WASHINGTON — 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 overrated 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.
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.
