SEC May Propose New Rules for Credit-Rating Companies

SEC May Propose New Rules for Credit-Rating Companies

Feb. 8 (Bloomberg) -- The U.S. Securities and Exchange Commission may propose new rules for credit-rating companies to help evaluate securities following investor losses related to subprime mortgages, the agency's chairman said.

The rules would increase disclosure about ``past ratings'' to help determine whether rankings successfully predicted the risk of default, SEC Chairman Christopher Cox said at a securities conference in Washington today. The regulations may also address the differences between ratings on structured debt and rankings for corporate and municipal bonds.

Investors could then use the enhanced disclosure to ``punish chronically poor and unreliable ratings,'' Cox told reporters after his speech. ``The rules that we may consider would provide information to the markets in a way that facilitates'' comparisons, he said.

Moody's Investors Service and Standard & Poor's have been criticized for waiting until July to cut rankings on some mortgage-backed bonds, well after the U.S. market for subprime loans collapsed. Lawmakers, including Senate Banking Committee Chairman Christopher Dodd, have also raised concerns about potential conflicts of interest, because borrowers pay for ratings rather than investors.

Examining Wall Street

The SEC is also evaluating how Wall Street firms managed risks and liquidity, Cox said. As part of that review, the SEC has formed an agency-wide ``subprime task force,'' he said.

The SEC rating-company rules, which may be proposed within a few months, are among a number of measures the Washington-based regulator has undertaken in response to the subprime crisis. Securities firms and banks have marked down about $146 billion of losses since the beginning of 2007.

S&P said yesterday it would hire an ombudsman, demand disclosure of collateral in structured-finance securities and change its risk measures. Moody's said on Feb. 4 it was considering a new ratings system based on numbers instead of letters.

New York Attorney General Andrew Cuomo, who is investigating whether credit-rating companies contributed to the mortgage crisis, said the companies' proposed changes are ``too little, too late.''

International regulators, including the SEC, are separately considering a code of conduct to restrict Moody's and S&P from advising banks on structured debt securities. The effort is being led by the International Organization of Securities Commissions, which doesn't have the authority to set binding rules.

Subprime Accounting

The subprime crisis ``presents significant accounting questions'' about off-the-books trusts and structured investment vehicles that Wall Street banks set up to sell mortgage-backed securities, Cox said. SEC accountants are reviewing when entities that sold so-called collateralized debt obligations and other structured products should be moved onto banks' balance sheets, he added.

The SEC's enforcement division is already investigating a number of issues relating to the subprime turmoil, Cox said. The staff is examining whether firms adequately disclosed information, including valuations, on CDOs. The SEC is also concerned that insiders used non-public information to divest holdings or otherwise profit before problems surfaced.

Another issue of concern is whether brokers followed guidelines for steering clients into suitable investments before recommending derivatives that lost their value, Cox said.

Cox, a Republican, said he expects to have a full slate of commissioners in place to consider any potential credit-rating rules. The SEC currently has no Democratic representation following the departure of two commissioners within the past six months.

Senate Democrats have suggested that the White House nominate Elisse Walter, an official at the Financial Industry Regulatory Authority, and Luis Aguilar, a securities lawyer, to fill the slots. President George W. Bush hasn't acted on the recommendations.

BLOOMBERG