Financial Regulatory Forum

U.S. SEC creates group to examine credit agencies

By Reuters Staff
July 14, 2009

U.S. Securities and Exchange Commission Chairman Mary SchapiroWASHINGTON, July 13 (Reuters) – Credit rating agencies, such as Standard & Poor’s and Moody’s, are now being targeted by a squad of examiners set up by the Securities and Exchange Commission and are subject to ‘special’ examinations.

The heightened supervision was ordered by SEC Chairman Mary Schapiro, who has also directed staff to consider bringing in new regulations, particularly to prevent companies from shopping around for favorable ratings.
Ratings agencies have been widely criticized for their role in the financial crisis, particularly for assigning various mortgage-backed securities and other financial instruments top ratings only to see them turn into toxic assets.
The SEC has already taken steps to clamp down on business practices that could present a conflict of interest such as banning an employee from structuring the same product he or she helps rate. But Schapiro has said more has to be done.
“I also have directed commission staff to explore possible new regulations in this area, including limiting the potential for rating shopping,” Schapiro said in prepared remarks to be delivered to a House Financial Services subcommittee on Tuesday. Her testimony was found on the full committee’s website on Monday.
SEC staff are exploring requiring banks and other bond issuers to disclose all the ratings obtained from credit rating agencies before they selected the credit agency to publicly rate their product, Schapiro said.
The SEC is also taking a hard look at the so-called issuer paid model, where rating agencies such as Moody’s, McGraw-Hill Cos Inc’s  Standard & Poor’s and Fimalac SA’s Fitch are paid by the bank or issuer whose products they rate.
On Monday, Representative Paul Kanjorksi questioned this business model and said some of the rating agencies let us down: “We’re not going to correct this problem if in the future they can let us down again by the issuer paying the rating agency for the valuation,” Kanjorski said on CNBC television.

SEC MULLS LEGISLATIVE CHANGES, MUTUAL FUND FEES
Schapiro has been lobbying members of Congress in a bid to preserve the SEC as the country’s top securities markets regulator and investor protection agency. Unlike many other financial regulators, the SEC would not lose authority under the Obama administration’s regulatory overhaul proposals.
Schapiro said SEC staff have identified legislative changes to help better protect investors. Those changes include giving the audit watchdog the Public Company Accounting Oversight Board the authority to inspect auditors of broker-dealers.
Such legislation has already been introduced in the House of Representatives, aimed at helping prevent a repeat of what happened with confessed swindler Bernard Madoff’s audit firm, which was uninspected or registered by the PCAOB.
Under current law, auditors of broker dealers do not have to be registered with the PCAOB.
The SEC would like other legislative changes including authorizing the release of certain grand jury information to the agency and establishing “aider and abettor” commission causes of action in areas of the securities law where it does not already exist. Some of the SEC’s wishes are reflected in the Obama administration’s legislative proposals to beef up the agency’s investor protection authority.
Schapiro also said she has asked staff to prepare recommendations on mutual fund distribution fees known as 12b-1 fees, which allow funds to use fund assets for distribution and servicing costs.
The fees are not well understood by investors.
“If issues relating to these fees undermine investor interests, then we at the SEC have an obligation to adjust our regulations,” Schapiro said in her testimony. (Reporting by Rachelle Younglai with additional reporting by Karey Wutkowski; Editing Bernard Orr and Tim Dobbyn)

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