UPDATE 3-Credit rating agency bill backed by US House panel

By Kevin Drawbaugh WASHINGTON, Oct 28 (Reuters) - Credit rating agencies would be more tightly regulated and exposed to lawsuits under legislation approved on Wednesday by the U.S. House of Representatives Financial Services Committee. In another procedural step forward for the Obama administration's push for financial reform, the committee voted 49-14 to send the bill to the full House for a vote, likely next month. Credit rating agencies are widely blamed for failing to spot credit market problems with securitized debt and other instruments, leading to the global financial crisis that began in 2007. The committee also debated, but did not vote, on a bill to beef up the Securities and Exchange Commission (SEC) and bolster an assortment of investor protection standards. The wide-ranging bill was amended to require financial advisers to municipalities to register with the SEC, which would bring more scrutiny to the municipal bond market. President Barack Obama and Democrats have been working for months on a package of proposals to tighten bank and capital market regulation after the crisis, the worst in decades. While the outlook for financial reform in the Senate was cloudy, the House Financial Services Committee has been making steady progress on handling reform proposals, with the credit rating agency measure winning bipartisan support. (For more information on the reform proposals and their status, double-click on) "The rating agencies really screwed up and now people are asking for us to put their heads in the guillotine ... But what really needs to happen is to see what can be done to make sure this doesn't happen again," said Representative Paul Kanjorski, author of the committee's bill. The agencies are viewed by critics as compromised by their prevailing business model, in which issuers of debt pay the agencies for debt ratings.

Kanjorski said lawmakers explored ways to change that model, but found it was impractical. Instead, the bill imposes regulations on the industry intended to "close many of the weaknesses and the loopholes," said Kanjorski, a Democrat. Firms affected by the bill include Moody's Corp, Standard & Poor's and Fitch Ratings. The bill would for the first time set up an office in the SEC to oversee the agencies and their ratings and how they are determined. It would also open the door to more lawsuits by investors against agencies over flawed ratings, a provision opposed by the agencies and likely to attract controversy as the bill works its way to the House floor and the Senate. The bill also calls for removing some references in federal law that mandate certified agencies' credit ratings, as a way to reduce the pervasiveness of their use. (Additional reporting by Rachelle Younglai) Keywords: FINANCIAL REGULATION/CREDITRATERS ([e-mail], [phone], [phone] (fax)) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.