Fairly quietly last month, U.S. Senator Jack Reed of Rhose Island introduced a bill entitled the "Rating Accountability and Transparency Enhancement (RATE) Act of 2009." Reed, the Chairman of the Banking Subcommittee on Securities, Insurance, and Investment, says that the RATE Act of 2009 is an effort to reform the credit rating industry and improve the accountability and accuracy of credit ratings,

Specifically, Reed says, RATE would give the Securities and Exchange Commission new authority to oversee credit rating firms and hold them accountable for conflicts of interest and other internal control deficiencies that have weakened ratings in the past. In addition, the bill includes a provision that would allow investors to take legal action against rating firms that “knowingly or recklessly” fail to review key information in developing ratings. The NY Times reported yesterday that the prospect of easier legal action against the rating agencies, which have historically been all-but-bulletproof in litigation due to First Amendment protection, has "class-action lawyers salivating."

“Credit rating firms are in the business of providing investors with unbiased analysis, but the current incentive structure gives them too much leeway to hand out unjustifiably favorable ratings.... [L]ike any other industry, [rating firms] should be held accountable if they knowingly or recklessly mislead investors,” said Reed.

According to a press release from Reed, the RATE Act of 2009 will also:

Enhance disclosure requirements to allow investors and others to learn about the methodologies, assumptions, fees, and amount of due diligence associated with ratings;

Require rating firms to notify users and promptly update ratings when model or methodology changes occur;

Require rating firms to have independent compliance officers, and to take other actions to prevent potential conflicts of interest; and

Establish an office in the SEC to coordinate activities for regulating NRSROs.