SEC chief: need tighter oversight of rating firms

WASHINGTON — 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.

SEC Chairman Mary Schapiro spoke as the agency considers possible action affecting the $5 billion-a-year industry, dominated by Standard & Poor's, Moody's Investors Service and Fitch Ratings. The companies 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," Schapiro said. "The status quo just isn't good enough."

The SEC was examining the industry's business practices, competitive issues, potential conflicts of interest and government oversight at a public "roundtable" meeting.

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. Among other changes, the agencies would become liable for their opinions and could face EU sanctions if found guilty of professional misconduct. That would bring the loss of their license to rate debt in the 27-nation bloc.

The rating 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.

The agencies' officials maintained that conflicts of interest could arise just as easily from investors paying them a fee as under the current system of companies that issue securities paying for ratings. A small number of large investors could represent such a heavy portion of a particular security that they could unduly influence its rating, they suggested.