SEC cuts conflicts of S&P, Moody's

By Jesse Westbrook BLOOMBERG NEWS | Thursday, December 4, 2008

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The Securities and Exchange Commission, responding to criticism that Moody's Investors Service and Standard & Poor's Corp. contributed to the financial crisis, voted Wednesday to reduce conflicts at credit-rating companies.

SEC commissioners unanimously barred those who assess debt from discussing compensation with bankers who seek a letter grade before they sell bonds. The agency also limited gifts from underwriters to rating company employees.

"An important purpose of these rules is to create a more competitive, transparent environment in which many firms can serve the needs of investors and issuers," said SEC Chairman Christopher Cox, a Republican.

Moody's, S&P and Fitch Ratings are under fire for assigning mortgage securities their highest AAA ratings and then maintaining them months after the home loans began defaulting last year. Financial companies, pension funds and money market funds that bought the bonds based on the ratings suffered losses after the securities plunged in value.

Lawmakers including Senate Banking, Housing and Urban Affairs Committee Chairman Christopher J. Dodd, Connecticut Democrat, have argued that Moody's, S&P and Fitch are susceptible to client influence because the banks that pay them to rate bonds also sell the securities.

SEC Commissioner Kathleen Casey, a Republican, said the agency hasn't gone far enough in fostering competition for Moody's, S&P and Fitch. The SEC itself has contributed to the problem by making many of the requirements governing securities rely on credit ratings, she said, and that criteria should be removed to discourage investor dependence on them.

"The Big Three continue to overwhelmingly dominate what has to be one of the most concentrated private industries in the world," she said.

In addition to the rules curtailing conflicts of interest, the SEC said the ratings companies must publish statistics so investors can better judge the accuracy of their assessments.

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