In the wake of the current economic meltdown, U.S. Representatives Gary Ackerman (D-NY) and Mike Castle (R-DE), members of the House Financial Services Committee, recently introduced legislation that would restore confidence to the U.S. financial markets.

The measure directs the Securities and Exchange Commission (SEC) to promulgate rules that would determine the types of structured finance investments that are eligible to receive NRSRO ratings from credit rating agencies that have been designated as Nationally Recognized Statistical Rating Organizations, and defines the criteria to which NRSRO-rated structured finance products must adhere.

Under the bill, eligible structured finance investments would include securities whose future performances can be reasonably predicted, such as those with established track records and proven default rates, and securitizations that are comprised of homogeneous securities.

The current economic slow down developed as a result of many factors, including the relative ease with which underwriters could package and sell subprime loans into the capital markets through securitization. The investment grade ratings on those securitizations - which have since been downgraded - provided by Nationally Recognized Statistical Rating Organizations helped make most of these transactions possible. These ratings on investments, whose structures and products were untested, proved to be deeply flawed.

"Uncertainty is the biggest enemy of our markets," said Ackerman. "This legislation will ensure that in the future, investors can rely on the ratings of the NRSRO securities they purchase. This bill provides a common-sense approach for stabilizing our markets by restoring confidence and increasing liquidity."

The legislation does permit Nationally Recognized Statistical Rating Organizations to continue to provide ratings for securities that do not meet the proposed NRSRO criteria as long as they are not designated as NRSRO ratings.

The measure also provides the SEC with the authority to strip Nationally Recognized Statistical Rating Organizations of their NRSRO designation if the rating agency fails to comply with the provisions set forth in the legislation.

Ackerman's bill is the result of several House hearings held by the Financial Services Committee and its Capital Markets Subcommittee which probed the role of NRSROs in the U.S. financial markets.

In preparation for these hearings, Ackerman began discussions with Sean Mathis of Mathis & Company, a New York-based advisor to pension funds and corporations, Julia Whitehead of Pearson Enterprises, also an advisor to pension funds and corporations, who, along with Joseph R. Mason, a banking professor at Louisiana State University, testified before the subcommittee.

According to Ackerman, it was the insights drawn from the combination of their practical client experience and academic perspective that informed his thinking regarding the immediate need for the proposed legislation.

"A sound, reliable and consistent NRSRO rating system is critical to the confidence required by pension fund managers and other fiduciaries," said Sean Mathis. "It is this confidence that will again stimulate investment in structured finance and begin the process of providing the much needed liquidity to the mortgage market."

A Nationally Recognized Statistical Rating Organization is a credit rating agency which is so designated by the SEC, allowing its ratings to be used by financial institutions, pension funds and other investors whose regulations or investment mandates rely on NRSRO ratings.

U.S. Rep. Gary Ackerman (D-NY), a senior member of the House Financial Services Committee, recently introduced legislation that would reinstate the uptick rule, a regulation that required all short sale stock transactions to be conducted at a price that was higher than the price of the previous trade.

For reasons not fully understood, the Securities and Exchange Commission (SEC) rescinded the uptick rule last year (in July 2007) after the regulation had been in place since 1938. The congressman's bill mandates that the SEC reinstate the uptick rule within 90 days of the legislation's passage.

"In the wake of the elimination of the uptick rule, many volatile stocks that the regulation was designed to protect are being driven down as a result of manipulative short sale practices," said Ackerman. "Reinstatement of the uptick rule would help curb these abuses and ensure greater stability and confidence in the market. Under the uptick rule, fewer companies would fail, less investors would be driven out of the market, and more capital would remain in our stock markets."

In a short sale, an investor borrows shares of a stock from a broker, sells it to others, and then hopes to buy it back at a lower price before returning it to the lender. The difference --- if any --- is kept as a profit.

The uptick rule was designed to prevent short sellers from being the only investors to cause a stock price to decline. Under the rule, a short sale could only be entered after a trade that caused the last price to increase.

Recently, the SEC implemented a limited version of the uptick rule when its chairman, Christopher Cox, issued an emergency rule to limit naked short sales, where traders sell shares that they have not borrowed or do not intend to borrow. Under this 30-day regulation, the SEC will require that investors own or actually borrow shares of stock before completing a short sale. The rule applies to 19 major financial companies.