and then its caveat emptor.

Legislative Spotlight Shifts to Financial Reform

Now that health care reform has been passed, President Obama is focused on financial reform and pushing for the formation of the Consumer Financial Protection Bureau, a new watchdog agency to protect the interests of American consumers.

Among other things, it would regulate credit cards, mortgages and nearly all other consumer loans; create transparency and accountability for credit rating agencies; and bring oversight to hedge funds.

“Safety and soundness is important, but the Fed also has a consumer role and it has failed miserably,” said Senate Banking Committee member Bob Menendez (D-NJ). “They didn’t take that part of their charge seriously.”

There are two versions in Congress right now: the House version, which would create a stand-alone agency with the power to write and enforce regulations, much like the Federal Trade Commission; and the Senate version, which would put the agency within the Federal Reserve and make its actions subject to veto by other federal regulators.

“Ultimately, I’d love to have a free-standing entity, but I think the reality is that it may not be possible in achieving the ultimate goal,” Mendez said.

It looks like the Senate version will be passed, but the last-minute changes still have to be hashed out.