Moody?s Investors Service, Standard & Poor?s and Fitch Ratings may face more disclosure requirements and greater accountability for debt analyses after being faulted for misreading risks of investing in toxic mortgage securities.
The US Securities & Exchange Commission will propose that firms seeking to sell bonds disclose the grades they got while shopping among credit-rating companies, according to people familiar with the matter. Other changes scheduled for discussion tomorrow at a Washington meeting may make it easier for investors to sue credit raters and require the companies to disclose revenue from their biggest clients, the people said.
Congress will decide whether the steps go far enough to reform an industry whose wrong assessments on subprime-mortgage securities fueled the financial crisis by helping banks sell assets that went sour. House Financial Services Committee chairman Barney Frank this week said he wants to cut references to credit ratings from US rules because the provisions foster reliance on ratings and deter investors from doing research.
?What happens as a result of these rules is that investors have to buy securities that have particular ratings,? said Frank Partnoy, a University of San Diego law professor and former Morgan Stanley banker who has written research papers about credit-rating companies. ?It creates this incredible dysfunctionality where the ratings agencies, instead of surviving based on their ability to generate good ratings, are basically selling licenses? to the capital markets.
The SEC will seek additional comment on a proposal, issued in June 2008, to drop requirements that the $3.5 trillion mutual-fund and money-market industry rely on assessments from ratings companies for purchase decisions, according to the people. The SEC plans include removing some references to ratings from its rules, the people said.
?The commission will consider measures to strengthen oversight of credit-rating agencies and improve the quality of ratings through greater transparency and accountability,? SEC spokesman John Nester said yesterday.
S&P spokesman Chris Atkins, Fitch spokesman Kevin Duignan and Moody?s spokesman Michael declined to comment before the SEC issues specific proposals.
Regulators have debated the role that ratings companies play in financial markets since 2007 when S&P, Moody?s and Fitch drew criticism for assigning mortgage bonds their highest AAA rankings and maintaining those grades after the underlying loans began defaulting.
Lawmakers including Senate Banking Committee chairman Christopher Dodd have said the three biggest companies have a conflict of interest because they get fees from banks seeking to sell bonds instead of investors who want to buy the securities.
At the meeting, SEC commissioners will vote on whether to approve a rule that would force disclosure of the data that goes into rankings. The SEC says the change would encourage unsolicited ratings by allowing firms to grade securitised debt even if they received no compensation from underwriters.
The SEC will seek public comment on a requirement that Wall Street report ratings from firms they didn?t hire and that S&P, Moody?s and Fitch disclose the banks that account for the biggest share of their fees.
SEC commissioners will also vote on whether to force ratings-company employees to provide written statements that their opinions can be used as part of a securities sale.