Lawmakers Seek Tighter Oversight of Credit Raters

Lawmakers on Tuesday proposed tightening oversight of Wall Street's credit rating agencies as regulators move to reshape supervision of the industry widely criticized for failing to give investors adequate warning of the risks in subprime mortgage securities.

At issue is government oversight of the $5 billion-a-year industry dominated by Standard & Poor's, Moody's Investors Service and Fitch Ratings. The firms came under fire after the collapse of subprime mortgage securities helped set off the global financial crisis.

Sen. Jack Reed, D-R.I., chairman of a Senate Banking Committee panel, introduced legislation to give the Securities and Exchange Commission greater authority to oversee credit rating agencies. Reed said his bill would hold the firms accountable for "conflicts of interest and other ... deficiencies that have weakened ratings in the past."

The bill also would allow investors to take legal action against rating firms that "knowingly or recklessly" fail to review significant information in developing ratings.

In the House, a measure sponsored by Reps. Gary Ackerman, D-N.Y., and Michael Castle, R-Del., would direct the SEC to write specific rules for ratings of complex securities.

"You cannot accurately predict performance of newer (financial) products that have no longtime track record," Ackerman said at a hearing by a House Financial Services subcommittee.

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 SEC adopted new rules in December designed to stem conflicts of interest and provide more transparency for the rating industry. But the agency didn't approve a proposal that would have required ratings of complex securities — such as those underpinned by mortgages, student or auto loans — to be distinguished by a special identifier from those for more traditional securities like corporate or municipal bonds