House and Senate negotiators assembling a giant financial regulation bill diluted a measure Tuesday that would have upended how Wall Street assesses risk.
Lawmakers agreed to remove a proposal that would have ended the ability of financial institutions to choose the firms that rate the risk of their investment products.
Instead, negotiators altered the bill to require that the Securities and Exchange Commission, after a two-year study, set up a system for assigning credit rating agencies in a way that avoids conflicts of interest with issuers or underwriters of financial products.
The new proposal changes a provision approved 64-35 in the Senate last month that would have required an independent board to assign ratings firms to assess the risks of new financial products. That requirement, proposed by Sen. Al Franken, D-Minn., would replace a long-standing practice whereby banks select and pay ratings agencies to rate their new offerings.
Critics of the current system argue that the relationship between financial firms and the credit agencies creates conflicts of interest and that the agencies overrate risky investments that fueled the financial crisis.
During negotiations to merge House and Senate versions of the financial regulation legislation, House Democrats on Monday proposed striking Franken's provision in exchange for a study by the SEC.
Eager not to alienate Franken, Senate Banking Committee Chairman Christopher Dodd insisted that the SEC give "thorough consideration" to the plan passed in the Senate.
"Today's compromise is not everything we wanted, but it's a major step in the right direction," Franken said. "The language agreed on by the conference committee means more time and more study than I think is necessary, but it also means definite action will be taken."
The proposed study was the most significant adjustment to the legislation Tuesday as the House-Senate conference committee worked methodically through the bill section by section.
Separately Tuesday, House Democrats on the panel asked to expand a proposal in the Senate that would require a one-time audit of the Federal Reserve's emergency lending during the months surrounding the financial meltdown in fall 2008.
The House, which passed a tougher audit measure, wants to add other Fed transactions to the scope of the audit. The Senate will consider that request Wednesday.
House Democrats also want to strike a Senate provision that would require a presidential appointment for the president of the Federal Reserve Bank of New York. Instead, the House Democrats are recommending that bankers who sit on the Fed's regional bank boards have no say on presidents of the regional boards.
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