SEC, Congress Eye Increasing Liability of Credit Ratings Agencies

By | July 16, 2009

U.S. securities regulators are looking at ways to rely less on credit ratings and prevent issuers from shopping for their ratings, Securities and Exchange Commission Chairman Mary Schapiro told lawmakers Tuesday.

Schapiro also said increasing the liability standard could improve the quality of credit ratings.

“It may make a big difference. You would want to be careful in crafting it. You want rating agencies to work,” she told the House Financial Services Capital Markets Subcommittee.

Representative Paul Kanjorski, chairman of the subcommittee, agreed and said: “Anything we can do to get rating agencies more responsive to quality analysis is vitally important.”

Policymakers are grappling with how to revamp the credit rating agencies, such as McGraw-Hill Cos Inc’s Standard & Poor’s and Moody’s, which have been accused of contributing to the financial crisis by assigning top ratings to mortgage-backed securities that later collapsed in value.

Legislation has been introduced in the Senate that would allow investors to sue credit rating agencies that recklessly failed to review key information in developing a rating.

An SEC official said Schapiro had not embraced any one approach.

The bill introduced by Senator Jack Reed, the chairman of the Senate Banking subcommittee on securities, aims to hold rating agencies liable when it can be proven that the firms knowingly failed to review data for determining a rating based on their methodology or failed to reasonably verify data.

Kanjorski has said the threat of civil liability would force the industry to issue more accurate ratings. But industry has balked at such proposals and has said setting a specific liability standard for failing to accurately predict the future is unwise.

Schapiro said the SEC was looking at creating a “roadmap” to lessen reliance on credit ratings and has assigned a special squad of examiners to inspect rating agencies.

The SEC has already adopted some rules that would require more disclosures about the assets underlying mortgage-backed securities.

And the agency has proposed removing references to credit ratings in most of its rules, but the idea is strongly opposed by Wall Street.

Federal securities laws are intertwined with the credit rating agencies, with references to ratings in dozens of SEC rules.

Schapiro has also directed SEC staff to consider new rules to prevent companies from shopping around for favorable ratings.

SEC staff are exploring requiring banks and other bond issuers to disclose the preliminary ratings obtained from credit rating agencies before they select the credit agency to publicly rate their product, she said.

The SEC is also mulling requiring credit agencies to privately disclose the underlying data of structured products so that other rating agencies could provide an unsolicited rating on the product.

(Reporting by Rachelle Younglai; Editing by Tim Dobbyn)

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