Friday, September 17, 2010

Credit agency model may have to be changed- SEC member

WASHINGTON: Credit rating agencies' business models may have to be changed in order to mitigate their conflicts of interest, a Securities and Exchange Commission member told Reuters on Thursday, Sept 16.

"I think there are thorny issues. We have a long way to go," said SEC Commissioner Elisse Walter, one of the five officials who decides on federal securities rules.

Under the recently passed Wall Street reform law, the SEC must find a solution to conflicts at the biggest rating agencies Moody's Corp, McGraw-Hill Cos' Standard and Poor's, and Fimalac SA's Fitch Ratings.

The Big Three agencies are paid by the issuers whose bonds they rate.

"There are conflicts. The question is what you do with the conflicts. The question is once you get over the hurdle and end up with sound disclosure of what the conflicts are, how do you cure them," Walter said in an interview.

"It may be that we have to change the business model, but I am not convinced yet whether we do or we don't," she said.

The SEC may be forced to adopt a congressional proposal that would upend the rating agencies business model if it does not find a way to mitigate conflicts of interests within two years, according to the legislation.

That proposal would create a board to match rating agencies with debt issuers.

The SEC has been trying to increase competition in the industry dominated by the Big Three. It also has adopted a number of rules to improve disclosures and prevent issuers from shopping for the most favorable rating. But it has not been able to find a solution to the conflicts of interests at the issuer-paid model.

In addition to new credit agency rules, the SEC must write some 100 new rules for financial players and markets under the Wall Street reform bill.

The SEC and futures market regulator, the Commodity Futures Trading Commission, are starting to craft rules to shed light on the $615 trillion over-the-counter derivatives market.

Walter said it was imperative that the SEC and CFTC were able to cross jurisdictional lines and access information about equities and futures markets.

"We need information about the futures market. The CFTC needs information about the securities market because in today's world, strategies are executed across jurisdictional lines," she said.

"Regulators need information that goes beyond their jurisdictional line." - Reuters

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