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Credit-Rating Firms Scrutinized

Federal regulators are examining possible anti-competitive practices and conflicts of interest.

January 28, 2003|From Associated Press and Reuters

Wall Street credit-rating companies, which critics say contributed to the cloud that obscured defunct Enron Corp.'s true finances, are being scrutinized by federal regulators for possibly stifling competition in their field.

The Securities and Exchange Commission has been investigating since last year the role of the credit raters and considering whether they should be more tightly regulated.

The SEC informed Congress on Friday that it is examining possible anti-competitive practices in a field dominated by three big companies: Moody's Investors Service, Standard & Poor's and Fitch Ratings.

Their grading of companies' creditworthiness is closely watched by the markets and can determine whether banks and other institutions agree to finance a company. Despite their power, the SEC allows them to largely police themselves.

As part of its probe, the SEC said it is looking into possible conflicts of interest stemming from the raters being paid by companies whose debt securities they evaluate.

The SEC said it plans to propose new rules regarding the credit raters after publishing a "concept release" in about 60 days.

Officials at Standard & Poor's, a unit of McGraw-Hill Cos.; Moody's, a unit of Moody's Corp.; and Fitch, a unit of Paris-based Fimalac, said they would cooperate with the SEC probe.

Lawmakers dissecting one of the biggest corporate failures in U.S. history have asked why the three agencies maintained high ratings for Enron even as its stock plummeted in late 2001, up until four days before its bankruptcy filing on Dec. 2.

In another report to Congress, the SEC said it is considering hiring outside collection agencies to bring in more of the money owed by people and companies prosecuted by the agency.

Outgoing SEC Chairman Harvey L. Pitt raised the idea in November, noting that the departure of some of the agency's lawyers and auditors for the private sector has hampered its ability to collect fines.

The SEC also again asked Congress to allow it, in cases of securities law violators, to go after property that normally is sheltered under bankruptcy laws. Florida, Iowa, Kansas, South Dakota and Texas have unlimited homestead exemptions that allow wealthy defendants to file for bankruptcy and keep their mansions out of the government's hands.

Separately on Monday, the SEC reported that it brought more enforcement actions for financial book-cooking against chief executives than any other corporate officer class from 1997 to 2002. The SEC said CEOs and presidents were charged in 111 out of 227 investigations of improper financial reporting and disclosure involved in the five-year period studied for a report to Congress.

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