[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]


                      A NOTCH ABOVE? EXAMINING THE
                          BOND RATING INDUSTRY

=======================================================================

                             HYBRID HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON INVESTOR PROTECTION,

                 ENTREPRENEURSHIP, AND CAPITAL MARKETS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 11, 2022

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 117-83
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
47-650 PDF                 WASHINGTON : 2022                     
          
-----------------------------------------------------------------------------------  

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York           BILL POSEY, Florida
DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas                      BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri            ANN WAGNER, Missouri
ED PERLMUTTER, Colorado              ANDY BARR, Kentucky
JIM A. HIMES, Connecticut            ROGER WILLIAMS, Texas
BILL FOSTER, Illinois                FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio                   TOM EMMER, Minnesota
JUAN VARGAS, California              LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey          BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas              ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida                   WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam            TED BUDD, North Carolina
CINDY AXNE, Iowa                     DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois                TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts       ANTHONY GONZALEZ, Ohio
RITCHIE TORRES, New York             JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts      BRYAN STEIL, Wisconsin
ALMA ADAMS, North Carolina           LANCE GOODEN, Texas
RASHIDA TLAIB, Michigan              WILLIAM TIMMONS, South Carolina
MADELEINE DEAN, Pennsylvania         VAN TAYLOR, Texas
ALEXANDRIA OCASIO-CORTEZ, New York   PETE SESSIONS, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts

                   Charla Ouertatani, Staff Director
        Subcommittee on Investor Protection, Entrepreneurship, 
                          and Capital Markets

                   BRAD SHERMAN, California, Chairman

CAROLYN B. MALONEY, New York         BILL HUIZENGA, Michigan, Ranking 
DAVID SCOTT, Georgia                     Member
JIM A. HIMES, Connecticut            ANN WAGNER, Missouri
BILL FOSTER, Illinois                FRENCH HILL, Arkansas
GREGORY W. MEEKS, New York           TOM EMMER, Minnesota
JUAN VARGAS, California              ALEXANDER X. MOONEY, West Virginia
JOSH GOTTHEIMER. New Jersey          WARREN DAVIDSON, Ohio
VICENTE GONZALEZ, Texas              TREY HOLLINGSWORTH, Indiana, Vice 
MICHAEL SAN NICOLAS, Guam                Ranking Member
CINDY AXNE, Iowa                     ANTHONY GONZALEZ, Ohio
SEAN CASTEN, Illinois, Vice Chair    BRYAN STEIL, Wisconsin
EMANUEL CLEAVER, Missouri            VAN TAYLOR, Texas
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 11, 2022.................................................     1
Appendix:
    May 11, 2022.................................................    31

                               WITNESSES
                        Wednesday, May 11, 2022

Gomez-Vock, Mariana, Senior Vice President, Policy Development, 
  American Council of Life Insurers (ACLI).......................     9
Le Pallec, Yann, Executive Managing Director and Head of Global 
  Ratings Services, S&P Global Ratings...........................     5
Liang, Angela, General Counsel and Executive Committee Member, 
  Kroll Bond Rating Agency (KBRA)................................     6
Linnell, Ian, President, Fitch Ratings...........................     8
Schulp, Jennifer J., Director, Financial Regulation Studies, 
  Center for Monetary and Financial Alternatives, Cato Institute.    11

                                APPENDIX

Prepared statements:
    Gomez-Vock, Mariana..........................................    32
    Le Pallec, Yann..............................................    41
    Liang, Angela................................................    51
    Linnell, Ian.................................................    61
    Schulp, Jennifer J...........................................    67

              Additional Material Submitted for the Record

Sherman, Hon. Brad:
    Written statement of Creative Investment Research............    73
    NRSRO Corporate Issuer Ratings Scores........................    83
Davidson, Hon. Warren:
    Letter to Financial Services Committee Chairwoman Waters from 
      Financial Services Committee Ranking Member McHenry and 
      IPECM Subcommittee Ranking Member Huizenga requesting a 
      hearing with the full SEC, dated May 5, 2022...............    84
Le Pallec, Yann:
    Written responses to questions for the record from 
      Representatives Hill and Huizenga..........................    86

 
                      A NOTCH ABOVE? EXAMINING THE
                          BOND RATING INDUSTRY

                              ----------                              


                        Wednesday, May 11, 2022

             U.S. House of Representatives,
               Subcommittee on Investor Protection,
             Entrepreneurship, and Capital Markets,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Brad Sherman 
[chairman of the subcommittee] presiding.
    Members present: Representatives Sherman, Maloney, Scott, 
Foster, Vargas, Gottheimer, Axne; Huizenga, Wagner, Hill, 
Emmer, Davidson, Gonzalez of Ohio, Steil, and Taylor.
    Ex officio present: Representative Waters.
    Chairman Sherman. The Subcommittee on Investor Protection, 
Entrepreneurship, and Capital Markets will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time. Also, without 
objection, members of the full Financial Services Committee who 
are not members of the subcommittee are authorized to 
participate in today's hearing, pursuant to committee rules.
    Today's hearing is entitled, ``A Notch Above? Examining the 
Bond Rating Industry.''
    I will now recognize myself for 4 minutes for an opening 
statement. I will then recognize the ranking member of the 
subcommittee, Mr. Huizenga, for 5 minutes, followed by the 
Chair of the full Financial Services Committee, Chairwoman 
Waters, for 1 minute.
    Each year, roughly $3 trillion worth of money flows based 
upon the ratings of the bond rating agencies, in commercial 
paper, asset-backed securities, and corporate bonds. If the 
rating is good, the interest rate is low and the project can go 
forward. If the rating is low, well, it doesn't pencil out. It 
is like when you get a bad credit score and you don't buy a 
home, or, in this case, a business doesn't build a factory.
    Earlier this year, S&P Global Ratings, the largest of the 
rating agencies, came up with a proposal which triggered these 
hearings, and that proposal was described as, ``notching,'' 
because the bond rating agencies play two roles: they rate the 
insurance companies that buy the bonds; and then, they rate the 
bonds the insurance companies buy. And the notching proposal, 
in effect, told insurance companies that if you buy bonds that 
weren't rated by S&P, that when S&P went to grade your 
insurance company, you could be notched downward. That is what 
triggered this hearing.
    And I am pleased to say that this is the most successful 
hearing I have had as Chair of this subcommittee, because S&P, 
just 2 days before the hearing, announced that they were 
withdrawing the proposal. Thank you for being here, thank you 
for doing that, but I still believe that we should pass 
legislation to prohibit notching. Current statutes prohibit 
notching with regard to asset-based securities, and we now need 
to extend that to corporate bonds and other issues.
    There are other issues that this hearing will also deal 
with, one of which is relatively new to our subcommittee, and 
that is whether our bond rating agencies should be allowed to 
rate the bonds of Russia or Belarus, and whether we should 
allow our issuers to pay for bond ratings from foreign bond 
rating agencies that choose to continue to provide services, 
that is to say, whether we should impose secondary sanctions 
designed to prevent the rating of Russian and Belarusian bonds.
    Another issue is whether the bond rating agencies will be 
forced to do something that they haven't chosen to do, which is 
to speak English to the 320 million Americans who don't 
understand that the 12th highest rating, Ba2, unless the 12th 
highest rating is BB, which, I might add, is better than B+/2 
ratings. There are those who think that maybe we should tell 
people what is the highest rating, what is the second-highest 
rating, what is the third-highest rating, et cetera. There are 
others who believe that bond rating agencies ultimately paid 
for by the American people should speak in a language 
understandable to those not initiated to Wall Street.
    A final issue comes up, and that is the incentives for the 
bond rating agency to give the rating that the people who 
select the bond rating agencies, the issuers of the bond, 
prefer. This is the only game where the umpire is selected by 
one of the teams. Trust me, if the Dodgers got to pick the 
umpire, Kershaw would never throw another ball. So, whether or 
not bond rating agencies should continue to be the only 
professionals in our society not subject to professional 
liability for malpractice, and at the same time, should be 
selected by the issuer, which means all of the incentives are 
to please the issuer and there is no risk of liability for 
giving too strong a rating, those are the issues that this 
hearing will address, in addition to whatever other issues 
Members wish to bring up.
    I now recognize the ranking member of the subcommittee, Mr. 
Huizenga, for 5 minutes.
    Mr. Huizenga. Thank you, Chairman Sherman. While the title 
for this morning's hearing, ``A Notch Above? Examining the Bond 
Rating Industry,'' gets an A for creativity, I sadly have to 
give the subcommittee's work and agenda a failing grade. 
Unfortunately, hearings for the subcommittee have become very 
rare in leaving precious time and resources to focus on issues 
that are actually timely. In fact, Democrats have failed to 
hold a meaningful hearing on our capital markets in over a 
year. I know that it is called the Subcommittee on Investor 
Protection, Entrepreneurship, and Capital Markets. I have seen 
a lot of discussion about investor protection, a little bit of 
conversation about entrepreneurship, not a whole lot, and it 
has been a big fat zero on the capital markets side. So, let me 
be very clear. I have my own concerns about S&P's recently-
rescinded proposal, but to hold yet another hearing on our 
nation's credit rating agencies is, at the very least, 
misguided.
    Earlier this week, as you noted, Mr. Chairman, S&P pulled 
back on proposed changes to the risk-based adequacy methodology 
for insurers, which begs the question, why is this hearing 
moving forward in this fashion? At the very least, pushing 
Congress to engage on this issue seems premature, given that 
stakeholder input had seemed to move that ball. So, let us be 
clear: Our capital markets are under attack. Since the 
gentleman from California has become Chair, the SEC released a 
rulemaking agenda that contains nearly 60 far-reaching 
proposals. And what is even more alarming from that list is 
that the Agency has proposed 16 rules in the first quarter, the 
first 3 months of this year alone, often leaving a scant 30-day 
window to comment.
    So, since the start of the calendar year, the only time 
Democrats have cared to comment on the SEC's agenda was to 
congratulate them on their proposed climate disclosure rule. A 
500-page rule, I might add, which, SEC's own analysis, will 
cost billions of dollars to comply, with most of that cost 
being passed down to hardworking Americans. In contrast, 
Republicans have continued to sound the alarm on a number of 
these harmful proposals. So, let me ask the question: What will 
prompt Democrats on this committee to get serious about 
oversight? In the 116th Congress, with a Republican in the 
White House, Chairwoman Waters held a hearing with the entire 
SEC Commission, but has repeatedly ignored requests from myself 
and Ranking Member McHenry to hold one this year. Why is that? 
Are they hiding something?
    Given the breadth of issues before the Commission, and 
given the size and importance of our markets, I am sure Members 
on both sides of the aisle would appreciate a hearing to 
understand the Commission's ongoing deliberations, given their 
aggressive agenda. I would hope my Democrat colleagues would 
also appreciate a hearing to explore why the Commission is 
ignoring its mission to facilitate capital formation. If you 
don't want to bring the full Commission in to testify, how 
about an oversight hearing with the the SEC's Division of 
Enforcement? Last month, the SEC acknowledged a very 
significant breach in protocols between the SEC's adjudicatory 
and enforcement functions, with potential ramifications 
regarding the fairness over prior SEC enforcement actions. How 
about a hearing on digital assets?
    Last week, the SEC announced an expansion of its crypto 
enforcement team, which nearly doubled the size of the unit. 
Why is this significant and timely? Well, given the Chair's 
inability to provide clarity and transparency to the $3 
trillion digital asset ecosystem, I would be interested in 
knowing what prompted his decision to move forward on that. To 
quote Commissioner Hester Peirce, ``The SEC is a regulatory 
agency with an enforcement division, not an enforcement 
agency.'' So, why are we leading with enforcement in crypto? 
What about a hearing on the impact of the bipartisan Jobs Act, 
which just had its 10th anniversary last month, or maybe we 
could focus on legislative proposals to help fuel capital and 
growth on Main Street? Just because the SEC has zero capital 
formation items on its agenda, doesn't mean we can't focus on 
it; it does not mean we should be ignoring our job.
    These are the timely topics for the hearings, and, by the 
way, ones that Republicans held while we were last in the 
Majority, yet, again, today's hearing topic is not. So this 
subcommittee, and we as lawmakers, should focus and prioritize 
issues that will expand opportunity for retail investors and 
promote capital formation for small businesses, all while we 
are protecting those investors. I look forward to hearing from 
our witnesses today in how we can best accomplish that.
    Mr. Chairman, I yield back.
    Chairman Sherman. Without objection, I will put in the 
record a letter dated April 14th, signed by 13 Democratic 
Members of this committee and 9 Republican Members of the Full 
Committee, asking the SEC to intervene to stop the 
anticompetitive S&P notching proposal, which was withdrawn just 
2 days ago.
    Without objection, it is so ordered.
    And with that, I will now recognize the Chair of the Full 
Committee, Chairwoman Maxine Waters, for 1 minute.
    Chairwoman Waters. Thank you so very much, Chairman 
Sherman, for holding this very timely hearing. I am so pleased 
with the leadership that you are providing for this 
subcommittee, and I am so pleased today that we have oversight 
on bond rating agencies, and that what you have done has caused 
them to pull back something that would have been grossly 
unfair, and so you have done a great job. And as for the 
gentleman from Michigan, I think he does not understand that we 
are in charge, and I am the Chair of this committee. You are 
one of the subcommittee Chairs. He does not dictate to us what 
our agenda is. We develop that agenda, and if he is trying to 
draw attention away from the oversight on bond rating agencies, 
that is not going to happen.
    Mr. Huizenga. It will be remembered.
    Chairwoman Waters. I have long called for robust oversight 
of the bond rating agencies, particularly after Wall Street's 
and the financial market's overreliance on the often-erroneous 
credit ratings of just three agencies directly contributed to 
the 2008 financial crisis. It has been my goal to empower 
investors and other market participants with an abundance of 
accurate information, and anti-competitive practices, like the 
S&P's latest proposal, run counter to those--
    Mr. Huizenga. Mr. Chairman--
    Chairwoman Waters. While S&P may have withdrawn this 
proposal, I am concerned it and other credit rating agencies--
    Mr. Huizenga. Mr. Chairman, we are 30 seconds over time.
    Chairwoman Waters. --have other anti-competitive practices 
that, if allowed to fester--
    Mr. Huizenga. Mr. Chairman, we are 30 seconds over time.
    Chairwoman Waters. --will harm our market and the American 
public investing their hard-earned dollars.
    Mr. Huizenga. [Inaudible].
    Chairwoman Waters. Thank you for holding this hearing, and 
I yield back the balance of my time.
    Chairman Sherman. Today, we welcome the testimony of our 
distinguished witnesses.
    I now recognize our first witness, Yann Le Pallec, who is 
the executive managing director and head of global ratings 
services for S&P Global Ratings. You are recognized for 5 
minutes.

 STATEMENT OF YANN LE PALLEC, EXECUTIVE MANAGING DIRECTOR AND 
      HEAD OF GLOBAL RATINGS SERVICES, S&P GLOBAL RATINGS

    Mr. Le Pallec. Mr. Chairman, Mr. Ranking Member, Madam 
Chairwoman, and members of the subcommittee, good morning. My 
name is Yann Le Pallec. I am an executive managing director and 
head of global ratings services at S&P Global Ratings, and a 
member of the S&P Global Ratings Operating Committee. I oversee 
a group of approximately 1,400 credit analysts present in 28 
countries and covering more than 1 million outstanding ratings 
on entities and securities across a wide range of sectors, 
including governments, corporations, financial institutions, 
and structured finance. I appreciate the opportunity to testify 
as part of today's hearing.
    S&P Global Ratings is committed to providing the financial 
markets with timely, transparent, and high-quality credit 
ratings. Credit ratings are forward-looking opinions about the 
ability and willingness of debt issuers, like corporations or 
governments, to meet their financial obligations on time and in 
full. As opinions, credit ratings are not fungible, meaning 
that there are true analytical differences among the credit 
ratings and credit ratings' methodologies on different credit 
rating agencies. And just like how opinions evolve, our credit 
ratings and our credit rating methodologies can and do evolve 
over time.
    By regulation and S&P policy, we publish all new proposed 
rating methodologies and proposed material updates to our in-
use methodologies in advance so that market participants can 
review and comment on our proposals. We consider comments 
received from the market, and we make those comments publicly 
available upon the publication of our final criteria. By SEC 
regulation and S&P policy, employees participating in 
developing or approving our procedures and methodologies used 
for determining credit ratings cannot be influenced by sales or 
marketing considerations. And we maintain a strict separation 
between analytical and commercial activities within S&P Global 
Ratings.
    On December 6, 2021, we published a request for comment, or 
RFC, on certain proposed changes to our methodology and 
assumptions for analyzing the risk-based capital adequacy of 
insurance companies. An insurer's risk-based capital adequacy 
considers the amount of capital that an insurance company may 
need to cover any losses across its different exposures and is 
one of the key factors in our framework for rating all 
insurers. Our RFC process gives the market the opportunity to 
provide feedback and voice any concerns about our proposals 
prior to the finalization and implementation of our final 
criteria. We thank market participants for the extensive 
engagement and high volume of comments they have provided in 
response to our December 2021 RFC. We take the market's 
comments and feedback seriously.
    As set out in our RFC publications, our proposed 
methodology change was intended to improve our ability to 
differentiate risk, enhance the global consistency of our 
methodology, improve the transparency and usability of our 
methodology, and account for more recent data and experience 
since our last update of our insurance capital model criteria 
in 2010. However, given the nature of some of the concerns 
raised in the comments that we received through our RFC 
process, on May 9, 2022, we announced to the market that we 
have withdrawn parts of the proposed approach and we are 
considering alternatives. While we believe certain of the 
criticisms made to date in the press misconstrued our proposal 
and are unfounded, we have heard the markets' concerns.
    My submitted testimony goes into more depth on the proposed 
application and the intent of the withdrawn sections of our 
RFC, but I am happy to address any questions you may have on 
these issues. As I mentioned, we are considering alternatives 
for the withdrawn elements of the proposed criteria. After we 
have had sufficient time to consider the high number of 
comments received, we intend to issue a subsequent RFC and then 
will finalize the criteria article in its entirety, consistent 
with our criteria development process.
    Throughout our RFC process, we have engaged in high levels 
of transparency and interaction with the market, and we are 
committed to maintaining that transparency and interaction as 
we move forward to the next phase of our process. Thank you, 
and I look forward to your questions.
    [The prepared statement of Mr. Le Pallec can be found on 
page 41 of the appendix.]
    Chairman Sherman. Thank you. Next, we have Angela Liang, 
who is the general counsel at the Kroll Bond Rating Agency.

   STATEMENT OF ANGELA LIANG, GENERAL COUNSEL AND EXECUTIVE 
       COMMITTEE MEMBER, KROLL BOND RATING AGENCY (KBRA)

    Ms. Liang. Thank you. Chairman Sherman, Ranking Member 
Huizenga, Chairwoman Waters, and distinguished members of the 
subcommittee, thank you for the opportunity to testify today. I 
am Angela Liang, KBRA's general counsel and Executive Committee 
member. I am grateful for the subcommittee's strong bipartisan 
interest in issues being discussed today. This hearing is 
particularly critical and timely given the impact of S&P's 
proposed risk-based capital methodology. While S&P temporarily 
withdrew certain sections of its methodology a mere 2 days 
before this hearing, the proposal caused immense concern and 
confusion among market participants in all sectors as they 
grappled with the likely negative effects of the proposal and 
decreased competition among nationally recognized statistical 
rating organizations (NRSROs).
    KBRA was founded in 2010, and it is a full-service credit 
rating agency. It is one of the five largest rating agencies 
globally, and the largest rating agency established after the 
2008 financial crisis. Mr. Chairman, we believe that KBRA's 
entry into the market has been extremely positive for 
investors. We offer a diverse perspective and have restored 
transparency and analytical rigor to credit analysis. However, 
we and other small and medium-sized NRSROs continue to face 
barriers to competition. Despite KBRA's success over the past 
12 years, the Big Three still command approximately 95 percent 
market share and are woven into the fabric of our financial 
system. For example, many investor guidelines still refer to 
only the incumbent NRSROs. Certain key bond indices require 
that its security be rated by at least one of the Big Three. 
Government regulations and recent government facilities still 
reference the largest NRSROs by name, rather than all NRSROs.
    I would also like to highlight the importance of bond 
indices. Many investors benchmark to the S&P Bond Index or 
Bloomberg's Fixed Income Indices and, therefore, are not able 
to purchase bonds not rated by the Big Three because they are 
not index-eligible. We believe that the continued lack of open 
competition is by far the biggest problem facing the credit 
rating industry today. KBRA has been successful because of its 
relentless focus on transparent, thorough research and investor 
feedback, but it has not been easy.
    In our view, entrenchment of the Big Three disadvantages 
the financial markets, investors, and the public writ large. 
The impact that a mere proposal had on the market demonstrates 
S&P's significant market power and its ability to impede 
competition using that power. While S&P withdrew for the time 
being the anti-competitive sections of its proposal, we are 
concerned that S&P will continue to consider approaches with 
similar anti-competitive effects.
    In addition to already-significant systemic barriers to 
competition, S&P's proposed methodology would have allowed S&P 
to notch down KBRA's ratings from AAA to as low as CCC. If 
S&P's methodology had been implemented, it would have further 
reinforced S&P's position as the most-dominant credit rating 
agency by establishing disparate and arbitrary treatment of 
non-S&P ratings on bonds across all asset classes held in S&P-
rated insurance company portfolios.
    The negative market reaction to S&P's proposal was swift, 
clear, and widespread. We are aware that many diverse market 
participants submitted comments and provided feedback to S&P 
beginning in early January. In addition to the concerns raised 
by this committee, the Department of Justice submitted a 
comment identifying potential violations of antitrust laws 
stemming from S&P's proposal, and yet it took S&P 5 months to 
withdraw the problematic sections of the proposal.
    What can we do to prevent the aversion of fair competition 
among NRSROs? Mr. Chairman, in our view, many components of the 
NRSRO provisions of the Dodd-Frank Act have been highly 
successful and have meaningfully improved the credit rating 
industry. The requirement that NRSROs publicly post their 
methodologies and substantive changes to them allows investors 
to analyze methodologies in advance of implementation. This 
requirement was key in S&P's withdrawal of proposed changes 
that would have had further negative effects on the market and 
NRSRO competition. Still, we believe there is room to 
strengthen Federal law to bolster competition and increase 
disclosure. We support current legislative efforts to prohibit 
notching and to prohibit credit rating agencies from taking 
actions that have an anti-competitive effect while maintaining 
credit rating agencies' ability to determine their rating 
methodologies.
    We encourage Congress, the Department of Justice, and the 
SEC to continue to scrutinize S&P's proposed methodology, and 
to take swift and decisive action to prevent anti-competitive 
behavior such as notching, or any feature that includes 
disparate treatment of other NRSROs.
    Mr. Chairman, I thank the subcommittee for the opportunity 
to testify today, and I look forward to your questions.
    [The prepared statement of Ms. Liang can be found on page 
51 of the appendix.]
    Chairman Sherman. Now, I recognize Ian Linnell, the 
president of Fitch Ratings.

       STATEMENT OF IAN LINNELL, PRESIDENT, FITCH RATINGS

    Mr. Linnell. Chairman Sherman, Ranking Member Huizenga, and 
distinguished members of the subcommittee, I appreciate the 
invitation to appear before you to discuss the anti-competitive 
practice called notching, and how S&P is, in our view, using 
this practice in its proposed insurer capital adequacy 
methodology to further its market dominance.
    While we are pleased that on Monday, S&P effectively 
admitted that they had no basis for the proposed methodology, 
we hope that both S&P and Moody's will now consider 
alternatives to notching in local government investment pools, 
money market funds, bond funds, and collateralized loan 
obligations (CLOs), which fund U.S. small companies where 
either one or both of them are currently engaged in this 
behavior.
    In 2006, Congress passed the Credit Rating Agency Reform 
Act to foster accountability, transparency, and competition in 
the credit rating agency industry. Although the Reform Act 
addressed the notching conducted by both S&P and Moody's in the 
period before its passage, both agencies have continued to 
engage in this activity, and the SEC has failed to stop it.
    Fitch Ratings is a global rating agency located in over 25 
countries. During the last 3 decades, Fitch has become the only 
credible challenger to the duopoly of Moody's and S&P in the 
credit rating industry. Credit ratings play an important role 
in the efficient allocation of capital by providing the 
financial markets with an independent view of credit risk. Any 
measure that reduces competition in the credit rating agency 
industry hurts the marketplace.
    S&P's methodology is fundamentally anticompetitive because 
it incorporates the practice of so-called notching into S&P's 
assessment of insurer capital adequacy. Notching occurs when an 
agency either insists on rating most, if not all, of the assets 
owned by an entity and/or significantly reducing the ratings 
that other agencies have assigned to assets that they have not 
rated.
    The proposed methodology applies significant haircuts to 
all non-S&P-rated investments held by insurance companies. As a 
result, securities held by an insurer rated AAA by Fitch or 
Moody's could have their credit rating lowered to AA- by S&P, 
while securities rated AAA by other agencies or by the National 
Association of Insurance Commissioners (NAIC) could be rated 
CCC. We believe that S&P withdrew the methodology and continues 
to fail to explain its methodology because no explanation 
exists. The methodology was a pretext by S&P to use its 
dominant market position in insurance to increase its market 
share in the securities commonly purchased by insurers, 
including areas where S&P has a low market share.
    S&P's ratings are hardwired into many insurers' broker 
systems and brokers typically have criteria for recommending 
insurers to clients that only refer to S&P or AM Best ratings. 
This market power gives S&P a monopoly on insurer financial 
strength ratings and makes insurers hostages to S&P. As 
insurers are focusing on maintaining their S&P ratings, they 
would be discouraged from purchasing securities in those 
sectors where S&P rates relatively few securities. Insurers and 
the issuers of securities that insurance companies purchase 
would select S&P to avoid the punitive notching of the 
methodology and the negative impact on insurance financial 
strength ratings.
    Fitch was not alone in criticizing the methodology. Many 
market participants have condemned S&P's proposals. In 
addition, the Department of Justice recently commented that 
S&P's methodology has the potential to suppress competition 
from rival rating agencies.
    S&P and Moody's have been engaging in notching for over 20 
years. It is time for Congress to ban notching in all market 
sectors and for the SEC to start enforcing this ban.
    Thank you for your time and your attention on this critical 
matter. I welcome any questions that you may have.
    [The prepared statement of Mr. Linnell can be found on page 
61 of the appendix.]
    Chairman Sherman. Next, we have Mariana Gomez-Vock, who is 
the senior vice president for policy development at the 
American Council of Life Insurers.

STATEMENT OF MARIANA GOMEZ-VOCK, SENIOR VICE PRESIDENT, POLICY 
     DEVELOPMENT, AMERICAN COUNCIL OF LIFE INSURERS (ACLI)

    Ms. Gomez-Vock. Good morning. Thank you, Chairwoman Waters, 
Chairman Sherman, and Ranking Member Huizenga, for having me 
here today. My name is Mariana Gomez-Vock, and I am proud to be 
here today representing the American Council of Life Insurers. 
Before I dive too much into the details, I would like to 
briefly touch on the big picture, because I think it 
demonstrates why we care about this issue so much.
    The big picture is that 90 million American families, 
people you represent, depend on the life insurance industry to 
protect their financial future. Life insurance annuities, 
disability insurance, paid medical leave, and other products 
make certain that they can care for themselves and their loved 
ones in good times and bad. Our policies often stay with 
families for decades, and our promise to them is that we will 
be there no matter what, and we are. When the pandemic hit, 
life insurers were there. The pandemic hit many industries 
hard--retail, restaurants, airlines--but we were the industry 
that was writing checks and paying out to families. We were 
there when the worst came for too many. Benefits paid in 2020 
were the highest in history. The industry paid over $90 billion 
in life insurance benefits, and it is our long-term investments 
that are the bedrock of our commitments to be there when we are 
called.
    We invest $7.4 trillion in the U.S. economy. That is $572 
million every day. That makes life insurers one of the largest 
sources of investment capital in the nation, and our 
investments do more than protect policyholders. They drive 
economic growth in every corner of the country. Steady slow-
growth investments make it possible to keep our promises while 
providing business owners, farmers, school systems, and 
communities with the working capital that they need to open 
their doors, fund infrastructure, and grow their workplace. 
That is the big picture. Now, let us dig deeper.
    Insurer capital models like the one proposed by S&P are so 
critical to insurers that they will often shape their long-term 
investment and capital management strategies to align with 
them. When a rating agency notches an investment, it is 
signaling that it believes the asset has a higher risk of loss 
or default, and the insurer should hold more capital against 
it. S&P has proposed a notch, and, in some cases, disregarded 
credit ratings from competitors and designations from the NAIC 
Securities Valuation Office. In some cases, the notching would 
assign a 100-percent capital charge to an investment-grade 
asset without any clear reason for the notching, other than it 
is rated by an S&P competitor. We appreciate S&P's decision to 
revisit that part of their proposal because notching assets 
just because they are rated by a competitor will compromise the 
integrity of financial strength ratings and could disrupt 
capital markets. That is a bad outcome for consumers and the 
economy.
    Before I conclude, I would like to make three brief points. 
The first is that ACLI supports robust competition. Competition 
and diversity among the NRSROs benefits the insurance industry, 
the economy, and ultimately, consumers.
    The second point is that automatic notching is not 
harmless. It creates a fundamental disconnect between the 
asset's value and the asset's charge. Large swathes of 
insurance bond portfolios would have been notched, and 
structured products not rated by S&P would have been treated as 
junk under the S&P's original proposal.
    We look forward to exchanging views with S&P on the 
appropriate treatment of NAIC-designated securities. The 
proposal's disregard of these designations is counterintuitive, 
given that the NAIC designations are designed for and overseen 
by State regulators whose mission is to preserve the solvency 
of insurers and protect consumers. There is no conflict of 
interest there. Automatic notching essentially inflates asset 
charges. It would force insurers to choose between holding 
artificially-inflated levels of capital or to avoid high-
quality, high-yield assets just because they are rated by a 
competitor. Both outcomes are bad.
    The third point addresses the proposal's impact on the 
competitive global insurance market. Some of the changes were 
designed to promote global consistency, an understandable goal, 
but some elements of the proposal appear to disadvantage 
American regulatory and accounting regimes. This could 
disadvantage U.S. insurers' ability to offer key products to 
consumers, like variable annuities and whole life. We look 
forward to continuing the dialogue on this issue.
    One final observation. Much of this is highly technical, 
but the details matter. They matter because individuals and 
families all across this country are seeking certainty, and we 
are in the business of providing certainty. We are there for 
our policyholders when they need us. We are there for 
communities who rely on our economic investments in our towns, 
suburbs, and cities so they can feel America's commerce and 
ingenuity. A change by the world's largest rating agency will 
have an impact. Those changes should be transparent and 
supported by data. We urge you to think of those details and 
the impact that they will have.
    Thank you for the opportunity to share our view. I look 
forward to answering any questions you may have.
    [The prepared statement of Ms. Gomez-Vock can be found on 
page 32 of the appendix.]
    Chairman Sherman. And finally, we will hear from our last 
witness, Jennifer Schulp, the director of financial regulation 
studies at the Cato Institute.

STATEMENT OF JENNIFER J. SCHULP, DIRECTOR, FINANCIAL REGULATION 
 STUDIES, CENTER FOR MONETARY AND FINANCIAL ALTERNATIVES, CATO 
                           INSTITUTE

    Ms. Schulp. Chairman Sherman, Ranking Member Huizenga, and 
distinguished members of the Subcommittee on Investor 
Protection, Entrepreneurship, and Capital Markets, my name is 
Jennifer Schulp, and I am the director of financial regulation 
studies at the Cato Institute's Center for Monetary and 
Financial Alternatives. Thank you for the opportunity to take 
part in today's hearing.
    The state of competition within the bond rating industry is 
a perennial question. The Security and Exchange Commission's 
most recent report to Congress describes the concentrated 
NRSROs industry, with the three largest NRSROs accounting for 
approximately 95 percent of all outstanding ratings as of the 
end of 2020, but such broad statistics can be deceptive. As the 
Commission points out, smaller NRSROs have increased their 
total number of ratings outstanding, and have increased their 
share in some ratings categories. Moreover, drawing conclusions 
about competition from these numbers alone is difficult. A 
number of factors may explain the long-term tendency for the 
ratings industry to be comparatively concentrated. And, 
importantly, regulatory barriers can decrease competition. 
Legislative solutions should focus on lowering regulatory 
barriers and decreasing the artificial demand for NRSRO 
ratings.
    The subject of today's hearing relates to a recent proposal 
now withdrawn by S&P Global Ratings to notch down ratings of 
non-S&P-rated securities when applying its methodology to rate 
life insurers' investment portfolios. While such notching may 
raise concerns about its effect on competition, legislative 
action is premature.
    First, the proposal has been withdrawn in response to 
critical comments. S&P has indicated that it will issue a new 
request for comment which may ameliorate any potential anti-
competitive concerns or raise different ones. It would be 
prudent to delay consideration of potential legislative action 
until the issue becomes more clear.
    Second, other laws already prohibit anti-competitive 
behavior. In addition to the antitrust laws that apply without 
regard to industry, Section 15E of the Exchange Act, and the 
Commission's rules, prohibit unfair, coercive, or abusive NRSO 
behavior. Additional legislation may not be required.
    Finally, rushing to judgment on the methodology change 
proposed may itself harm ratings quality by limiting NRSROs 
from considering the creditworthiness of instruments rated by 
another agency, or by substantively regulating credit ratings 
and rating methodologies.
    Given this committee's hearing on NRSROs less than a year 
ago, I respectfully suggest that there are other issues more 
suited to the investment of this committee's limited resources. 
For example, the Commission's agenda may be the most ambitious 
in its history. It is being undertaken at breakneck speed and 
with an unprecedented disregard for the importance of public 
comment to the rulemaking process. While short comment periods 
have the potential to limit public comment on proposed rules, 
particularly where those rules are complex, public input is 
limited even further when commenters are unable to analyze the 
interrelationship of a large number of proposed rules, 
including their unintended consequences.
    The Commission's recent announcement that it would extend 
the time period for its climate risk disclosure proposal, and 
reopen comment on two other proposed rules, is welcome, but 
does little to alleviate broader concerns where short comment 
periods have predominated and continue to do so. The ability of 
the public to comment on proposed rules and the effect of 
limited public comment on the quality of rulemaking should be 
of concern to this committee.
    The Commission's agenda also raises a number of issues 
relevant to this committee's interests in investor protection, 
entrepreneurship, and capital markets, including the 
Commission's proposed rules on climate risk disclosure and 
private fund disclosure. What is missing from the Commission's 
agenda is also notable. There is little that arguably 
constitutes a plan for supporting capital formation, and many 
of the Commission's proposed rules and agenda items may operate 
to deter entrepreneurship. The Commission's agenda also lacks 
items relevant to the regulation of digital assets, except 
where rule proposals may have effects the Commission has 
declined to discuss. The Commission has instead chosen to lead 
with enforcement actions over rulemaking in this space.
    These are just a few of the issues in connection with the 
Commission's current agenda that are more deserving of this 
committee's time and attention than additional focus at this 
time on NRSRO regulation. Thank you, and I welcome any 
questions that you may have.
    [The prepared statement of Ms. Schulp can be found on page 
67 of the appendix.]
    Chairman Sherman. Thank you. We have heard from our 
witnesses. I will now recognize myself for 5 minutes for 
questions.
    This is known as the Capital Markets Subcommittee. Our last 
hearing was on the stock markets. This hearing is about the 
most critical part of the bond markets. It is hard to say that 
we are not focusing on our capital markets. Though as a 
philatelist, I believe that perhaps we are leaving out the 
market for collectible stamps. So, we are covering the bond 
market. We are covering the stock market.
    The critical role that the bond rating agencies play is 
exemplified by the fact that if you are putting together a 
portfolio, and you generate a 5.7 percent return on bonds rated 
either AA or AAA, you look good compared to somebody else who 
puts together a portfolio meeting the same requirements, who is 
only getting 5.6 percent. The fact is, whether you are putting 
together a portfolio for an insurance company and trying to 
please your boss there, or whether you are putting together a 
portfolio for a mutual fund, the ratings determine what you 
need to put into that portfolio.
    As to the problem that is focused on in this hearing, we 
are being told by some that it is not an important problem. 
Nine Republican Members signed the letter urging that this 
problem be dealt with, and I think our witnesses have 
illustrated how important this problem is. And as I say, I 
think this subcommittee hearing was remarkably effective and 
that the proposal has been withdrawn, but that raises the 
question for our witness from S&P, Mr. Le Pallec, is this 
proposal dead or just sleeping for a while?
    Mr. Le Pallec. Thank you, Mr. Chairman, and I appreciate 
you giving me the opportunity to give more information on the 
ongoing request for comment process. On Monday, the 9th of May, 
we published a FAQ that announced the withdrawal of one 
particular section that was describing the way we were 
proposing to deal with a fairly complex technical issue, which 
is how to assess the thousands of securities held by insurers.
    Chairman Sherman. I am going to interrupt you there. We 
have an anti-notching statute that deals with asset-based 
securities. Is there any reason we shouldn't extend that to all 
bond issuances?
    Mr. Le Pallec. I have no particular view about that. What I 
am trying to say is that--
    Chairman Sherman. Well, that is the major proposal being 
considered by this subcommittee, and on our list of proposals, 
and the fact that you aren't here to oppose that proposal 
commends it to all of our colleagues.
    Mr. Le Pallec. We have an open request for comment that 
continues. We will continue to take in comments. There were 
serious concerns raised. We took them into account. It is out 
there for everyone to see.
    Chairman Sherman. I thank you for doing that, and knowing 
that this issue could come up in the months and years ahead, I 
think that we need legislation. Why don't I ask the gentleman 
from Fitch? One proposal before us is that we prevent the bond 
rating agencies of the United States from rating any new 
instruments coming out of Russia and Belarus more particularly, 
or we might limit it to certain state-affiliated firms. We 
could go further with secondary sanctions and turn to the 
foreign-based bond rating agencies and say, if they rated such 
bonds, they could not rate bonds here in the United States, or 
at least American issuers couldn't pay them to do so. What 
effect would denying bond ratings to all future issuances by 
Belarus and Russia have on their ability to raise capital? Mr. 
Linnell?
    Mr. Linnell. For us, in Russia, the ship has already 
sailed. We announced the suspension of commercial operations in 
Russia on March 7th. We announced on March 23rd our intention 
to withdraw the ratings in Russia. Towards the end of March, 
several banks--
    Chairman Sherman. Thank you. I will ask the gentleman from 
S&P, Mr. Le Pallec, are you still rating Russia?
    Mr. Le Pallec. No, we don't. We withdrew all our ratings on 
Russian entities--
    Chairman Sherman. Are foreign-based bond rating agencies 
rating them, the Japanese, the Europeans? You don't know?
    Mr. Linnell. I'm sorry to just interrupt. The EU passed a 
law that for any rating agency based in Europe that endorses 
international ratings, they have to withdraw their ratings by 
April 15th.
    Chairman Sherman. Okay. Next, I will ask our representative 
from Kroll, Ms. Liang, we have a system of different ratings. 
Instead of saying first-best, second-best, third-best, fourth-
best, all the way up to 18th-best, we have weird combinations 
of plus and minus signs, and capital and small letters, which 
are absolutely unintelligible. What would be the harm to the 
bond rating agency if you just said, first-best, second-best, 
third-best? Would it be a great harm to our society if my 
constituents could understand what you are saying?
    Ms. Liang. Thank you for your question, Chairman Sherman. I 
don't think it would be any harm to your--
    Chairman Sherman. I see that my time has expired. I am 
going to ask you to respond for the record.
    Ms. Liang. Okay.
    Chairman Sherman. I now recognize the ranking member of the 
subcommittee, the gentleman from Michigan, Mr. Huizenga, for 5 
minutes.
    Mr. Huizenga. Thank you. Ms. Schulp, the pace and substance 
of the SEC rulemaking is unlike anything I have seen as well in 
the 6 terms that I have been here doing this. And as you had 
pointed out, coupled with those short comment periods, they are 
releasing rules really without articulating how they are going 
to interact or potentially contradict some of their other 
proposals. For instance, SEC securities lending, short 
disclosure, and swaps rules impact similar markets without 
specifying how the rules will interact with one another. Do you 
believe that the SEC has clearly articulated how these rules 
are supposed to work together?
    Ms. Schulp. No, I don't believe they have. A similar 
problem exists with respect to the 10b5-1 plans and the share 
repurchase disclosure as well.
    Mr. Huizenga. Okay. And you have sort of articulated this 
in your opening statement. You would agree that the common 
effect of all of their rules really isn't understood by the 
Commission, much less those that they are actually regulating, 
correct?
    Ms. Schulp. Correct.
    Mr. Huizenga. Okay. It should be noted that these rules are 
being released during a period of extreme market volatility as 
well. And I am curious, in your view, do you think these rules 
could be potentially adding to some of that volatility that we 
are currently seeing?
    Ms. Schulp. It is difficult to say what exactly is adding 
to the market's volatility, but the uncertainty caused by these 
rules can be disruptive, both to the economy, as well as the 
financial industry generally.
    Mr. Huizenga. We have lots of reasons to talk to the SEC 
and other regulators. I guess we will have to get to those 
hearings in about 7 months, but trust me, it is going to be 
busy, so buckle up and hang on everybody.
    Ms. Gomez-Vock, one of the overreaching criticisms of the 
S&P proposal is that it diverges significantly from the U.S. 
regulatory framework. As I noted in my opening remarks, some of 
my original concerns remain, and I certainly would like to see 
S&P address those in any forthcoming proposals. My concern is 
that the divergence from the U.S. system will have material 
impact on insurers and their products that they offer in the 
financial marketplace. For instance, it appears that long-term 
guarantee products, such as variable annuities, which our U.S. 
companies offer, will be especially impacted by this proposal, 
unnecessarily raising costs, limiting availability, et cetera, 
and I am just wondering if you could comment on that?
    Ms. Gomez-Vock. Yes, products like variable annuities and 
their availability, accessibility, and affordability, which 
help people live and retire with predictable income, could be 
particularly impacted. And we are concerned with the S&P's 
proposal, the fact that it does diverge significantly.
    Mr. Huizenga. What is the management issue there? What is 
going to make it more difficult to manage that and put you at a 
competitive disadvantage?
    Ms. Gomez-Vock. I think there are a number of different 
reasons, given the complexity of the actual formula itself. But 
the big-picture issue is that for insurers, it is very 
difficult, if not impossible, to manage two different capital 
standards, and the U.S. system is the NAIC risk-based capital 
system. It is a book value-type approach that uses reserves and 
is more cash flow-based. The S&P global capital model is more 
similar to Solvency II and the ICS. It is more of a market-
consistent framework which tends to be unfriendly to long-term 
products.
    Mr. Huizenga. Okay. Thank you. Mr. Le Pallec, I would like 
to take a moment and discuss S&P's recent decision to publish 
ESG indicators for U.S. States. Do you agree that these 
ratings, whether they are done by S&P or, frankly, any other 
credit rating agency, should be based solely on financial 
indicators within the State and items that are material to the 
creditworthiness of the rated entity, or are you looking at 
something else?
    Mr. Le Pallec. We have taken into account ESG risks in 
credit ratings all along, whenever those risks have had an 
impact on creditworthiness, and we have published that in our 
rating rationale--
    Mr. Huizenga. Let me stop you right there. So, materiality.
    Mr. Le-Pallac. The indicators that you are talking about 
are an additional element of transparency and disclosure that 
we have been publishing on corporations, financial 
institutions, and more--
    Mr. Huizenga. Is that for everybody, whether it is material 
or not?
    Mr. Le Pallec. That is for all entities we rate, because 
investors for the past 2 years around the world have been 
asking us constantly the same question, tell us whether ESG 
risks have had an impact on creditworthiness or if they have, 
and why? And those indicators--
    Mr. Huizenga. How about D&I? How about D&I issues or some 
of those other, maybe not the ``E'' side of the ESG? Is 
diversity and inclusion now also part of how you rate a company 
or--
    Mr. Le Pallec. To the extent that it has an impact on 
creditworthiness, we have to take any ratings--
    Mr. Huizenga. Again, only if it is material.
    Mr. Le Pallec. The ``S'' would typically be aging 
population in any municipality or State that has an impact on 
cash flows--
    Mr. Huizenga. My time has expired. I appreciate it. Thank 
you.
    Chairman Sherman. The Chair of the Full Committee, 
Chairwoman Waters, is recognized for 5 minutes.
    Chairwoman Waters. Thank you very much. Mr. Le Pallec, 
shortly after this hearing was announced, S&P withdrew a 
controversial proposal that many market observers have 
suggested was anticompetitive. In fact, S&P was warned by the 
Justice Department that the proposal would violate antitrust 
laws. S&P deserves no praise, however, for withdrawing a 
proposal it never should have put forward. Notably, this wasn't 
the first time S&P proposed notching down its competitors' 
ratings. In 2007, just before the financial crisis, S&P was 
trying to increase the market's reliance on its own ratings by 
similarly proposing to undermine its competition. One positive 
outcome of S&P's latest proposal has been to draw attention to 
other anti- competitive practices by the largest bond rating 
agencies.
    Before the 2008 economic crisis, for example, it was a 
common practice among the largest two rating agencies, S&P and 
Moody's, to stipulate that they would only provide a credit 
rating for collateralized loan obligations (CLOs), and bond 
insurers if they also rated all of the underlying securities 
issued by that CLO or the bond insurer, aiming to prevent 
smaller rating agencies from rating any of the underlying 
securities. A decade later, does S&P's rating criteria still 
stipulate that S&P will only provide ratings for bond insurers 
if S&P also rates every underlying issuance of that bond 
insurer? Yes or no?
    Mr. Le Pallec. No, we don't.
    Chairwoman Waters. I beg your pardon?
    Mr. Le Pallec. We don't.
    Chairwoman Waters. Ms. Liang, as a smaller rating agency, 
what is the effect of this policy on KBRA and your ability to 
rate securities?
    Ms. Liang. Thank you, Madam Chairwoman. The effect on KBRA 
as a smaller and medium-sized NRSRO would be the same as what 
S&P proposed recently. I will note that the CLO market and the 
bond insurer market is smaller, and so the effect may not be as 
great as it would be in the insurance industry, but the effect 
would be anticompetitive in practice.
    Chairwoman Waters. Thank you. In 2015, Moody's, whom we 
invited to today's hearing but declined to come, drew criticism 
when a Wall Street Journal article reported that after a 
Pennsylvania bank contracted with KBRA for a rating, Moody's 
threatened to release an unsolicited rating that was lower than 
the KBRA rating. Ms. Liang, from your perspective at KBRA, what 
was the effect of this action by Moody's?
    Ms. Liang. Thank you, Madam Chairwoman. At the time, we had 
just started rating community banks, and Moody's and the larger 
rating agencies were not rating that space because their 
methodology had a size bias and did not permit the rating of 
the smaller banks. And so, when we published our rating and 
heard that Moody's was going to publish an unsolicited rating 
with a lower rating, we took that to mean that they were trying 
to discourage our entry into the market and also to undercut 
the viability of KBRA as a rating agency.
    Chairwoman Waters. More recently, S&P purchased IHS Markit, 
which at the time was one of the largest data and analytical 
firms in the world, for $44 billion. Rating agencies need data 
to conduct their analysis. Some have raised concerns that now 
that S&P is in control over IHS Markit, it may limit the 
provision of this data to its competitors.
    Mr. Linnell, do you share these concerns about S&P owning 
such a trove of data and analytical capabilities?
    Mr. Linnell. I think there is a broad benefit from groups 
having and offering a broader range of credit and risk 
products. It does indirectly help their core ratings business, 
but I don't think you can draw a line one-for-one saying that 
this reinforces their duopoly. I think the issue on the table 
today around notching and anti-competitive practices is more 
important, and it is a shame you didn't ask the colleague from 
S&P about their CLO bond fund money market funds. The 
reinsurance sector is not really a big sector anymore.
    Chairwoman Waters. I have only asked you about a few of 
these practices, but the list is longer. For example, S&P's 
exclusion of non-S&P-rated securities from its mixed-income 
indexes, S&P's notching practices in money market funds, S&P's 
and Moody's heavy engagement with institutional investors to 
maintain investment guidelines that favor S&P and Moody's, 
among others. Investors need a diversity of ratings opinions, 
and I am glad that this committee is shining a light on how 
incumbent large rating agencies employ various anti-competitive 
practices--
    Chairman Sherman. Thank you.
    Chairwoman Waters. I yield back the balance of my time.
    Chairman Sherman. Yes. The gentlelady from Missouri, Mrs. 
Wagner, is recognized for 5\1/2\ minutes.
    Mrs. Wagner. Thank you, Mr. Chairman. I hope you can watch 
the clock a little more closely here in respect to everyone, 
our witnesses and our Members.
    Ms. Schulp, does the Commission's rulemaking agenda include 
any proposals to help facilitate capital formation? And further 
to that, why should the SEC be focused on reducing burdens for 
companies to access capital?
    Ms. Schulp. First, the Commission's agenda does not have a 
specific rulemaking or capital formation agenda items on it. 
And, in fact, I am concerned, because many of the agenda items 
that are on the Commission's agenda go towards putting 
additional burdens on capital formation themselves, such as the 
ESG disclosure rules.
    Mrs. Wagner. And what else? Please elaborate.
    Ms. Schulp. The ESG disclosure rules are private fund 
disclosure rules where the SEC is beginning to insert itself 
further into private markets, where the SEC has previously not 
done so before, which puts additional costs on capital 
formation in those spaces as well. There are a number of places 
where the SEC's proposed rules can harm entrepreneurship and 
harm the efficient allocation of capital.
    Mrs. Wagner. And certainly, one would think that we should 
be focused, at the SEC in particular, on reducing those burdens 
to capital formation, correct?
    Ms. Schulp. I agree. Part of the SEC's tripartite mission, 
as they are happy to say, is to facilitate capital formation.
    Mrs. Wagner. We will get to that. Our priorities in this 
committee should be, I think, as I stated, reducing the cost of 
capital for companies, and helping investors, our retail 
investors, real people out in Missouri's 2nd Congressional 
District who are trying to make both ends meet, helping those 
investors grow their savings, especially during these very 
difficult inflationary times. Instead, I have to say that 
committee Democrats and the Commission are focused on climate 
disclosure requirements for public companies and other 
initiatives, as you have outlined some, Ms. Schulp, that will 
ultimately discourage companies from going or staying public, 
which means fewer investment options for Main Street Americans.
    Ms. Schulp, there has been much discussion surrounding the 
impact of the SEC's short comment periods, especially when it 
comes to the multitude of potentially interconnected proposals. 
Will you discuss the impact that short comment periods have on 
market participants and how these historically short comment 
periods impact the Commission's rulemaking process as its 
ability to uphold the three-part mission as you meant--
    Ms. Schulp. First, I think it is important to clarify that 
market participants really mean all of us, when we are talking 
about market participants here, all the way down from your 
retail investor who might have opinions about how the SEC 
should be regulating here, all the way up through your largest 
Wall Street banks. Your largest Wall Street banks may very well 
have an army of lawyers who can spend their time reading 
through these proposals. But even at that, being able to 
determine how these proposals interrelate, to really sit down 
and think about the unintended consequences of these proposals, 
short comment periods, harm that. And they harm the SEC's 
ability to really understand and weigh the potential effects of 
the rules that they have proposed. Short comment periods also 
result in fewer comments. They likely result in fewer 
complicated comments that bring some of these deeper issues to 
light. That is less for the SEC to deal with when they are 
finalizing rules under the Administrative Procedure Act, and I 
think that is a negative. The SEC should be able to gather as 
much information as possible in order to create quality 
rulemakings that benefit the American people, benefit the 
markets, and will also be able to stand the test of time--
    Mrs. Wagner. And obviously, the smaller investors and the 
smaller capital formation companies are greatly hindered by 
this. Ms. Schulp, there has been no discussion on removing 
barriers for everyday investors from my Democrat colleagues. 
Are there any regulatory barriers you see that we in Congress 
could work to remove today?
    Ms. Schulp. One of the easiest is to open up the accredited 
investor definition to more investors. In fact, that is on the 
SEC's agenda, but not with the intention of opening it up 
further, but rather taking a look at it again to close it down 
and to make private market investments less available to 
average individuals.
    Mrs. Wagner. Barriers, barriers, barriers, when we have to 
be concentrating on growing capital, capital formation, and 
helping our investors grow their savings. I thank you for your 
input, and I yield back the balance of my time.
    Chairman Sherman. The gentleman from Georgia, Mr. Scott, 
who is also the Chair of the House Agriculture Committee, is 
recognized for 5 minutes.
    Mr. Scott. Mr. Linnell, let me start with you. I am very 
concerned about competition in the credit rating agency 
industry and the impact that market domination could have on 
banks, insurers, financial companies, and other industry 
participants. And about the ratings market, there are some who 
feel that they should remain as they are, which really looks 
like an oligopoly where only a small number of participants 
compete in order to safeguard their reputations of the ratings. 
However, studies that have been brought to my attention have 
shown that competitive dynamics, even amongst a small number of 
rating agencies, can result in higher-quality ratings and 
potentially mitigate the inherent conflict of interest in the 
issue-payers model.
    Mr. Linnell, tell me, how would you assess competition 
amongst the credit rating agencies, and how is this competition 
distinct from other markets?
    Mr. Linnell. I think since the passing of the Dodd-Frank 
Act after the financial crisis, competition in the rating 
agency industry in general has intensified. We are seeing more 
and more new entrants. I think a good example of that is what 
we are talking about today, really one aspect of it, which is 
the U.S. structured finance market. There, back around 2010, 
you really had the Big Three firms competing with each other: 
Fitch; Moody's; and S&P. But since then, you have had the new 
entrants. We have Kroll, and then you have had DBRS expanding 
with the merger with Morningstar, and their market share has 
increased significantly. They are up to about 20, 25 percent of 
the market each, while the Big Three have come down quite 
steadily to around about 45 percent, and we are about 30 
percent.
    What you have there is a market that has gone from three 
large players to one, where there are five agencies competing 
with each other, and there are new agencies coming up all the 
time. So I think competition is good, but there are still 
problems in the industry, and S&P and Moody's benefit from 
institutional barriers, but some due to their own policies 
which they have put in place, such as notching, which is what 
we are here to discuss today.
    Mr. Scott. Okay. Do you believe that robust competition for 
the credit rating industry is the absolute best way to promote 
the continued integrity, reliability, and quality of their 
ratings?
    Mr. Linnell. Yes, as long as it is combined with 
transparency. As long as you have transparency around the 
performance of those ratings, how those ratings have been 
developed, what analysis and what issues support those ratings, 
then, yes, absolutely, competition tends to produce--
    Mr. Scott. How would you rate transparency in the industry 
right now?
    Mr. Linnell. I think it is pretty good. The agencies 
generally had a high level of transparency going into the 
financial crisis, but regulatory reforms around Dodd-Frank and 
similar regulations in Europe promoted a much greater level of 
consistency in the way that agencies provide information to the 
market. I think the level of transparency is--
    Mr. Scott. Yes. I want to get to Ms. Liang with this 
question. Ms. Liang, you cited in your testimony how difficult 
it is to even enter the credit rating agency market, and 
highlighted the Securities and Exchange Commission's 
registration process as a barrier to new entrants. What 
specific changes would you suggest that the SEC consider making 
to increase the number of new credit rating agency registrants?
    Ms. Liang. Thank you for your question. Currently, the SEC 
regulation requires new entrants to the market to basically 
provide attestations from investors who have used that 
applicant rating agency's ratings for 3 years. This is a very 
difficult bar to achieve because most investors have little use 
for ratings from non-NRSROs. So, I think it might be helpful 
for the SEC to look at different ways that new entrants could 
enter the market. I leave it to them in their research on how 
best to do that, but I would be happy to continue the 
conversation.
    Mr. Scott. Thank you, Ms. Liang. I am done with my 
questions, Mr. Chairman, relatively on time.
    Chairman Sherman. Thank you. Relatively. I now recognize 
the gentleman from Arkansas, who is also the Republican lead on 
the Russia and Belarus Financial Sanctions Act, Mr. Hill, for 5 
minutes.
    Mr. Hill. First, let me thank the Chair for our 
collaboration together on economic cost, raising the economic 
cost on Putin and the Kremlin for their illegal invasion of 
Ukraine. And yesterday, we had excellent work on that on a 
bipartisan basis to send the signal to our transatlantic 
partners that the U.S. speaks with one voice on raising the 
economic, diplomatic, and military costs of Putin's illegal 
invasion. So today, thanks for having this hearing to talk 
about our rating agencies, and I couldn't help but notice a 
number of the bills that were noticed and attached to this 
hearing. One was of particular concern to me, which is the 
Commercial Credit Rating Reform Act, that proposes to change 
the rating assignment model process.
    After the financial crisis, as we have talked about this 
morning, Dodd-Frank tasked the Democrat-led SEC at the time 
with implementing a ratings assignment model, which meant the 
creation of a quasi-governmental board to assign qualified 
rating agencies to provide ratings. The SEC thoroughly 
considered a range of business models, and many other market 
participants raised concerns that the writing assignment 
model's quasi-governmental board would hold significant 
influence over the capital markets by being the sole party to 
select and assign ratings for the entire market rather than 
relying on market checks and balances, competition, and 
investors.
    And after a thorough review and public feedback, the 
Commission decided not to mandate any structural changes to 
what is known as the issuer pay model. We have talked about 
this now for over a decade, and we certainly recognize that 
credit rating agencies have potential conflicts of interest, 
regardless of whether issuers, investors, or governments pay 
for those ratings or assign those ratings. Our goal as 
policymakers should be to ensure that these potential conflicts 
are managed and mitigated. That is the whole secret to the 
capital market system, is, of course, it has built-in conflicts 
of interest in it. And the whole question about public policy 
is, can those be transparent? Can they be managed in the right 
way? Can they be subject to the checks and balances of those 
market forces? So, despite those potential conflicts of 
interest, issuer pay produces a stronger and, I think, less 
biased signal for market participants. My thoughts are, we had 
these conflicts, and they are not going to be solved, in my 
view, by turning more power over to the government.
    Let me start with you, Mr. Le Pallec, and I will, in turn, 
ask the other rating agencies present to comment. Would you 
agree that a rating assignment model would discourage 
independent competition and risk that would end up 
deteriorating the quality and future innovation in the credit 
rating industry?
    Mr. Le Pallec. Thank you for your question. Certainly, we 
have reservations about this proposal. We think it treats 
ratings as a commodity, and prevents investors from making 
their own choices. Investors may have very different use cases, 
and they rely on the diversity of view in the market, and we 
want the market to be competing on the quality of our ratings.
    Mr. Hill. Thank you
    Mr. Le Pallec. Also, in terms of the feasibility, 
particularly for the corporate market, it would be very 
important to consult with the corporate issuers. Apart from 
Treasuries, that is the biggest section of the market in the 
United States.
    Mr. Hill. Right. Mr. Linnell, what do you think?
    Mr. Linnell. Just a moment ago, we talked about the 
benefits of competition, and what is the best way to provide 
high-quality credit ratings to the market. A board or some sort 
of selection process is essentially a government subsidy and 
just removes that incentive. We continue to think it is a bad 
idea. It just introduces new potential conflicts, new costs, 
and new bureaucracy, and isn't needed.
    Mr. Hill. Good. Thank you. I would like to invite the other 
agencies here to send me a written answer to that question.
    Let me switch gears to Ms. Schulp from Cato. Given the 
significant influence that this quasi-governmental board would 
have for a ratings assignment model, doesn't this approach in 
and of itself carry its own conflict of interest?
    Ms. Schulp. It absolutely does.
    Mr. Hill. Tell me more. Tell me why you think that is just 
a bad idea in search of a challenge?
    Ms. Schulp. I think we have recognized, and as Congress has 
recognized before, by promoting and seeking to promote 
competition in the rating space, that competition is the way to 
keep these conflicts within check. And in order to encourage 
the additional development of new methodologies, refinement of 
methodologies, and continuing to innovate in the credit rating 
space, the government, a quasi-governmental board, or a 
governmental board assigning ratings in that way removes the 
incentives for all of that development and the focus on quality 
in the same way.
    Mr. Hill. Thank you. And, Mr. Chairman, thank you for the 
hearing, and I yield back.
    Chairman Sherman. Thank you. The gentleman from Texas, Mr. 
Taylor, is recognized for 5 minutes.
    Mr. Taylor. Thank you, Mr. Chairman. I appreciate that. Mr. 
Linnell, I wanted to hear from you about what changes have been 
made in your business model over the last decade since the 
financial crisis?
    Mr. Linnell. The business model itself is unchanged, the 
issuer pay model. But since the financial crisis, particularly 
after the passing of Dodd-Frank, we put in a number of 
different changes to reflect the legislative requirements but 
also just to continue to invest and grow and improve our own 
risk management infrastructure.
    The Dodd-Frank Act, in particular, introduced a formalizing 
control framework around the determination of ratings, formal 
legal attestation around those controls being adequate to 
manage those risks. It requires the board now to independently 
approve all criteria. It created a formal compliance officer 
role and also strengthened the regulatory oversight of the 
rating agencies for the creation of the credit ratings unit 
within the SEC. And it also encouraged greater transparency and 
disclosure around things like key rating drivers and 
standardization, of how agencies talk about key risks in their 
ratings. And these regulations, which, as we all know, run many 
hundreds of pages, are echoed as well in the EU regulation 
around the credit rating issue, Directives Number 2 and 3.
    So, there has been a significant strengthening of the 
control infrastructure, all designed to more effectively manage 
this conflict of interest that we all talk about. And then, in 
addition, disclosures have been significantly stepped up across 
the industry. And I think there is a general acceptance, or at 
least that is what I hear, that disclosure standards are pretty 
robust.
    Mr. Taylor. And in terms of your underwriting, how has that 
changed over the last decade?
    Mr. Linnell. Essentially, we are trying to predict the 
future with credit ratings, right? Is the company going to 
honor their obligations in 10, 15, 20 years' time? We continue 
to think about new ways of how we can analyze risks, how we can 
look at new and emerging risks. There is a discussion on ESG 
risks but cybersecurity risks, conduct risk, all new risks are 
starting to come and play a greater prominence.
    We continue to strengthen things like different access to 
information, the way that we look at data and using new 
technologies around machine learning, artificial intelligence, 
and also strengthening internal control functions, such as our 
credit policy group, which is not aligned to any particular 
group. It is an independent internal task force, if you like, 
that looks at the quality of our ratings. And we continue to 
think about how we can improve our methodologies and criteria 
to reflect the ever-changing risk environment in which we 
operate. And I think overall, you can see that in the 
performance of the ratings that continue to be very strong 
since the financial crisis.
    Mr. Taylor. Ms. Schulp, just to switch to you, are there 
any regulatory barriers that you think could be removed, that 
would help improve the markets?
    Ms. Schulp. Sure, and it has been discussed before, but I 
think the--
    Mr. Taylor. Why don't you just add on new information--
    Mr. Schulp. Yes. The registration, the letters from 
investors for 3 years in order to become an NRSRO has been 
cited time and again as a barrier to entry into the NRSROs 
space. And regulations and legislation across the government 
that recognize particular NRSROs for recognition for investment 
and other purposes itself creates an anti-competitive 
environment where the smaller ratings agencies are 
disadvantaged. I think those are places to focus on.
    Mr. Taylor. Okay. Thank you. Mr. Chairman, I yield back the 
balance of my time.
    Chairman Sherman. Thank you. I now recognize the gentleman 
from Wisconsin, Mr. Steil, for 5 minutes.
    Mr. Steil. Thank you very much, Mr. Chairman. Ms. Schulp, 
as we have discussed today, the SEC has been rushing out new 
significant rulemakings and setting unusually short comment 
periods. I am concerned with the substance of many of these 
rules, but I am also worried about the SEC's pace, that is 
designed to limit substantive public comment. I know you have 
authored multiple public comments for rules. Is this correct?
    Ms. Schulp. Correct.
    Mr. Steil. How long does it typically take to draft 
substantive comments on a significant rule proposal?
    Mr. Schulp. Quite a bit of time. It depends on the rule 
proposal, but it is a solid--
    Mr. Steil. Give me a range.
    Ms. Schulp. A couple of weeks' work for me, while I am not 
focused on other things--
    Mr. Steil. So from the moment you start, it is a couple of 
weeks of full-time work, from the moment you start to getting 
those rules out. In that context, if you have other things 
going on, which most people do, when we have unusually short 
periods of time, it makes it incredibly difficult for 
individuals, companies, and stakeholders to provide substantive 
comments to SEC rules. Is that correct?
    Ms. Schulp. It does, and I will say that the pace has 
caused me to pick and choose what I would comment on in ways 
that I would otherwise not do.
    Mr. Steil. So you pick and choose, but it also limits 
others who are able to provide comments, meaning it limits 
those who might want to provide comments from providing those 
comments?
    Ms. Schulp. Absolutely.
    Mr. Steil. And what does it do to the quality of our 
regulations? Is the SEC at risk of having blind spots because 
they are not going to have the opportunity to receive comments 
from stakeholders?
    Ms. Schulp. I think that is true.
    Mr. Steil. Let me shift gears slightly. You wrote an 
article last year criticizing the SEC's paternalistic attitude. 
And in many ways, I share some of the concerns you put forward 
in that article, in particular as it relates to excessive 
restrictions and burdens on retail investors, reducing 
opportunities for millions of American families to be able to 
participate in our capital markets. And my colleagues are 
concerned about wealth inequality. I think one of the areas 
that we have an opportunity to push back on is some of the SEC 
rules and regulations we see being put forward in a 
paternalistic manner.
    I would like you to just, tightly here because I want to 
jump to another question as well, identify some of the 
proposals or general beliefs that you think the SEC exemplifies 
with this paternalistic approach?
    Ms. Schulp. The ESG rules that are coming out, the climate 
risk disclosure rules, those in particular are problematic 
because they are going to encourage companies either to not be 
public or to go private as the situation depends. And that will 
remove the ability of average investors to invest in those 
companies that are having important roles in our economy.
    Mr. Steil. I think that is really important. So, your 
average mom-and-pop retail investor, when companies leave the 
public markets, go into the private markets, it gives an 
advantage to private equity firms. It gives an advantage to 
some of the biggest players on Wall Street, and removes the 
opportunity for Main Street mom-and-pop kind of investors to be 
able to invest and take advantage of U.S. capitalist 
structures.
    Ms. Schulp. Absolutely.
    Mr. Steil. Let me shift gears with you for a moment. I want 
to talk about one of the core principles of securities law that 
seems to continually come up in this hearing, or in this 
committee, and that is materiality. As you know, this principle 
underpins our disclosure-based system. And it served investors 
quite well for decades, and under current law, if information 
is material to investors, it needs to be disclosed. Is that 
correct?
    Ms. Schulp. Within the broad categories that the law 
already requires disclosure on, correct.
    Mr. Steil. Correct. And the SEC, in my opinion, appears to 
be moving away from this traditional interpretation of 
materiality, in particular as it relates to the climate 
disclosure rule that they are working on. SEC Chairman Gensler 
and Commissioner Lee have argued that there is an investor 
demand for climate disclosures, so the SEC should be required 
to act on that. Can you talk about how the SEC's interpretation 
of materiality in their argument supporting the climate 
disclosure rules differs from the traditional understanding of 
the term?
    Ms. Schulp. When looking at the climate risk disclosure 
rules, the connection between so many of the things that are 
disclosed and financial materiality is tenuous at best, and, in 
some cases, completely absent. What is also important to know 
is that investor demand can be a component of whether something 
is material to an investor. The SEC relies, in its climate risk 
disclosure rules, solely on demand from large institutional 
investors who have worked climate risk into their modeling. 
While that is not unimportant, they are focused solely on the 
largest investors rather than on what the whole market and 
perhaps what individual investors might want in an investment.
    Mr. Steil. Thank you very much. Mr. Chairman, I remain 
concerned about where the SEC is headed as it relates to 
shifting away from materiality, and, in particular, the rush of 
some of these rulemakings. Cognizant of time, Mr. Chairman, I 
yield back.
    Chairman Sherman. I now recognize the gentleman from 
Illinois, Mr. Foster, who is also the Chair of our Task Force 
on Artificial Intelligence, and has recently arrived from his 
important work at the Science Committee, and he is recognized 
for 5 minutes.
    Mr. Foster. Thank you, Mr. Chairman. The Dodd-Frank Act 
required SEC staff to study and publish a report, and one that 
the credit rating system would benefit from requiring NRSROs to 
adopt uniform rating scales and rating symbols. In the final 
report published in September of 2012, the Commission found 
that, ``Standardizing credit rating terminology may facilitate 
comparing credit ratings across rating agencies and may result 
in fewer opportunities for manipulating credit rating scales to 
give the impression of accuracy.'' However, the SEC staff 
ultimately recommended the Commission not to take further 
action, to require increased standardization, primarily because 
of concerns over feasibility. A discussion draft attached to 
this hearing would direct the SEC to issue rules to require all 
NRSROs to use a uniform set of credit ratings for each of the 6 
categories of credit ratings recognized under the Securities 
and Exchange Act.
    So, Mr. Le Pallec, Mr. Linnell, Ms. Liang, all three of 
your firms use an identical set of rating symbols for corporate 
issuers. Do you feel that uniformity in your rating scales 
allows investors to more quickly and easily understand your 
ratings?
    Mr. Le Pallec. What we know from investors is that they 
benefit from a diversity of views, and we don't think that 
treating ratings with common definitions across the piece could 
lead to handling them like commodities, and would lead to 
convergence of methodologies, and would, therefore, limit 
competition on quality in the market.
    Mr. Linnell. Yes. I would just add that you have to 
differentiate between the two issues of the standardized 
criteria and the definitions of those ratings versus the actual 
nomenclature of the scale. You could, if you wanted to, propose 
and argue for a standard scale. In fact, there are some pieces 
the same at Fitch, and Moody's is pretty similar. It uses 21 
gradations. And I figured that as an industry, we should be 
open to positive feedback or criticism that a common scale 
itself may be facilitate little transparency and comparability. 
But you don't want to undermine the independent integrity and 
the diversity these agencies have by putting and enforcing the 
same criteria across the agencies.
    Mr. Foster. Yes. Ms. Liang? About those--
    Mr. Liang. Thank you. I would agree with my colleagues 
regarding preserving the diversity of perspectives, and better 
serving the market. Another way we could come at it is perhaps 
requiring more disclosure, because I have heard you and your 
colleagues talk about the difficulty in understanding rating 
scales, and perhaps increasing disclosure on those rating 
scales might help with clarity and understanding.
    Mr. Foster. Yes. Another mechanism that I have heard 
suggested is that a small fraction, say 1 percent, of all 
issuance would have to be rated by everyone, all major players 
in the market. So that, combined with standard ratings, and you 
could actually have an interesting discussion when you saw a 
wide divergence of ratings for a single issue. Is that 
something you would have any comments on as a possible way to 
get it part of the whole conflict-of-interest problem in this?
    Mr. Linnell. Maybe I will take a stab at that. It could be 
an interesting way of doing it. But I think in reality, if you 
look in most markets and you did the Venn diagram of coverage 
of the agencies and even at the new agencies, you probably have 
plenty of examples where they are already covering 1, 2, 5 
percent of similar rating. You may already have that in play. 
And indeed, part of our approach has been to do unsolicited 
ratings where we believe our ratings are different from the 
existing ones of S&P and Moody's on some of the major issuers 
that are of interest to investors. Again, the competition 
between the agencies creates that comparability in many of the 
industries and sectors we are talking about.
    Mr. Foster. So, when you issue an unsolicited rating, and 
in some sense you turn out to be right, does the market reward 
you for making a correct objection to one of your competitors' 
ratings?
    Mr. Linnell. I would hope, but I figure it is more in the 
long term. It is about building your reputation and your 
franchise for the quality of the work that you do, and that is 
what everybody should be striving for, to compete on the 
quality of their analytics and the quality of their ratings. 
Over the long term, you hope that kind of action would result 
in that benefit.
    Mr. Foster. That is right. Of course, one of the big 
challenges is that you only see in times of distress, whose 
ratings are not as solid as they might have been.
    Well, my time is up now, and when you figure all this stuff 
out, let me know. We have been struggling with it for a decade. 
Thank you, and I yield back.
    Chairman Sherman. And longer. The gentleman from Ohio is 
recognized for 5 minutes.
    Mr. Gonzalez of Ohio. Which one?
    Chairman Sherman. Mr. Gonzalez.
    Mr. Gonzalez of Ohio. Thank you, Chairman Sherman, and 
thank you to our witnesses for being here today. I want to 
start by echoing some of the comments of Mr. Huizenga and other 
colleagues expressing concern with the direction of the 
subcommittee. Just recently, the financial stability report 
came out from the Federal Reserve. This is the Capital Markets 
Subcommittee, and one of the things being highlighted is low 
liquidity and cash, Treasury securities, and equity-indexed 
futures. That is a major issue. If we have liquidity 
challenges, if the depths of our markets all of a sudden are 
impaired, the ability of the financial system to respond to 
large shocks is severely diminished. And I hope at some point, 
we will start taking up some of these, what I would consider 
more pressing issues, and certainly ones that could really harm 
the financial system.
    That aside, Ms. Liang, I want to start with you. As part of 
this hearing, the Majority attached a discussion draft called 
the Commercial Credit Rating Reform Act. A provision within 
this legislation would establish a newly-created credit rating 
agency assignment board that would assign NRSROs to provide 
ratings for corporate issuers. Can you discuss some of the 
concerns that you have with this sort of approach?
    Ms. Liang. Absolutely. Thank you very much for the 
question. I think some of these topics have already been 
touched on, but I feel that an automatic assignment would be to 
guarantee business for rating agencies and would create a 
disincentive to provide quality research. I think, ultimately, 
the market investors, and the investing public at large would 
suffer from that lack of quality research.
    Mr. Gonzalez of Ohio. Thank you. I couldn't agree more. I 
know that there are obviously some challenges in this 
particular market, but to just assign them at the Federal 
level, I think is a little bit absurd.
    Mr. Le Pallec, earlier this week, S&P announced that it was 
going to withdraw the notching proposal, but said that, ``We 
are considering alternatives for the withdrawal elements.'' Do 
you expect this alternative proposal to come out in 2022, and 
do you have any more information that you could share on what 
is being considered?
    Mr. Le Pallec. Thank you for your question. Yes, the 
request for comment process continues. As we said last Monday, 
we are going to go back to the market with proposals on how to 
handle the technical issue at hand, and we plan to come out 
with a final criterion by the end of this year. We will update 
the market as we know more and as we treat more comments. We 
want to maintain the same high level of transparency we have 
applied up until now, and we will continue to do so.
    Mr. Gonzalez of Ohio. Thank you. I think that is very, very 
important.
    Ms. Liang, back to you. In your testimony you, sort of 
related to the first question, discuss the importance of 
increasing competition in the NRSRO market. What are the key 
barriers this committee should further explore to promote that 
competition in the credit rating market?
    Ms. Liang. Thank you for your question. I highlighted a few 
instances where there continue to be systemic barriers to 
competition. Many investor guidelines still require the 
incumbent rating agencies by name, and certain Federal 
regulations and facilities require and refer to the larger 
NRSROs by name, rather than all NRSROs. I think taking a look 
at those references and requirements would be helpful in 
promoting competition, and certainly, I think that continued 
attention to S&P's proposed methodology would benefit 
competition in the credit rating industry.
    Mr. Gonzalez of Ohio. Thank you. I couldn't agree more. 
Again, sort of basic stuff: more competition, more choice, 
deeper markets, less government dictating and interventions, I 
think, is usually the direction we want to go. This is 
certainly no exception. Again, I want to reiterate, I hope we 
spend more time on some more pressing issues than this, but 
with that, I yield back.
    Chairman Sherman. For the record, I believe the gentleman 
from New Jersey has asked that we waive him and go on to the 
next Member, unless that is incorrect. And so, we will go to 
the second gentleman from Ohio, Mr. Davidson, for 5 minutes.
    Mr. Davidson. Thank you, Mr. Chairman, and thanks for 
convening this hearing. I think it is useful. It is a good 
hearing, and of the fact, as you highlighted in your opening 
remarks, Mr. Chairman, part of the purpose was already 
achieved. I look forward to the discussion with our witnesses, 
and thank you for being here, but I really want to kind of join 
the urgency of getting the Securities and Exchange Commission 
here. We really need to weigh the weighty matters. And frankly, 
my colleagues, Mr. McHenry and Mr. Huizenga, sent a letter to 
Chairwoman Waters on May 5th. Since we weren't here in town, 
perhaps it has escaped notice. And, Mr. Chairman, I wouldn't 
want it to escape your notice, so I ask unanimous consent to 
submit that letter for the record.
    Chairman Sherman. Without objection, it is so ordered.
    Mr. Davidson. What that calls for is a hearing of the full 
Securities and Exchange Commission, because it is very clear 
that Chairman Gensler is exceeding the authority that Congress 
has granted to the Securities and Exchange Commission. He is 
acting outside of the scope of the authority. And certainly, 
even within the authority, there has been some ongoing concern 
for regulation by enforcement and the harm that is causing to 
capital formation here in the United States. And, frankly, when 
they say they are protecting investors, obviously their view of 
protection sometimes means preventing investors from even 
participating in markets and owning certain assets, and there 
are huge consequences for that, no more so than in fintech and 
digital assets. I hope that, frankly, the letter will not just 
be submitted for the record, but that it will be read and fully 
supported, because this kind of accountability ought to be 
overwhelmingly bipartisan. It will certainly happen with a 
Republican Majority, but we might as well get it underway now.
    Mr. Le Pallec, can you explain the process of mapping 
ratings given by other firms and factoring them into S&P 
ratings? How does it work?
    Mr. Le Pallec. Mapping is one of the options that we have 
to get to a view on the creditworthiness of assets held by 
insurers as per the withdrawal methodology, so we don't 
consider everything is junk. Actually, we do mapping by 
exception. And we do mapping for credit rating agencies for 
whom we have common ratings, a lot of ratings in common so that 
we can translate, if you will, their ratings into our own. This 
is what mapping tries to do.
    Mr. Davidson. Is it similar to crowdfunding, 
crowdsourcing--the wisdom of crowds, and to some, is it 
vulnerable to groupthink?
    Mr. Le Pallec. No. It is a statistical study that just 
looks at default and performance statistics published by all of 
the credit rating agencies. And wherever we have ratings in 
common, we translate their ratings into our own because, as we 
said, rating definitions differ from one credit rating agency 
to the other. This is what mapping tries to do.
    Mr. Davidson. It basically translates how you score versus 
somebody else?
    Mr. Le Pallec. It is a translation exercise.
    Mr. Davidson. Okay. I would like to ask an open-ended 
question to the three witnesses representing credit rating 
agencies today. The COVID-19 pandemic provided a real-world 
stress test within every aspect of the financial industry. This 
includes credit ratings, since access to Federal emergency 
lending facilities is tied directly to an applicant's credit 
rating--not in every case, but often. My question for the 
rating agencies is, of all the defaults that you saw among 
companies that you provided ratings for, what percentage of 
them were of speculative grade?
    Mr. Le Pallec. Most of those that defaulted were of 
speculative grade because the definition of a, ``speculative 
rating,'' is that it is more likely to default than an 
investment-grade rating. But COVID was the biggest stress test 
for the industry that we had since the great financial crisis, 
and now, if you look at rating's performance through COVID, you 
will see that they are completely in line with rating 
definitions and expectations built in the rating. So we can say 
that, in our case, COVID pressure tested our ratings and they 
performed as expected, which, for us, makes us very proud.
    Mr. Linnell. Can I just add to that? Actually, I think the 
default way of companies is actually quite low and lower than 
what you would expect in a typical stress test. And the reason 
why was because of the unprecedented policy response by 
governments around the world, which offensively created a 
bridge from a stressed COVID world to a post-COVID world. And 
the performance of companies and, therefore, the performance of 
credit ratings benefited from that.
    Mr. Davidson. Thank you. Any other comments on that?
    Ms. Liang. I apologize. I don't have those statistics at my 
fingertips, but I would be happy to follow up with you and the 
committee on that.
    Mr. Davidson. Thank you, and we certainly hope that stress 
test is behind us, and hopefully, the lessons learned can help 
us in the future, so that we can keep pandemic risk and 
minimize the political risk. Governments around the world laid 
a pretty heavy hand on industry, certainly helpful in some 
cases, and so, thank you for highlighting that positive aspect.
    My time has expired, and I yield back.
    Chairman Sherman. I want to thank the Members and, 
particularly, the witnesses, for participating in this 
important hearing today.
    The Chair notes that some Members may have additional 
questions for these witnesses, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is now adjourned.
    [Whereupon, at 11:41 a.m., the hearing was adjourned.]

                            A P P E N D I X

                              May 11, 2022
                              
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