Federal regulators get strict with debt-ranking agencies

WASHINGTON – Federal regulators advanced tighter rules Wednesday for agencies that rate the debt of companies and governments, part of a broad effort to better oversee an industry blamed for helping fuel the 2008 financial crisis.

Credit ratings can affect a company’s ability to raise or borrow money. They can also influence how much investors pay for securities.

But critics say the agencies have a conflict of interest because they are paid by the same companies they rate. The big three – Moody’s, Standard & Poor’s and Fitch Ratings – were criticized for giving low-risk ratings to high-risk mortgage securities ahead of the crisis. Those investments later soured when the housing market went bust.

The new rules, which were required under the financial overhaul passed last year by Congress, would force the agencies to provide more details about how they determine each rating. They would also bar the agencies’ salespeople from participating in the ratings process. And agencies would be required to review and potentially revise ratings in cases where an employee was later hired by a company he or she rated.

The Securities and Exchange Commission advanced the rules for public comment Wednesday after a 5-0 vote.

The big three credit agencies together account for nearly 95 percent of the ratings market. Seven other smaller rating agencies are officially recognized by the SEC.

Moody’s, Standard & Poor’s and Fitch said after the meeting that they support the SEC’s proposals. The three agencies noted that they have already taken steps voluntarily to tighten their operations.

A Senate panel investigating the financial crisis last month found that the big three rating agencies contributed to the financial crisis by awarding their highest ratings – AAA – to the riskiest subprime mortgages. A congressionally appointed Financial Crisis Inquiry Commission reached a similar conclusion.