The Obama administration on Tuesday sent the U.S. Congress legislation seeking to tighten government oversight of Wall Street's credit rating agencies and stem potential conflicts of interest in their business practices to protect investors.
The plan also seeks to reduce reliance on an industry widely criticized for failing to give investors adequate warning of the risks in subprime mortgage securities that triggered the financial crisis.
The legislative proposal is meant to bring greater transparency to the rating agencies and would bolster the authority of the Securities and Exchange Commission over them. Now voluntary, registration would be made mandatory for all agencies large and small.
Investor advocates and other critics maintain that conflicts of interest can arise under the current system when companies that issue securities — as opposed to investors — pay the agencies for ratings.
The proposal is the latest in a series rolled out in recent weeks by the Treasury Department as part of the administration's sweeping plan for overhauling the financial rule system to help avert another meltdown.
Several lawmakers have also proposed stiffer federal supervision of the $5 billion-a-year industry dominated by McGraw-Hill, Standard & Poor's, Moody's Investors Service and Fitch Ratings. The 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, and which securities will be purchased by banks, mutual funds, state pension funds or local governments.
The administration proposal would bar ratings agencies from doing consulting work for any companies whose securities they rate and would require every rating report issued to include disclosure of the fees paid by the company for a specific rating. With an eye to reducing so-called "ratings shopping" by companies for a more favorable assessment, companies would be required to disclose all the preliminary ratings they receive from various agencies.
Special symbols to designate more complex, potentially riskier types of securities would have to be attached to their ratings.
The SEC last year abandoned a proposed rule to require the special identifier, which was sharply opposed by the financial industry. The agency did adopt other rules designed to stem conflicts of interest and provide more transparency for the rating industry.