A House committee on Wednesday voted to set new rules for investment rating agencies, which lawmakers say misled investors by giving high marks to risky securities tied to subprime mortgages.
The proposal, approved by a 49-14 vote, is the House Financial Services Committee's latest attempt to tighten the rules of the road for financial institutions after last year's market crisis. A floor vote was expected as early as November, although the measure would still face scrutiny in the Senate.
The bill would allow the Securities and Exchange Commission to test the methods employed by rating agencies and sanction lax supervisors.
While the legislation does not provide for criminal sanctions against the agencies, it would make them more vulnerable to lawsuits by angry investors who feel they were misled.
"These rating agencies were falsely elevated to some godlike status that when they put a triple-A rating on something, you could take all of your mother's savings and invest it in there and you were doing the right thing," said Pennsylvania Democratic Rep. Paul Kanjorski, who sponsored the bill.
As part of its broader effort to clamp down on Wall Street, the committee also has voted to create a new federal agency to protect financial consumers against fraud and abuse. The panel has agreed to give regulators new powers to monitor hedge funds and regulate privately traded derivatives, the kind of complex financial instruments that nearly brought down insurance giant American International Group.
Under the latest plan, the SEC would have greater oversight of how private companies rate investments.
One provision is aimed at trying to reduce potential conflicts of interest at credit rating agencies, which make money by charging fees to companies whose securities they rate.
Under the bill, the SEC could set new rules to deal with conflicts of interest or require that rating agencies handle them in a certain way.
The bill also directs the agencies to appoint to its board of directors at least two outsiders. These members couldn't have extensive ties to the rating agency that they would monitor, other than to sit on its board.
Later on Wednesday, the committee was expected to pass a separate proposal by Kanjorski that would give the SEC new enforcement powers and double its budget in the next five years.