- The Washington Times - Wednesday, April 15, 2009

WASHINGTON (AP) - The head of the Securities and Exchange Commission said Wednesday the agency must do more to tighten oversight of Wall Street’s credit-rating industry to help bolster investor confidence. Proposals to reshape the industry and its supervision were advanced at a public forum hosted by the agency.

The SEC is examining competitive issues, potential conflicts of interest and government oversight of the $5 billion-a-year industry dominated by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. The firms have been widely criticized for failing to give investors adequate warning of the risks in subprime mortgage securities, whose collapse helped set off the global financial crisis.

“As much as (the SEC has) done, there is still more to do,” SEC Chairman Mary Schapiro said. “The status quo just isn’t good enough.”

Schapiro said the SEC must determine whether increased competition would benefit investors and how it would be achieved.

Elsewhere Wednesday, European Union governments and the European Parliament agreed on a preliminary deal on new rules that will expand oversight for the rating agencies.

The agencies are crucial financial gatekeepers, issuing ratings on the creditworthiness of public companies and securities. Their grades can be key factors in determining a company’s ability to raise or borrow money, and at what cost which securities will be purchased by banks, mutual funds, state pension funds or local governments.

The agencies had to downgrade thousands of securities backed by mortgages as home-loan delinquencies soared and the value of those investments plummeted. The downgrades contributed to hundreds of billions in losses and writedowns at major banks and investment firms.

Officials of S&P;, Moody’s and Fitch speaking at the SEC event said their firms have taken steps to enhance accountability and transparency.

“We have been actively applying lessons from the current crisis to adopt a number of measures aimed at restoring investor confidence,” said Deven Sharma, S&P;’s president.

Some market stakeholders are calling for creation of a new oversight board for the rating industry, paralleling the independent board overseeing the accounting industry established by Congress after the corporate scandals of 2002.

The credit-rating system is “fundamentally broken,” said Damon Silvers, associate general counsel of the AFL-CIO, which is a major shareholder in public companies. “It’s not a question of a tweak here and a tweak there.”

Joseph Grundfest, a law professor at Stanford University and former SEC commissioner, suggested establishing a rating agency owned and controlled by the investors to make parallel ratings matching those issued by the big Wall Street agencies paid by companies.

That would spark competition and give investors “a seat at the table,” Grundfest said. The notion appeared to intrigue Schapiro and the other SEC commissioners.

The SEC has undertaken several actions to enhance oversight of the industry under authority it gained in 2006 legislation, Schapiro said, but more must be done.

In December, the SEC adopted new rules designed to stem conflicts of interest and provide more transparency for the ratings industry.

Among other things, the rules ban the rating agencies from advising investment banks on how to package securities to secure favorable ratings. Gifts over $25 from clients also are prohibited.

Rating agencies are banned from making ratings in cases where the agency made recommendations to the company issuing securities or the investment bank underwriting them concerning the corporate structure, assets or activities of the issuing company.

But the SEC commissioners did not adopt a controversial proposal to require ratings of complex securities, such as those underpinned by mortgages, student or auto loans, to be distinguished by a special identifier from those for more traditional securities like corporate or municipal bonds. That proposal drew opposition from Wall Street when it was floated previously.

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