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SEC Focusing on Credit Raters

The agency will ask for public comment on whether it should regulate the firms.

June 04, 2003|From Bloomberg News and Reuters

The Securities and Exchange Commission is set to ask the public for comment on how -- or whether -- the agency should oversee credit-rating companies, which have long had significant power on Wall Street but have been only loosely regulated by the agency.

The SEC is expected today to respond to a request from the House Capital Markets Subcommittee for information on credit raters. Congress' interest was piqued by the role of the companies, including Moody's Investors Service Inc. and McGraw-Hill Cos.' Standard & Poor's, in the financial boom and bust of Enron Corp.

Within a few weeks the SEC is expected to issue a concept release asking for public comment on how the ratings firms operate and what the SEC's role should be in their oversight.

Credit-rating firms grade the riskiness of bonds and other debt instruments issued by companies and governments.

Days before Enron filed for bankruptcy protection late in 2001, S&P and Moody's rated its debt as investment grade. Those ratings were immediately chopped to noninvestment grade -- or junk bond status -- after the bankruptcy filing.

Members of Congress asked why the rating agencies, which employ hundreds of financial analysts worldwide, weren't tuned in to Enron's troubles sooner, and more publicly. Questions have been raised about potential conflicts of interest between raters and the companies they grade.

The SEC is responsible for designating credit-rating companies as "nationally recognized statistical rating organizations" -- a status enjoyed by just four firms: S&P, Moody's, Fitch Inc. and Dominion Bond Rating Service. SEC approval helps rating services because many U.S. money managers must use NRSRO rankings for investment decisions. Also, rated companies pay to be graded.

Smaller rating services say the SEC's standards for NRSRO status are subjective and have unfairly shut them out.

At the SEC, Commissioner Cynthia A. Glassman said there are two paths the agency can take with regard to rating-service regulation: "One is to stay in, and the other is to get out of the rating-agency designation business," she said.

"If we decide to stay in the business of designating NRSROs, then we'll have to consider whether additional oversight is needed and if so what type, and we'll also have to improve the transparency of our process," said Glassman, one of five SEC commissioners.

"If we decide to get out of the business, we will have to consider what other regulatory regime would be substituted, or if a regulatory regime is even needed, and how to extricate ourselves in an orderly way."

Spokeswomen for S&P and Moody's declined to comment. A Fitch spokesman didn't return a call.

The SEC's criteria for NRSRO designation include a requirement that a service's ratings be widely accepted in the U.S. and that the service has enough staff and financing to make reliable ratings. But the SEC doesn't provide applicants with specific benchmarks on how to meet these standards.

"Even after meeting the stated criteria, we're still waiting for word on whether we'll get the designation," said Sean Egan, founder of Egan-Jones Ratings Co. "In August, it will be the five-year anniversary of our application."

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