HFSC, Subcommittee on Investor Protection, Entrepreneurship and Capital Markets Hearing on A Notch Above? Examining the Bond Rating Industry

House Financial Services Committee, Subcommittee on Investor Protection,

Entrepreneurship and Capital Markets

A Notch Above? Examining the Bond Rating Industry

Wednesday, May 11, 2022


  • The hearing focused mainly on Securities Exchange Commission (SEC) agenda and credit rating agencies.
  • Many Republican Members of Congress focused their questioning on the number of SEC proposed rules within the first quarter of this year.


  • Yann Le Pallec, Executive Managing Director, Head of Global Ratings Services, S&P Global Ratings
  • Angela Liang, General Counsel and Executive Committee Member, Kroll Bond Rating Agency
  • Ian Linell, President, Fitch Rating
  • Mariana Gomez-Vock, Senior Vice President of Policy and Legal, American Council of Life Insurers
  • Jennifer J. Schulp, Director of Financial Regulation Studies, Center for Monetary and Financial Alternatives, Cato Institute

Opening Statements
Chairman Brad Sherman (D-Cali.)

In his opening statement, Sherman said the S&P Global Ratings notching proposal triggered today’s hearing. He recognized that the withdrawal of part of the proposal. Sherman concluded by saying Congress should pass legislation to prohibit notching related to asset-based securities and corporate bonds.

Ranking Member Bill Huizenga (R-Mich.)

In his opening statement, Huizenga said capital markets are under attack and noted the number of proposed SEC rules of the last year. He also highlighted the number of rules the SEC has proposed during the first quarter of this year and said the Commission often leaves a scant 30-day window to comment. Huizenga discussed the significant cost associated with complying with the new SEC proposed rules and suggested the Committee hold an oversight hearing with the SEC’s Division of Enforcement. He concluded by saying that Congress should prioritize issues that will expand opportunity for retail investors and promote capital formation for small businesses. 

Representative Maxine Waters (D-Cali.)

In her opening statement, Waters said she has long called for robust oversight of bond rating agencies, particularly as it relates to financial markets over reliance on just three credit rating agencies. She stated that it is the goal of the chair to empower investors with the abundance of accurate information and anti-competitive practices. 

Yann Le Pallec, Executive Managing Director, Head of Global Ratings Services, S&P Global Ratings

In his testimony, Pallec discussed the S&P Global Ratings proposed changes to their methodology for analyzing the risk-based capital adequacy of insurance companies. He stated that the proposed rules were withdrawn on May 9, 2022. He concluded by saying that S&P Global Ratings is committed to providing the financial markets with timely, transparent, and high-quality credit ratings.

Angela Liang, General Counsel and Executive Committee Member, Kroll Bond Rating Agency

In her testimony, Liang stated that the continued lack of open competition is by far the biggest problem facing the credit rating space today. She discussed the significant existing systemic barriers to competition and said S&P’s previous proposed methodology would have further entrenched its position as the most dominant credit rating agency. She concluded by saying she encourages the development of stronger guardrails to enhance competition.

Ian Linell, President, Fitch Rating

In his testimony, Linell said S&P’s proposed Methodology is anti-competitive because it incorporates the practice of “notching” into S&P’s assessment of insurer risk-based capital adequacy. He added that the proposed notching would damage the competitive environment of the credit rating industry. He concluded by saying Congress must amend existing legislation to ban notching, not only in structured finance, but also in all other market sectors, and the SEC must start enforcing this ban.

Mariana Gomez-Vock, Senior Vice President of Policy and Legal, American Council of Life Insurers

In her testimony, Gomez-Vock highlighted several concerns with S&Ps proposed Methodology. She said permitting Nationally Recognized Statistical Rating Organization’s (NRSROs) to automatically notch securities without empirical evidence could jeopardize financial strengths ratings, harm capital markets, and restrain competition. She also said the methodology’s potential impact on consumers and the competitive global insurance markets merits additional evaluation. She concluded by saying a change by the world’s largest rating agency will always be impactful and that any changes should be transparent and supported by data.

Jennifer J. Schulp, Director of Financial Regulation Studies, Center for Monetary and Financial Alternatives, Cato Institute

In her testimony, Schulp focused on the regulation of Nationally Recognized Statistical Rating Organizations (NRSROs) and competition within the bond rating industry. She said that even though “notching” may raise concerns about its potential effect on competition, it is premature to take any legislative action in response to S&P’s Methodology proposal. She added that future legislative solutions to increase competition in the ratings industry should focus on lowering regulatory barriers to competition or decreasing the artificial demand for ratings conducted by an NRSRO (including by examining the necessity of the designation). She concluded by discussing issues on the SEC’s current agenda that are a cause of concern.

Question & Answer

Securities Exchange Commission (SEC) Proposed Rules

Huizenga asked if the SEC has clearly articulated how newly proposed rules regarding swaps and short disclosures will work together or contradict each other. Schulp said no and added that a similar problem exist with respect to the 10b5-1 plans and share repurchase disclosures. Huizenga followed up by asking could the recent proposed SEC rules be adding to the current capital markets volatility. Schulp said the uncertainty caused by recent proposed rules can be both disruptive to the economy and the financial industry generally. Rep. Ann Wagner (R-Mo.) asked does the SEC’s rulemaking agenda include any proposals to help facilitate capital formation. Schulp said the SEC does not have a specific capital formation rulemaking agenda, adding that many of the agenda items that are currently on the SEC’s agenda adds additional burdens on capital formation, such as Environmental, Social, and Governance (ESG) disclosure rules, private fund disclosure rules, and numerous more. Rep. Bryan Steil (R-Wis.) and Wagner asked about the impact of short comment periods and how they impact the SEC’s rulemaking process. Schulp said market participants such as large banks may be able to adhere to the proposals in a timely manner but being able to determine how the proposals correlate and understanding the consequences of the proposals is difficult with short comment periods. Schulp also said short comment periods harm the SEC’s ability to completely understand the effects and consequences of their proposed rules adding that short comment periods result in fewer comments. Steil asked how long it typically takes to draft a substantive comment on a significant SEC rule proposal. Schulp stated that it depends on the rule proposal but usually within the realm of two weeks if you are only focused on that one thing during that time period. 

Credit Rating Agencies

Sherman asked if the S&P Global Ratings proposed methodology and assumptions for insurer risk-based capital adequacy proposal has been completely withdrawn or will it be brought back up in the future. Pallec said only the section regarding how to access securities held by insures have been withdrawn, the rest of the proposal is moving forward. Huizenga asked Pallec if he agrees that S&P Global Ratings for ESGs should be based solely on a financial indicator within a state and items that are material to the rated entity. Pallec said they take into count ESGs risks overall whether material or not. Rep. Anthony Gonzalez (R-Ohio) and Wagner asked what regulatory barriers Congress could work to remove. Schulp said Congress could expand the accredited investor definition to include more investors. Rep. David Scott (D-Ga.) asked how someone would assess competition amongst the credit rating agencies and how is the competition distinct from other markets. Linell stated that after the passing of Dodd-Frank, competition amongst rating agencies has intensified. Scott followed up asking is competition within the credit rating industry the best way to promote integrity and reliability of their ratings. Linell said yes adding if competition is combined with transparency around the performance of those ratings. Scott asked what specific changes the SEC should consider making to increase the number of new credit rating agencies. Liang said she would defer to the SEC on the best way to do so. Reps. French Hill (R-Ark.) and Bill Foster (D-Ill.) asked would a rating assignment model discourage independent competition. Pallec and Schulp said investors rely on diverse views within the market and it is important for the market to compete on the quality of the ratings. Gonzalez asked when will the alternative notching proposal be released by S&P Global Ratings. Pallec said the request for comment period continues and will be going back to the market on how to handle the withdrawn proposal adding that their plan is to have final criteria by the end of this year.


Sherman asked would denying bond ratings to all future issuers in Belarus and Russia minimize their ability to raise capital. Linell and Pallec both said yes and stated they are no longer rating bonds in Russia.


For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.